Real Investor Radio Podcast

Craig Fuhr (00:00)
Hey, welcome back to Real Investor Radio. I'm Craig Feuer joined again by the great Jack Bevere. Jack, quick episode here. I was taking a quick look at the Pricewaterhouse and Urban Land Institute emerging trends in real estate for 2026. And I thought there were a couple of takeaways, one in particular that I thought we would expound on today.

I basically asked Chad to summarize the five major topics of this report that they come out with every year. And one of the bigger headlines in it was small and multifamily, small multifamily and everyday rentals is going to remain head and shoulders above all other property types with particular investor interest in work for how workforce housing and smaller SFR and multifamily.

Multifamily starts fell roughly 40 % from 2023 to 2025, setting up for improving vacancies and firmer rent growth over 26 and 27. The company, Dominion Financial Services, we have a great blog. And over the last few weeks, Jack, we've put out what we feel is the outlook for small multifamily over the next 12 months.

But in particular, how to analyze those types of opportunities, Jack. How to underwrite them in a way that you can avoid all of the rookie mistakes that come along with ⁓ underwriting that type of asset. So I thought we would jump into that today as quick help for folks that are looking at small to mid-size multifamily opportunities and get your thoughts on it.

Jack BeVier (01:47)
Yeah, sure. I do. am anecdotally seeing more multifamily opportunities hitting the market and those deals trading at more reasonable cap rates, you know, where there's actually a creative, you can actually borrow at a cheaper rate than the going in cap rate, which, you know, was an unheard of idea in 2021 to 2024. And so that's exciting just from a fundamentals investing perspective. I think that

Deal volume is down still certainly relative to that period of time. And there's a bunch of deals that didn't pencil that are in workout now and are getting in later and later stages of workout because time just keeps passing. Right. And I think, you know, the overall trend was generally to kick the can down the road, know, lenders that were realizing that their borrowers were in some level of

sub performance, decided that they didn't want to deal with that, right? They didn't want to foreclose and put a gun to all these guys' heads. They just decided to restructure it or kick the can, let them put it on the back end or, you know, modify the rate just to keep this thing in a performing status to the extent that they were, you know, allowed to do that. So we, we haven't seen a flood of multifamily inventory, but we've certainly seen a pickup.

in multifamily inventory, would say, especially over the past six months. And I think it's a trend that we expect to continue and maybe even like with the pace increasing also. And so I'm kind of excited about the buying opportunity for small multifamily over the course of the next couple of years. I think that it's gonna be a place where you can get some better yields than the house next door, which is...

You know, the opposite of 15 years ago, used to be that the multifamily building was a seven cap and you could buy the house next door for a nine today. The multifamily is still a seven cap, but the house next door is a five. so. You know, the rel on a relative value basis, I think that multifamilies become better, a better, you know, more interesting from a cashflow investors perspective than it was before.

Craig Fuhr (03:58)
Let's kick off a quick discussion on some issues that you see when folks are underwriting these opportunities, Jack. I'll start with number one, underestimating expense ratios.

Jack BeVier (04:13)
Yeah, absolutely. So the every broker or wholesaler tell, you know, you get those single family pro forma's and the broker tells you that the only expenses are property management, maintenance and insurance and taxes. You know, multifamily brokers are the same, this, you know, rhyme with that idea. And, um, and especially, and we see it a lot in like borrowers submitting loan requests and telling us that like, Hey, this is a,

You know, this is this, this asset's going to trade at $300 a foot, even though all the comps are at $225 a foot. And then when you really dig into how they got there with that, um, it's that they've got a 25 % expense ratio, which what mean by that is that, you know, if you've got a thousand dollars of rent, they are saying that I've going to spend $250 a month in expenses or $2,000 a month in rent is $500 a month in expenses. And I've just never seen a property actually perform at that level.

Like I am, we kind of have like, just, just kind of like back of the envelope heuristic based off of the rents. This is not by far like, you know, perfect or correct, but like, if you're just kind of like eyeballing a deal to be like, Hey, should I spend any more time on this thing? If the rents, if the monthly rents on a property or less than a thousand dollars a month,

I've never seen one that had better than a 50 % expense ratio. So if the pro forma says that it's a $850 a month rent and the expense ratio is 35%, that's toilet paper. there's, know, like that's, you know, we were working off of very false assumptions and frankly, the guy's trying to get over on you. Right. So I like walk into that deal with a great deal of skepticism. You get up to like, you know, 12 to $1,500 a month rents.

Maybe you can get your expense ratio into the 40 to 45 % range for a well operated property. When you get above 1500 a month, 15 to 2000 a month, you maybe can get that into the 35, 40 % range. If your rents are above 2000 a unit a month, maybe you can get that to the 30, 35 % range. But those are like, you know, property taxes are different, how utilities are assigned are different. So there's, there are factors that are going to vary those.

numbers within those ranges there that people pick me apart for having given these rough guides. But those are like pretty good starting points that if, if, if the, if the pro forma is outside of those reference points, then I want to understand exactly why, like then, then it bears an explanation. so yeah, those are the kind of the, numbers that we use internally to try to like flesh that stuff out quickly.

Craig Fuhr (06:49)
Sure.

Are you saying there's that strata that difference there? Is that directly tied to sort of like the asset class itself? Like, is it class A is a class B, C, D, you know? So I.

Jack BeVier (07:07)
Um, yeah,

some of that is the case, um, where in like the lower end of the market, you tend to have higher credit and vacancy loss. So that's part of it. Um, or in the higher end properties, you know, the $2,000 a month, you tend not to have $10,000 turnovers because those, the folks who can afford, you know, assuming you tenants green them, right. The folks who can afford $2,000 a month also tend to have a, you know, a credit.

profile that they want to protect. And so they don't bang up the house on the way out or bang up the unit on the way out. But also a lot of it's just because a toilet costs what a toilet costs. And so if you got to repair the toilet and the faucet and you know, it's a, it's 125 bucks for the trip fee. Um, when the rent's $1,600 a month, that's a much, just a much lower percentage than if the rent's $850 a month. So

Between, you know, the real estate cost and what it costs to maintain and the difference in behavior of tenants from a $700, 50 a month rental to a $2,000 a month rental, that those two ideas, you know, result in different expense ratios being typical for those ranges.

Craig Fuhr (08:16)
What do you say to the guy, Jack, says, well, hold on, Jack, I bought the thing. It was a little crappy. I force vacated everything. I made all the rentals bulletproof, you know, like with better fixtures, better flooring. What do you say to that guy? What he says? Ah, you're out of your mind. My expense ratio will never be 50%.

Jack BeVier (08:38)
I just think they're wrong. just I just think they're wrong. Like, I can't I can't for the life of me get there. So like, just I just think the foolish bit

Craig Fuhr (08:46)
Can I, I would just say, like,

I think there's a better answer. It's like, ⁓ you know, I've only been doing this for 20 years and I bought, you know, thousands of units. ⁓ Maybe I know, like that might be what I would say if I was Jack Bavair, but you're too humble and kind to say that,

Jack BeVier (09:01)
I yeah, hey, or you or you know what? Are you taking any students? That's what I might say to him. I might I might be like, teach me master because I failed to do that for 18 years now. So you got I want to know what the secret sauce is.

Craig Fuhr (09:08)
you

Alright, so we've got we've got a couple of newbie mistakes and you've you've explained to him how to understand and underwrite a better expense rush ratio. Don't ignore the real risks of like sort of lower end multifamily because that that class of tenant comes with a you know, more headaches, right? ⁓

Jack BeVier (09:34)
Yeah, that's a,

that's a definitely, that's a good one. ⁓ and catches a lot of people slipping. We were talking, ⁓ with our friends in Ohio about that particular issue, because those units are like, you can get, you can get really cheap cost basis in these units, right? Like you find these $800 a month rent, you know, apartment building, and you can buy it for like 40 grand a unit. And you're like, my God, this thing is, you know, crushes on paper. If you can, and it can.

Craig Fuhr (09:59)
Right.

Jack BeVier (10:02)
If you operate it, if you were an extremely good operator and like can, can just dial in everything perfectly from an operational perspective. But the thing is, if you, there's no room for error because you're only working with $800 a month in top line. Like that's all you got to work with. like the, if your maintenance costs go up too much, you're going to be butting up against your mortgage payment very, very quickly.

Not to mention the fact that you're working with people who let's use a three times income, right? Say they, they qualify, you qualify somebody at three times income. make $2,400 a month gross. That's like 15, that's a $15 an hour job. Like, so that's the tenant basis. People who have $15 an hour job, those people get right? Like those people get laid off. Those people get fired. Those people have, you know, you know, personal issues that

leads to disturbances in their income. They're the first ones who get laid off in a recession. And that's the credit profile though, right, of your rent. And so there's risk in that in and of itself. And then the other thing is like when those buildings go sideways, they can go sideways very quickly, right? If you get a negative element in there, if a criminal element infiltrates into the building, can, your vacancy can just spread like wildfire.

Craig Fuhr (11:01)
Mm-hmm.

Jack BeVier (11:21)
So keeping those tight is super hard. So yeah, there's upside to it, but there's a lot of risk to the downside.

Craig Fuhr (11:29)
Jack, were, we, we, in our annual holiday party, this past Friday, all 200 of us got on some buses and went out and, toured, several projects that Dominion Properties is currently working on. Two in particular really kind of blew my mind from a multifamily standpoint. And we don't need to get into all the numbers of them, Jack.

But one of them was a 42 unit that we're doing in what area of Baltimore would you call?

Jack BeVier (11:58)
west side of downtown. ⁓

Craig Fuhr (12:00)
There you go. And then the other one was, I think, the one that sits right on the corner jack with a big mural still on the front of it. That's just basically a shell inside. And when we say shell, we mean like you step one foot in the thing and you're falling 25 feet to the bottom and you there's no upside, there's no upstairs like to look at. So it's a complete show. So

Jack BeVier (12:10)
Yeah, a shell. Yeah, also the west.

Yeah, bracing on the

walls to keep it up. Yeah, everything.

Craig Fuhr (12:24)
Definitely

two very advanced development projects, which I'm sure we could do an entire ⁓ series of episodes on. But let's speak to some of the folks that might be listening, Jack, who aspire to do projects like that. how does one even underwrite not necessarily the development risk, but the operational risk?

How do you underwrite that type of tenant that you're going to get in there? How can you, in what appears to be a very transitional ⁓ neighborhood of town, how do you know who you're looking for? How do you know that you're gonna get that tenant? And then how do you manage them in a way that you can keep your expenses to a relatively reasonable level?

Jack BeVier (13:06)
Yeah, so

the both of these projects, it's 200 block of Park Avenue for those who know Baltimore, is the west side of downtown, right across from the super block, which hopefully someday happens. And then 400 block in North Howard Street, which is just a little bit north of that Park Avenue project. So the these are basically both total guts, like long.

Craig Fuhr (13:29)
Yep. ⁓

Jack BeVier (13:31)
You

know, long permitting processes, both of them were opportunities zone deals, which was a factor for the economics for us that made them more attractive. and like super high execution risk, lonely, a long permitting processes, big design costs, bunch of soft costs, lot of approvals. And so Craig, actually to answer your question, the tenant side of it was, I didn't have any stomach for risk.

On the tenant side of it, because there was so much execution risk in both of these projects that if we were like trying to create a new luxury market and being like, you know, creating a product where it's like, Hey, if we build it, they will come and we're going to go get higher rents than anybody else has, because we're going to do this beautiful product project. We just don't have the stomach for that to like add that to the pro forma. we, you know, the, the reason why these worked is because we got them super cheap. got these shells super cheap.

Craig Fuhr (14:10)
Yeah.

Jack BeVier (14:26)
I think we got the park Avenue for 30 bucks a foot, 30 bucks a buildable foot. And the Howard was even cheaper. It was like 15 bucks a buildable foot. And so we were essentially starting, you know, we're starting below replacement costs because you couldn't put in utilities for that. Um, and, uh, it's really just a project that's like, Hey, uh, we're going to be in for 100 % of replacement costs because we're just, you know, just about, you know, we're going to be.

Infer, you know, just about a hundred percent of replacement costs or maybe a tiny bit below. Um, and the market is strong enough that we can put out an affordable working class rental, you know, product. Um, we're going to, you know, we're gutting it. So it's going to be beautiful. It's going to be really nice inside. Um, but we're not like, you know, we're not going after a luxury market. We're going after like, you know, a thousand dollar a month, one bedrooms, which in Baltimore downtown is like a very reasonable.

Craig Fuhr (15:12)
Brand new.

Jack BeVier (15:23)
affordable rent. So yeah, actually the only reason we had stomach for either of those huge execution risks is that we were like, the leasing process will be fine. Like given where we needed to get rents to make that pro forma work, they'll lease up just fine. yeah, otherwise though, they're multi-year projects. ⁓

Craig Fuhr (15:43)
Yeah, I was surprised

to hear that the 42 unit, I think you guys have had it for over five years just to get it to where it is today, right?

Jack BeVier (15:48)
Yeah.

It was two years of getting it vacant. was such a mess of a process, which was, was, it was like, we got, we got it in the depths of COVID. So we got it really cheap and we were like, we got it so cheap. Let's go, you know, let's go take a crack at it. And here we are five years later, finally getting a UNO. but that was two years of getting it vacant a year and change going through the permitting process.

And then two, really two years to build it, which is too long, but we used guys who we build houses with to do this, four 35, 40,000 square foot building. so like each phase of it took much longer than it should have. know, the counter argument is that like, if we had used, but, but it was because the guys that the crews that we used are, you know, it's like crew of three guys. Well, if we've got all three crews working, you if we have the entire company there,

it's still going to take them two months to get through plumbing, you know? and so the argument is we got to use a bigger company that can throw 50 guys at that thing. And, ⁓ and I understand that they're also, those are also more expensive contractors. And so then you're weighing what's the labor savings versus what's the cost of the carry. I think we, know, sometimes we made the right decision on that trade off. Sometimes we made the wrong decision on that trade off as a whole. I don't think we like screwed that idea up, but

But we also exposed ourselves to a lot more market risk in the meantime, you know, and, you know, interest rates haven't helped us. maybe, you know, given the interest rate environment that we should have gone the other direction. I don't know.

Craig Fuhr (17:19)
Yeah.

So

I think Fred was commenting on like, was it the best use of our equity sitting in this building for four years? Yeah, wasn't a ton, but it was a ton enough. And you guys are reminded probably on a daily basis that your money is sitting there. But I guess once you're pregnant, you're pregnant, right?

Jack BeVier (17:45)
Yeah, yeah, we got nothing to do but plow forward and get her to the finish line. I mean, the project turned out great. We're excited to have that. Excited to have that. It made us learn a bunch of things. So the platform is stronger for having gone through the process. And it was like the lowest stakes way we could accomplish those other goals.

So anyway, I'm happy that we did the project. It was far from a grand slam, but it'll be like a nice little trophy building that we'll own forever. And then the Opportunity Zone stuff like kind of actually really made it work. So from an after-tax perspective, it was a very successful project. On a real estate project on its own, it was fine. It was fine.

Craig Fuhr (18:29)
When you're getting into, let's say you're one of our listeners and you've been in single family, maybe a couple small multi units, one, two unit buildings over the last several years and you've gotten good at that, Jack. You've become good at operating that type of asset as a landlord. What's the real cautionary tale, Jack, if you're that guy looking to get into that 10 to 20 unit building?

Like how much different of an animal is that from an operational standpoint? Like what kind of are you? Are you bringing someone on board for that? Like what does that look like? What's what would you say to them?

Jack BeVier (19:09)
think it's a different animal from a project management perspective. It requires much more on being on the ground every day. ⁓ Tracking progress. I mean, you have to nail the Gantt chart, right? Because the delays are so expensive when you're carrying that much.

Craig Fuhr (19:19)
tracking progress.

And we're talking about like

this not even doing ground up. We're just saying like, I'm to go buy a building and do a significant value add to it. Keep going. ⁓

Jack BeVier (19:34)
Yeah. Yeah.

No, I just think the, I think it's, I think it's a little bit of a different animal. mean, for talented project managers, they can handle it. It's the same bones and it's the same, you know, same concepts. It's not, you know, it's not brain surgery to learn how to do it. But I think that people, I mean, I think what the common mistakes are to use the same, to think you're going to be able to use the same cruise and achieve the same timeframes in a single family house versus a 20 unit building.

Craig Fuhr (19:44)
process.

Jack BeVier (20:02)
And that gets them into trouble.

Difference in the permitting process, you know, to the, know, if you're working on a project that has to go through the permitting process, at least in Baltimore and Maryland, there are significant differences between renovating a house and renovating a multifamily, even, you know, different thresholds. Like, know, when you get to, you're changing 50 % of something, then everything has to come to code. And now we are sprinkling the sprinkler sprinkler ring the place and,

you know, digging basements to have egress windows and moving utility poles and having to interact with the utility, you the utilities, the, the can of worms just gets thrown on the table, right? Like opened up and tossed out on the table. And, ⁓ and so, and those, those things end up adding up and screwing you, ⁓ or like eating away your proof.

Craig Fuhr (20:52)
Yeah, I would think it would be a hell of a lot different process

to tie into sewage with a 42 unit building as opposed to a single unit structure. Like you're not just going to go, hey, here's my main, let me tie it in.

Jack BeVier (21:04)
Yeah, and different contractors and different fee structures altogether. And if it's the first one, you're going to pay some dumb tax, right? So that's my point is like on the first one of anything, you're going to pay some dumb tax. You just are. So like you think you're not, you can work your butt off, but you're gonna.

Craig Fuhr (21:17)
What about the what about?

What about how you would tackle a project of this sort of time horizon Jack with equity and debt? I would think that if if you guys went out to a hard money lender on on this 42 unit building, it would not be. It wouldn't be looking too pretty right now. You know, like that that that that carry would just eat you alive.

Jack BeVier (21:36)
boy.

No, we did. We did. That's exactly what we did. And it's been...

Craig Fuhr (21:42)
Well, then Fred,

but I didn't hear it correctly from Fred when he was talking about it.

Jack BeVier (21:47)
I mean, we put a, we put a bunch of equity in, but like now we borrowed a bunch of debt too. So like, no, and it's been eating us. You know, it's been, but then that's the math we've been doing is like, you know, at one point telling our construction manager, just like pay more for the labor. I don't care. Like, and you know, it can't take two months to get through one phase of mechanicals. We're spending, know, we're spending too much in carry. You can spend it on them. Just give it to them instead. Um,

It's the same to me, you know, whether I pay it to the bank or I pay it to the plumbers, all leaving the house. So, but, no, no, we, experienced exactly that pressure. and, know, moved as fast as we could. And this was the best we were able to do given that, know, given the decisions that we made, you know, like I said, we might've made a couple of different decisions, but

Craig Fuhr (22:34)
Is there a way to go into that deal with just equity first and then at some point you're bringing in a, you know, an RTL loan to sort of take it from like permit to the end or okay.

Jack BeVier (22:47)
Yeah, so we did. Yeah. So we bought it. We

bought it cash. We got through permits cash. And then we took took out a construction loan to actually do the do the renovation.

Craig Fuhr (22:56)
Final thought. Again, experienced guy knows what he's doing, knows his way around the permit office, but now he's going to tackle something like this. What would you say to that guy? In terms of what he in terms of OK, let me let me just be very blunt here. I think there are certain jurisdictions in the country Jack that are much more favorable to do development in.

I think your developmental risk and sort of all the factors that come along with that horizon of like, I've got an idea to the day I get the permits and I can start putting shovels in the ground can be two weeks or two years. And we just happen to live in an area here in Baltimore where it's probably closer to two years for something like this. And it just kills you. Like, I don't know why an experienced guy like yourself would ever come back to Baltimore given a similar project that could go happen in the County somewhere. And so.

What do you say to those guys that are in these areas where, like, that's going to be your biggest hurdle? Like, that timeline is just gonna eat you alive or you'll be in a better area where it does not.

Jack BeVier (23:59)
Yeah, I think that two things, one, one is that don't do the first one with your own money. Like go fricking volunteer to project manage somebody else's or sit alongside somebody as an assistant and project manage somebody else's to just get through the process and see all the different ways that the world's going to screw them over when it's on their dime so that you can try to like learn from as many of mistakes as possible. and then the second is, I mean, it's price, you just pricing it in, right? Like I can hear, you know,

Craig Fuhr (24:16)
Mm-hmm

Jack BeVier (24:27)
You need to price it in and you and you cannot, and you're wrong, whatever your pro forma is, you're wrong. And it was just like, start with that assumption. And so you need to steal these things. If you're in a, if you're in a high touch, you know, high permit, low motivation to encourage development, you know, jurisdiction, like you need to steal the thing, to make it work at all. So like, like on these two projects, like we stole them. So it's fine. I'd do it again, but.

I'm not paying, you know, I'm not paying 50 a unit for, know, as my going in price, I want to pay 10 a unit, 20 unit going in, um, for something that needs to be gutted because, because I'm going to spend 20, 30 and carry. So like, I'm going to end up at the same place. You know, that's the, but if I start at 50, I'm going to be just, I'm going to be in for more than what it's actually worth. And I should have just bought the finished building and not, you know, you're supposed to make money.

for doing work, right? So like, if you just want to invest in a multifamily building, we'll find, buy a finished one then. but if you're doing, you know, if you're doing a large scale development, make sure the spreads, you know, very significant, bigger than you think.

Craig Fuhr (25:40)
Well, I hope you all enjoyed that quickie there. I would encourage you to go over to the dominionfinancialservices.com blog to check out more on multifamily ⁓ opportunities over the next year or so and how to look at them and underwrite them and stay tuned for more content on the same on the Real Investor Radio podcast. We'll see you on the next one.