For today’s episode, we will be doing our first ever live podcast!
We will be going to be tackling the very hot topic of rent control. We’re going to be doing it live without a net. There’s no parachute. So if we flub up, we die. But this is going to be a really interesting episode!
The audible version Passive Investing Made Simple: How to Create Wealth and Passive Income through Apartment Syndications coming soon!
[00:01 – 05:53] Rent Control, Some Of The Effects And What That Means For Investing
[05:54 – 13:26] What Is The Problem Rent Control Aims To Solve?
[16:49 – 18:01] This Might Be The Biggest Problem, The Vacancy Control
[18:02 – 28:53} What Minneapolis Had In Their Votes
[28:54 – 45:47} Rents Are Only One Portion Of The Ways That We Can Make Money On A Multifamily Asset
[45:48 – 48:36] Are We Buyers Sellers Or Are We On Hold?
[48:37 – 53:48] Talking Through What Some Of These Changes Mean On The Bottom Line
[53:48 – 1:04:52] Q&A
“Typically how we see rent control go into effect. It’s a percentage plus inflation.“ – Anthony Vicino
“One of the things that we see when rent control does go into effect across the board in any city when it happens. Investors, broadly speaking, start to convert their apartments and their single-family homes into condos, and so more supply goes off the market and creates more of a crunch.” – Anthony Vicino
“We’re pretty conservative, we kind of always assumed that the future’s going to stink and we always hope that that doesn’t play out.” – Dan Krueger
“If there is not enough supply to meet the demand, prices will rise until equilibrium is reached, right? That’s just simple, basic economics.” – Dan Krueger
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The Real Estate Boogieman: Rent Control
Anthony Vicino: [00:00:15] Hello and welcome to multifamily investing made simple to the podcast, it’s all about taking the complexity out of real estate investing so that you can take action today. I’m your host, Anthony Vecino of Invictus Capital, joined as always by Dan. He has no apple in his hand. Krieger today we have a very special episode and we’re doing a little bit of an intro here just to get you guys on the podcast that are listening to this in the car at a later date. Up to speed about what’s happening, we are about to go into a live webinar with all our, all of our investors, and all of our What would you call it, email newsletter. Folks, people are doing. We’re doing a live webinar. It’s like a live podcast. So it’s all-new. We’ve never done this before. It’s pretty exciting. And we’re going to be tackling the very hot topic of rent control. We’re going to be doing it live without a net. There’s no parachute. So if we flub up, we die. But this is going to be a really interesting episode, I think because we’re going to have investors and people in the conversation asking questions about rent control as we go. It’s the big boogeyman. So without further ado, let’s start that webinar
Dan Krueger: [00:01:20] Starting webinar now
Anthony Vicino: [00:01:23] Rolling. You know, let’s just jump into it. And so what we’re going to do is we’re going to discuss rent control, broadly speaking, and some of the effects and what that means for investing, largely when it gets enacted in different markets. We’re going to talk specifically about the ordinances that got passed this last week on Tuesday in Minneapolis and St. Paul, because that’s those are the markets that we love the most and we invest in the most. And so as we’re going through this, if you have questions about rent control broadly or rent control specifically to the Twin Cities, feel free to raise your hand. We’d love questions. We’d love to make this as interactive as possible. But. From a high-level Dan, talk to me about rent control, yeah, well, it’s an apple over here,
Dan Krueger: [00:02:05] Quick over here. What we’re going to do is talk to you about a first, what’s going on? What happened? There were two votes, one for Minneapolis, one for St. Paul. What happened there? What is what do those mean? And then I’ve been very busy this week. The underwriting? Yeah, this week’s been very busy, but re-underwriting all of our deals basically to see how this impacts everything that we’ve got so far. And so we’re going to dive into some of that info for you guys. So those current investors who are on this call and you’re curious about how your deal deals are going to be impacted by this, we’re going to provide some clarity on that. So let’s dive in first. What happened? So Minneapolis and St. Paul both had some major elections with the mayor, mayors, city council, and they voted on a few issues. One was whether or not to defund the police. That’s been all over the news. And so that was a no across the board, which is great. We don’t want that and people realize that that was just not a good decision. So that’s something we don’t have to worry about. But on the rent control piece, we had two different things on the St. Paul side. The citizens were able to place a question on the ballot, which was basically, do you want to enact? And I’m probably going to botch how this is phrased. I don’t have verbatim, but it was basically, do you want to enact rent control in the city of St. Paul that would cap rents across the board? New development old buildings don’t matter what kind of building it is, how big it is, or whether it’s new construction or old at three percent. This would be the most strict rent control ever enacted anywhere in the U.S. because everywhere else this has happened, it’s been usually some combination of inflation plus another little bit of an increase. And so this would be the most strict thing that’s ever been enacted.
Anthony Vicino: [00:03:54] So so let’s break that down really quickly because if this is the first time that you’ve ever heard about rent control, this might be new to you and you’re like three percent, OK? Is that a big deal? Is that is that good? Is that bad? So if we’re using other markets as an indicator, say, San Francisco, I believe theirs is seven percent plus CPI or inflation. So if we assume that inflation, let’s say two to three percent per year, then in San Francisco they can raise the rent seven percent plus that. So-net about 10 percent per year. In Seattle, I believe it’s five percent plus CPI. And that’s typically how we see rent control go into effect. It’s a percentage plus inflation. What makes the St. Paul ordinance so different in so strict is that it’s not pegged to inflation. And that’s problematic because right now you guys might have noticed we’re in a kind of an inflationary environment. And if inflation is in fact around five to six percent and we can only raise rents three percent, then effectively and expenses are going to be going up. But our rents are not going to be keeping pace. And so this poses some problems and we’ll talk about that and how we want to how we plan to navigate that. But broadly speaking, it’s important to understand that the St. Paul referendum, it is very strict. And that’s a consequence of the fact that St. Paul has the ability for any citizen to put up the ballot. Any measure? Pretty much. And so this was kind of concocted without a lot of people being in the kitchen and people they got thrown on there and then everybody’s like, cool, because when they see rent control, it’s a politically charged topic that a lot of people go, Oh yeah, of course, rent control, that’s a good thing. But from a high level, let’s zoom out real quick and let’s talk about why rent control doesn’t necessarily solve the problems that rent control is designed to solve. So, Dan, what is the problem rent control aims to solve?
Dan Krueger: [00:05:54] Well, the problem that rent control aims to solve is, you know, it’s a product of a shortage of supply, right? If there is not, it’s basic economics. If there is not enough supply to meet the demand, prices will rise until equilibrium is reached, right? That’s just simple, basic economics. I think we all kind of get on the same page with that. Even if we’re not economists, we can understand that concept, right? And so the problem that they’re trying to solve with rent control is these rising prices wherein a normal functioning economy, what happens is demand will drive more supply to come into the market, right? Because there’s an incentive for builders and developers to create the thing that’s wanted to make money, right? And you can’t do that. If there are rent controls, right, there’s no incentive to go out and build a thing if you can’t make any money doing it, so you’re not going to be able to increase the supply. And so we’ve still got this constraint. In fact, it gets exacerbated because the building isn’t. It goes from just not keeping up with demand to not happening at all. And the other problem that happens is all of the properties that are there, that are owned by investors and they have tenants living in them, the incentive to improve the properties to, you know, force appreciation and, you know, to make money as on your investment goes away, right? Because if you add a bunch of money to a property, but you can’t recoup that investment through increasing your rents, then the incentive to do that goes away.
Dan Krueger: [00:07:23] So two things happen the building and development will stop, and all the owners will be disincentivized to fix up their units. And eventually everything just kind of turns into slums so you don’t solve the problem of limited supply, and the existing product gets crummy and crummy, and it just makes it a really crummy situation for everybody. But the problem is that a lot of people that are voting on this don’t go through the full mental exercise of all the things that come after rent control. All they see is, oh, a three percent max increase. That means my rent isn’t going to go up a bunch that sounds really great, and I stop thinking and I vote. They don’t realize what the long-term effects are of this. And, you know, under the normal kind of rent control that we’ve seen elsewhere in the U.S., you know, everyone kind of does OK, right? There’s still like if you look at some of those other markets A. mentioned if you’re still able to increase the rent seven to 10 percent, that’s on the high end of anything we’ve ever done, even during a value add phase, right? So you could still make your money as an investor and tenants are protected from price gougers, which is really what I think people are worried about, right? We want people to not get screwed over, but we also want to solve the problem of the limited supply, which this rent control thing does not solve. And we’ve only seen examples of this in the past. We’ve never seen an example. Of this actually working.
Anthony Vicino: [00:08:40] Yeah, and it’s so frustrating. Yeah, so so we’re rent control is at its core trying to solve for the limited supply. If there was a surplus of supply, then prices, prices would drop. And so in the last decade, there definitely hasn’t been enough building going on. There is a huge shortage of housing. And one of the things that we see when rent control does go into effect across the board in any city when it happens. Investors, broadly speaking, start to convert their apartments and their single-family homes into condos, and so more supply goes off the market and creates more of a crunch. And investors start to invest, which means they sell off their properties to people who are just going to go instead of a single-family home that they were renting. Now they’re selling it to somebody who’s going to go and buy it, and that can be fine. But that’s still not solving the underlying issue, which is, you know, good affordable housing for everybody. Now, one of the interesting things about this three percent. You might wonder, like where was this pulled from? And this is actually pretty interesting because what they did to come at the three percent number was they looked over the last, say, last 20 years and they said what was the average rent increase in the Twin Cities or in St.
Anthony Vicino: [00:09:49] Paul over that period of time? And it was three percent. And the idea here is like, that’s actually not very much in the grand scheme of things, but it gets a little bit skewed because in that environment, a lot of people weren’t having their rents increased at all. Right. There’s a lot of people at zero or one percent rent increases, and there were some people at the five and six percent to make that average. But you really have to ask the question like, was this really that much of an issue? Maybe, maybe not. It’s hard to say, but as it currently stands, it doesn’t solve that issue. And one of the biggest problems at the St. Paul ordinance really creates is the fact that and you mention this in every other market, rent control is usually pegged to a certain class. Age of building this referendum says regardless of age, so new buildings luxury class A.. Well, they are also going to have rent control. They can only increase their rent by three percent. And when that happens, builders stop building. There’s no incentive to build. And so again, if rent control is trying to solve the supply issue and now the builders are not building, it’s only exacerbating the issue.
Dan Krueger: [00:10:56] Mm-hmm. Yeah. Yeah, it’s really unfortunate, honestly. And because of all those things, in our opinion, it’s extremely unlikely that it’s going to stick as it currently stands. I think even the mayor is already backpedaling, making statements that, Hey, you know, this is a start, but it needs to be improved, right? Because he knows that this current structure isn’t feasible. And on top of that, one of the biggest feathers in his cap was this old Ford plant site development, which is midstream and they have not fully funded it. It’s the biggest. I say things that he can, you know, put his name on and say, this is the amazing thing that I helped produce, and he’s simultaneously one. I shouldn’t say he is. He wasn’t the one that came up with this, but what’s happening is that is getting destroyed right if this actually goes through the way it is currently written and it sticks. That project is going to fall apart, and that will be a very big black eye on his whole period as mayor. So, yeah, so there’s a lot of things that are telling us that the likelihood of this sticking is extremely low, but just, you know, for fun. We went ahead and underwrote all our deals as if it sticks like this just to see because we’re really we’re always pessimistic. And so we want to make sure that we look at the worst-case scenario and make sure we make a plan for that.
Anthony Vicino: [00:12:16] And so I got a question here I want to dive into from Randy. But a couple of the things on that note to point out is that Ryan companies the companies that doing that huge build over at Ford, they’ve already as they’ve already come out and said, this is going to be really problematic for us to get investors to come into these deals. So Melvin Carter to Randy’s question, when did finding the details on the ordinances? There are no ordinances in Minneapolis yet which we’ll get to in a second in St. Paul. If you Google it, you can find it. But there was a City Council meeting a couple of days ago, and honestly, it’s very unclear who’s even spearheading the thing there. There’s a lot of. Nobody knows how they’re going to enforce, how they’re going to actually fund the project, or it’s pretty much creating a government agency out of nothing. So there’s a lot of questions here. What we do know is that they are supposed to only they’re supposed to put this into effect within six months. So this is going to be May. So it’s supposed to go into effect in May. And typically, you’re not allowed to change a referendum in the first year that it was issued. However, they might be able to make improvements to it. And that’s what Melvin Carter, the mayor, and the city council they’re looking at because they’re like, as it currently stands, this would be very problematic because the last thing that we haven’t talked about about the St.
Anthony Vicino: [00:13:27] Paul rent control. So it’s like, man, the hits just keep on coming. This might be the biggest problem is the vacancy control. So in every other market, what we see say in San. This goes New York is that when tenants move out, you can bring the rents back up to the market, so when they have tenants in there, they’re not really incentivized to leave. But when they do leave, at least as a landlord, you can bring it back up into alignment with market rates here in St. Paul. You would not be able to do that. The cap would always be three percent every year, regardless of if it’s a new tenant or an old tenant. And that’s problematic. So let’s see here. We got a couple of questions. Just bear with me because our computer is very picky. Somebody was eating an apple while working with this. I’m trying to get back to Randy’s questions. Ok, so does it impact owner-occupancy duplexes? Yes, it affects everybody across the board, regardless of asset size or type. And this is again, why this is like, really crazy. You usually don’t see it. So broadly speaking, this is how you know, it was concocted by people that haven’t really studied the ramifications of it because they pretty much just said. Pretty much all the worst things, and they’re like, do it, how do rents get set on new construction or on single-family homes that are converted to a rental? Great question.
Dan Krueger: [00:14:47] We need a lot of unknowns right now, so you’re going to hear us say we don’t know yet because of the City Council and the mayor and everybody involved in this. They don’t know. We got a very, very basic thing that everybody voted on and outside of those couple sentences. It’s like, you know, so that’s why we’re just basically looking at worst-case scenario because, you know, if we can plan for that, then pretty much anything else is going to be an upside.
Anthony Vicino: [00:15:12] Yeah. And to that question about how do you set the rents for a recently converted single-family home or for a new build? My presumption would be you can set it wherever you want. If you’ve never had a tenant in there and it’s a new build, just set it to the moon. If you can get people in there, so it’s really going to be a matter of like, I think that we’re going to see a lot of rents getting increased in April leading up into May as people are like, what’s what can we get and trying to set the new baseline for themselves? But what this will do and this is unfortunate, is that this guarantees that everybody is going to get their rents increased every single year by at least three percent. Whereas in the previous model, when we’re saying to have a three percent average, there’s a lot of people not getting their rents raised to every landlord to keep pace and keep the values of the building. They’re going to have to do the rent increases, which is a bummer because one of the things that we like to do to incentivize tenants to stay a long time really marginal rent increases 20 bucks. That’s like one percent, two percent, maybe.
Anthony Vicino: [00:16:08] So like now it’s going to go up three percent every time. Yeah. Yeah. And Elizabeth brings up a good point in the chat. So if you guys aren’t looking in the chat, there’s some good stuff happening there. She mentions that the problem with the promise of amending is that there’s very little wiggle room and this is exactly it. Like, who knows what they can actually do or not do over there? And so right now, what we’re doing is we’re planning for the worst and we’re saying, OK, as it currently stands, this ordinance is going to go into effect in May, and we need to adapt and understand what we can do to continue to thrive because at the end of the day, like this, we’re painting a picture of doom and gloom, but we’re the type of guys that firmly believe that we are paid to solve problems. And whether you choose to see opportunity or difficulty, it’s just a matter of perspective and this is going to make it more difficult to operate. But with difficulty comes opportunity, and that’s something that we’re looking for right now, and we’re going to share some thoughts on that in a bit.
Dan Krueger: [00:17:00] Yeah, I would say I’m the type of guy who actually gets excited when presented with a problem because it’s like a puzzle I get to solve even when it’s, you know, not a good thing like this. I still am like, OK, great, I get to solve a problem, and it just feels good to do it so.
Anthony Vicino: [00:17:18] This keyboard is so bad, I’m sorry, guys. Just bear with me. It’s actually not the keyboard, it’s just this computer is very old. It was like me, my preteen sister’s computer
Dan Krueger: [00:17:28] Or all these links.
Anthony Vicino: [00:17:30] So I’m guessing, Matt, is this is a link to an article, I think Elizabeth put an article in there as well. Coming from, we’re not
Dan Krueger: [00:17:37] Really able to pop over to other sites and look at things that you guys are sending this way.
Anthony Vicino: [00:17:41] But this will be good for other people in the conversation.
Dan Krueger: [00:17:45] Yeah, it’s good to share. Good to share. But we’re not really able to pop those open reference.
Anthony Vicino: [00:17:48] So, so keep the questions coming. Keep the insights coming because like guys, we’re not experts on this. We are talking to every other landlord, every other operator or any politician that we can get hold of to get clarity on this. And we’re reading up and keeping our pulse on it.
Dan Krueger: [00:18:02] But we should talk about Minneapolis, too, because we just talked about St. Paul. Yeah, yeah, yeah. Let’s talk about Minneapolis that is going on. So what Minneapolis had in their votes. Like we said, the vote in St. Paul was to enact a three percent rent cap across the board on everything, everything. So that was St. Paul. So Minneapolis was a little bit different. Minneapolis was a vote to put the power of enacting rent controls in the hands of the City Council, which all it did was it gave them a tool in their toolbox. So if they decide that the rent controls are something that they want to enact, they have the ability to do it as opposed to the citizens putting it on the ballot or, you know, some other external force, right? They wanted to keep the the decision-making power on. On that front, local and the mayor of Minneapolis has been very consistent with his verbiage that he’s not a fan of rent control, at least in the more strict forms that we’ve seen in the past, and he’s a much more moderate person to be dealing with. And with the election on the 2nd, we also got a much more moderate and less extreme left city council right. So we’ve got a situation now in Minneapolis where the cards are stacked in our favor, where if something does get passed, it’s going to be very much workable.
Dan Krueger: [00:19:22] Just like everything else across the U.S., our business model does not get impacted by the rent controls that we’ve seen in, like San Francisco and New York, right? Are things still working just the way it does now? And so we’re very confident that Minneapolis is going to be a much easier place to work in. But we still went through and we did our underwriting and all our current deals as if the St. Paul style rent control got it enacted next year, just like everything else. So like we said, we’re we like to focus on that downside and make sure we mitigate that. And so we went ahead and did that so we can communicate to all of our current investors what these deals look like if everything shakes out exactly the way it did in St. Paul. And honestly, I was very pleasantly surprised that not a big difference, honestly. We’ll get into the details here. But you know, based on when we’ve bought most of our deals, we’re far enough along on them. So by the time we get to when these things are actually going into effect, we really only had three or four percent rent increases built in anyway, because we’re pretty conservative, we kind of always assumed that the future’s going to stink and we always hope that that doesn’t play out. But in this case, I mean.
Anthony Vicino: [00:20:30] Yeah. And so the message here, if you’re so there’s a whole diverse number of people on this call, some people who are just other investors that are just generally interested in learning about rent control in the Twin Cities. Some people just want to learn about rent control broadly. And then we also have some investors that invest alongside us in deals. And so we went and we crunched numbers and we said, OK, if everything goes into effect right now, what would this do to our pro forma our numbers? And this might be an interesting thing to talk through with everybody here, because for us, you know, the timing of when we’ve purchased things, we’re going to be through the value added a portion of all our deals before any of this even goes into motion. So we’ll already have gotten the rent premiums that we thought we would be getting before this. So on that side, previous deals, they’re going to continue performing strongly and we’re going to talk about how we’ve underwritten that to kind of show what we’re going to do to compensate. But the question really becomes then moving forward, do we continue buying assets in St. Paul? Do we continue buying assets in Minneapolis? So let’s tackle that. And then let’s reverse and talk about the underwriting, some of the assumptions that we made and how that’s changed things, and then give some tips of how worth thinking about working within these rules to still be able to realize the returns that we’re looking for. So if you’re another operator, this is going to you’re going to want to stick around for that because we have some things that you’re definitely going to want to pay attention to.
Dan Krueger: [00:21:49] Yeah. And that’s the important part is there’s always a way to make things work, right. You might have to pivot your strategy a little bit, maybe your location or your business model. But the bottom line is like Anthony said before, when something like this happens, some people focus on the problem and the negative aspect, and other people start looking for where that new open door is. And that’s our approach.
Anthony Vicino: [00:22:11] Yeah. Lindsay, you ask a great question for St. Paul. Does the cap transfer between new owners? And she asks if I continue to create a Create LLC and transfer to each other? Maybe that would work. Unfortunately, it won’t, because it’s going to transfer with ownership, and that’s really problematic. So if I sell this building to Dan, he can’t go in there now and reset the rents, can’t do it, and the tenants. And this is where we get into the regulation of like, how are they actually going to police this? It’s going to be very, very messy because theoretically, the tenants are going to be able to petition to see previous renters’ rent rolls to say, like, Am I? Have you raised the rent too much? So there’s going to be this whole paper trail thing, which is going to be problematic, but LLC is, unfortunately, won’t work around that issue.
Dan Krueger: [00:22:57] Yeah, yeah. That’s another concept, is the staffing needs for the size of the department that would be able to handle the volume of work that needs to be done here for policing it and following up with all these, you know, resident claims to, you know, look into historical rent rolls. And so it’s going to be a mess.
Anthony Vicino: [00:23:16] I’m sorry, I guess get really excited when I see people in the chat and this is great. So, Lynn, she says, funny how some of our taxes increase seven percent garbage service just doubled, but they can cap our rent crazy. Absolutely agree. And stick with us because we’re going to explain exactly how you can use those rising utilities as a means to still offset some of the expenses, which is something that we’ve been modeling now and we’ve done on a lot of our properties in the past. But now it just gives us more incentive to be more aggressive with it. So we’ll talk about that in just a second, but.
Dan Krueger: [00:23:50] You talk. Oh, all right, great, thanks for the layup.
Anthony Vicino: [00:23:55] I feel no, I felt like there was something else that we were going to talk about before we got back to the actual underwriting.
Dan Krueger: [00:24:01] Yeah, I don’t know. You jumped into the question there.
Anthony Vicino: [00:24:03] So you guys, I just got too excited. I jumped right in. All right. So Dan, let’s talk through what exactly has happened with our underwriting in particular because one of the things that are really interesting about rent control is if you look at San Francisco in New York and these places that have like pretty stringent rent control, what tends to happen is these assets struggle to cash flow a lot or they just don’t generate the cash flow that you come to expect in the Midwest city. But because there is that crunch on supply that we’re talking about before the prices go up, they appreciate more. And so you might not make as much in the holding period of these assets, but they’re going to trade for more. So we’re going to see even more compression of cap rates, which is if you have the reserves and the ability to hold on to a seven to 10 to 15-year horizon, you’re going to do great. It’s going to be fine, but you’re not going to necessarily have really strong cash flows throughout the life of the project. To live off of maybe,
Dan Krueger: [00:25:00] Yeah, it’s really interesting, right? It sounds so negative as an investor, we’re either active or passive investors in these deals. It sounds like the nail in the coffin, right? But when you actually dig into it and run the numbers, what you’ll find is that that appreciation component is actually a pretty big deal because although we talked about how absurd it was that they were limiting supply and how that’s going to make things really crummy as far as like the quality of the buildings, no one’s going to keep them up and there’s going to be just more supply constraints when that was the problem in the first place. That’s what’s frustrating. But at the same time, that creates an opportunity, right? Because if you’ve got an asset in the supply, you just got more restrained. That boosts the value of that thing on the resale. So you might not be getting top dollar for rents. You might not be maximizing your cash flow like you were before, but you end up in a kind of like a Manhattan situation where you go and invest in Manhattan. You’re going to do pretty well, right? But you’re not really going to be getting cash flow. There’s might be some there, but you’re not really in it for the cash flow. You’re in it for the appreciation. And so that model works. It’s just different, right? So if you’re a cash flow junkie, probably not the great thing to go to Manhattan. But if you want to park some money somewhere where you know it’s going to appreciate because the supply is so ridiculously constrained, then you’re going to do all right.
Dan Krueger: [00:26:14] So it’s really interesting to see how that plays into our underwriting when we make these adjustments. Because what’s going to happen is the appreciation is going to offset a lot of the reduced cash flow and on our deals in particular, based on when we bought them and how far we are through the business plan, we’ve already gotten the rents up on a lot of these things and can get them up on the rest of them before these things become enacted that we’re actually sitting pretty good. All things considered now, as we said, we’ll have to pivot going forward and make some changes. But based on the timing of everything, we’re actually pretty darn good and not trying to toot our own horn. But because we’re so darn conservative and always plug in these pessimistic assumptions that people obviously kind of give us crap for, it works. I mean, yeah, we don’t do nearly as many deals as some guys because we’ve got a really high hurdle for things to hit. But when stuff like this happens, I mean Cove in 2020 and now this going into twenty twenty two, it’s really played out well. So yeah, we didn’t do as many deals as some guys out there, but we only did the deals with so much meat on the bone that, you know, we’re pretty much good no matter what happens.
Anthony Vicino: [00:27:17] So. So Julie asks. But if a building’s value is sold based on rents question mark, and that’s true. So the building’s values of multifamily, let’s say, is NOI divided by the cap rate, right? So our NOI is not going to be as strong. But if you look at New York and San Francisco, the reason it’s so hard to buy there is everything’s a two and a three cap. So right now we’re transacting on a Class C multifamily asset in a mid-five five percent cap rate environment. It’s not unrealistic to see that going dipping into the low fours and threes, right? And that’s where the building valuations are going to get really powerful because as our friend Charles Dobbins, the multifamily lawyer, says, cap rates are the most powerful force in the universe, like just a small tweak to the cap rate is going to go so much further than changing the NOI. And that’s really interesting. When you start to look at what effects this could have on your currently held investments, they’re probably going to appreciate a whole lot more than you think because the cap rate over the next five to seven years is going to compress a lot more than it already has been.
Dan Krueger: [00:28:18] Yeah, yeah. So it’s there’s always kind of another angle to look at. There’s always a way to pivot and assume that you’ve underwritten things properly, you’re not overleveraged and you don’t have these crazy optimistic assumptions built into your underwriting. You know, these types of things are just there changes that you have to deal with. They’re not necessarily the nail in the coffin. So those guys who were forecasting 10 percent rent increases, got overleveraged and they didn’t have any room for anything to go wrong. They didn’t do sensitivity testing like those guys are probably going to be hurting right now. But for us, you know, let’s talk. Scaredy cat investors are actually
Anthony Vicino: [00:28:54] To scaredy-cat. You’re scared. Fight me. So let’s talk about the other aspect of this. You know, we just talked about the cap rates and how that is going to play a very big effect on the end of valuation and therefore the exit that we’re going to be able to achieve on assets. But there are still some things, even if we’re only able to raise rents three percent per year. Rents are only one portion of the ways that we can make money on a multifamily asset. And so the other aspects and again, there’s not a lot of clarity on this yet. But as we see it right now, in the way everything’s worded, there is no limit in terms of what we can do with ancillary incomes, things like storage or laundry or parking, or the really, really big one that I told you guys earlier. The operators who are worried about rising taxes and utility costs and everything rubs, ratio, utility bill, bank services. So let’s break down for people that have never heard of rubs, which there might be probably a good number of people. What are rubs? What has been our experience with it in the past in these markets because we have implemented it? And what’s our plan moving forward and why is it so powerful?
Dan Krueger: [00:30:04] Yeah, I mean, that’s some of the lowest hanging fruit there, because if you’re only able to raise your rent three percent, then you’ve got these other tools in your toolbox. And historically, we’ve done a few rubs in the past. But I found personally from doing this that
Anthony Vicino: [00:30:20] It’s what is rubs, first of all,
Dan Krueger: [00:30:22] Ratio utility building where you build back for the utilities on a property. So it’ll be water, sewer trash could. Pretty much any of the standard ones is water that people will do water and trash. But technically speaking, you can build back for any utility that you want. I found in the past that it’s been easier for me to just increase the rent. Let’s say I had a plan to increase the rent by 50 bucks and then add ratio utility billing at 30 dollars a unit. Personally, I always just opted to do an 80 dollar increase. It just seemed easier, and so I’d done it. It works, but it just seemed easier to do higher rent and say utilities are included. So we’ve still got that arrow in our quiver, right? We’ve got some properties that have some light rubs implemented, so there’s still a lot more room to recoup more there. But there’s a lot of properties where we just never did it, and that’s still a very low-hanging fruit that we can implement. And that’s one of the things we did in our underwriting is instead of getting some of our additional income from rent increases, we’ve got ratio, utility billing, we’ve got other amenities that we can work in. There’s a concierge service that we’re looking at right now, where tenants can pull up an app on their phone and they can get a dog walker, a house cleaner, someone to come hang a flat-screen on their wall. Not much of a cost to us, but it creates an additional revenue stream, and all of that work is done by this other company and they facilitate all these things and we get to charge the tenants for this, this new amenity. So there are all these different little creative things that you can do to create more income in your property without actually raising the rent. So it’s just a matter of being creative and looking for opportunities instead of focusing on, Oh, this bad thing happened. That’s all I can see, and I’m just going to give up and walk away.
Anthony Vicino: [00:32:04] Mm-hmm. So real quickly and then we’ll get back on the ribs. Elizabeth mentioned that the cap doesn’t apply to Section eight properties in St. Paul, and those rents can be close to market value. That’s interesting. I did not know that, and I haven’t heard that at all. So sure about that. Yeah, she supplied.
Dan Krueger: [00:32:22] Yeah, we’ll click that link
Anthony Vicino: [00:32:23] And we’ll click that link later.
Dan Krueger: [00:32:24] But because it’s been, that’s interesting. There are just so many darn unknowns right now. It’s been tough to really figure out, you know, what’s confirmed and what’s not.
Anthony Vicino: [00:32:32] Yeah. Now, in terms of Julie asking the question, I thought charging back utilities in Minneapolis is not allowed unless separately metered.
Dan Krueger: [00:32:40] No, that’s incorrect.
Anthony Vicino: [00:32:41] It’s not true. Now you need now here. There are some nuances with rubs that you need to be really cognizant of. Is that one you can’t charge? You can’t profit from this in the sense that you can’t charge more than the utility cost. Now, Rebs is powerful because as expenses increase, they are going to increase water, electricity, trash. These things get more expensive over time. We can continue to charge in proportion, but we never want to charge one hundred percent or more because then we’re profiting and we’re not a utility company. We’re not licensed to do that and it’s going to get you in a lot of deep doo-doo.
Dan Krueger: [00:33:11] That was another reason I shied away from it in the past was just if you just charge more for rent, you don’t have to worry about accidentally overbilling for the water or something.
Anthony Vicino: [00:33:18] And what you need to do is you can either hire a company that can come in and do this and regulate it for you and handles all the billing for you or you create your own formula. And then you stick to that formula for how you’re deriving what the utility cost is. That could be as simple as two bedrooms. We charge this much, which is a percentage of how many units there are versus what the bill is. You could just charge a flat rate for two units and say two units. It’s always a hundred bucks knowing that that’s well underneath what that utility charge would be. So you can
Dan Krueger: [00:33:48] Sort of getting, you know, four for me, when I put this together, it’s always to try to get like 80, maybe 85 percent of the utility costs recouped. And that way there’s a nice cushion there. Just so if there’s like a really favorable month in the utility bills that you’re not, you know, if you’re up there at ninety-five plus percent, you’re
Anthony Vicino: [00:34:04] Flying close to the Sun. So if something fluctuates, you find yourself on the wrong side. And inadvertently, that’s trouble.
Dan Krueger: [00:34:09] That’s officially illegal to profit from selling utilities because you’re not a utility company. So you’ve got to be careful.
Anthony Vicino: [00:34:16] But that’s one way that we can mitigate the effects of inflation and not necessarily be able to keep pace with that. So I’m not saying go out there and charge to the moon on rubs, but just be aware that that’s a quiver. We’ve used it in the past, I think pretty conservatively on the properties that we have done it. And so we’re just looking and saying, OK, instead of 30 bucks per month, let’s go to 50 and that’s making up the delta in a lot of cases.
Dan Krueger: [00:34:37] So it’s laundry, there are pet fees, there’s just a multitude of things that you can look at to increase your revenue again. You don’t want to be too aggressive with this because, in this type of environment, you don’t want to end up with a tenant complaining to the city or to the county because. Obviously, things are not super friendly for landlords, so you want to be fair with this, but you also want to make sure that you can stay in business.
Anthony Vicino: [00:35:04] And a lot of times this is for me, it comes down to proactive communication with residents and letting them know why we have to why we’re doing it like it’s not hey, we’re not just charging you back the utilities because we want to like gouge you or anything, because those costs are inflating and we have to be able to keep pace with that. And so another thing to be aware of in St. Paul is that there is going to be there’s verbiage in there right now that shows that you as a landlord can file for an exemption to the three percent. I believe it’s in the case of if taxes increase to a degree that is cost-prohibitive. I don’t know. That language is really vague to me personally or if there is some kind of improvement that needs to be made to the property to make it habitable and safe.
Dan Krueger: [00:35:50] Bring it up
Anthony Vicino: [00:35:50] To code, bring it up to code. Now the thing is for this ordinance to go into effect, that has to be put into it because that was what was voted on. I have no idea how they’re going to mobilize any kind of government agency to handle the vetting exemption process. So that’s a real black box to me. Good luck.
Dan Krueger: [00:36:12] Yeah, I mean, it’s been a nightmare for the last couple of years, just having the usual city inspections, whether it be from the fire marshal or whatever, to make sure buildings are up to code. That’s part of the process that every owner goes through. Different cities are going to have different frequencies that they need to inspect your building to make sure it’s up to code. But I mean, over the past couple of years, it’s been a nightmare to get those guys in there to do the inspection even before all of this started. So you can only imagine you multiply this by, what a hundred times more things that these guys have to go out and inspect because every owner is going to be filing every possible petition to constantly or exemption to just say, Hey, you know, this seems to be brought up to code and all this. So it’s just going to need a massive infrastructure of people that are not there yet. So I just don’t think that this is going to go smoothly for them and there’s probably going to have to be a lot of backpedaling and modifying for this to be a reasonable solution to anything. And honestly, if there’s a reasonable rent control like we see in other parts of the company or in other parts of the country, it’s kind of I think it’s going to be a good thing because, hey, it’ll get rid of price gougers, which is great. Our business model still works great. And you know, then everyone’s happy. The residents feel safer because they don’t have to worry about some crummy slumlord screwing them over with the rent and we get to keep doing our thing. And it’s great. So, you know, give us a seven or 10 percent a year thing and we’re good. No care.
Anthony Vicino: [00:37:42] You know, it’s really frustrating because we transact with a lot of the older guard of investors that have been in the Twin Cities for decades, like 30 plus years. And they own a lot of inventory. And those are the types of guys that we typically are buying from. And one of the things we were having dinner with them, a couple like different guys at different points over the last couple of weeks. And one of the narratives that we kept hearing from people was like, You know, I might it might just be the time for me to get out of this game now because if I can’t take care of my properties, how I want to like to keep them in tip-top shape because it just doesn’t make financial sense to do it anymore. Like, I don’t want to do this. It’s a
Dan Krueger: [00:38:20] Shame because you
Anthony Vicino: [00:38:21] Take pride. Yeah, they don’t want to become like an inadvertent slumlord, which is what will happen to a lot of the operators that don’t have good systems or proactive systems in place to be able to cope with the changes. And that’s a bummer because the majority of of of assets are owned in the Twin Cities area by mom and pops that do not have professional systems.
Dan Krueger: [00:38:42] And so Manhattan money in here, it’s the people that live here, local people that, you know, like taking care of the properties and keep it, keep it a nice. So we’ve got a question here from Julie asking or saying, I appreciate your other income ideas, but any ideas for simpler properties where it’s street parking anyway? Maybe not, maybe not. Laundry could be installed, though. Any other ideas? So it sounds like she might have a single-family house or something that doesn’t really have as much going on here, but there’s a lot of things that you can do. It’s all just about providing value and charging for that. So that could be hooking up cable and internet and charging for that service, you could. There was something called, I think it was lateral. I don’t want to misquote. It’s that service that I just mentioned before.
Anthony Vicino: [00:39:28] I think it’s Joe Joe. If you’re still in the chat here, put it, put it in the chat for us. Yeah, there’s yourself useful.
Dan Krueger: [00:39:33] There’s a bunch of different little things that you can provide to your tenants that provide value that makes their living experience better, that you can also get some revenue and some profit out of. And so that’s just a few is basically just how can you add extra service, you know, on a smaller, single-family home, I’m trying to think of what else you could be doing as hard.
Anthony Vicino: [00:39:52] I’ll be honest, like the smaller properties, it gets harder.
Dan Krueger: [00:39:55] Lawn care. No room. Well, you know, that kind of stuff you can provide for them instead of giving them a shovel and a snow blower and saying, do it yourself. You could go out and get somebody a vendor to do that. Pay them building a little profit margin for yourself. There’s a bunch of things that you could do, I think. But you know, the big thing is just to kind of be creative and try to figure out ways to provide value. And you should be able to charge for that. As long as the residents get something from you, you should be able to make a profit. It might not be rent, but there should be something else that you can get some income from. I think the laundry thing would be great. You know, you could put in a pretty reasonable price system there and get an extra 15 20 bucks a month pretty easily. I think doing that. Mm-hmm.
Anthony Vicino: [00:40:37] Yeah, thanks. Thanks, Joe, for throwing that in there, lateral for those wondering, it’s like a virtual concierge service for tenants. It’s it’s hard.
Dan Krueger: [00:40:47] We’re still looking at it, so I can’t vouch for how great it is. But the concept so far concept is fantastic and there are a few different companies that do something very similar. So, you know, don’t just stop there if it doesn’t look like it’s a good fit, that kind of thing is kind of where your brain needs to be going.
Anthony Vicino: [00:41:01] Yeah, and it’s hard. The smaller the property, the fewer levers that you have to pull, unfortunately. And that’s just one of the the consequences of small versus bigger properties, which is why we like bigger properties personally. But yeah, hopefully, that helps. I don’t know if there was anything super actionable instantly.
Dan Krueger: [00:41:27] Laundry, oh, for Julie, yeah, I mean, yeah, it is tough for smaller properties, but I think if you just get your head moving in that rate, allow pets, allow pets.
Anthony Vicino: [00:41:35] And there’s no cap on pet rents.
Dan Krueger: [00:41:36] Yeah, pets are great
Anthony Vicino: [00:41:37] And there is. Everybody has a pet these days.
Dan Krueger: [00:41:40] You can also do it with pets. There are a few animals there. You can charge pet rent. You can also charge a move-in fee for your pets, where there’s a refundable portion of the pet deposit and a non-refundable one. And you can also look at that on your on deposit side as well. Do a move-in fee instead of a deposit that gets refunded. So that way it’s technically profit for use. I mean, they don’t completely trash the unit. So there are a few different ways you can actually take some of those transactions that are already taking place and modify them a little bit so that they’re not just deposits held, but their fees. Mm-hmm.
Anthony Vicino: [00:42:13] And this is a small one. But in terms of security deposits, you know, because the sort of security deposit it’s currently structured, it’s you’re really holding on to it. It’s not income per se. You’re holding on to a deposit that you’ve got to give back to them. In the end, you only get to keep it if there are damages that you need to repair. So I’m not saying like keep people’s security deposits, but there is a thing called security bonds.
Dan Krueger: [00:42:35] Think that would work on a small property.
Anthony Vicino: [00:42:37] Maybe it might. Maybe something to look into.
Dan Krueger: [00:42:39] Yeah, you could try and look into all the different options. Looked at it. And I want to say it’s probably not going to work. If it’s a single-family home, you have to have
Anthony Vicino: [00:42:45] Like fifty single families.
Dan Krueger: [00:42:47] Ok, you don’t know me. I don’t know. Hopefully, I don’t know your situation. Yeah, as long as you’re going down that rabbit hole and looking for those things, you’re going to find probably a multitude of different solutions that you know individually might look like a couple of bucks a year, a couple of bucks there. But when you aggregate them all together, it’s actually looking pretty good. Mm-hmm.
Anthony Vicino: [00:43:03] Maybe put a billboard on your building. Oh yeah. I don’t know what kind of building, but maybe. Yeah. Got to get creative.
Dan Krueger: [00:43:09] Sometimes throw a tent and back and rent that out. I saw someone do that in south. I mean, San Francisco, actually. They were renting a Coleman tent for a few hundred bucks a night. Really? Yeah, that’s the extreme version of what we’re talking about here.
Anthony Vicino: [00:43:22] That’s that is like a minimalist adieu. I love it.
Dan Krueger: [00:43:26] Yeah. Yeah, because if the cost, I mean, if the supply constraint is there and you can’t build because it’s just not economically viable, then you get people living out of tents and you have like, you know, people that are very highly paid Google employees living in the back of a U-Haul.
Anthony Vicino: [00:43:41] Now, I don’t know exactly where your property is. Let’s let’s let’s put St. Paul aside for a second, because St. Paul is that rent control is just crazy. It really can cost a lot of what you can do. But in Minneapolis, let’s say in, let’s say, St. Paul gets a little bit more conservative with they scale it back a little bit now. In most rent control environments, if it’s, says, three percent plus CPI, which is inflation and it’s not, there’s no vacancy control, which means that you can raise rents between tenants and like, let’s say, we get more moderate rent control and that environment. One of the things that you’ll see is especially in Minnesota, in Minneapolis, where there’s the 2040 plan, there’ll be a large incentive to build because building keeps pace with inflation. And if it’s not, if the rent cap isn’t pegged to luxury new builds. So you might be sitting on a plot of land right now that at some point becomes very, very valuable to a developer. So it’s something to think about is maybe repurposing a building if you’re not able to. And this is again where the supply crunch comes in is like affordable housing. There’s not enough of it already. And if we’re incentivized to take our 1920s building and just tear it down and build something new, which is already putting it out of the price range of the tenants that we were serving before, it just keeps us exacerbating the issue. But from an investment standpoint, that might be away. Does rent control impact Airbnb’s? That’s a fantastic question. I do not think it bears any anything to do with it at all. But I could be completely wrong, but Airbnb always needs to be very, very careful with that, given the regulatory environments. I know Minneapolis has passed some things recently about non homestead. How many homestead homes that you can have? I don’t know if what that’s going to do for the Airbnb market. Presumably. It would not be affected by rent control because it’s not rent. There’s just the hospitality.
Dan Krueger: [00:45:28] It’s really hard to say anything definitively, you know, I mean, there’s just such a a big void in what we actually know to be true that we’ve got to make a lot of inferences. So we default towards the most negative assumptions because that’s just the way we approach things and we try to plan for that.
Anthony Vicino: [00:45:48] Joe asks, So are we buyers sellers or are we on hold? He wants us to be clear. He’s putting our feet to the coals and I would say
Dan Krueger: [00:45:56] On hold St. Paul mine in Minneapolis and also starting to look more in the burbs.
Anthony Vicino: [00:46:00] Yeah. So we’re on hold in St. Paul until that rent control ordinance. We’re not. We’re not dipping our toes back into those waters. Our current assets, we are confident to go back. I won’t say I love saying we love St. Paul.
Dan Krueger: [00:46:11] This is because St. Paul is fantastic. I love that
Anthony Vicino: [00:46:12] Market. But as it currently stands, buying new things with our model of value add we wouldn’t be able. We don’t feel we would be able to go in there and confidently do the work we want to do at the level we’d want to do it. And so we will continue riding out the current investments, which are fantastic and they’re going to do great regardless. Minneapolis still presents a lot of opportunities, especially as there’s a lot of fear and unknown. A lot of people are exiting early, but right now we don’t see any reason. We’ve had conversations with people who have the ear of the mayor and the City Council, and we don’t have any reason to believe that if rent control does pass there, that it’s going to be problematic for our model. And so we still have a lot of faith in Minneapolis. But we’re also starting to expand into the first ring suburbs now because. You know, when the times change, you got to change with them. Yeah. So broadening the broadening their horizons because St. Paul was such a core staple of our investment portfolio, we loved it. It was like where we cut our teeth. We we have two hundred and fifty hundred and eighty units there, and we love St. Paul.
Dan Krueger: [00:47:12] Yeah, for the same pulse. Yeah, it’s got to be something, you know, they
Anthony Vicino: [00:47:15] Love it and we’d love to keep investing there, but.
Dan Krueger: [00:47:20] Come on, St. Paul, come on.
Anthony Vicino: [00:47:22] I don’t know what to say, I don’t know what to say. Yeah. All right, so guys, we’ve exhausted, I’m exhausted. I’ve said everything I have to say. Not entirely. I still have many things, but if you guys have questions, now is the time to throw them into the chat. We appreciate everybody taking some time out of their day to join us. Hopefully, this was helpful or enlightening, or at least entertaining. Well, we’ll stick around for a couple more minutes if you have a question. Put it into the chat or in the Q&A if you’d rather ask us a question individually like your private type. Feel free to shoot us an email. I’m Anthony at Invictus Multifamily. This is Dan Invictus multifamily. Shoot us an email. We’d love to answer it. We can hop on a one-on-one phone call. If you have a small portfolio or you’re looking at this and you’re not sure what to do for your own portfolio and you’re scared and you’re overwhelmed, stop by the office. Come talk. Let’s brainstorm this together and see. Maybe we can. It’s all about perspective, right? And finding opportunities is sometimes just a matter of standing slightly to the side and looking at the situation differently, which we might be able to help you do that. So if you’re looking at your portfolio and like, Oh my God, do I bring it to the ground and run away? No, don’t do that.
Dan Krueger: [00:48:37] It’s going to be OK. Yeah, and do our current investors, you know, we’ve got a lot of people on here that are not investors, I’m sure. So we’re not going to bore you with all the numbers. But for those of you who invested with us, we did go through and underwriting everything. We’ll be emailing all our investors with the update underwriting, but just to kind of paint the picture from a really high level based on the properties that we have right now going in and re-underwriting, whether it’s Minneapolis or St. Paul, we’re assuming that St. Paul rent control is just going to go across the board at the exact same time. It’s not going to happen.
Anthony Vicino: [00:49:11] Assume everything just but
Dan Krueger: [00:49:12] We want to make sure that we’re covering all our bases. So we went through and underwrote all this stuff under that extremely strict rent control. Minneapolis or St. Paul doesn’t matter. Everything starts in May. That’s kind of the place we’re looking at here. So I don’t see across the board if we look at an internal rate of return. The most recent one of our most recent deals in St. Paul that we closed on back in July, we’re seeing an IRR go from twenty point two percent down to nineteen point four percent.
Anthony Vicino: [00:49:42] That’s pretty close. Yeah, point eight percent, not
Dan Krueger: [00:49:44] Not not a big difference.
Anthony Vicino: [00:49:46] Honestly, when we’re looking at projecting into the future, the
Dan Krueger: [00:49:48] Ten-point five percent average annual return in twenty-three to twenty. So it went down a little bit on that. But honestly, not big, not that big of a change there. The one we got in the same month over in Minneapolis, honestly, almost exactly the same.
Anthony Vicino: [00:50:02] Well, Dan, real quickly, can we? Is that is that this one? Is this one?
Dan Krueger: [00:50:07] I did Charles first. I’m talking,
Anthony Vicino: [00:50:08] Did you talk through what some of these changes were
Dan Krueger: [00:50:14] Going back even further? You know, this is kind of interesting. Some of those older deals that we had, we’ve been so pessimistic. I look back at some of these old underwritings and said, like, we already had three percent built-in. I’m like, Oh, we’re ready. And like, people would laugh about that in the past. But now it’s just like, literally, I don’t have to change anything. Yeah, we had a bank
Anthony Vicino: [00:50:31] Of about us two years ago,
Dan Krueger: [00:50:32] So. So and like, yeah, so it’s it works. And then if you combine the fact that we already had that built-in and assuming all this stuff happens and that equity appreciation happens like some of these things are actually looking better, I’m not actually going to send those better numbers to people because I don’t want to get to too crazy. But honestly, across the board, you know, out of all the deals, the biggest change we saw was an IRR change that dropped one percent. So not too shabby. We’ll send all the investors the details on those so that they’ve got some insight into exactly what those numbers look like under the worst-case scenario, but just kind of high level. What did we tweak across the board? We had rent controls going into effect in year two, which is next year. So regardless of whether it’s St. Paul or Minneapolis that happened, it was three percent flat. No inflation thing, just flat, three percent pet fees, late fees, and laundry were kept the same. We kept those guys the same on one of our properties. We took our parking from 50 to 75. And honestly, 75 is where the market is anyways, and we were a little bit behind on that one when we added rubs where we didn’t originally have it built-in. But I’m thinking that if this is going to keep playing out like this, rubs are going to become even more.
Dan Krueger: [00:51:49] Common in the market, and so that question of whether it’s going to be well received or not isn’t really going to be an issue. We added that right in there and. You know, one of the other properties we increased our robes like the one that we just got in January or in July, we went from fifty-three to fifty-five dollars on robes. Big change. Yeah. And then we started charging for parking at that one because that property picked up. It didn’t currently have parking being charged for and we hadn’t built it in. But heck, now we will. And in that standard, because these are nice, dense urban areas where parking is a premium. So the fact that that wasn’t built in is it’s always nice to have some low-hanging fruit there that you can tap into if needed, and that’s exactly what’s going on. So by and large, it’s, you know, really just looking at increasing the rubs, getting a little bit more for parking, getting up to market and there are some slight cap rate adjustments, but we took them from extremely conservative to still kind of conservative. Honestly, like on the one that we got in January 2020, I had a 10 basis point increase every year throughout the whole period built-in, so I took it down to a five basis point increase, which is still assuming the market is that we’re not seeing as much
Anthony Vicino: [00:53:03] In compression stops. The compression that we’ve been seeing over the last, however, many stops and stops and reverses somehow be
Dan Krueger: [00:53:10] Ridiculous with everything that’s going on right now and then the other ones, instead of having, you know, the cap rate go up two basis points a year just made it flat. So really changing things across the board by maybe like two basis points on the cap rate, pretty minuscule changes and just getting a little bit more creative with which bucket the income is coming in as opposed to renting in having to come in through rubs or parking or other fees is pretty much all we need to do here to keep things rolling. But you know, then the question is right to keep buying in St. Paul and we’re going to wait. We’re going to wait and see how things shake out. I’m thinking it’s going to become much more moderate and we can jump right back in, but we’ve got to wait and see.
Anthony Vicino: [00:53:48] You know, I was just thinking about that question that came in a little bit earlier about if you have a smaller property and you don’t have as many means for raising revenue. It’s really easy to fixate on the revenue because putting points on the board, it’s always sexy. We remember the high scorers. The MVP is usually the guy that puts the most points on the board. We forget about the defense and like the most important lesson I ever learned in business came from a mentor and very early who said, remember that a dollar saved is worth more than a dollar earned because the dollar earned is always on a margin, whereas the dollar saved always goes straight to the bottom line. So what that meant is when you raise the rent by a dollar. If you’re operating at a 50 percent expense ratio, you only get to keep 50 cents of that right. So if you focus on the defense and the expense reductions, how can you run your operation more effectively, maybe putting in low flow toilets or figuring out how you can manage this asset just in general more efficiently? Each dollar you cut and expenses goes to the bottom line. Now the problem and you got to be really careful here. This is where you are on a slippery, slippery slope to a slumlord is when you start cutting too much. And this is the problem with rent control is that it encourages people to cut too much. So you don’t have to figure out, what can I do to still maintain the quality of my resident experience while reducing expenses? And if you can do that, you’re going to make it through this pretty all. Oh, Joe, yeah, I love my sports.
Dan Krueger: [00:55:14] Do you know that? Yeah, one big one on that whole expense side is the taxes. I think we’ve never done this, but I’ve heard from a lot of people that have had really good success with appealing their property taxes to see if there’s something some way they can bring that down because that’s one of the biggest expenses that you have. The other one would be the mortgage, right? So if you can modify your mortgage or your taxes, those are two really big expenses that you could potentially reduce without having any negative impact on the resident. The other thing you can look at is keeping your vendors honest, right? If you’ve got, you know, a certain garbage company or certain other vendors that you’re using, right, call around to all the competition, see if you can get better bids on whatever services are being rendered. Because if there’s some competition among vendors or if they know that you can actually get something cheaper across town, they’ll probably come down.
Anthony Vicino: [00:56:07] You can’t do that with trash in St. Paul. That that still gets me, gets me in the craw.
Dan Krueger: [00:56:12] There are tons of trash companies you don’t have to stick with. One you don’t say, Paul, you do know I’ve got three different trash companies over there.
Anthony Vicino: [00:56:19] Yeah, well, anyway, I thought, I’m pretty sure they’re designated by territory.
Dan Krueger: [00:56:25] No, no. I’ve made switches. I mean, usually trash companies will lock you into a contract, and that could be the thing that gets you screwed. So as long as you’re not locked into a contract, at least I don’t know where you live. But in St. Paul, Minneapolis, there’s multiple companies that you can use for trash service. It doesn’t need to be one or the other. I think you might be thinking of something else because,
Anthony Vicino: [00:56:46] Yeah, it might be anybody else owned in St. Paul. What’s your experience with the trash company? I got
Dan Krueger: [00:56:50] Jeans.
Anthony Vicino: [00:56:52] I had some terrible,
Dan Krueger: [00:56:53] Terrible experiences in public.
Anthony Vicino: [00:56:55] Advanced down in, down in. The West St. Paul neighborhood, and I remember that being I don’t know if I think the
Dan Krueger: [00:57:02] Garbage company lied to you and said, No, you’re stuck with us, the city makes you. Maybe, maybe, yeah. Or maybe it changed. I don’t know if that was a long time ago. That might be different, but I know I’ve got three different trash companies and one of them is great.
Anthony Vicino: [00:57:14] Oh, gotcha. Thank you, Lynn. That’s very helpful because, yeah, I started in residential in St. Paul and then graduated to commercial with this guy and viewers see these. He handles the trash companies now, so I defer to him.
Dan Krueger: [00:57:25] So I don’t know if you guys can see this in the chat, but
Anthony Vicino: [00:57:28] Residential is assigned in the commercial. You can choose
Dan Krueger: [00:57:31] If you have an apartment building, you can choose if you’ve got a house, you get what you get, I guess.
Anthony Vicino: [00:57:35] Sense. Well, either way, if you’re owning a single-family or like a triplex like that’s how I started many years ago. And so that’s still scarred by this. So when we said trash company, I was like getting up in arms. Yeah, I’m glad you handle operations now.
Dan Krueger: [00:57:48] Honestly, it’s not the most fun part, but it’s one big puzzle I get to solve, so I’ll take it. So, I mean, I think that’s pretty much what we got, right? We got questions rolling in.
Anthony Vicino: [00:58:01] I mean, Ling seems to know what’s going on like Lin, get up here and talk. Let’s see here, I’m just going to sit.
Dan Krueger: [00:58:10] We want more questions.
Anthony Vicino: [00:58:13] Joe was impressed by the fact that I made a sports reference
Dan Krueger: [00:58:16] I was to
Anthony Vicino: [00:58:18] Because I love Sports Ball. I don’t support Ball. All right. So just to reiterate, guys, if you have questions that you want to answer off the air in private. Shoot us an email. I’m Anthony at Invictus Multifamily. This is Dan D810. That’s the part that I spelled, not Invictus, which probably is more helpful, but reach out to us. We are happy. And as you also guys, this is a changing landscape, so we’re constantly learning as well. So as you come across things that you think would be helpful, please, please, please forward them to us so we can share them with our community. And that’d be super helpful.
Dan Krueger: [00:59:02] Look, I’m not sure what you mean by will they check your book? I’ll check. They check our book every year.
Anthony Vicino: [00:59:07] Oh, so she’s asking, how will they monitor the three percent? This is a fantastic question, and the answer is nobody literally nobody knows. And there was a City Council meeting, I think, was on Wednesday, Joe. You can maybe attest to this to some boots on the ground there reported that nobody knows anything on the City Council about how it’s going to be enacted, how it’s going to be tracked in an article. They they mentioned the fact that on the policing side of things with the monitoring side, the person being interviewed said we will have thousands of monitors, a.k.a. the residents.
Dan Krueger: [00:59:45] Ok, sounds organized.
Anthony Vicino: [00:59:46] That’s cool. But that. But who’s the arbiter?
Dan Krueger: [00:59:52] That’s code for. We have no plan.
Anthony Vicino: [00:59:55] Yeah.
Dan Krueger: [00:59:55] So someone else figured
Anthony Vicino: [00:59:56] Out, Oh so seller book. Ok, so Joe says Seller book. So if you guys don’t know who we are, if you’re just joining us, we are Invictus Multifamily. We focus on investment opportunities here in the Twin Cities. Maybe not in St. Paul anymore, but we wrote a book Passive Investing Made Simple Our Whole Structure, where syndicators so what we do is we go in, we raise capital from residents from what we call them. Why am I blanking? I said I
Dan Krueger: [01:00:20] Was going to say a passenger
Anthony Vicino: [01:00:21] Retail, commercial retail investors. So passive investors, it’s been a long week, guys. You have no
Dan Krueger: [01:00:27] Idea. And I think we got a finish of the finish.
Anthony Vicino: [01:00:30] So, yeah, we wrote a book about how we do what we do, how we raise capital from investors to go purchase big assets. So if you’re interested in maybe doing what we’re doing, that book can give you some insights. If you’re interested in investing alongside us. That book is really designed for people that do not want to deal with toilets, tenants, and trash
Dan Krueger: [01:00:46] Or all this stuff. We just talk
Anthony Vicino: [01:00:48] All the rent control stuff that they want to invest in real estate, but they don’t want to be going to City Council meetings, and they don’t want to be caring about any of this stuff. And they just want to give their money to people who are doing all the work and caring about it problem. So that book is designed for people who want to invest in commercial real estate, take advantage of all the awesome benefits without doing any of the work.
Dan Krueger: [01:01:08] And if you guys want to learn more about just the economics of this whole topic and rent controls, I recommended a book a few weeks back on our podcast. So if you guys are avid listeners, you might have heard it. But Basic Economics by Thomas Sowell Anthony recommended this one to me a month or two ago. He goes in deep on rent control. I mean, the whole book is fast and the downstream effects are one of them.
Anthony Vicino: [01:01:30] So we talk about this. This is a really interesting thing that I hadn’t even thought about in a rent-controlled environment. If the number one problem that we’re trying to solve is supply right, there’s not enough supply and that’s what’s causing the prices to go up when you enact rent control. What it does is it puts an artificial ceiling on what people can afford and what they can afford. And so what you’re going to do is some people who previously could only afford a one-bedroom will find themselves in an environment where now they can afford a three-bedroom. And so a single male like myself, I go into a three-bedroom. I take two additional units off the market, which could have gone to a family. So just exactly I’m a jerk like that, but I can afford three units. I want more space because COVID, you know, I’m working from home now, but I can afford it. And so what it does is it creates this artificial cap and it compresses the supply even more. I found that really interesting.
Dan Krueger: [01:02:21] You see it in New York. This has been going on for a long time because there are some very strict rent control units in New York. And I don’t know if you know this, but there’s a lot of pretty high net worth individuals that live in Manhattan, in New York. And so you find these really wealthy individuals in these absurdly low rent-controlled apartments that are supposed to be for people that actually need them. And they’re like actors and actresses who have lived there for, like 30 years and they’re like, oh, I don’t want to give it up. It’s like that you’re wasting the resource.
Anthony Vicino: [01:02:48] And that’s the other part is you get a lot of I don’t want to give this up. And so they keep it and they move into another unit as well.
Dan Krueger: [01:02:55] Yeah.
Anthony Vicino: [01:02:56] And so it’s anyways, that’s basic economics by Thomas Sowell. That’s a great book. And the even better book, passive investing made simple. I’m not just saying that because I wrote it, but mainly because I wrote it.
Dan Krueger: [01:03:08] This is twice as long. Is that twice as good? Yes.
Anthony Vicino: [01:03:11] His book is so long. It’s so deep.
Dan Krueger: [01:03:13] It’s hard to put down,
Anthony Vicino: [01:03:14] Though it’s if you’re into economics, you’re going to love it. If you just want to learn more about rent control chapter one, stop there. George Miller, thanks for the webinar. Will you guys have this on your blog later? Do we watch you’re going to be sending this out in our emails? We are going to have it on the YouTube channel. We’re also going to convert this to a podcast and that will be going live next Tuesday. So if you want to come back and re-listen to all of this, you can do that. The podcast is multifamily investing made simple? You can subscribe to it on iTunes. And pretty much everywhere else,
Dan Krueger: [01:03:43] And leave a review if you like it, I don’t know. Just throwing that out there, I mean, if
Anthony Vicino: [01:03:46] You hated it, don’t leave a review unless you’re OK with lying and giving us a good review anyway. All right. Yeah, so Joe literally just dropped out, OK? Never mind. Bye, Joe. Hi, Joe. All right, guys. So it’s going to do it for us. I think we’ve run out of things to talk about here.
Dan Krueger: [01:04:10] We’ll be back as soon as there are updates.
Anthony Vicino: [01:04:12] Will you be back? Yeah, we appreciate you guys taking some time to join us. And Joe is here.
Dan Krueger: [01:04:18] Joe, well, it’s over, Jake. Take us
Anthony Vicino: [01:04:21] Out. Well, we’ll see you guys all next time.
