Real Estate

Episode 35: Jumping full time into Real Estate Investing in Colorado with Merrill Stillwell

Ben Lakoff, CFA
March 3, 2021
Listen to this episode on your favorite platform!

Merrill Stillwell is Managing Partner at Blue Mountain Investments, a real estate firm with operations in Denver and the Vail Valley. Blue Mountain Investments operates in real estate development and management and specializes in creative and unique developments.

Coming from an equity research background and making the jump into real estate full time we talk about this transition namely pitfalls to avoid for new Real Estate investors.

We discuss Colorado Real Estate, why multi-family is so interesting, luxury real estate and more.

Listen on your Platform of choice:

Check out for all the listening options (Spotify, Apple, etc.)

Show Notes

0:00:00   Welcome and context

0:01:27   What is your background?

0:04:10   What resources you used to value Colorado Real estate?

0:05:15   How do you value these opportunities?

0:07:50   What is your process for finding good investments?

0:09:51   What are some of the common mistakes you are seeing?

0:12:04   How to find a good contractor?

0:13:20   How do you look through construction cost?

0:15:03   Beginners mistakes of investing

0:17:11   How do syndicates work?

0:19:59   What excites you the most about the next 5 years?

0:22:01   Acquiring an operating service business

0:25:10   Do you see any COVID impact in the Colorado rental market?

0:29:35   What are your thoughts on prefab and construction costs?

0:30:33   What risks keep you up at night?

0:37:29   If you could start over, what things you’d do differently?

0:38:51   What are the disadvantages of multi-family homes?

0:45:01   Where can people find out more about you?

Show Links

I70 Real Estate

BiggerPockets Forum

Merrill on Twitter

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 to asset allocation podcast. Today’s interview is with Merrill Stillwell. Who’s a managing partner. Blue mountain investments, which is a real estate firm with operations in Denver and the Vail Valley in Colorado USA.

Blue mountain investments operates in the real estate development and management and specializes in creative and unique developments. Meryl is coming from an equity research background and making the jump into real estate full time. So we talk about his transition, namely, the pitfalls to avoid for new real estate investors.

We discuss Colorado real estate. Why multi-family homes are so interesting luxury real estate and more before you listen, please don’t forget to like, or subscribe to the podcast. This really, really helps all things, Colorado real estate investing. Please enjoy this conversation with Meryl Stilwell.

Morning, everyone. Welcome. Skip to the all to asset allocation podcast.

Merrill: [00:01:09] Thanks for having me. Good to see you.

Ben: [00:01:11] we met years ago when I was living in the U S in Denver. And since then, I’ve known you, you were, you were emerging market equity analysts, super short guy within the public markets. And now I come back seven years later and you’re a real estate tycoon doing all that.

These things are all over the place. I wanted to start today with your background and what led you to real estate and what you’re doing today.

Merrill: [00:01:41] Sure thing. We met yes, back in the day through the CFA program and events associated with that. So I’d say I, I come from a heavy finance background is what I studied in college.

That’s always been of interest to me. And the, at the time, you know, I’m picking small cap stocks outside of the U S I’m doing heavy grassroots research. I’m looking for value all over the world and I happen to look in Denver at the housing market. This is 2011, 10 years ago. And I saw better value there than anywhere else I could find.

And so I, I went into real estate. I started, you know now everyone calls that house hacking where you I bought a condo, got a mortgage associated with it, had two roommates. That were being charged under market rate rent. Those were my friends and that investment ended up being so good that I, I continued to make investments every year in real estate.

And finance, my, my salary was roughly half in bonus and I, I would take that and by Denver real estate, which at the time was cash flowing at something like 20% cash on cash

which is a home run. And that then just evolved over time. It was a slow process of. Of finding an opportunity and seeing that there was an opportunity to flip the property and partnering with some individuals to figure out that process of friends of mine that live in the mountains. That then got me hooked on luxury developments up in the Vail Valley.

And then back to Denver, as I saw a major opportunity and multifamily here. And so it was kind of a slow process that eventually went full time. And now 10 years in we’ve developed and sold about $40 million worth of real estate. And we develop an old, a good chunk more. And so yeah, it’s been a good, good run.

Ben: [00:03:28] And only specifically in Denver and then fail Valley. this is where your folks

Merrill: [00:03:33] that work in summit County as well. And so it’s really the front range and the, yeah, the I 70 corridor is where we’ve been working the ski resorts.

Ben: [00:03:43] Awesome. And then going back, you got your start within real estate with how how’s hacking, which is a.

A really good way to kind of get your toe in the water with real estate. But do you remember what kind of books or resources that you were consuming to help you start along this, this path into real

Merrill: [00:04:01] estate? You know, it was, it was more falling into it. I guess I would, I took a strong valuation backgrounds.

Every day as an analyst, I’m valuing different stocks. And I took that and took that to real estate. So I had a strong background in finance. I’m a big fan of Warren buffet. And so that started me down the path and it was just value. Value is what I’m after. And that’s, that’s why I’m in real estate.

Ben: [00:04:31] Yeah. And that makes a lot of sense. And I know with real estate you make a lot of your money on the purchase itself, right? real estate prices across the us, across the world are. Sky high. I mean, asset prices in general at are at all time highs across the board. what pockets of value do you see within the real estate markets, whether it be in Colorado or elsewhere, and how do you, how do you analyze these and value these, these opportunities?

Merrill: [00:05:02] So I’m going to stick to Colorado, which I know. And I guess the areas that I am seeing value or areas with less competition. And so I, I tend to shy away from competition. So if you’re looking in Denver right now, and you’re like to develop the next parking lot into a major multifamily projects, there are 10 bidders.

It is a highly price sensitive, you know, you’re having to bid against everyone. That’s just not for me, nor where I see value. And so as well, the competition is it’s highly sophisticated. These are major companies that have been doing this for a long time. And so I tend to shy into areas where there is, you know, more hidden value or less competition.

And so in the luxury markets in the mountains, they’re highly risky. The, the competition, there’s very few competitors. There’s a unique problem to solve, which is it’s a vacation home for a wealthy individual that they don’t want to have to think about anything. That’s an area where we’ve seen value in smaller multifamily projects.

So a at institutional capital has a, you know, a high, a lower return expectation. They’re looking for a certain level of scale. It’s really hard to compete against that. And so in these maybe six to 12 unit multifamily buildings, the competition is a lot less and they tend to be more mom and pop investors.

We’re buying properties that are, that don’t have formal property management. So frequently you’ll have, you know all written ledgers of, of everything associated with the property and you get handed this huge bag of keys and you can, we, we like properties like that. Cause we can immediately tell.

There’s opportunity. This hasn’t been managed professionally or, or hustled to get the best opportunities. And so that’s been where we find the most value right now.

Ben: [00:06:52] I cannot imagine getting a stack of physical ledgers and a, a sack of keys. That’s that’s my nightmare, but you’re right, right. Like where the, that there’s great opportunity there versus somebody professionally running this thing, like thinking like an investor, there’s a lot more upside potential.

at this point in your career, you’re obviously getting some inbound leads for deal flow, but getting started with real estate, walk me through the process of finding deal flow, running these initial filters, you know, what’s worth a second. Look. What is your process looking for investible assets within the Colorado real estate market.

Merrill: [00:07:33] So when I got started, I, I reached out to a few brokers to find it’s difficult to find more investment oriented brokers, particularly on the residential side. And so, but to start, I literally set up a property search covering neighborhoods. I was interested in and followed every single listing. Every single day, I would look at that.

And after staring at this long enough, you start to see wires you start to see opportunities and once you have that first deal, the second deal, the third deal, those brokers those they’ll they’ll take you more seriously. Be looking too early in the process instead of just listing it on MLS.

Ben: [00:08:16] Yeah, that makes sense.

and now the majority of your deals are coming from,

Merrill: [00:08:21] so we will, we will source them through brokers. I’ll send out letters. Those would be the primary two brokers. We operate in a few different markets. It’s tough to keep an eye on everything, particularly these smaller mountain markets. It helps to have someone on the ground that’s actively listening to other brokers and opportunities out there.

In, in the mountain markets you’ll have sellers frequently. There’s a lot of ego involved in these properties and they don’t want to, you know, publicly drop the price of a listing. But. There may, they may need to sell or have a high desire to do so. It’s difficult for me to discern that unless I’m hearing directly from that individual.

So I have a network of brokers that I worked through in these smaller towns to identify deal flow.

Ben: [00:09:05] Getting started, especially going from equity, investing to real estate. What mistakes did you make getting started that, you know, looking back now, you’re just like, Oh man, I wish somebody would have told me this before.

And obviously there were a number of them, but what significant ones do you, do you recall the most.

Merrill: [00:09:22] The major ones tend to be involved in construction. Construction is a highly unpredictable process hiring the right people, managing it making the right decisions. A lot of those early mistakes were missing significantly on my construction estimates or the amount of time it would take.

The results of early endeavors with, you know, I was looking to partner with friends and trying to do more handshake kind of deals which did not serve me well and got me into trouble. I was, I was, you know, trusting individuals and business. It’s just, everyone approaches things differently than through their friends.

Ben: [00:09:58] And those, those construction hiccups, what could you do to you? Just learn more. You have a contractor buddy as a partner in the firm. Like, what advice would you give to somebody just getting started to avoid these construction pitfalls?

Merrill: [00:10:13] I would write in a massive contingency into your numbers too, particularly as you’re getting started.

And I’m saying like 50% above your anticipated construction costs, just to give yourself enough leeways you get started and that can narrow over time. There’s just always things that come up and so early on, you can difficult the contractor to show up and give you a hard bids and project. And so you can pay those individuals so you can get your inspection, but on top of that, having a contractor give you numbers, it’s, it’s hard to get someone’s attention until they know you’re for real.

And so I would suggest. Paying a contractor, an architect to get in there, to take a look around, to give you those hard numbers. And those numbers may blow up your project, but it’s better to pay those up front and find stuff out later.

Ben: [00:11:05] And how do you find these people to help you out and give you better estimates in the beginning?

Merrill: [00:11:11] So in the real estate world, so much of it, it’s still connections and it’s referrals. And so, you know, I can try to define the best contractor through online reviews, but in the end, it’s, it, it doesn’t really help me, man, for subs that can help, but on a contract or level, I always go to trusted individuals, the other investors to ask them who they’ve used.

And from there, you know, you have to evaluate your contractor itself. And so getting started though, it’s, you’ve got to reach out to other individuals to see who they’re using.

Ben: [00:11:45] That makes sense. I know like BiggerPockets forums has, is trying to encourage this online community of real estate professionals, because it is so much network-based, you know, and you can do just that through these forums.

I’ll, I’ll link it in the show notes, but it seems to be a good resource. I’m not sure if you’ve used it in the past or plan on using it.

Merrill: [00:12:08] It’s a good way to meet other individuals through that are there are always local, real estate groups out there that you can always meet with.

Ben: [00:12:18] Cool. And then those construction estimates being way under what kind of your perfect XL model said they should be?

This applies nearly to all real estate developments and purchases, or just the ones that you have significant remodels, like how do you, how do you think through that?

Merrill: [00:12:36] So the, the construction cost estimates are really going to vary and they depend on the, the number of outstanding variables that you have to account for.

So ground up construction it’s, it’s a lot easier. You can get hard bids and for the most part, those are going to stay relevant. Contractors walking into. An apartment building that’s an existing old hundred year old apartment building that it used to be one, you know, one mansion that has now been converted and they have, they don’t know what’s behind the walls or how this has been upkept over the last hundred years.

Those numbers can be significantly wrong. Same in in these resort markets. And his resort markets, everything is seasonal. Construction is, is I guess, less reliable, I would say. And it just, you know, you can run into major issues if you don’t know what’s behind a wall, or I guess the other would be an uncertain approval process.

So if you’re in a project that needs to be going, that needs to. Rubel through a town or the planning and zoning commission that can add a ton of risk. And because they may add additional factors to your project, you were not aware of.

Ben: [00:13:47] Yeah, assumptions around constructions costs is to this. The biggest mistake you see early, like new investors, getting somebody that wants to get involved with real estate.

What are the biggest mistakes they, they make starting off in this real estate investment career? Is it construction?

Merrill: [00:14:07] I was going to construction first, depending on where your, your background is. So if you’re coming at this from an investor or business backgrounds and getting started, that construction is the trickiest portion and then it’s approvals and things.

And if you’re coming from it, a lot of real estate investors can come out of the construction world as well. If you’re a general contractor, they’re going to have that portion set nailed. But the, the financing, the, the. Evaluating the investment returns is going to be a more difficult skill set for those individuals.

Ben: [00:14:39] Yeah. And that’s my thing, right? I, I have the, the XL sheets for single family rentals and I I’ve crunched these things and they’re a wonderful 10% cap rate, but I know that when you really roll up your sleeves, you know, it’s going to, you’re going to have. Leaky roofs and all of this stuff. it’s a lot of work when talking to investors, somebody like me, I mean, you know, I’m an asset allocator.

I like to have investments in a number of different asset classes. I recognize that real estate should be one of those. But at the same time, I’m not full-time on real estate. Other ways would you recommend somebody like me to get exposure to the real estate market?

Merrill: [00:15:20] So there are plenty of people like me.

Or other syndicators or developers that take on outside investments and depending on your risk tolerance, there’s a whole gamut of options as well, just getting started and you can get started with the re pretty quickly, which is super liquid, publicly traded. That would be an even easier way to do it.

And so it really depends on your risk tolerance, what you’re trying to achieve with your investments. But I would start with REITs. I would take a look at syndicators or developers like myself or those that are bigger and and go from there.

Ben: [00:16:01] For my audience and myself as well. Talk to me about SIM syndicates and how those work, because I know that there’s certain regulations, you can’t advertise these, that you’re a syndicator, so, and things like that.

how does an investor find a syndicate. What are the questions they should ask? What are the, are there returns that are proposed to them? Just educate us a bit on syndicates.

Merrill: [00:16:28] Yeah. So, I mean, essentially it’s someone that identifies a deal that puts together the process and then is then pulling together the capital to pull that off.

And those individuals would be available through something like a bigger pockets. Or there you find them through again, personal connections or tip. Sometimes also brokers may know. I mean, they, they may have worked with someone like this that can, then they can refer you to them. And so at its core, it’s just, you know, someone that doesn’t have the cash that’s pulling together a cash to purchase an asset and complete a project or just cashflow it.

Ben: [00:17:06] Gotcha. And then what kind of. Projected ROI. are you looking at, I mean, the deals that you’re offering to investors to join your syndicates, what are you saying? You know, expect it 12% ROI. What are you, what’s kind of the language on these things.

Merrill: [00:17:25] So it’s really going to vary on what we’re doing. And so for someone like me, I’ve got I’ve got operations in a couple of different areas, so I’ve got a high risk, short term oriented luxury developments opportunity where we’re looking for gangbusters returns that have really high risk.

And then we have, you know, a multifamily building that we’re looking to cashflow like a nine cap after construction. And so it really varies those return targets and risks. And I would take a look at those hard because you know, on a luxury developments, if there’s a downturn, you could be sitting there for years.

And if you’re trying to sell a property over $10 million that, that buyer pool is extremely limited if they dry up there. If you’re trying to go into the single family rental area where you can. You know, sell to end users, you know, home buyers or people leasing it at that, market’s a lot more liquid.

And so the risks would be substantially less. And so I would be looking for significantly less return and something less risky, like single family rentals and some much higher in the luxury world.

Ben: [00:18:33] What’s your real estate development, all of this, what excites you most over the next five years?

Merrill: [00:18:40] You know, it’s, it’s difficult, you know, I’m pretty, kind of like short term.

It’s easier to make a bet and longterm it is. It’s that mid range right now. That’s a little bit more difficult. I feel pretty confident in in Colorado as a destination for more people to move to. I think that trend will continue. I think on the part on multifamily or single family homes I’m pretty bullish in, in markets that are receiving the more people moving there.

I’m a little less certain in certain areas of retail or office. I’m curious about the hotel space. We’re, we’re looking at a deal right now and the hotel space and we’re also looking at more real estate, heavy businesses. And so we’re, we’re, we’re looking at kind of more unique trends.

An example would be a wedding venue. Just got married or we eloped myself when we were looking through for our venue. There was a lack of available space in a place like Denver. And I think it’s because, you know, there’s, there’s so many millennials that have moved here. There’s kind of a great trend and now they’re all getting married.

They’d prefer to do it here. There’s a lack of, of good space. I guess the today’s brides don’t want your, your hotel ballroom, that’s less desirable than something more Instagram-able. And so we’re looking at more trends in that direction where we can, I think that will continue. And the business operating side is an interesting add on to what we’ve done already.

Ben: [00:20:07] Yeah, and this is something you and I have been talking about. I mean, I’ve had a couple interviews about people buying private businesses. I mean, the stock market valuations, you’re buying something at a PE of 150 times, right. With Amazon or whatever. And with these operating businesses, 60% of owners are over the age of 60, starting to think about retiring.

You can buy these things at very low multiples. walk me through your thought process here. It’s, it’s leveraging your real estate experience and getting this operating business and all of the assets that come along with that is, is this kind of what you’re thinking?

Merrill: [00:20:50] Yeah. So. Essentially you’ve nailed the bigger term picture.

We’re we’re curious as some of those real estate heavy businesses. And so example, there’s a developer in town here in Colorado that purchased a small organic grocery chain and the money really isn’t as much in the groceries it’s that they’re able to bring an anchor tenant to a new development that then immediately adds value to the nearby area.

And so if you’re able to bring to the, the rear to the land, that then is also being valued at today’s extremely low cap rates. That’s where we’re looking to head right now.

Ben: [00:21:32] And then. Yeah. if anybody is listening and looking at any, any source, they have anybody, they know that’s selling a operating business that has a significant portion of the company assets in real estate or land, they should reach out to you.

Is that right?

Merrill: [00:21:51] Of course, we’re always looking for opportunity and we’re Colorado focused right now and we’d be happy to look it in the other areas. It just needs to, we need to find ourselves comfortable with that market. And at this point we’re highly comfortable with the, the front range and Denver and those vacation markets up in the mountains.

Which I’m also pretty bullish on as well. I think a lot of these Denver connected vacation markets are going to continue to grow over the medium. And long-term.

Ben: [00:22:22] Is that a product of Denver’s growth, just being so favorable with job growth and population growth and all of these other things. And it’s close proximity.

People want to go on vacation. Is that, is that kind of your bowl thesis there?

Merrill: [00:22:38] Yeah. So the base buyer in a market like bale has always been your Denver buyer. So while you’re still getting major international money, nationwide money in the place like Vail Breckenridge, they’ve always typically been anchored by Denver and they tend to trail and the cycle behind Denver by a few years.

And so we’re seeing, you know, what we thought, I mean, What we were seeing in Denver maybe three years ago, it feels like what I’m seeing in Breckenridge right now, which is a booming market, the hottest it’s ever been. And so there’s, there’s out-of-town buyers and there’s also that Denver buyer that wants their house after they’ve moved here and enjoyed it enough, they don’t want to deal with traffic.

They want to stay there for the evening.

Ben: [00:23:22] Yeah. And with COVID, I mean, this is being recorded late August. It’s still very much a thing. Travel is way down. Tourism is way down. Do you see any COVID impact in the vacation total purchase market? In Colorado?

Merrill: [00:23:40] So it’s through the roof right now. It’s the hottest in the last 10 years?

The exact opposite. Yes. The mountain towns in Colorado are booming right now. There’s it’s a very strange market where you have in a hot hotel. Occupancy may be slightly off. Given the lack of travelers, but at the same time you have individuals buying your luxury vacation homes at a record clip.

Right now, we just had our record sale and bailed at those $58 million for one single family, family residence. That’s not even ski at ski in ski out. It’s, it’s a beautiful home. But no, I think there’s just tense up demands. I could hypothesize as to, you know, other travel has been canceled. They, you know, after a lockdown, people would prefer to be outside.

I’m uncertain, but it’s, it’s as hot as it’s been. And it seems likely to continue, although the winter we’re unsure of what the markets are going to look like at this point in time.

Ben: [00:24:35] Yeah, a lot of, a lot of unknown unknowns, but congrats on your new home purchase. I mean, 58 minutes,

Merrill: [00:24:42] not mine

or setting record highs on price per square foot. So it’s a really interesting time to be there. And part of why we’re in these mountain markets while construction is really expensive. We’re, we’re trying to take advantage of these, like that gap between the sales price and the construction. And so it’s really difficult with construction costs are continuing to grow.

They they’re really driving a lot of project selection right now. And so we like playing in a space where we can play in that gap. Of where construction while a really expensive when you’re, when you’re able to sell. I mean, our highest price per foot was 2,750 a foot. And so when you’re able to sell at that number you can write in, you know, a significant.

Construction number and still have a margin there.

Ben: [00:25:36] Yeah, that makes a lot of sense. Got $3,000 per square foot. I mean that’s just crazy.

Merrill: [00:25:43] And in a market where say you’ve got an existing structure. And you’re able to add square feet to that structure. This is the type of, kind of unique development and opportunity that we were after.

Say we’ve identified a, a building where we can add an extra thousand feet and while the complication, it’s a complicated process of adding that to an existing building and getting town approvals when you’re able to sell at close to 3000 to foot. It’s worth your time to figure that out. And that’s an area where other developers or homeowners may be less, or they’re not as they’re not looking as closely in that area.

And so as a homeowner, this is a significant undertaking to take from wherever you’re coming from, whether it be Denver, but a lot of ultra high end is from out of Colorado. You’ve got to manage a huge construction projects and you’re unaware of. The zoning of the available you can add. And so they’ll play, they’ll pay a premium for a finished product.

And we’re one of the few that are keeping an eye on, you know, available square footage in a building and Vail.

Ben: [00:26:54] And I, I mean with home building, it seems like every tech tech is disrupting, disrupting every industry. Everything. And then home building, it’s still humans running around with hammers and nails.

The cost probably hasn’t changed a lot. the cost hasn’t changed a lot. I mean, there’s something like prefabs and, and a lower cost of home construction. Is this something that keeps you up at night or something that you think about or not, not for the next 20 years sort of thing.

Merrill: [00:27:26] It’s highly interesting.

We’ve been scoping projects to make it work. It, I’m not sure it’s totally there yet in terms of cost competitiveness, and a lot of. It starts to get more competitive. You can get to scale. And so if you’re able to you know, in our case, if you’ve got one building going up one multifamily building that you’re, you’re developing it it tends to not price out.

If you’re adding, you know, 10 20 of these, and we’re able to get these at discounts, that’s when those options start get more interesting. And I. It’s something that everyone in real estate is highly interested in because if we could unlock that, there’s a lot more we could do. And so, no, I think, I think everyone’s cheering for it that we’re hoping that that gets unlocked.

It’s just, it doesn’t seem like it’s totally there yet.

Ben: [00:28:17] And operating in real estate like you do. I mean, what does keep you up at night? What systematic risks are very terrifying for you?

Merrill: [00:28:27] I’d have to think on that. It’s a, I mean, we’re in a highly cyclical business and I mean, part of the beauty and of real estate and part of the, the, the risk to it as the use of leverage in those deals.

And so you know, being highly labral levered in a, in a cyclical industry can get lead to blow ups. And so I think the bigger concern is, you know, where we’re at in the cycle, particularly on the luxury side. It, it’s really tough to tell these cycles you know, once they dry up those markets are brutal.

And and the Denver area, you know, it’s a more certain bet in my mind. I see people continuing to want to move here. I see construction as a tough. Variable don’t I don’t really see it going down substantially over the next few years. It’s fairly land limited. And so that feels like a more certain bet to me.

And so I’d say it’s those construction once you’re under in, in a project and start so. What is the the difficult portion to the end, as long as you’re underwriting conservatively as long as you’re not you’re prepared for that eventual cycle to change on you. And you’re not over levered.

It’s okay.

Ben: [00:29:45] Yeah. Well, this time it may be different, right? That the world is over that verse. I think a small de-leveraging cycle might be a little bit more dramatic than previous one, but you know, that’s

Merrill: [00:29:58] potentially, I mean, The market, the market’s tough to read right now where a lot of a lot of the market’s kind of frozen.

And so, for example if you wanted to build a ground up office development right now or build a new mall the the market’s very uncertain and a lot of those assets aren’t really trading.

Sometime, no one, no, one’s found a new price and I think the not difficult to figure out. And so you may be right there may be blow up potential in the medium term I guess in the longterm, as long as you, you know, our time horizon for anything we’re holding is 10 plus years or, or hopefully not selling.

And, and in that environment, I’m pretty bullish in the long run on the USA on Colorado and particularly on people needing places to live. Yeah.

Ben: [00:30:53] And when thinking about super long-term 10 plus years, I mean, do you start thinking about. Water and things like that. Climate change impact on, on the city and the landscape.

Do you think through thin anything like that or

Merrill: [00:31:09] to an extent those there’s so many big variables to really make sense of. And I do have faith. That we will figure out these problems that may be you know, it may be difficult in the meantime. But I prefer to look at you know, more certain variables.

So I look at, in a job growth, the diversity of jobs in an economy, number of people move into location, land availability. I would be looking to, those is more certain areas for where I can bet. And, and betting on, you know the impact of climate change in Denver 20 years from now is pretty difficult since a guess.

But I do think we will eventually figure these major problems out.

Ben: [00:31:50] Yeah, I think so as well, it’s just real estate just seems like such a big financial commitment, exposing yourself to a number of idiosyncratic risks within that market. yeah, if you have a spare a hundred million dollars and you can buy a portfolio of.

Single family rentals all over the world. Like, yeah, it’s going to be a great investment over the next 20 years, but if you just buy more or to like, maybe you choose the wrong market, right. And you, you make all of your money when you make the purchase and maybe you pick a wrong time of the cycle. there seems to be a number of risks associated with that.

Merrill: [00:32:27] I guess I would, I would look, this is a mass real estate is a massive industry. So just U S real estate assets alone are something like $55 trillion. It’s an incredibly large industry, which allows for a ton of small niches within it. And so it’s huge. And there are opportunities at every level of, of that, whether they be in single family homes, whether they be in, you know, your massive developments and downtown locations.

And the same, if you’re looking to add value, I mean, there are it’s so big. That you’re able to outsource a significant portion of the work. And so there are consultants for anything you can possibly think of. So whether that be managing construction designers you name it, the property management.

There’s always a consultant out there which allows you to stay more nimble. So I, I tend to staff up for all of my projects. And so if there’s a a multimillion dollar construction project that we’re undertaking it’s over my confidence level, I, I hire someone that has done these multiple times that can then manage that whole process for me, that allows me to stay nimble.

I’ve only got them for one project. Once it’s completed, I’m either holding it and we’ve got a new property management company, or I sell the the project. So there’s just, it’s a huge market that gives you a ton of options and where to go. And I would, I would suggest looking in areas where you are more competent so where you are confident of long-term growth and an ability to, even if you are buying now where valuations are stretched, or if you’re confident 10 years from now in that area, that use case will still be there, that, that economy will still be strong.

And that may, that looks like a good bet to me.

Ben: [00:34:19] Really, really good advice there skipping or and I think generalizing that as well. Right? I mean, outside of your competent competence, As somebody as somebody that has done it before, and don’t be afraid to pay that person and bring them, bring them on as a consultant to help out and focused on what you know, and so really, really good stuff there.

If you were to start over within real estate and focus on some specific niche, whether it be in Colorado or else there elsewhere what would it be and why?

Merrill: [00:34:51] I were to start over. I would buy everything. I was, I happened to I was trying to cherry pick the very best deals I could find in 2011, 2012. I was a young guy at the time and I should have just bought them all.

But it’s still, I still would bet on on multifamily in, in areas that are strong Metro areas that are going to continue to grow. Those are areas where yeah. It feels like the the long-term prospects of those will continue to grow. You can’t miss, as long as you’re you’re, you know, you’re projecting trouble in the short-term.

And so I would start more in multifamily instead of, you know, wandering as I have from a multifamily, single family rentals, industrial, it’s I would take a hard look in that direction.

Ben: [00:35:44] I’ve looked into multifamily a bit and walk me through the disadvantages. Cause I know that the one big one that sticks out to me is when you go to sell, you’re selling to an investor who is buying this as an investment property, as opposed to a single family rental that you can sell it.

Because, you know, they, they love the yard and it’s in a good school district and it’s less about like Fisk cap rate and we can optimize this and increase the profit. what are the disadvantages of multi-family versus some of these other real estate investments,

Merrill: [00:36:17] single family, the rentals are great. It’s difficult to operate at scale, so it’s difficult to get you know, concentration of units.

It’s difficult to manage them across different areas. The, the scale that comes with a multifamily building is really attractive. And so if you know you as an investor, if you’ve got no a hundred rent yeah. Spread across the world. It’s pretty difficult to keep tabs on all of them to, to hire individuals that can manage these different areas.

And so, yeah, multifamily allows you to to immediately have scale. It’s easy to keep track of. There is more set up to service those buildings and you are, I mean, if you are more bullish on the capital appreciation of, of single family homes which I am, it’s great. It’s just, it’s really tough to find that scale.

And. That there are groups doing that or building and title developments for single family rentals. It’s just tougher to get. And right now you are competing against the high home buyer market where millennials are starting families settling down into homes. And so you’re, you’re competing against a lot of people in that space.

Ben: [00:37:35] Yeah. And but isn’t there a a trend, I mean, especially accelerated right now with COVID that people want a yard. They want to stand alone. They want space. And that just seems totally contrary to what a multi-family offers. Right.

Merrill: [00:37:55] Yes. So at our rental properties, we see a lot more traffic for things with a yard right now.

I guess I, I don’t think you know, we’re, we’re still getting take-up and at all our multifamily properties, there’s still low vacancy. We’re in an environment where we’re land constrained. And people want to be in certain areas. I think that will continue. I guess that’s a, that’s a bigger discussion going on in the real estate world.

Does this fundamentally shift the trends towards urban or suburban environments? And like people have been doing this for thousands of years. Do they suddenly want to jump to rural properties? And there may be some new demand. I guess I have a hard time betting against these really long-term trends right now.

And so there is a bit more desire for more space and things, but I tend to think that, you know, amenities will shift multifamily properties to accommodate some of that. And I, I would be surprised if there’s not if people are suddenly deciding apartments or they’re done with them or that there’s a significant drop in demand for them.

Ben: [00:38:59] Yeah, I find, I find that hard to believe as well, that at least in the very short term, I mean, who knows this work from anywhere remote work path that we’ve been thrust down a lot more quickly, you know, I think about me for the last seven years. It’s like, well, I can live elsewhere and still do the same work.

Still pull the same salary. The rest of the, world’s kind of catching up to that and they’re like, well, why am I spending four grand a month for this shoe box apartment when I can live in a palatial estate, Indiana. you never, you never know. And

Merrill: [00:39:35] I’m still seeing, you know, as. As you know, we’re seeing a major influx in Denver right now of people leaving those coastal markets.

But they’re not really moving into rural areas. I still like the hottest markets tend to still be near the cities. And so maybe somewhere in like Boise and Indiana could have more demand as people are after, you know, an urban experience, they don’t need to be the tied to wherever they were. But I still, it still seems like individuals want to be close to some of these city amenities.

Ben: [00:40:13] Yeah, until we have the ready player, one VR experience. Right. And you can, you can experience that from the comfort of your own living room. Yeah. I go just real quick with all of this stuff, right.

Merrill: [00:40:28] It’s kinda my it’s, it’s easy to do. And there’s so much uncertainty that wasn’t there before that is making realistic difficult, I would say.

And that the uncertainty of it all is making it difficult to make decisions. So a seller remembers January pricing and what they were able to get for their office building, or you name it. In January and now here we are six months later and it’s tough for them for, you know, for a buyer to come in and say that that is the same risk profile as what I saw previously.

And so it’s a very strange time to be making investment decisions. And so our approach has been to simplify them to things we understand and doubt. And the bet on long-term trends that we like

Ben: [00:41:14] can along with that strategy, or hopefully not Merrell really appreciate you taking on taking the time today, jumping on here and talking, talking through all things, Colorado real estate, very, very exciting market within the U S that’s for sure.

Where do you want to leave my listeners? Where can they find out more about you, about your company? Where do you want to send it?

Merrill: [00:41:36] These just as on Twitter and my handle is M still well eight, and I’m very active there. If you didn’t and DMS are open, if you’d ever liked to chat.

Ben: [00:41:47] And I’m so glad I staked him still.

Well, one, two, three, four, five, six, and seven. Before you got number eight,

Merrill: [00:41:54] unfortunately.

Ben: [00:41:58] Awesome. Meryl really appreciate you taking the time.

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. If you have any questions or comments, please reach out. I’m always happy to hear them. Lastly, if you’re on YouTube, please like the video or subscribe to the channel. If you’re listening to the audio version of this, please subscribe to the podcast and, or leave a review.

This really helps more people find the podcast. 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.