SOTM 60: Trump vs. Biden: How Election Results Could Impact Real Estate

November 2, 2020
With the presidential election just one day away, we want to touch on how either outcome could impact real estate. Ari Rastegar, founder and CEO of Rastegar Property Company, joins us to share his thoughts on post-election real estate opportunities. We also discuss the California exodus, the best markets to buy in right now, and what retail might look like once normalcy returns.
Listen to today’s show and learn:
  • About Rastegar Property Company [3:23]
  • Ari’s forecast for commercial real estate [12:11]
  • The future of retail [16:23]
  • Markets agents need to monitor right now [19:22]
  • How election results will impact real estate [20:18]
  • Coronavirus’ impact on New York City [23:59]
  • How homelessness destroyed San Francisco [29:29]
  • The California exodus [31:23]
  • Why agents need to hustle right now [36:13]
  • Ari’s predictions on multifamily properties [37:53]
  • The biggest real estate opportunities in 2021 [43:53]
  • Ari’s strategy for renovating multifamily properties [46:27]
  • Plus, so much more.
Ari Rastegar Ari Rastegar, Founder and CEO of Rastegar Property Company, has earned a reputation as a thought leader in real estate with his innovative, technology-driven investment strategies. He specializes in recession-resilient real assets and multifamily real estate developments, building portfolios designed to reduce risk and maximize capital appreciation potential. Ari is a frequent contributor to popular publications like The Wall Street Journal, Forbes, CBS, and International Business Times. He started his first real estate investment company in 2006 while still in law school at St. Mary’s University. He completed his undergraduate work at Texas A&M University. Related Links and Resources: Thanks for Rocking Out Thank you for tuning in to Pat Hiban Interviews Real Estate Rockstars, we appreciate you! To get more Rockstar content sent directly to your device as it becomes available, subscribe on iTunes or StitcherReviews on iTunes are extremely helpful and appreciated! We read each and every one of them, please feel free to leave your email so that we can personally reach out and say thanks! Have any questions? Tweet meFacebook me and ask Pat anything. Don’t forget to head on over to Bare Naked Agent for Pat’s answers, and advice. Thank you Rockstar Nation, and keep rockin!

Real Estate Rockstars, this is Aaron Amuchastegui. Hey, I am back. The last couple of weeks, you guys have heard from some of our old Real Estate Rockstar classic episodes. You’ve had Paul Morris on here being a guest host. I have been traveling over the last six weeks and now I am back and we are getting live.

As we get going with this one, this one is recording just a couple of days before it’s getting released. I’m really excited about who I get to talk to today and the different things we’re going to be talking about. This is going to be a hybrid between what to do in real estate, a state of the market, and also maybe an election policy update type stuff.

I am Aaron Muchastegui with Real Estate Rockstars. Today, I get to interview Ari Rastegar, founder, and CEO of Rastegar Property in Austin, Texas. Ari is doing so many things within his business: commercial, residential, developments, things like that. We’re going to talk about a whole bunch of fun stuff today. Ari, thanks for joining me.

Ari: Hey, thanks for having me. We love the show. We’re happy to be here.

Aaron: Awesome. Why don’t you give everybody just a quick little update of what Rastegar Property is? What are the projects that you’re working on? Just so we get some depth for the info you’re going to give us.

Ari: Yes, sure. We’ve been in 38 cities, 12 states, 7 different asset classes. Our investors are public pension funds, family offices, insurance companies, high net worth individuals. We’ve been really asset class agnostic for most of the firm’s history. I own 100% of the company. I literally deliver pizzas through college and use my student loan money in law school to start the firm.

It’s very much a family business. My wife works in the company and my sister-in-law is our chief operating officer. The core of our business now although we’d been in the other asset classes is here based in Austin, Texas. We have a high-rise site on McKinney Avenue in Dallas, the high-rise side in Phoenix, but our focus is really in the Sunbelt.

That’s really where our expertise lies and where we see really the future. Our core competency is vintage multifamily. Just buying 30-year-old, 40-year-old vintage products outside the urban core. One of the projects I’m most excited about that’s new to us, so we have some great partners that are helping us execute, is a 200-acre parcel in Kyle, Texas, which is about 15 miles south of Austin on the I-35 corridor, if anybody’s familiar with that, where we’re building 660 houses in this first phase, 300 multi-units in response to what’s really going on with COVID.

As we talk about this thing, agents are looking and seeing home prices surging outside of the urban core because COVID is kind of force people out the urban core for really proximity issues. You’re seeing housing prices really, really surge more than they have in many years before because people don’t feel as comfortable, the urban core.

I don’t think that’s permanent, but being in all these different asset classes and building industrial, live a 50-acre site next to very close to where Tesla is at Austin. We’re seeing a lot of these trends that had already started because of COVID, whether it’s the exodus out of California into Texas, the exodus from New York into the Florida areas.

COVID has thrown an accelerant on a lot of these trends that were already happening. I think there’s just such a tremendous opportunity right now for anybody that’s in this business that’ll do the work. Edison had a funny quote that people missed opportunity because opportunity shows up in overalls.

This is one of those moments where if you’re willing to do the work and slug through mud, there’s just such a tremendous opportunity to be able to create a lot of value, make money, whether it’s for your investors or whether it’s to serve your clients on the investment sales side. It’s really, people talk enough about doom and gloom. I actually think this is a pretty unbelievable generational opportunity, but that’s the long and short of it.

Aaron: I like the throwing accelerant on the trends, because we’ve seen it in real estate, we’ve seen people making choices faster than we’re coming. The exodus from California, there were a lot of people that because of different laws that were coming, we’re like, “Oh, eventually we need to start thinking about this,” and then it’s speeding up. People in the cities thinking, “Hey, I would like some more stuff and now this is speeding up.”

Then technology-wise, we’ve heard so many people say that we’ve excelled 10 years in 6 months. Airbnb, they interviewed the CEO recently. He said, “I didn’t realize I was going to have to make 20 years of decisions in six weeks.” They thought they thought they were going under, they thought they were out of business and now they’re going to go public.

It’s like seeing the different trends that people have seen, and similar for us. I’ve shared the story. I’ve got a bigger house in California when this was all starting, everybody canceled all the Airbnb bookings, we were thinking, “Oh no, that asset is gone.”

Then as soon as summer started to hit, instead of people coming for big parties and company retreats and things like that, we had people from San Francisco just wanting to go up, drive two hours out of San Francisco instead. As we talk about that exodus stuff, it’s really interesting to see–

Ari: I was in seven. We actually did a bunch of retail, but we touched it all. We actually sold a bunch of those assets and we did a lot of self-storage. We did student housing, we did some industrial redevelopment, office. We were very opportunistic in our strategies and we exited them. Actually did really well at discount retail that had the targets, the Roses, TJ Max, many years ago, we sold those outlets out back in 2006. Amazon started to take over the world but I still find it a little bit ironic that Amazon’s largest acquisition today is whole foods for $13.2 billion, which is a brick-and-mortar location. I still find that to be a little bit funny being that they’re e-commerce juggernaut. Dovetailing to your question, my first entree into real estate was building a little single-family home basically on Canyon Lake while I was in law school.

It was an $80,000 interim construction loan. I partnered with a local developer used my scholarship money to buy the lot. Borrowed a little bit of money from a friend of mine’s father and got to work. It was on the built site in the morning, building pouring concrete, and driving 20, 30 miles to make it to law school classes.

I wasn’t a very good law student, but I did graduate law. Otherwise, my father would have killed me, but that was how I started. We built houses, we did well, and then 2008 happened. I was lucky that to keep my hat and keep good credit and move on to the next thing and went to Wall Street, so it’s a town on Wall Street. We’re coming back down to Austin.

Aaron: Yes. That was the other big opportunity. Like 2008, 2009 became the– so many crazy stories out of there. That was when we bought our first house on the courthouse steps in 2009 and we were just trying to find all these different options. It was blood in the streets. My wife was working nights as a waitress at the casino and I was struggling, we were a failed home builder. We bought that first courthouse step. Fast forward, over the next couple years, we’d bought a thousand courthouse step things. That was the big opportunity. [crosstalk]

Ari: This is different though, but right now it’s different. It’s a little different than that though, right?

Aaron: It’s a totally different market. The mindset of going, “Hey, the world is crushing collapsing.” Finding the opportunity in what’s out there. You’re seeing there’s so many opportunities now. As you said, I don’t think the opportunity is necessarily going to be, well maybe you’re going to tell me different in the downtown core and things like that.

You mentioned retail really quick. Right now that’s what we’re seeing so many foreclosures in Texas. That’s really like the only foreclosures we’re seeing go through in Texas because the moratorium is commercial and retail. We’re seeing a lot of strip malls and things like that. What do you think is going to happen? Is there an opportunity there? Is it a sit and wait for a while? What’s your forecast on retail?

Ari: From an Austin stand, I have to bifurcate this response. I really believed in this K-shaped recovery. I guess that’s a fancy way, a jargoning way of saying some asset classes are going to recover quicker than others. You look at hospitality as an example, people are going to go back to hotels, people are going to travel, we’re going to have a vaccine and we’ll get there.

Retail needs to be reinvented. What happened when we call the retail apocalypse, it was really an overcorrection. If you look at millennials, I’m actually the oldest millennial. I’m literally at the cutoff. The core values are different. There is a desire for experience to be out of the house, to be doing things. As a father of three, my wife and I are really sad that Toys “R” Us doesn’t exist.

Not because we can’t buy toys online, but because it’s something we did as a family. You go to Toys “R” Us, you walk the aisles and it’s this fun thing you can do. People are starting to realize that as the retail has gone and clothes and all of those areas, which it absolutely has, people are really missing it. There are certain bars or restaurants and those things closing, we’re realizing that there’s actually a pent-up demand for the right type of retail.

I’ll give you a funny example. Louis Vuitton just spent, I want to say $20 million to exit their location on Madison Avenue. LVMH and Givenchy said, “We’re going to pay the landlord,” its owned by a very, very wealthy man in New York, named Jeff Sutton, he’s brilliant, “a huge breakup fee to leave Madison Avenue.” That’s a systemic shift.

What was interesting is up until the pandemic, only 10% of Louis Vuitton’s product was sold online. Now 100% of it is sold online. You’re having a shift in luxury goods. We thought all luxury goods should be done online. It’s shifting more and they’re seeing the sales happen, but we’re missing the experience on the other side of it.

I believe that there’s going to be a reinvention of what retail is. There was probably too much survival of the fittest, some things are just going to have to go that aren’t just thriving businesses and that’s capitalism and that’s survival of the fittest, and I’m a big believer. People ask me if I’m a Republican or a Democrat and I just say I’m an American. [chuckles]

Aaron: I don’t want to say what you are right now anyway. People are so–

Ari: It’s not even that. We’ll talk a little bit about that, about the implications of the election because I know a lot of people are thinking about that and what that means. I actually believe that retail is going to make a pretty interesting resurgence, but it’s going to be different. For example, some of the big shopping malls that we grew up going to, that’s not coming back. Not in that way.

Those sites though are prime real estate, so you can bulldoze them, rezone them, build multifamily consensually as some sort of mixed-use component, office. Some of the big boxes that are in these like Sears is a great example. Let’s say the Sears goes bankrupt in big shopping center, you can convert that into self-storage. It’s going to change, but it’s not going to go away.

People want to go to restaurants, they want to go to bars, they want to go to live music thing, they want to be– We’re tribal beings. This is the whole thing into the work-from-home. Coca-Cola started this work from home thing 10 years ago and the new CEO took over. He let a lot of people in certain sectors work from home. Longer-term people like, “Oh, people are going to work from home, work from home.”

I don’t think that’s true. I think that the power of human interaction, the power of connection, of being together, whiteboarding, talking, it creates something greater than the sum of its parts. Breaking bread together, going to lunch, and having these interactions. There are certain sectors that if you’re a coder and you’re not having any interaction with clients per se, and you’re not in a sales or marketing or those departments.

Sure there’s going to be certain sectors that’ll have more work from home, but the office will begin to come back in a very meaningful way. We also have more entrepreneurs and more startups right now than we ever had in the history of the United States, which I love to see. That shows the innovation that’s happening. During this type of pandemic, we saw during World War II, out of necessity, we innovated.

That what’s going to happen to retail: it’s going to innovate, it’s going to iterate, it’s going to change it to something different. There might not be 20 bars, but there’s going to be six or seven awesome bars, or there might not be 20 clothing stores, but trust me, Lululemon is still gonna have their spot there. It’s going to be about finding out, where is the experience?

If you can create an experience with retail, whether that’s restaurants or that’s shopping, that is what I believe will be the future of retail. Is some kind of activity that is incorporated into what that actually is. There’s certain markets that that’s going to thrive more in. If you look at business-friendly states like Texas, like Florida, like Arizona, cities that are business-friendly, that have a younger culture, like Nashville that has a great music scene, you’re going to see retail and things like that begin to recover much quicker and be vibrant in those types of environments.

Where retail pricing is extremely expensive in San Francisco and New York– I was joking the other day on Yahoo finance that, New York and California are the land of the flee and Texas is the land of the free. In areas that you have the ability to do that, I believe that it’s going to recover and it’s actually going to be much more interesting, much more innovative. I’m excited to see what that iteration is going to look like.

Aaron: I love the point of the people are missing some of that experience and maybe they don’t even realize it.

Ari: They feel something’s missing. It’s like, “I’m at home or I’m at–” It’s the thing. The other side of it is, which I thought was wildly ironic, is the CEO of Zoom said he’s sick of Zoom meetings. I think we all are, but Genius, it’s done a great thing. I’m not entirely sure why Skype didn’t fill that void. That’s another discussion.

It’s almost like Skype became MySpace. A lot of the listeners might be too young to remember MySpace, per se, but I’m not entirely sure why Skype didn’t take over. That might be a different podcast, but these are all going to recover. All of these things are going to recover. We have population growth, but it’s about the macro play of what cities.

If I’m an agent right now, as an example, I’m looking at Phoenix, Arizona, the Sprawl Metroplex, I’m looking at Dallas Texas. I’m certainly in Austin. I’m in Raleigh Durham. I’m in Charlotte. I’m in Orlando. I’m in Tampa. I’m in cities that have strong technology hubs. I’m looking at the suburban core, watching the suburban areas thriving.

I’m looking more at single-family home investment than I ever would be, and talking to people, leaving California, buying in Texas, selling their house for a couple of million bucks, as you mentioned, and buying the same equivalent size location for $500,000, and watching that population migration trend.

If we look at the election, there’s a lot of reasons that I’m still– Look, we’ve been in the longest bull market in history. We all know that. If Biden wins, from a real estate vantage point, there’s a lot of things that would create a lot of opportunity. Some of the is distress, which is a good thing. The market’s coming down, people look at as, “Oh, the market’s coming down so bad.”

We live in a cyclical economy. This is a cyclical economy. When you have a fed without getting too much into the weeds, this is how the death cycle works. You go in, you have a bull market, it comes down. There’s an old saying on Wall Street that bulls make money, bears make money, pigs get slaughtered.

The market coming down or maybe some of the things that Biden talks about could create huge distress opportunity, buying great real estate at a fraction of intrinsic value that will grow over time which is fantastic. There’s a lot of arguments to be made, the market needs to come down, tech stocks are trading at P/E multiples that are a little bit scary.

Trump being a real estate guy, if he wins, opportunity zones will stay intact as we see them. Probably you’ll have your long-term capital gain taxes kind of stay where they are. There’s different reasons, but because of the pandemic and because of this interesting time, either way, the elections swings, I still believe they’re going to create massive opportunity but for different reasons.

Aaron: Yes, I like that idea of people get so stressed out about what’s going on right now. People say we’re more polarized now than we’ve ever been, but I remember every election year for the past 15, 20 years, January would hit in the election year and the news would totally change.

Ari: Accelerate. It’s all accelerate. Everything is sensationalized, everyone is so– There’s been an emotional, psychological trauma that this has caused, is that fair to say?

Aaron: Yes, I think that is fair to say. There’s is trauma just from the news–

Ari: There’s trauma. I’m not a psychologist but, look, just having my kids at home that they can’t go outside as much and hang out with their friends. There’s something there. Even with the vaccine coming, it’s still going to take time for people. When you’re in that state of emotional trauma and you have anxiety of whatever it is, no matter what the issue is, to your part of the election, or your friend texted you something, you’re already on the edge of your seat.

It’s being accelerated, jet fuels being thrown on it. Yes, it’s become polarizing. I think right now is a very polarizing time certainly between Trump and Biden and this division that we’re seeing. I also believe it’s an accelerant and it’s not truly as much on the merits as people are trying to make it, it’s that everybody else is very, very sensitive for a good reason.

This is the first pandemic that we’ve seen in modern history, although we have had the Spanish Flu. This is not the first time this has happened. Spanish Flu was exponentially worse. you had people literally coughing up blood and dying in the streets, literally. Not to minimize, there’s a lot of people that have really, really suffered, which is horrible, and it’s been devastating for many different reasons.

Long-term, it’s the greatest country in the world. When you look at the Southern states that are business-friendly, were having the best tech innovation. There is places to make money right that there has never been before and people being entrepreneurial more than they’ve ever been which is pretty incredible if you think about it.

Aaron: Yes, it really is interesting too because we’ve talked about before that there’s two different recoveries, there’ two different experiences that are happening right now in the world. There’s a lot of people that are saying, “Oh, with my kids working at home and we’re working from home now, we’re getting so much more family-experienced and we’re not spending all this time at Costco’s anymore on Sundays.”

I was talking to a guy that lives in Manhattan yesterday, and he still lives in Manhattan. I said, “How’s it going?” He said, “I work at home now and my wife works at home now, our kids are working from home now,” and he’s like, “and it’s really stressful. We’re really struggling because the best parts of the city are all closed.” We have this tiny little place to live–

Ari: What’s happening in Manhattan honestly, I live in Manhattan for many, many years and I love New York City, it is devastating, what’s going on in Manhattan. Honestly, what’s going on in SoHo and some of the things there– Look, I don’t get too much into politics. Look, I think there’s great points on both sides as I’ve mentioned before. There’s some good here, some good there and whatever, but that city right now is devastated. I mean, it is horrific how bad it is.

Aaron: I just think people need to remember that.

Ari: Life-long New Yorkers that I know has said to me, very senior people in the real estate world, that they don’t think it’ll ever recover. Think about that; not to ever recover. That’s scary. Mayor de Blasio is talking about making SoHo the affordable housing, homeless epicenter of New York City. Seemed a little bit strange.

Aaron: We’ll see this become the homeless epicenter. Will that become the affordable housing because everything is mashed together.

Ari: Can you imagine?

Aaron: In San Francisco, it’s happening.

Ari: By the way, it’s absolutely happening. No question. When you look at homelessness, you look at these other issues, and that’s another– By the way, homelessness and things have that effect on real estate, whether people think about that or not. You think twice if you’re taking your kid, your wife out and there’s homeless that are in front of your building or whatever that looks like and that’s whole other issue that we need to figure out a solution for.

Because again, a lot of homelessness, what people don’t talk about, which is very sad, is the mental health around it again. It’s not just homelessness, there’s a lot of mental health issues that are tied into that that need to be addressed and that’s a separate discussion which is very sad. If those things aren’t taken care of, they destroy cities like they did San Francisco. San Francisco, honestly, how cool the city is in San Francisco.

My whole childhood, every time we got to go into California, we wanted to go to San Francisco. We wanted to appear. We wanted to look at those giant buildings.

Ari: Of course, it has the hills, there’s the water, great food, all these things. Then they didn’t deal with the homeless issues the way they should’ve. I honestly think, ethically, it should’ve been dealt with in a different way, in a better way. Some cities like Houston is an example, have done a tremendous job with homelessness and dealing with it ethically and it’s just great.

If you don’t know much about what they have dealt with it, you should look it up. It’s worth reading, like what their plan was because it’s been so effective. It’s unbelievable. This is going to impact real estate in a major way where people are like, “Do I want to live in a shoe box anymore if I’m going to work from home, or do I want to be–“

Having all that proximity to your point of your friend of Manhattan, of the kids here around, just the simple distraction. You love your children, you love your wife, you love your husband, but that separation of, as the kids going to school, them socially interacting, getting that different stimulation.

Wife, husband, going to work, doing something coming back together, there’s a certain routine and a certain synergy and a harmony that creates that it doesn’t matter who they are. If you’re this close together in a little apartment and you’re the best friends in the world, there’s going to be friction.

Aaron: Yes, it is. It’s wild to think about it. Maybe there’s an accelerant there too, because that is a whole different topic that has very tough solutions to it. In California, they’ve started to buy hotels from the owners because their hotels are now struggling and now it’s a homeless center where we’re homeless people get to live. That’s not necessarily a bad solution, but the other part with, it such a tough, complicated thing.

I think COVID has probably thrown some accelerant on that too. We’re now talking about that exodus, the city and the exodus and where there is. Most of the property– We own a few hundred houses that are about an hour from Austin. We’ve got them up in Killeen and South of Austin and places where they’re really great right now because they’re very affordable.

Ari: Growing like crazy.

Aaron: Yes, you still get a house for $100,000. If you’re trading–

Ari: By the way, with huge population growth, huge upside potential, I think it’s brilliant markets. We’re super long on Kyle, which is a little bit closer, but the premise is pretty much the same. We’re building them to rent quite frankly and hold them longer term. That makes all the sense in the world, but people weren’t really thinking about that kind of stuff before.

Aaron: People didn’t really like the market. You could still get a– It’s funny if you sell a house in Sacramento, California, and you want to move to Austin, Texas in the heart of Austin, you’re not actually going to get that much bigger house for your dollar anymore. The city of Austin, they’re the same.

Ari: Absolutely.

Aaron: If you go 30 minutes outside of Austin–

Ari: Aint that amazing?

Aaron: It is amazing. It is amazing.

Ari: You know what I call that?

Aaron: What’s that?

Ari: Opportunity.

Aaron: Yes. It is the opportunity as you get close. Now people are realizing, “Hey, if I sell my $2 million California house, I want to live in Austin, I’m going to pay 2 million bucks, but I move 30 miles outside and I get a comparable property size for $200,000– [crosstalk]”

Ari: With a yard, good school districts, and proximity. One of the coolest cities in America.

Aaron: Yes, you still have to go see this stuff.

Ari: You know what I call a 30-minute drive?

Aaron: What’s that?

Ari: Two phone calls.

Aaron: A couple of phones. With the Tesla, right? It’s also like, you can almost be emailing now too. The self-driving is on the verge.

Ari: That still makes me a little bit uncomfortable, but ultimately, I’m good with my hands-free, with my Bluetooth. Two phone calls, right?

Aaron: Two phone calls. The self-driving and all those different technologies and things, and even Uber and things like that, have made living 20 minutes outside the city totally tolerable and not a disadvantage anymore.

Ari: Because when you’re in San Francisco or you’re in New York, how many people, their whole life, commute from Long Island to Manhattan, take an hour and 15-minute train back and forth every day? Millions of people. Millions. Driving 30 minutes, 20 minutes, 42 minutes, 18 minutes, to have that standard of living, it’s unbelievable.

If I was an agent today, I would be going to the Killeen’s of the world as you’re explaining and I would be putting my– I’d be going to Killeen, Mainer. I’d be going to Bastrop. I’d be going to all these little cities like Fredericksburg, Dripping Springs. Little city quaint, cool little areas that might there and I’d be putting my flag in the ground.

Because inevitably, simply from property migration and all the reasons that you explained, those cities are going to be vibrant and be unbelievably valuable if you look at the 5 to 7, and the 10 year. I urge everybody in this market though, as whether they’re investors or agents is to play long ball. You have to build those relations.

This is not an overnight market in my mind, although Austin housing things in these markets are selling very quickly and Dallas as well, Phoenix, and it’s moving. If you can play long ball here, whether as an investor, whether building relationships as an agent and building up your clientele, I think the payoff is so much bigger than it is from traditional long ball. If that makes sense.

Aaron: Yes. Back in like 2009, 2010 Blackstone and the big investors that really went after the housing, they said, “Let’s find houses that we’re just going to get them for less than replacement value.” At that time, they just said, “Hey, we just need them for less than replacement value and it’s going to work itself out.” As I see places, 30 minutes outside this course [crosstalk].

Ari: Do you know how much money they made? They shocked themselves.

Aaron: They shocked themselves and that whole reasoning of that was long ball. They actually performed much faster than they thought they would because they created a whole different market.

Ari: Ain’t that funny?

Aaron: They bought every house on foreclosure and on the market and the market went up 40% instantly. They were brilliant but the premise at the beginning of, “Hey, this is a deal. This is a deal. It is below replacement value.” When you start to look 30 minutes outside the urban course. For people out there right now, this is a crazy housing market.

Agents are like, “Hey, we’re having the biggest year ever,” and the other half of our agents that are listeners are really struggling because they can’t figure out where those opportunities are. When you start to look just a little bit outside the urban core, find the places that are affordable with a way to play long ball, I think that is one of the biggest opportunities.

Ari: You nailed it. That is the best advice. There’s no way it could have been said more elegantly and more succinctly. That’s exactly right. I will say back to the Edison quote is this is not a lazy person’s market. You’re going to have to work twice as hard to get there, to get those results. You got to hustle. Already break it to everybody. You see what I’m saying?

Aaron: Absolutely.

Ari: Because you’re walking through mud. You’re walking through mud. It’s like financing, rates are really low, but borrowing restrictions are higher. Some people want all. I think there’s junk to sort through, but if you do, and you put in that work, put in that extra hour, it takes that hustler’s mentality. You’re going to see a big dichotomy as you pointed out.

Because if you’re hustling, this year is a banner year. If you’re hustling, you’re on the bottom. Usually, that wouldn’t be the dichotomy. If you’re not working as hard, you’re still doing pretty good, that’s not what this market is. It’s either you’re in there and a winner and you’re taking over or you’re getting eaten alive. I don’t see there’s much of a middle there.

Aaron: 2010 was the same. The guys that had the REO listings, they had the short-sale listings, the guys that were buying the foreclosures, it was feast or famine, so you’ve got these opposite ends of it. We’re in this time in our life, where could be maybe the second opportunity in my lifetime that I’ve seen that’s really out there but yes.

Ari: This is bigger than OA, by the way.

Aaron: People need to push. I hadn’t thought about it being bigger, but seeing that out there, let’s talk multifamily for a minute because that’s one of your kind of specialties.

Ari: Yes, that’s one of my core competencies.

Aaron: Yes, It’s your core stuff. I’m thinking, so downtown Austin, when COVID hit, our friends were selling their high-end condos downtown. People said, “Now you don’t have to work downtown anymore. Now you can work from home.” Everybody is fire selling everything. People are moving out of apartments because like the people said in Manhattan–

Ari: Prices didn’t dip as much as they–

Aaron: You are absolutely right. In March and April, everyone was terrified.

Ari: For us in Austin for prices to dip 8%, that’s a fire sale.

Aaron: Yes, that’s true.

Ari: An occupancy dropped in office 5%.

Aaron: What do you think is going to happen– Multifamily downtown compared to multifamily like three to– There’s a ton of–

Ari: We own outside of the urban core. Our strategy has always been, so we own stuff in Clarksville and those people that know Austin that’s right outside of downtown. Outside the urban core, but still central Austin, has been our thesis mostly. That stuff, we had record-breaking applicants. We collected over 99% of our rents at the height of COVID.

I think we did seven transactions, five of which were multi-family during COVID. Closed on them. They have all outperformed everything that we thought that they were going to do. The fact of the matter is people are going to come back to the urban core. This is temporary. It’s temporary.

Aaron: Our rent collections are higher than they’ve ever been right now.

Ari: I’m with you.

Aaron: Our occupancy is higher than it’s ever been.

Ari: No question. I think that’s a proximity geographic issue based upon the way you’re talking about it. Class A, obviously, it took a little bit of a hit. If the cities that we’re talking about that are these top 10 robust Sunbelt level cities, wasn’t really that bad multifamily as a whole on average. New York City at this time last year had about 5,000 vacant apartments. The last thing I read is that they have 35,000 vacant apartments. That’s a problem.

Aaron: That’s a problem.

Ari: Collecting 92% of your rents is performance as vacancy loss. Multifamily has been the flight to security and I believe it’s going to continue to be a flight to security. People are more cost conscious right now. The amenity that typically was the knock on vintage multifamily of saying, “Oh, you don’t have a gym, you don’t elevate, whatever, has actually become a plus. Because vintage, two storey or garden-style apartments that, just to put that in perspective, visualizes what the old motels look like.

The two-story walkup or three-story walkup has inherent social distancing. People see that and say, “Oh, these are renovated down to the studs, and it’s nice on the inside. I can pay 30% less than the Class A across the street. I’m actually not using the gym, or I’m not one of the pool.” It’s actually become a positive.

Aaron: Apartments that are, let’s say, five miles out of downtown, those two stories just like you’re talking about compared to downtown Austin or the cities, wherever, as you get out there. Do you think prices will go up for apartments that are five miles out and down for stuff in the city or do you think

Ari: Look, prices are going to surge on that type of market for a while because of the emotional trauma. People want to be out there for that reason because it gives them a little sense of security.

Aaron: Go ahead.

Ari: There will always be a certain amount of people that like urban living. In markets like Austin or Nashville as an example, or Raleigh, where your urban core is actually pretty limited because Austin has geographic barriers. You go too far west, you hit the pill country and you can’t build there. East, you can go the other way. That’s is headed.

There is always going to be a market of people that want to be in that. Whatever blip that we’re seeing on the multifamily urban core side, in sunbelt cities, the major sunbelt cities that are anchored mostly with tech or have diversified economies, this is a blip. If you’re looking at a five, seven-year tenure, on a tenure performer, this is literally negligible, what we’re talking about.

Aaron: I like that comparison of a core, a city core with geographic limitations, meaning it doesn’t go on forever, because in San Francisco, it goes on forever.

Ari: That’s the issue why Austin has done so well, is that, and this is what I love about Austin, so you have a strong liberal core. Right? with the perimeters highly conservative. That’s done, is create a beautiful dialogue. We have beautiful trees. There’s very strict zoning laws. Great. These are the things that make real estate surge. You have geographical barriers, you have actual supply and demand. We know what can be built. This is why Manhattan really went through the roof.

Is this a freaking island? It’s an island. There’s only so much can be done. When you couple that with one of the more parks than any top 10 city in the country, and with beautiful water, great live music, and good food. [crosstalk] By the way, and fair weather climate, and no state income taxes. It starts to become pretty obvious why this city is the future effectively.

Aaron: You’re making a lot of bets right now, maybe it’s not fair to say that. You’re doing the long game in Kyle. You’ve got the garden-style apartments out there. What do you think in the first year of the election, maybe it’s a different answer for either, what’s the biggest opportunity in 2021? If someone was going to say, “Hey,” whether it’s as an agent or whether it is as an investor or really trying to create this generation–

Ari: I would ask slightly, I would look at it, I’d have to clarify. It depends on what the goal is. I’m not copping out of the question. It depends on what we’re looking for. Is it a net worth play? What’s your timeline? Because if your timeline is to go do something and go to distress, and you have 10 years, I’m just using an example– Hospitality is destroyed right now.

If you could buy a boutique hotel in a great area, for a ridiculously low price, but you have 10 years, people are going to come back to that hotel. If you’re just starting out and you’re trying to buy your first rental property and start to build your portfolio, I’d be exactly where you are. Clean, little cities outside of great cities, like Sprawl Metroplex of Phoenix, is a great example.

There’s so many little pockets around there. Forget about Scottsdale and the more expensive areas, but out there, you can do that exactly what y’all are doing. You can go buy a single family home, finance the thing for 2%, rent it, and wait. It depends on what part of the market that you’re looking at. For us, the biggest opportunity is vintage multifamily 50 to 100 doors, 30-year-old plus product near the urban core, but outside the urban core, close to new development that we can do Class A finish out.

I’m talking about gut renovation down to the studs, new electrical, new plumbing, new roofing, effectively creating an annuity, increasing rent, and then putting into agency financing, financing with Fannie Mae and Freddie Mac, and waiting. Because right now to lock in, this is almost unbelievable. Fannie Mae quoted us 2.4% on a 15-year term with 10 years interest only, non-recourse?

Aaron: How big was that property?

Ari: That property was 18 million purchase price.

Aaron: It is crazy to even–

Ari: That’s literally free money on an inflationary basis.

Aaron: It’s like they’re paying you to take the money if you’re considering inflation when the rates are that low. You’re buying 30-year-old apartment complexes and even though they’re rented and they’re performing at a cap, you are adding value on all those. Do you got people one building at a time and you got it or you got everything?

Ari: No, no, no absolutely not. We go with organic records. We don’t kick people out of buildings. By the way, not only is it not best practices, in my opinion, I don’t think it’s good business, because why get rid of your current cash flows? We want to test our thesis. If you have 50-unit building, five units are organically maturing or organically expiring. You take those five units, you renovate them.

First of all, you have to see if your thesis is right. I put in these countertops, this flooring, this finish out, what if they don’t lease? I’m going to vacate the whole building and just say, “Oh, I’m right. This is what the market wants. What if I’m wrong?” If you do it on five units, and you maintain 95% occupancy, you can pivot on the next ones and put a different countertop in or less than then you’re more. It’s all about mitigating risk.

In this environment, the most important thing is how you run sensitivity analyses. That’s basically a fancy way of saying, if stuff goes wrong, what are you going to do? You need to be more stringent on budget, more cost-effect, running your expenses. You have to watch the pennies in this market, because if you don’t, small leaks sink big ships.

Aaron: That is great advice on a strategy out there that even people on their second, or people that have five, six, a lot of people talk about they’re in single-family, they want to get into multifamily. How do you do it? Because there’s so many people that are presenting these value add performance, they’re like, “Hey, we’re going to buy this, we’re going to do this much value add.” You’re saying, “Hey, it’s just your thing belonging. There’s no rush. Let’s do it as we can, figure out the best thing. After we do 20 or 30 units, we’ll figure it out.”

Ari: It’s lower risk. If you’re an investor, you should take that word out of your lexicon, throw it in the garbage, and call yourself a risk manager. That’s the difference between a gambler and an investor, is risk management. My job is to look at every scenario statistically that I can look at or stress testing, as they say, the fancy way to say, my Performa, and manage risk, especially if you have third party capital, especially if you have other people’s money, even more so.

Because then at that point, you’re responsible, whether you’re a fiduciary and a bit, you have to manage those things and take as little risk as possible to make whatever money you’re making. We can make this much money but how much risk are you taking? That’s always looking like it’s, we call it risk-adjusted returns are not we but industry jargon, risk-adjusted returns.

If I can take this much risk to make this much money, that’s the asymmetrical risk that I’m looking for. That can be applied to a single-family home you’re buying for $100,000. Got the whole thing, changed the roof, do all this stuff, and go spend every dollar on the whatever, hey, try to get a tenant for six months or a year. Get a little money come around the bank. Ask them what they want. Change your cabinets. You’ll see if that gets you an extra 50 bucks.

Taking it slow and playing that long ball game back to that thing is what I believe will ultimately achieve greater results over time. We live in this instant gratification, quick fix dopamine hit environment that has to happen now. That’s not how investing is done in the long-term, in a risk mitigated environment, in my opinion.

Aaron: I like that idea. Throw out the word investor, you’re now a risk manager, and the more risk you manage, the more you get paid for it. The more risk that someone is able to manage, the higher they get paid for it. Your video went out but I think you’re still there. Can you still hear?

Ari: My video go out?

Aaron: Yes. You’re back. We’re just talking about Zoom and all those different technologies out there, that has been one of the coolest things I think for technology innovation, is, how many people do know how to get on now and click in and see that?

Ari: Aint that cool?

Aaron: I’ll do five podcast interviews today. I’ll be able to– As I hit my journey back, we’re jumping back in the RV next week heading back to Austin. I can’t wait to hit kind of some of our best weather– [crosstalk].

Ari: Look, I’ll tell you what, when you get back to Austin, shoot me an email. Let’s grab dinner, let’s get together come by the office. I’ll show you some of the stuff that we’re doing. I’d love to see the stuff you guys are doing as well. We love the show. We love what you guys are doing. Keep it up. We’re big fans of what you’re doing.

Aaron: That is awesome. Ari Rastegar, thank you for coming on here today. If our listeners want more information, they want to hear more of what you’re saying, is there anywhere they can go find some stuff that you do?

Ari: Yes. Honestly, just googling my name, you just type in Ari Rastegar into Google or go Rastegar Property in Google, there’s a bunch of stuff out there even in Forbes and The Journal. It’s very public what we’ve done, what we do, and what we stand for and what we believe in. It’s pretty easy to look us up and see what we do. We love to come back if it makes sense and we’d love to listen in and see more of what you guys are doing.

Aaron: Yes, I think for sure in a few months, we’ll have to get you back on as you and I are then going to be talking about our [Crosstalk].

Ari: Let’s see what happens. Let’s see if we’re right.

Aaron: Let’s see what happens. Let’s see what’s going on. Let’s see who gets elected and what’s next. Ari, thanks for joining me today. Real Estate Rockstars, thank you for listening.

Ari: Much love to you guys.


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