Real Estate

Episode 24: Investing in Multifamily Apartment Complexes with Chi Hathiramani

Ben Lakoff, CFA
December 28, 2020
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This interview is with the CIO of Upside Avenue, Chi Hathiramani. Upside provides access to professionally-managed multifamily real estate investments.

With attractive 10+% Yields, in this conversation we go into detail on why multifamily real estate investing might make sense for investors and discuss how it works with Upside avenue.

Multifamily Real Estate investing was once only available to commercial and high net worth individuals and Upside Avenue lowers this barrier for individual investors to invest with as little as $2000.

Enjoy this conversation with Chi Hathiramani.

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Show Notes

0:00:00   Welcome and context

0:01:47   How did you get into multifamily investing?

0:02:46   What do is multifamily and what makes it interesting?

0:05:35   What are the disadvantages of managing a multifamily investment?

0:06:50   Walk me through the decision-making process for investing in multifamily homes?

0:09:51   What fundamental risk do you see for multifamily investments at these times?

0:12:34   Are we going to see a mass exodus from the multifamily living spaces?

0:14:00   What is your area of operations?

0:15:33   What are the most important factors for making an investment decision?

0:17:41   What are some of the most common red flags?

0:20:09   What does the perfect case scenario looks like?

0:22:21   What are some of the bigger trends you are seeing?

0:23:56   Common mistakes that people make

0:25:05   What is Upside Avenue doing?

0:30:37   How are investors getting their returns?

0:33:09   Valuation of the real estate owned?

0:35:13   What kind of investors should be interested in this?

0:36:15   What risks are present in the Texas real estate market?

0:37:32   Where can people find out more about you?

0:38:51   What is next on the roadmap for you?

Show Links

Upside Avenue

Casoro Group

Land Investments with Mark Podolsky

Episode Transcript

Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.

Hello and welcome to the alt asset allocation podcast. Today’s interview is with Chi Hathiramani. Chi is the CIO of upside Avenue in Austin, Texas.

What the heck is upside Ave upside is a REIT or real estate investment trust that invests into multifamily properties located in high-growth geographic areas, carefully selected to mitigate investment risks. Multifamily real estate investing was once only available to commercial or high net worth individuals and upside Avenue lowers this barrier for individual investors to invest.

With as little as $2,000 with attractive 10 plus percent yields, especially in these days in this conversation, we dive into why multifamily real estate investing might make sense for investors and go into detail how it works when investing with upside Avenue. Before you listen, please don’t forget to like, or subscribe to the podcast or even better leave a review.

This really helps people find the podcast and keeps this thing going. It really helps. Thank you. Okay, well, let’s learn something about multifamily investing. Enjoy this conversation with Chi Hathiramani.

Welcome. Chi Welcome to the alt asset allocation podcast. Super excited to have you on today.

Chi: [00:01:31] Likewise, thank you so much, Ben, such a pleasure to and blessing to be here. Yeah.

Ben: [00:01:35] Are you you’re in Austin right now?

Chi: [00:01:37] That’s right. Yeah. Yeah.

Ben: [00:01:39] Yeah. We’re just catching up a little bit before we started. And I’m excited about what you’re doing with Casoro group and upside Avenue, but before we get into that just wanted to start off a little bit about your background, who you are and how, how you got involved with multifamily investing.

Chi: [00:01:55] Yeah, sure, sure. So it goes back to me being born and raised in the Philippines and coming to the States for undergrad. I got a degree in real estate, moved to DC, went to go work for a publicly traded REIT collaborative Realty trust, which is an office-based read about a $30 billion shop spent about 10 years there working in acquisitions.

And so, you know, with working in a shop like that, I got experienced In a multitude of asset sort of classes in real estate, you know, office retail, multifamily, little bit of industrial and some ground up as well you know, experience along the way. So that’s, that’s sort of the basis of where I came from.

And then I met my wife there and we moved to move to Austin and picked up some student housing experience along the way. And now specialize in the multi-family segment, that crossover group.

Ben: [00:02:41] Awesome. And just so we’re clear when you say multifamily, what exactly do you mean? What does this mean to you?

Chi: [00:02:48] Sure. So technically I, from what I understand, the definition of multifamily is five or more units. Apartment units, right? So we specialize in a, in a class that’s larger than that. We, we focus on institutional multifamily, which is generally 200 or more apartment units. So it’s typically as you’re driving down the street, those communities, you know, the fenced in communities, you see those are really what we focus on from an investment perspective.

Ben: [00:03:12] Okay. And you’ve had experience with a number of different classes within real estate. What is so attractive about multifamily and especially these like mega multi-family investments that you’re making? What attracts you most to this asset class or subclass, I guess.

Chi: [00:03:29] Absolutely. You know, it’s really interesting now that we are sort of, this is a, you know, we’re recording this in a COVID environment. You can really see where we’re multifamily shines. Everybody needs a roof over their head. You know, whether you own a house or an apartment in it’s, it’s a decision to be made, but everybody needs a roof over their head.

So multi-family is, has demonstrated itself as an extremely resilient and sort of cashflow cash flowing asset class, sort of in this environment. And I think that’s what attracts us to multi-family. It it’s very stable cash flows and unlike sort of office or retail. Those, those product tend to have residue tenants that come and go in large batches.

So you might have an entire office building leased to one tenant. You know, like a text company or something like that. And when they go, you lose all of your income. Yeah. Versus multifamily, it’s a diversified base of income. So even unlike single family, residential, you know, if you have a resident living in, in one of your homes, when they, when they leave, you’re basically footing the bill for the mortgage and the utilities and repairs and all of that.

With multifamily, when you have 300 apartment units, you know, you can, it’s a very diversified stream of income, which you can manage and, and, and grow. So that that’s really what’s attractive.

Ben: [00:04:41] Gotcha. Yeah. And I think that, that Potential for scale and management at scale is one of the most, most interesting aspects, especially for me, for multi-family and to reach that the operational need of managing, you know, 10 or 15 single family rentals.

That sounds like a nightmare to me. So we can have one property management company, one big roof over all of them sort of thing. And, and, and streamline that quite a bit. Those are some of the advantages I get that it’s like instant diversification. You have a number of different tenants, all paying you income.

So if you have vacancies, but what are some of the disadvantages for an investor holding multi-families versus some other options within real estate.

Chi: [00:05:29] Yeah. Obviously, you know, with scale comes the challenge of, of managing a far more complex enterprise. You know a real estate community is, is not just a physical sticks and bricks.

It’s also the operation of call it 300 residents, having vendors, having professional onsite teams that manage it, having construction going month in, month out, you know, for an entire year because residents are coming and going. So it’s, it’s running a company at that point. You know, when, when you’re dealing with multifamily and I think it’s that, it’s that scale that when you know what you’re doing, that, that competency and professionalism pays off and multifamily.

But if you’re, if you’re really looking for a passive investment, you know, it’s, it’s, it’s going to be tougher. Or if you’re trying to mom and pop it as, as what we say. It’s going to be tougher to manage, you know at an apartment community of any scale.

Ben: [00:06:15] Yeah. And that makes sense, but I mean, some of these smaller, you take a five, six unit multifamily, for an investor that has the option of buying five or six single family rentals, or perhaps one multifamily with six, six or eight apartments.

And it kind of. Walk me through the decision process, the pros and cons of each, if you would.

Chi: [00:06:39] Yeah. Sure. Sure. So there’s a couple of different things. There’s sort of the, the renters profile with an apartment renter profile. You’re generally, they’re more transient they’re coming in and coming in and going right.

They’re professionals that are looking for maybe on average, we say two year tenancy with when you’re renting out a house, it typically tends to be more families. You know, they’re looking for a three bedroom, four bedroom house. Generally, and they’re there for the school districts. They may have kids. So it’s just a different profile from that perspective.

So one of the benefits, I think we’ve seen of single family rental is really the longevity of the renter base. But with multi-family, you know, sort of, you can, you can get more rent per foot. We call it. For every square foot that you’re leasing. So there’s that opportunity from that perspective. There’s from a single family perspective, I think you’re more focused on what we call sales cops, you know, since basically what are other houses in the area selling for?

And that’s sort of where you’re limited, you know, you’re, if your house is worth about $400,000, that’s sort of what it’s worth with an apartment community. You can buy an apartment. Complex for let’s just call it also $400,000, but do all sorts of things to improve the resident experience. So, you know, you can add washer dryer, so the units, you can increase the rent, you know, and by doing that, you increase what’s called NOI net operating income and given the way multi-family trades it trades more like commercial real estate.

You basically get a multiple on that on that NOI or we call it a cap rate in this case. So with that, you can sort of force value creation. So that’s another sort of difference between the two now, I think, you know, I do own a rental houses as well, personally in addition to having made investments in multi-family and they’re just different from from a single family perspective, it, it is nice to know that, you know, you can you can drive down to the house and it’s, it’s, it’s all yours.

And, you know, if you ever need to sell it, one of the benefits of single family homes is liquidity, right? You can basically post it on the MLS and get that puppy sold in two weeks. If you’re in a good market. You know multi-family not so much now that con yeah.

Ben: [00:08:35] And, and the lack of liquidity is more that it’s just serious investors that are buying these multi-families as opposed to, you know, I want it because the yard looks nice sort of home buyers.


Chi: [00:08:47] right, right. Yeah. The transaction timelines are longer. The the diligence is longer, right. You go far deeper when you’re spending $10 million. Of of equity into into a deal rather than, you know, 5% down on a, on a $400,000 house. So there’s, there’s that little differential there and there’s a fiduciary responsibility as well which is so important, right?

For us being sponsors for our investors, we have a fiduciary responsibility to treat their money at a much, much higher standard that we would our own money. So I can’t treat it like I would my own personal money. Right. The standards are just much higher. So that adds a layer of complexity as well.

Ben: [00:09:23] Makes sense. Yeah. Casoro group, you guys have been doing these mega multi-families for a number of years. What fundamental risks do you see to the multifamily investing thesis?  I’m hearing things, with Corona, this is being recorded late August. People want to get out of the cities and have more space.

maybe this is just a phase, but is this a fundamental risk to the let’s have a giant multifamily stock it full of amenities, maybe a little bit of extra space, but like help me think through this kind of systemic risks here.

Chi: [00:10:00] You’re sure. So interestingly enough. I think if I include student housing and senior housing as sort of categories within multi-family, it starts to paint that picture more and more clearly.

So conventional multi-family, which is sort of, you know, the, the space that we plan has, has fortunately done very well. And we think it’s done very well during the current time period because of sort of stimulus the cares act, the heals act, and all of that have really propelled by giving money to renters.

It allows them to, to pay rent. Right. So that that’s really propelled sort of the multifamily the conventional multi-family industry to the extent that actually right now fundamentals are even better than they were pre pre COVID. Not by much, but I mean, you know, properties we’re already doing multifamily is already doing very well.

They’re gonna be doing a little bit better, but where you’re actually starting to see the contrast now is with student housing and senior housing. So with student housing, because you know, universities are shutting down effectively and like,

Ben: [00:10:55] nobody’s them. Cause they’re not going to school.

Chi: [00:10:59] Students are not coming back to universities.

And we’re starting to see sort of the cracks there. Same thing with senior, you know if you’ve got mom and pop living at home and it’s time to move, you know, a parent into sort of a senior housing facility. You’re going to think twice at this point, right? From a, from a safety perspective. And that’s, what’s actually happening with student senior housing industry right now where they’re, they’re, they’re, they’re well occupied, but there’s very slow moving into it, you know?

So it really depends on which sub-segment you are, what the world we call multi-family.

Ben: [00:11:30] Yeah, that makes sense. But even with the traditional non-student non elderly multifamily, I mean, it sounds like this is. Propped up by the stimulus and, and free money. Right. it’s like as soon as this runs out, which is debatable, if they ever turn off the faucet, I suppose.

But as soon as in theory, it’s, it runs out and they stopped paying this. I mean, Are we going to see mass Exodus from, from multifamily people into rural areas? What is kind of your thoughts on, on these macro trends,

Chi: [00:12:04] right? Yeah, I think, and that’s obviously the concern that, that, that we think we’re going to face in 2021 is, well, what actually truly happens, but the truth is it’s sort of counterbalanced by the fact that people need a place to live.

Right. So it’s not so much that they’re just going to move out in mass Exodus. It may be that they can’t afford to pay rent for a month or two, or we have to, we have to work out a payment plan with them. Right. So that if that affects multifamily fundamentals, but the question is how much and how long internally just, you know, we’re, we’re obviously watching the markets closely, but we think 20, 21 is probably going to be a choppy year for everybody.

But by 2022, we expect things to be back to normal, you know? So. And the question is, you know, okay, well, how do you handle that? How do you, how do you ride through that? The reality is that multifamily or real estate in general, generally is best played as a long-term investment because there’s so many frictional costs getting in and out of a deal.

If you’re best served holding it three, five, seven, 10 years, that’s really how ultra high net worth families invest in real estate for a decade plus. Right. So it’s depends on your strategy. Really.

Ben: [00:13:11] Yeah. Yeah. And I think that’s a very good point. even if that there’s some near term pain, what’s your longer-term 10 plus year thesis.

Does this make sense? And that should be driving the decision to invest or not? I’m curious.  Casoro and upside you operate only within Austin area.

Chi: [00:13:30] We actually operate within a hall. We operate within tech, central, Texas, primarily some investments outside of Texas, but we are generally sharpshooters in Texas.

That’s what we’re, we’re known for when it comes to institutional investing your LP, the passive investor in, in our deal wants to know that we actually have the operational expertise in that we’re targeted in the areas that we work. Right. So we do Dallas Fort worth, Austin, San Antonio, and Houston. We own about 5,500 units.

Today. So it’s about 19 properties, generally, all institutional and operate in that. In that arena, we’re also vertically integrated as a sponsor, which means that we have everything from sort of property management, construction management, asset management. We have a general contractor affiliated.

We do utility building green improvements, all of that sort of in this ecosystem of our companies that creates this value, add opportunity.

Ben: [00:14:21] Yeah, that makes sense. And actually, I just had a podcast guest on Mark Podolsky and he said one of his mentors had said, you know, when you’re a kid and you’re burning ants with a magnifying glass, if you move in that glass all the way around, you’re never going to burn the thing.

Right. So you got to. Really focus on that ant and keep that magnifying glass in the same spot. And it just, it seared into my memory that if you’re always chasing all of these other things like you guys, I mean, there’s a sharp shooter in Texas, you know, the market. So you focus, focus on your competencies and double down on your strengths there.

I get that. I’m curious in Texas. I mean, central Texas is a big area. what factors are you looking at before going after a development? What kind of demographics population job growth, like all of these factors that are kind of most important when making these investment decisions.

Chi: [00:15:15] Absolutely. Yeah, we’re, we’re, we’re obviously focused on location, right. And fortunately Texas has been sort of one of the largest in migration States, right? It’s got like about 30 million people today, 29 million people. And it’s just continuing to attract folks from West coast, East coast, Northern States, et cetera.

So generally speaking, Texas has been great now within. Within Texas, we focused on the largest Metro areas, which, which is in and of itself a security blanket because it creates liquidity. And basically the, the mass of the urban scale in any of these major cities makes basically gives you a large enough rental pool, such that, you know, you’re probably not gonna land up in a situation where.

You know, one employer believes in you’re you’re, you’re kind of out. So location is primary is, is very critical, but I’ll take Houston for an example. And it really depends on where you are in Houston, you know whether you’re in Green’s point, you know, just, and I don’t, I don’t mean to get too specific here, but it, you know, your sub-market.

And, and, and you’re half a mile block from, from the next place really does matter as to where you face. You know, so we’re, we’re focused on sort of location, specific neighborhoods specific. We look at the schools, we look at the the home prices. We look at the average median income, right? The demographic of the folks.

We also wouldn’t. When we dig into an asset, we study their rent roll. We study their. The physical condition, very, very acutely because those, those things really matter. Right. But the quality of the income that you’re getting from the asset matters and also the quality of the real estate itself and its ability to attract people that will pay you that income.

It also matters. Right? So those are some of the key factors that we’re looking into. There’s obviously a myriad. But there’s some of the big ones.

Ben: [00:16:50] What are some of the glaring red flags? You go into a market that maybe ticks the box on some of these, but what kind of jumps out? And it’s a, it’s a, no-go like, are, are you looking at water,  availability and things like this, like super term.

Chi: [00:17:06] Well, fortunately, you know, in, in the inner city water, water is tends to be available. What we would be considered about is flood planes like Houston, you know your flood insurance can be, can be a surprisingly high in, in Houston. But yeah, red flags generally, you’re you’re looking both to the market, a submarket and, and also to the property itself.

So from a sub-market standpoint, you know, we, we want to make sure that the, the. The property sort of well located in the submarket sub-market is, is performing. When you drive around the neighborhood, you want to see that people you know places are kept up. Well retail is doing well. You know generally businesses and services are humming in an area that tells you this is a vibrant and, and and You know, it’s a strong area in which people, the people that live on your property are probably going to be able to find jobs in the area.

And that’s what attracts it. When it comes down to the property itself, you’re looking really to the, the physical asset itself, you know, how what’s the quality, what’s the condition. What’s the curb appeal, how well haves has the equipment and maintain. And one of the big things with sort of value add properties that we deal with is that they’re a little older.

They’re like 1980s, 1990s, sometimes even 1970s. And so you have to consider things like the roofs, the parking lot. The the HVC units, the air conditioning units, right inside and outside the, the property, the water heaters, like these things could be really large capital items. You know, from that perspective, you also want to see, you know, the resident base, the quality are they actually paying, or is there a lot of delinquency at the property, you know, are there, are there key signals that tell you, Hey, this resident base you know, the management prior management or the prior owner has not really done a good job, either screen the residents or.

Teaching the residents, how to, how to live at this community. You know, those things can signal some pretty big flags once you take over. Now at the same time, those things also create opportunity for upside, right? Because that, that indicates generally it goes hand-in-hand that the property he’s not actually being maintained that well, not being operated that well, that’s really part of the upside story.

Ben: [00:19:00] But yeah, yeah, that makes a lot of sense. what is a perfect investment and multifamily investment opportunity look like  obviously you make most of your money when you buy it, so at a great price, but besides that, I’m what are the massive levers you can pull right off the bat and, and, and force that appreciation, get a lot of value right off the bat.

Chi: [00:19:20] Yeah, absolutely. Yeah. We’re, we’re looking, we look for properties that have definitely operational and, and physical upside. And I keep coming back to that, but that’s really where it’s at. Cause the, the operational upside is, is really, you’re looking for revenue generation. You’re looking for expense savings and you’re looking to control taxes and insurance and those kinds of factors through sort of long-term planning.

Right. And then from a physical standpoint, you’re saying, what kind of dollars can I put in to actually improve the quality of the, of the property? Can I, can I add. You know, can I upgrade the amenities? Can I upgrade the fitness center can upgrade sort of the entire landscaping, all, all, all the features that when a resident drives up to the property, they find really exciting and the user experience grows, right?

And then there’s other aspects like safety creating a sense of community. So community programs there, those are all the things you can do from an operational standpoint that really make resident you know, want to live at your community. Now as a company, our, our vision is to create better homes for better lives.

And we believe that that’s our, that’s our company vision and our motto. We, we take that very seriously. So when we look at a community, we look at all, all these different aspects, you know, what’s the safety look like, you know, how are residents doing? Can we create a sense of community? Can we give them access to financial resources and, and other, you know, training and, and after-school programs?

Like what can we do to make their experience better? You know, so that they want to stay. When residents stay, when you’re we call it retention. When you have higher retention, you will find that your, your NOI will automatically go up. Right? There’s just a lot of things that they do, right. They, they, you know, when, when residents are very happy, they tend to pay rent, right?

They don’t skip, they don’t, they don’t ask for, you know, the push for concessions. They don’t also don’t leave the units, which means you don’t have, you have a lower turnover, expense. All these things just improve NOI, which ultimately improves property value, increases, property value.

Ben: [00:21:06] Yeah, that makes, that makes a lot of sense.  retention is a huge thing, especially in these gigantic multi-families. what trends are you seeing here? increased importance of the amenities, increased sense of community increased open space, like what are kind of the bigger trends with that? You’re seeing to increase this retention and make people be happy in these living situations.

Chi: [00:21:31] Yeah. I, I think, you know, the, the old playbook pre COVID playbook is sort of out the window at this point. And right now, everybody working from home

Ben: [00:21:39] with everything, right?

Chi: [00:21:43] Yeah. W w w with all of this, you know, our residents are going through a tremendous amount of strain, right? This is a different world. So being there really creating a sense of community and community services and being responsive to them meeting there. Meeting their their needs for maintenance and, and just general care seems to be the most important thing we can do in that.

Ashley is our highest priority right now. It’s sort of back to basics at this point. You know, it’s the whole the whole push for, how can you have the highest amenities? You know, the, the, the, you know, the, the half a million dollar sort of, you know play scape outside. I mean, nobody’s going outside, but, you know, there’s sort of that.

So we might see it, we might see the resurgence and recovery of sort of those amenities, but at this point, it’s really just, it’s coming down to basics here. And, and just showing that you care about your residents, that’s becoming the key point.

Ben: [00:22:33] I know Casprp and upside cater to a different audience with more institutional interest.

But in terms of smaller investors within the multifamily investing space, what are some of the biggest misunderstandings or hurdles that they face when going into this, this world?

Chi: [00:22:54] Yeah, I think potentially, and this is what we see with upside Avenue. There’s, there’s quite a, quite a steep learning curve for, for folks that don’t understand institutional real estate, you know, it’s it, you have to understand and things like timing of your investment when things get paid out, why, why is there a three-year or five-year hold, why does my money need to be locked up for a certain period of time?

You know, why am I being charged the fees I am. All these things are sort of critical components to understand. There are different in institutional real estate. Timelines are longer value creation processes are, are longer, but at the same time, they’re also more resilient. You know, they’re more robust because you’re the scale of what you’re dealing with.

And the professionalism of all the teams involved tends to guarantee a bit, or it tends to ensure really, I can’t guarantee anything but tends to ensure a better outcome, but at the same time, things do take longer. And, you know, you’re, you’re part of a bigger process at this point. And that’s something that people really need to understand.

Ben: [00:23:50] Okay. Yeah. And let’s, let’s dive right into it. pitch me up upside what it is exactly. You guys are doing the value you’re creating, and then we’ll, we’ll dive into more of the details.

Chi: [00:24:01] Yeah, sure. Sure. So upstate Avenue is is a real estate investment trust. Which basically is, is a type of it’s a type of ownership entity style it’s a diversified fund really is what it is.

So upside Avenue today owns about a dozen investments. And so it’s a way for somebody to come in with less than institutional cash, right? So we add up that Avenue of the minimum is $2,000. So you can come in and invest alongside. Cosara group, which is our entity the, the real estate investment companies, entity into institutional deals and sort of participate on that institutional side, on these large deals.

That’s really what the vehicle does.

Ben: [00:24:39] It’s a private REIT essentially, right? It is.

Chi: [00:24:42] Yes. It’s a public. It’s actually public, but non-traded, so it’s not on the stock exchange. Traded REIT. Yeah.

Ben: [00:24:49] Gotcha. Yeah. And how many assets under management or how do you, kind of measure this?

Chi: [00:24:54] Yeah, yeah, sure, sure.

So the REITs made about a dozen investments to date. That’s sort of our metric at this point.

Ben: [00:25:01] net asset value, is that a public number then?

Chi: [00:25:05] Not at this point.

Ben: [00:25:06] Okay. So upside Avenue offers you the ability to invest alongside this institutional capital in these, these multi-families that you would never be able to invest in otherwise, unless you had a spare couple $10 million sitting around.

So with 2000 bucks, you can, get involved something you had mentioned earlier. That is a big difference for investors is lockups fees. Timing, timelines are longer. Can you just touch on some of these then?

Chi: [00:25:35] Yeah, absolutely. Yeah. Yeah. So I think maybe, maybe the best way to understand it is so you invest in the rate, call it, you know, 2000 minimum.

Actually many of our investors are 7,500. You’ve even got a half a million dollar investor in our rate, but generally what happens is so you invest in the rate and then the money in the next quarter gets invested into sort of the pool of capital available for the REIT to then deploy into real estate.

So then that happens shortly thereafter, right? At which point you’re already starting to basically get your cash and cash return. And I can explain where the components of return come from. So then that money sort of gets invested into the real, into the pool of real estate. That the the re ovens, which today is about a dozen assets.

And then you clip you, you receive a cash and cash return every quarter, right. And then obviously when an asset sells, then the, sort of the return from that gets returned back to you as a shareholder movie. So that’s sort of the standard structure of how the investment works now from a fee standpoint the, the parent company of upside Ave charges, a 2% asset management fee on the equity.

So there’s there there’s that fee. There’s also a small disposition fee on the backend, but that’s not always charged. I think we we’ve also, depending on the structure of how the REIT makes an investment with customer group into a deal, it may or may not get a disposition fee. So we may not charge a disposition fee yet at the upside Avenue level.

So generally for the most part, the fees really are just the 2%. Sort of asset management fee

Ben: [00:27:02] there’s there’s no performance fee or anything like that.

Chi: [00:27:05] No, actually that’s one of the that’s one of the key differentials here is we don’t have some backend promote or something like that, that scrapes, you know, a lot of the return of the investor.

It’s quite literally that there is an administrative fee just to manage the rate paid along the way as, and when possible, but it’s not, it’s not significant. And so it’s, it’s really the 2% asset and the 2% equity management fees really work. There are sort of earns effectively or sorry, upside Ave, for instance, key.

Ben: [00:27:33] Yeah.   the only problem with a a flat fixed percentage on management is how can you ensure that the, the incentives are aligned because fixed in implies that the incentives are to grow the pool of investible assets less than, asset appreciation, I guess. So how would you address that

Chi: [00:27:52] for sure. Yeah. And obviously we will, number one is our reputation, right? It’s back. Upside avenues back like a server, which is an 18 year company. That’s delivering outstanding returns really in the industry. So you’ve got, you’ve got reputation, but the second is in order to raise more capital, as we discussed, you have to deliver the returns.

And so upside Ave has and does deliver that returns and is expected to deliver those returns right in the moment we don’t, you know, we, I can break it down for you. We basically tell investors that we’re looking to generate a four to 7%. Sort of range of cash and cash, which we’re in per year plus another six to 8% of appreciation.

So for a total of about a 10 to 15% return per year, right now, if we start moving away from sort of that range, particularly on the low side we won’t be able to attract capital. So that sort of keeps us

Ben: [00:28:44] okay. 10 to 15%. And that’s with both built in Is that net of the fees or then you would be minus the 2%.

Okay. And then, for an individual investors, so say I invest in this  public non-traded yeah, almost got it. Public non-traded REIT. how are these returns treated for me? The individual investor and, you know, disclaimer, this is not investment advice. Seek a professional advice.

All of that applies obviously, but just higher level. How, how would it be treated?

Chi: [00:29:16] Yeah, so again, yeah. That’s absolutely a good disclaimer. I would, I would suggest you talk to your tax advisor or your CPA, but there’s obviously an ordinary income component or a dividend income component which may be portfolio, portfolio income.

And then there’s long-term income from, from a capital appreciation is out of sale.

Ben: [00:29:33] Okay. And then you talked as well about lockups and timing and timeline. Can you address those as well?

Chi: [00:29:41] Yeah. Sure. So there is a, when, when you make an investment into the REIT there’s an, there’s an assumption and expectation that this is a long-term investment, right?

So the money gets deployed immediately to real estate. So the way we’ve the way we handle it as are, as upside avenues for the first year, you’re basically locked out. And then in years, two and three, and I believe for a, there’s a declining scale of of fees. Effectively. So I think it’s a new year, two it’s 2% year three it’s 1%.

And then from year four, it’s it’s basically at par. So that means, you know, there’s no cost to take out your money after that.

Ben: [00:30:12] After three years

Chi: [00:30:14] after three years. Yeah.

Ben: [00:30:16] That’s pretty low, right? I mean these investments should be really long-term investments. If I can pull it out and to have liquidity with no impact after three years, that’s pretty, that’s a differentiating factor. And I would think, correct.

Chi: [00:30:30] Yeah, we, we actually, absolutely. And we believe the same. In fact, the way, the way we look at it is basically if you’re, if you’re clipping a 5% cash on cash in year one, if you had to take a 2% hit on your. On your principal, basically going out the 2% fee, you’re still net positive by the end of the first year.

You know? So it’s just it’s but again, that’s never the intention, right? The intention is we’re, we’re looking for investors that are looking to make long-term investments, because that’s where you make your money in real estate. As with anything really like the, the compounded interest, the compounded rate of return you know, it goes up substantially dramatically.

That’s how you make more money. The longer you keep your money in a, in a high yield asset class,

Ben: [00:31:08] let’s dive into this a little bit more deeply. the net asset value is just the total value of all the assets, all the multi-family properties that consort that upside owns as a REIT divided by the number of shares outstanding.

Right? Correct. Correct. And then that is revalued every year. Or only on time at time of sale of these properties,

Chi: [00:31:32] right? Yeah. So upside avenues are relatively new, your re vehicle. So it’s been around for two years. So at this point we’re still not marketing to market. We expect to do so. Once we hit a certain minimum sort of Corpus of assets in the region, maybe, maybe 10 more assets, I think is what we’re looking at.

Before we start to value the re on a share basis. So at this point, the REIT has not really truly exited any of its equity investments, you know, so it’s still sort of building up. And as that happens, investors start to get paid back and then the share value also will, will start to get pegged basically marked nav.

Ben: [00:32:03] if you exit early, say after, after three years, I’m missing out on that capital. Appreciation or, or no, if you’re marketing it to market every year in theory, I would be capturing that.

Chi: [00:32:17] Correct. Well, once we start marking N a once we start marking the share price to nav, absolutely. That’s exactly the mechanism.

You just need a certain amount of assets to start to make the, the the Mark to market feasible. So at this point, basically, yes, it’s, it’s a fixed price. It’s $10 a share. But in the very near future, as you know, as soon as we scale up the portfolio, large enough, it’s going to start to move basically with asset value.

Ben: [00:32:41] Okay. And then the redemption process, after three years, I’m selling this to another investor on the platform, or I’m selling it back to upside Avenue.

Chi: [00:32:52] at this point, you’re selling it back to mostly Avenue.

Ben: [00:32:56] Okay, was making sure there wasn’t a pool of extremely limited liquidity, right? Yeah. You can sell good luck sort of thing.

Chi: [00:33:04] We’ve we’ve honored distribute redemptions. So we’ve had, we’ve had a few investors to, thankfully not much, but you know, some, some flips obviously, but with the COVID environment have, have had changes in their circumstances. So we monitored a few redemptions.

Ben: [00:33:16] what kind of investors should be interested in something like upside Avenue?

I mean, who’s kind of your ideal investor here.

Chi: [00:33:25] Yeah. So we’re, we’re looking for, you know, someone who wants long-term exposure. To sort of the real estate asset class and, and more particularly institutional real estate, someone who’s looking for sort of those, those good steady returns and that good.

You know, the, the appreciation that a large pension fund would be looking for, or a large private equity firm would be looking for, you know, so that, that sort of the investor they just get to participate at a much smaller dollar amount, but it’s effectively the same strategy.

Ben: [00:33:53] Right. Yeah, no, it’s definitely, it’s definitely a value, tremendous value, but like I said, I don’t have a spare $10 million sitting around to have this, this sort of asset sitting in my report. And even if I did, then I wouldn’t be very diversified. Now what I, if I only own that for somebody that doesn’t know much about the Texas economy, multi-families in Texas.

what fundamental risks too? The real estate market in Texas. Do you see it?

Chi: [00:34:22] Yeah. It comes back down to sort of employment employment trends, job growth trends. For example, one of the risks occurring in Texas right now to Houston is because of the the, basically the oil crash. Right.

You’ve had a lot of it’s created an energy crisis in Houston. Again, we just had one. You know, five years ago, five, six years ago. And we’re, we’re back at it again in Houston. So you really need to look at for every city in any state, really Texas or anywhere else, what, what the migration patterns are and what the job growth patterns are.

Texas being so heavily energy dependent, at least on paper. And I think a third of the economy, if I’m not mistaken, you know, have some tie to energy. You’ve really got to look at that. If you’re in Washington, DC, it’s the government. You know, if you’re in New York, it’s the financial sector or, you know, the various other things, obviously these are all diversified economies, but those are some of the key things to be looking at.

Ben: [00:35:11] Yeah. Makes sense. I mean, those are, those are the key drivers and that that’s keeping everything else afloat. Awesome. Well, this was, this was really helpful. And I think thinking through, multi-family makes a lot of sense in a lot of portfolios. So I think upside avenues offering a lot of value to investors to get in at a lower dollar amount.

What else, what do you want to leave my listeners with? Where can they find out more about you about upside Avenue? What do you want to leave them with?

Chi: [00:35:41] Absolutely. Yeah. So you know, obviously we you can find more information and on our website and it upstate and that’s for the REIT.

And then, you know, the sponsor of ups Avenue is really Custora group, which is the company with sort of the track record, the in-house management expertise, the vertically integrated structure. So that’s  dot com. One of the differentiators between sort of offset Avenue and some of the other crowdfunding or retail funding websites on the internet is, you know, you really got to look at who’s backing it.

Who’s sponsoring the investment. Is this a technology company that is raising money and pumping it into real estate? Or is this a real estate company that is raising the capital for its deals? You know, so there there’s, there’s, there’s a very different sense. We, we come from a legacy of actually, you know, tried and tested boots on the ground, real estate investment in Texas.

Ben: [00:36:25] Awesome. And actually one more question. Sorry, the roadmap. you want to get 10 more properties? These will continue to be in Texas, continue to be in multifamily. What, kind of excites you most about your roadmap going forward?

Chi: [00:36:42] Yeah, that’s a great question. So in our vision of creating better homes for better lives, we also do want to grow the company tremendously.

So we have 5,500 units today. Our target is actually 20,000 units across the entire symbol. So the re is, is a vehicle designed to it has a mandate that allows it to do that. So the REIT can invest in conventional multi-family, senior and student housing across the Sunbelt. Obviously, given the dynamics of what’s going on today, we’re probably going to continue to focus on multi-family.

In Texas, as we grow and scale up the platform over here. But eventually this is going to be diversified across the entire Sunbelt and across multiple segments of the multifamily space. So that’s where we’re headed.

Ben: [00:37:22] Awesome. Awesome. Really exciting. Well, I’ll link all of these things in the show notes, but really appreciate it.

Chi coming on here and spending all the time talking about this.

Chi: [00:37:31] Well, thank you so much. Really appreciate the opportunity

Ben: [00:37:34] There you have it. Thank you for listening. I really appreciate your support show notes, transcript links, and more can be found on our [email protected]. If you’d be so kind, please share this with anyone you think might be interested or get some value from this conversation.

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And I really appreciate it. Thanks again, and hope you have a fantastic day.

Happy investing.

Ben Lakoff is an entrepreneur and finance professional. He has developed strong global finance experience through 10 years of international assignments in the US, Brazil, Afghanistan, Southeast Asia, Czech Republic and through the award of his Chartered Financial Analyst (CFA) certification.