Working Capital The Real Estate Podcast
Value Investing with Ryan Smith|EP56
Jun 2, 2021
In This Episode
Ryan Smith is a Principal of Elevation Capital Group bringing more than 15 years of extensive business experience in market evaluation, property analysis, management systems, due diligence and finance. He focuses on mobile home parks, has a computer science programming background.
In this episode we talked about:
- How Ryan got started in real estate
- The transition from single family homes to mobile home parks
- Manufactured houses
- Fundamentals of the storage business
- Outlook for 2021
- Investment vehicles and funds
- Ryan’s Investment philosophy
- Distribution of risks
- Real Estate Market outlook
- Fiscal and Monetary policy
- Ryan’s view of mentorship
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesse Fragale. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you’re looking at your first investment or raising your first fund, join me and let’s build that portfolio one square foot at a time. Gentlemen, you’re listening to working capital the real estate podcast as usual special guests today. Ryan Smith, Brian is the principal of elevation capital group bringing more than 15 years of extensive business experience in market evaluation, property analysis, management system, due diligence and finance.
And just, if you, if you’ve heard of him before big focus on mobile home parks and kind of an interesting story in, in his beginnings that we’ll talk about today coming from kind of a computer science or programming background. So without further ado, Ryan, how’s it going?
Ryan (56s): And I don’t go well. It’s good to, good to be here
Jesse (59s): Right on. So you’re, you’re joining us from Orlando today. That’s right. That’s correct. Awesome. I feel like we’re just starting to get our first little bit of sun. So golfing is a, is now in full, full effect up here. So it’s, it looks like we’re moving in the right direction.
Ryan (1m 16s): It’s great. Well, come on down. We’ve got no shortage of sign down here.
Jesse (1m 20s): Yeah, actually, it’s funny. You mentioned that we’re actually looking at a couple properties right now in, in and around the Orlando area. So I’d like to come down sooner rather than later. I think I still have a ticket to Miami that’s a year and a half old that I’m gonna have to redeem with this pandemic special. I think, I think the 24 months is the max.
Ryan (1m 41s): Well, yeah, I do look us up. We’d love to see you. Right.
Jesse (1m 44s): So for listeners, you know, this is probably the first time we’ve had somebody that specializes in mobile home parks on the show. And I wanted to give listeners a little bit of a background for yourself. So maybe for listeners that haven’t heard of you, you can kind of start at the beginning cause you kinda got into real estate in a unique way to say the least.
Ryan (2m 6s): Yeah. It’s, it’s not your typical story. Although I don’t think there is any typical stories. I think they’re all unique and, and as they should be, but kind of to treat topic for the sake of your listeners grew up in a real estate family, you know, trenched, scraped, you know, did all this stuff I should do as a kid gravitated into analytics, learned to code, taught myself how to code ended up, you know, coding and antsy, see object oriented, C Orland, c.net S you know, so baby eyes and get a lot of different things.
So got into coding, ended up building an analytics tool for real estate investors. With the focus of it being my bad use. He used it, liked it at work. We were all shocked, which if you’ve ever coded anything that’s that’s, it’s, it’s, it’s God’s grace that anything works. So it worked. I found a market up having about 140,000 or so users of my software globally, mostly mom and pop real estate investors. So, but you know, made quite a bit of money from that ended up making probably a million, 2 million or something like that box as a, as a, you know, to a degree, a teenager got drafted professionally, but baseball I’m six foot eight at the time I was 250 pounds.
You can’t tell that via zoom, but, you know, anyway, I was, I was a ballplayer got drafted by the Baltimore Orioles and Anaheim angels played all the way through college, had a real choice, you know, kind of, you know, brains versus brawn moment, you know, which, which do I pursue. And I took the, I took the brain path, which may lead you to question the integrity of the brain that chose the path, but that’s the path I chose. So coming out of college, I, you know, I had capital, thankfully I had an awareness that real estate was a good place to play.
My wife is incredibly talented. She works just right down the hall with me here for, I should say I worked with her she’s she’s brilliant. So anyway, we started building a business together, bought about, I’d say about 25 single family houses pretty quick came to the realization that it wasn’t as scalable as we had hoped and looked for a better path and basically landed through analysis and research on self storage and mobile home parks. And we had two different kinda thesises around both of them.
We liked each one of them for different reasons, but we also liked them a lot together. There’s, there’s some interesting things that happened there. So anyway, to really fast forward, went out and build a portfolio. Now almost 15, 20 years later, we ironically we still just buy mobile home parks and storage facilities and we we’ve bought, you know, more than 150 assets and more than 30 states and continue to kind of go and grow.
Jesse (4m 55s): Yeah, that’s great. So for the, on the baseball front, you were a pitcher, right?
Ryan (5m 1s): Yeah. Okay. Arguable or accurate. I threw really hard and whatever direction I was facing,
Jesse (5m 10s): Let’s say you’re getting drafted. You’re a, you’re throwing some heaters in the nineties. No doubt.
Ryan (5m 14s): Yeah. I, I, you know, I think my best day I was 96, 97.
Jesse (5m 19s): Wow. Yeah, yeah. You know what, just on that point, just to kind of, cause you hear this story so much, you know, whether it’s an investing in brokerage and real estate in general athletic backgrounds or team backgrounds, what do you think that is that, that common thread that, that people just gravitate towards our industry or, or maybe it’s the other way around that, you know, the come from an athletic background and then pivot well into, into our industry.
Ryan (5m 46s): Yeah. You know, I think there’s a lot of commonality. Baseball is such a unique sport and pitching even more so. And that it’s, it’s, it’s kind of a singular part of a collective like pitching you’re really alone on the mountain. So you have to have, you know, determination belief, you know, all of those things, but within a team construct. So I find there’s a lot, you know, a lot of parallel in business, you know, we have a saying here, we all take out the trash, you know, I take out the trash with, with, with anybody else.
So I, I, you know, I think that, you know, a lot of what it requires and takes to be successful in sports that a lot of that translates into business beyond just the obvious talking point of it. So yeah, I think, I think you’re right. I, I do see a lot of correlation and there’s a lot of ex athletes that I come into contact with, you know, in, in the business. So yeah, it’s interesting.
Jesse (6m 41s): Yeah. And it’s, it’s kind of like you, a lot of what is done in our industry and in, in athletics is behind the scenes. People see the end result oftentimes and, and really, you know, a lot of the work is done where nobody’s watching.
Ryan (6m 55s): Yep. For sure. Yep. It’s it’s not, it’s definitely not glamorous. Yeah. Or yeah,
Jesse (7m 2s): You’re building, you’re building the software program for your father. And I think, I think in one of the previous podcasts I listened to with, with you on it, it was, you talked a little bit about how your, your father kind of pivoted it was from like roofing and then actually building a portfolio of his own. Right?
Ryan (7m 20s): Yeah, you’re exactly right. I mean, my, my dad grew up dirt, basically dirt floor poor cause my grandfather was a church planter, which he was, he was not in the denomination where that was profitable to be profitable. So my dad grew up a really dirt floor, four and you know, to put himself through college worth houses, which is a very tough gig. And then he came to the realization at, at, as a teenager that, you know, the person who made all the money was the one who owned the roof.
So to say not the one on the roof. And so, you know, he, he really came to that realization and jumped off the roof and started buying houses. Although he’s still roofed his own houses that they, you know, when I was, when I was born, there’s a photo of me. I think it was, I don’t know, four or five months old in a crib, on a roof, a slanted roof, by the way that my dad was roofing. So anyway, it tells you a little bit about my upbringing.
Jesse (8m 14s): Yeah, yeah, absolutely. So the, the apple doesn’t fall far from the tree. So you start, you start going into real estate and you know, I’m assuming it’s something about mobile parks that the scalability, as opposed to single family, how did you, did you initially get into that a vertical or did you transition into it like, like a lot of people do when they start with single family,
Ryan (8m 37s): You know, so we started with single family and we really just jumped cold Turkey to mobile home parks. And the reason was it was, I mean, there was scalability there in that, you know, now you can buy one asset with 50 units as opposed to, you know, 50 separate transactions plus, you know, managing those over disparate, you know, so there’s more inherent scalability that we thought, but really the compelling feature. I mean, Jamie and I, what was, I think kind of unique was we sat down and I, I remember it, we sat down and basically created an underwriting model for every asset class we can think of, you know, so as opposed to just deciding this asset class sounds nice, we’re going to go do it.
We kind of sat down and, and kind of programmatically thought three asset class created a model and our thought was we would throw all the models on the table, let the models do get out. And then we would pursue the ones with the most merit along the lines of what we were seeking to accomplish. And we had four very specific objectives that we were wanting, and those were cashflow capital appreciation, wealth creation, basically low correlation, low beta. You know, we wanted off the rollercoaster ride as much as possible.
And then we want to tax benefits. So those were the four things we wanted. And the two best asset classes by our determination were storage and mobile home parks. And interestingly enough, all these years later, they have been, so we were right or directionally, right. They had been actually number one in number two or for really all real estate. And we think there’ll continue to be. But the thing that attracted us most to mobile home parks or manufactured housing communities was the moat. The aspect of the moat that I saw, I saw a fairly significant moat hiding in plain sight in, in the modes really, really, really simple.
I, I just saw the fact that, you know, mobile home parks I thought were in high demand. I thought demand would continue to grow, but I thought supply would be constrained by the stigma surrounding the asset class. And more than just the stigma of mobile home parks. I don’t like them. I don’t want them near me or this kind of this negative bent emotionally towards them. There, there is a reality that is, they’re not efficient for producing tax revenue. So most municipalities don’t want them either. The residents don’t want them for whatever reasons, you know, perception of crime or property values or whatever, but municipalities don’t like it because the density, they can’t get any good, you know, they can’t get good density sufficient to produce tax revenue.
So we thought the net effect of all of that would be demand, would grow. Supply would be constrained. And, and we thought that barrier would protect our capital. And, you know, I think that the story has been told,
Jesse (11m 20s): It looks like it’s worked out. So in terms of the, I want to jump into manufactured housing, but just on the storage front, just because I feel like storage, it’s, it’s a very particular area in real estate. And I don’t think a lot of people kind of understand the fundamentals of it. So when you were initially getting into storage, was it you buying existing? Were you developing? What was the approach
Ryan (11m 43s): Existing? Yeah, we, we’re not, we have developed storage out of the ground predominantly in Denver, two facilities there, but we prefer to buy existing if we can. And what is it about storage that you love? So the trends, I mean, all that, I mean, there’s really a lot of tailwind long-term trends and that COVID has only helped accelerate. So, you know, just, I guess from a macro view, you have back in the nineties, there was about three feet of storage per person was demand.
So demand was around three feet of storage. So if you had a hundred thousand people in an area, you have 300,000 feet of storage and that might be six 50,000 foot storage facilities. Or so today, by the way, when it was three, nobody thought I’d ever before that it hit four, but it never hit five and hit five, six, seven. Now we’re nine. And the projection is that we’ll be at 12 by 2030. So that same market of a hundred thousand people, you know, if that holds true, we’ll need now 1.2 million feet of storage, let alone the consideration that that market may have gone from a hundred thousand to 200,000, if you’re investing in a growing market.
So there’s, you know, you have increasing population multiplying by increasing usage, you know, more, I guess, a couple other high points you have baby boomers going from big to small, you have this trend of new home starts being smaller. I think the current kind of I’ll say inflationary, you know, commodity price inflation or reflation or whatever one wants to consider it, I think will only accelerate that trend of smaller, you know, for, for the purpose of affordability.
So more, more, more people need, you know, storage as a, as a garage primary or secondary. And then lastly, I guess just, you know, in saying in America about 10% of Americans use storage one in 10, but interestingly enough, millennials there’s data that suggests about 30% of millennials are current users of storage one in three. So it looks as, as new populations kind of rise in America, that the adoption rate is growing significantly of storage as a, as a, as a tool in the tool belt, so to speak.
So there there’s many other things to mention, but we’re, we’re, we’re pretty bullish on long-term storage
Jesse (14m 5s): When you’re evaluating storage, as opposed to, well, whether it’s a manufactured housing or a apartment buildings, you know, what are you looking for in terms of how you’re evaluating? Are you doing it on a, on a payback period on an IRR? How does, what does that look like?
Ryan (14m 21s): So we’re, we’re long-term holders of real estate. So we, we don’t think of it in IRR terms because really we want to buy, it takes, well, first there’s only so many good assets out there. There’s not an unlimited supply of quality deals. So if you come across one, it doesn’t make a lot of sense to quick flip it, you know? So for us, we want to buy quality well located manage well and hold for a long-term. So, so yes, we want to, I mean, just some bullet points, the number one question on both asset classes we have, number one, is, is it molded?
Is there, is there something about that asset in that location that gives us a competitive advantage? So that’s, that’s the number one question from an economic lens? You know, we want, we want to buy where people are moving to, not from, we want the asset to be well located, where it’s very difficult to compete, so that there’s a supply demand imbalance, which gives us the ability of positive price pressure over time. So we want to be able to grow our, we have a pathway that we think we can grow our net operating income incrementally for a very long period of time.
We’d like to buy an institutional quality asset in a market that institutions are interested in owning in which you know, could contribute to a lower cap rate higher, multiple on NOI, you know, some of those things.
Jesse (15m 39s): And do you find just given the fact that, you know, pivoting to the manufactured housing side, as we kind of see a convergence of, of, you know, class, a assets, class, B and C, how that the, the spread between cap rates and interest rates we started, you’re starting to see that converge. Do you find that this area kind of where it sits is one that’s more, let’s say resistant to market fluctuations, or like you said before is kind of beta more, you’re looking for beta and less volatility.
Ryan (16m 12s): Yeah. So I think the way we, you know, when you look at mobile home parks, for example, to your point, there’s many different qualities, there’s a lot of different business implementations, for example, do you own all the homes and rent the homes and the land you own, none of the homes and you just rent the land and everybody owns their home, which by the way, is our preference. We don’t want to own the mobile homes, but we to, you know, so there’s different implications depending on the quality of the location, the model you’re executing as to the stability and, and, and basically the risk adjusted return, you know, and, and maybe, you know, beta as well for the asset class at large, it’s fairly low beta.
I think mobile home parks generally are in the 0.3 to 0.4, you know, beta range. So, you know, sub one, you know, so pretty, pretty good there, you know, throughout COVID I noticed, and this is anecdotal, but it tended to be that if you owned all the homes and you rent the homes and the land, that there were more delinquency issues in the peak of COVID, because there was this sense where I’m running the home, I’ve got an eviction moratorium. I’m not going to pay. Cause, you know, I might have for six months and you know, I’ll just go to the next part, but with our model where everybody owns their home, their skin in the game, because if you don’t pay eviction, moratorium will one day be lifted and you could lose your home.
Right. There’s, there’s a significant amount of skin in the game. So I think we have one portfolio for example, of about, so I’ll say roughly a thousand units, geographically dispersed, I think at the peak of COVID we had about five delinquencies at the peak, you know, and that’s because we had, you know, we PR quality asset, well located. They own their home and they have skin in the game. So we think our model is more resilient to fluctuation. And then lastly, I guess to your point, there has been this trend lately where, you know, due to social media and kind of the jobs act where in the, in the United States, at least the jobs act allows people to generally solicit for the purpose of raising capital.
And it’s, it’s gotten in my opinion, pretty frothy and, and how, how, and, and how that’s done. But what you typically see is you see this bent towards cashflow as the kind of the marketing tool. So people will advertising, you know, cashflow. And so that really forces them up the cap rate ladder or down the quality ladder. So you’ve actually seen a fairly significant amount of capital aggregated by kind of these newer upstarts. And they’re deploying that capital in the lower quality for the purpose of generating, hopefully greater cash flows, which is actually compressed to your point, you know, the, the, the variance between the highest quality and the lowest quality.
So in our, I mean, for, for our point of view, we, we, we think there’s far more reason to execute our model today, which is to buy quality well located because what you’re, you know, I’ll give you, I guess the last point we’re, you know, we own mobile home parks that we bought a decade or more ago that are, you know, I would say two, two and a half star quality, which is, you know, kind of downstream and quality. And we may have bought them for 10 to 15 cap when we bought them as a range today, those are trading in the five, you know, could be in the five to six cap rate range.
It’s, you know, anyway, but I would not be a buyer necessarily of that at five gap, but I might buy a property in Washington, DC at forecasts.
Jesse (19m 41s): Yeah, for sure. It’s, it’s definitely, at least for, for the markets in our area, it’s been very much this, this game of you’re starting to go more and more outside the downtown, you know, the CBD and you’re starting to not really find the returns that you’d expect if you’re going to non-core assets, even, you know, further down the line. So it’s, you know, this last year has been a unique one to say the least, but even before that, we were all just like in, in our position, you know, w what are you buying right now? And where are you cash flowing?
So the deals that I found that were appealing were those ones where they’re just, you know, there’s something there, whether it’s a it’s management issues, it’s not leased up. And then you kind of have to have some sort of value add play.
Ryan (20m 25s): Yup. For sure. Our next acquisition, which will probably be three, four weeks from now, it couldn’t be, I mean, it really could not be better located it’s in Washington DC, and it could not likely be more poorly managed. I don’t think that same cleaning solution since the year of my births, but to your point, we liked those deltas. Yeah.
Jesse (20m 45s): Just think just on that point, Washington DC friendly, are they from the landlord perspective?
Ryan (20m 52s): Yeah. So this property is actually in Virginia, Alexandria, Virginia, and this is storage. So this one’s a self storage asset, so yeah, w we don’t have any concerns and we already own through other entities in the area. So we, we, we know the market fairly well.
Jesse (21m 9s): Right. So was it something where, you know, throughout your career that you were buying a manufactured housing at the same time as buying storage? Or did you kind of start with one and then the other one came after? Sure.
Ryan (21m 21s): A really good question. I actually started with mobile home parks. So we started with that kind of cut our teeth on that, and then had a chance encounter. As you know, I think happens, you know, over most of our lives, get to meet that one person that was random and he had he, or she had a huge impact that you didn’t expect. And so that happened to us and, you know, around, I think it was 2006, 2007. I met a gentleman named Brian Dawn, who at the time was the fifth largest owner of self storage in the U S privately pretty significant individual.
And, and so he, he made a huge impact on my wife and I, he, he threw us, I, he gave us advice, I think in part to get rid of us, like, like just, okay, I’m doing my friend a favor, I’m talking to you, but you know, like little did he know those? The, the, the, the crumbs he gave us, which were invaluable to us, we actually went out and did something pretty significant with them, which blew his, blew him away, blew his mind. And, and all these years later, we’re, we’re actually partners in the business.
So we brought the mobile home park side, he brought the storage side and we’re doing both together and it’s been, been a great,
Jesse (22m 32s): Yep. That’s great. You know, when I hear a storage, it’s something that I I’ve always wanted to get into. And part of it too, is, you know, we, the city that we invest in, for the most part, very heavy regulations, very in favor of the tenant, you know, not, not going to argue the, the political aspect of that, but I always see these guys that are in storage where, you know, it just seems like it’s just something that they don’t have to deal with. And that just seems like it’s, it’s one of those things where it just make your life a lot easier.
Ryan (23m 2s): Yeah. I know. It’s, it’s, you really don’t get into the regulatory melee typically. Cause there’s the sense that I’m not saying it’s right, but there’s this kind of broader sense that, you know, if the tenant has some issues, they should, they’re hoarders anyway. Kind of, they’re not, there’s that, well, that’s, it’s, it’s very different than, you know, where somebody lives.
Jesse (23m 24s): Yeah. For sure. You’re home and yeah. There’s definitely a different emotion and connotation to it. I want to talk a little bit about the vehicles that you used or you use for these investments. Maybe you can talk about when you were first acquiring and if that’s kind of moved into whether it’s, you know, you kind of touched on this, whether it’s a syndication or fund and yeah. You could talk a little bit about that.
Ryan (23m 48s): Yeah. So for the, I’ll say it’s been a very long arc and we we’ve done a lot of different things and iterated over a long period of time. But in short, you know, really the first, you know, call it seven, eight years of our business, we really just deployed our capital for ourselves. It wasn’t fun structures or raising outside capital. It was just us for, for the benefit of us. We built the model and so on and so forth. And then in 2010 know, we started looking and basically said, there’s a lot of opportunity to buy good assets, you know, at fairly low prices at that time.
And we didn’t have enough capital to take advantage of all the deals we were seeing. So we formed a fund called fund one, or unbelievably creative with our naming schemes. We’re now on fund eight and there are two, three, four, five, six, seven, and now eight, but so fund one was a reg D five oh six B as in boy offering in the states, no general solicitation, you know, friends and family kind of thing. And we raised $2 million to buy six properties that have now gone full cycle.
And, and that was, I’ll just, I’ll mention this because to me, anybody who’s watching this, that’s thinking about raising capital. In my opinion today, things are pretty fast and loose. And I say that, I’ll give you an example of what I mean by that. I talked to a guy recently. He said, you know, I, you know, he was, I think he was, he had another job in a completely different industry a year ago has been doing real estate for less than a year is about to launch his first fund. And he said, you know, but it’s a small fund. I’m only raising $30 million.
I it’s it’s there’s, I don’t even know where to begin on that comment. You know, I mean, we not saying everybody, but, you know, we were, you know, call it seven, eight years with our own money before we started a $2 million fund. And we’re, I mean, to say we were freaked out by the $2 million raise just by the responsibility of deploying that. Well, you know, anyway, so we did our first stack. And so then, you know, 2013, September, I think it was September 23rd of 2013, the jobs act was passed.
We could do a reg D five oh six C as in Charlie offering. So our funds three, four, five, six, seven, and eight have been rightly five or six C we’ve iterated. Every single fund has had improvement structurally over the previous fund. So there’s just every fund is, you know, we try to find a way to do things better. So, but currently,
Jesse (26m 19s): Sorry for, for listeners five oh six C for, for anybody in the, the U S that’s going to be your kind of prospectus exemption, right. That you’re going to have, I’m assuming accredited investors and family, friends that you can market to.
Ryan (26m 33s): Correct. It’s it’s only accredited investors and they have to be third that the onus is now on us then to verify them as accredited. So it, whereas a, B you could do a fattest station, you can say, yes, I hear by certified that I’m accredited with, with a C you actually have to prove that you’re accredited. And we have to have that proof on file the clients from
Jesse (26m 55s): Say their accountant or lawyer that, you know, a certain net worth or incomes achieved.
Ryan (26m 60s): Correct. Yeah. Opinion letters. We can rely on those. Yeah. We just have to, we have to take what are reasonable steps to know. Okay.
Jesse (27m 10s): And you used that for the, the following sort of the following investments that you did. And then is that if I was six 60, kind of where you play today, is that a, is that what you typically use
Ryan (27m 22s): Right before C is where we’re at? Yeah. So
Jesse (27m 25s): For the general solicitation where you see, and I, first of all, even the backup a second, I couldn’t agree more with you on, on the market. And we talked about this on the podcast before it, it reminds me of oh eight oh nine, where you heard every friend of yours has flipped a home. And you’re like, I thought you were in a software or something. And, you know, they got five hosts or something. It’s kind of that you’re starting to see that again, where everybody you talk to is it seems, and maybe I’m siloed because I’m in this industry, but it just seems like a lot of people that haven’t done anything substantial in real estate before are jumping into raising capital, which like you said, for myself, the first time you raise capital, you’re, you’re scared as hell.
Or you should be, it’s the first time you’re not using your own money. And you’re just, you know, you’re basically, you’re the, the trust vehicle that you now have other people relying on you. So, absolutely agree with that. I, in terms of, so when you go into the fund model for, you know, for listeners, the distinction between where you make the jump from, say, syndication or asset specific raising capital, and you move to something where you have deployable capital, what, you know, what did you find was the, if any of the, you know, the jump or the, the nuances of moving from one to the other.
Ryan (28m 41s): So we really didn’t do single assets indications. You know, we just kind of started with a multi-asset syndication or a fund, which is fun one, and we bought six assets. We’ve learned more as we kind of have grown. And I guess maybe it would be helpful to kind of, you know, I can give you my, kind of my 2 cents on what I think the differences or the benefits of beach. But I, I really think that there’s benefits to having a mini assets in one pool.
For one, you have a better, you could potentially, depending on how it’s executed, have a better balance sheet, that’s geographically diverse, by the way, we do it across many asset classes, many assets, you know, in that could potentially open up opportunities for different type of debt options that a single asset syndication with kind of a one-off balance sheet wouldn’t have. So 10 assets under one on one balance sheet, you know, might be better than 10 separate balance sheets with different control structures, different splits, all of that.
The other thing that’s an interesting kind of nuance is if you have one asset, you know, that’s, that’s solely owned by an entity. You know, when you’re looking at your reserves and you’re budgeting for cash reserves, you really need to set it aside. You know, let’s say it’s 5% or whatever that is by that asset. But the benefit of having, you know, kind of a bigger balance sheet and multiple assets is you can actually bring that down because if one, if one asset needs cash for a specific function, it could actually draw on cash from another asset.
So you, you have some benefits there, so you can keep more of your capital working, you know, plus you just have the diversification play multiple assets, multiple states, multiple asset classes, so diversification to a degree. But so
Jesse (30m 35s): Anyway, did you find that being that you raised the fund for the first time, like I’ve always heard the way I’ve always liked to described as like the fund is really that trust vehicle, like you, they trust you. Whereas with the syndication single asset, at the very end of the day, they can walk up to a building in theory and, you know, knock on a brick. So was it, was it challenging to have people buy into this idea that, you know, there’s this pool of capital we’re going to invest it. This is our investment philosophy, and these are the type of assets we’re going to look for.
Ryan (31m 7s): So to me, I don’t think it, I agree wholeheartedly that the currency of everything is trust wholeheartedly. And the challenge investors have is you can’t jump to trust. No, no investor trusts you when they invest with you the first time. And they, and they shouldn’t because I haven’t, I haven’t earned that. They hope I’m telling them the truth, but hope is not trust. They hope they can trust, you know, and then our job is to, to bridge that by, by performing in line with their expectation. But I, I guess, you know, I don’t want to say I’m unpopular for this, but it’s, it’s an unpopular point of view in the way that we raise our capital.
We do not use performance and models, and that’s not what you said, so I’m not putting words in your mouth, but I do see that often kind of be kind of your comment where an investor can go see and touch the bricks. Hmm. That’s not saying performance and modeling, but at the end of the day, okay, so the property exists. What does that mean? You know, you still are relying on the person. So when we raise our capital, we try to remove all the shiny objects in the room and allow the investor to focus on where their greatest point of risk is.
And that’s me and that’s us, the management team. We are the great, if you, if you don’t trust that we will, you know, put your interests before our own and, and work our tail off with excellence on your behalf, we’ll run, you know, don’t invest, no projected IRR should change that. The problem is I actually suspect that some of those projected IRR is do potentially draw the focus off the question. Do you trust the operator? Which is why I think they’re out there. So, you know, if you’re, I guess if one of your listeners is looking to raise capital or is thinking about syndication, the, the part that’s encouraging, please, you can raise this capital with, without doing all of those, I guess, riskier mechanisms to raise capital.
You can raise capital by, by doing it, you know, in a more conservative way. So we’re, we’re pretty big on that.
Jesse (33m 8s): Yeah. I couldn’t agree more with that. It’s funny too. Cause I know you’re naturally a kind of inclined towards finance and kind of the analytics of the deal, but w the last deal that we bought, we just had a lot of investors that it was the first indication that they’re investing in. And with when we initially did the model, a lot of it was, you know, your typical stuff, cash and cash IRR. And then what I found with just cut through the fat for people was just your, your equity multiple, you know, like, what am I putting in? What do you think it’s going to be valued at three, four years?
Cause even if you’re, you know, obviously there’s going to be variants, but at least that’s something people can graphs and, and it can look okay in this market. Is that probable, is that in the realm of possibilities where when you see 23% IRR leveraged IRR, what does that mean? There’s so many things that you could have, you could manipulate, whether it’s, you know, getting cash out on the end, having a cap rate, that’s, you know, this, you know, different scenarios for cap rates. So yeah. I completely agree with that.
Ryan (34m 8s): Yeah. And then to your point, I mean, I’ve, I’ve seen IRR, but the, you know, to the hundreds, you know, it, the way I look at it is from an analytical standpoint is a hundred percent of all performance are, will be wrong. A hundred percent. There’s a 0% chance. It will be right. So the question is, is that a reasonable marketing tool? You know, and I’m like, for us, we, we just say, no, you know, you know, people will ask, do you have a performance? The answer is, yes, we do.
We just don’t use it for marketing. We have one internally, but we don’t use it for marketing, you know, and we can talk through our assumptions and what we think might happen and that person can then create their own model and Excel and kind of projected out on their own. But we’re not, we’re in the last, I guess the reason kind of, you know, for me, we’re a conservative bunch, or at least we would contend that we’re conservative in the way we use 50% leverage where, you know, we’re, we’re kind of, I would say in some ways, crotchety and conservative about how we do things, but I see some groups out there that are really aggressive in anything but conservative in how they raise their capital, but then they tout themselves as being conservative in how they operate the assets.
So to me, and maybe I’m just, you know, find humor in odd things. But to me, I find it humorous to say, okay, I’m going to raise, I’m going to raise capital, being incredibly aggressive. And then as soon as I get your dollar, I’ll never do it again. It seems in-group. So anyway.
Jesse (35m 39s): Yeah, for sure. Well, I think just kind of simplifying it, but at the end of the day, the real estate, the language is going to be through the finance of the deal. So yeah. Yeah. I definitely have been in the background, but I think, you know, I’ve talked about it before on the show where Howard marks has a great diagram for risk and, you know, you can just Google Howard marks and basically it’s, you know, you’re obviously, you’re, you’re kind of risk return a line starting from the bottom left, going to the top. Right. But every point on that line is this new distribution of risk. So you kind of go to different segments that, you know, just cause you’re going to have an asset in a certain area, it’s not necessarily correlated with risk, it’s correlated with the expectation of, of risks.
So I think at the end of the day, though, you’re right, the person that’s investing for the first time, that’s all just kind of shiny objects. It’s really do I trust you? Can you lead me down a path where I can trust you in the future? On, on that point, I want to save a little bit of time because I heard you on a podcast on this debate, which I found fascinating on, on interest rates and inflation and where we kind of think we’re going. And it’s so funny when it comes to like interest rates or inflation, both of those topics is that you can have geniuses on both sides and completely disagree with where we’re going.
So maybe you could give a little bit of background kind of where you stood in that debate. And if, if, if that’s still the case today.
Ryan (37m 3s): Yeah, no. So with this debate, so you unders I guess, so your list can understand the construct of the debate. We were given hunter and I were on a team were given the position that we had to take. So it wasn’t it. So our position was we had to argue for the case that interest rates would be at, or the app the same or lower than they were in February two years from that point in time. And then Neil and John took the opposing argument and it was, it was, it was a lot of fun.
And, and to your point, I’m not, you know, there aren’t many successful financially successful economists kiddo. There’s not many of them that, so I don’t, you know, I, I don’t have a crystal ball, but the, the point I made on that, on the, on the debate, even to the position that Neil and John were arguing is I actually hoped their position. I hope for their position, that that inflation does come to a degree that interest rates do go up, that the fed does take action that, you know, cap rates may rise.
That that’s actually more compelling for me. Long-term inflation is that is a wonderful thing for real estate. At least it has been historically. So I, I’m not, I’m not the person who, who wants things to continue to go down in the hopes that this, this cap compression opportunity might continue, you know, in the, in the same, in the same way. So, so anyway, there’s a whole discussion around inflation and I’m happy to go down that path if you want, but I’ll, I’ll take a breath and see where, where you want me to go with all this.
Jesse (38m 38s): Yeah. So I think what we’re hearing, and this is something I hear from people that don’t participate in, in, in investing real estate, people that are in the industry. And it’s one that, whether you’re in the U S or Canada, that we have now leaned on the fiscal aspects of our policy leavers so much now that how can we have a situation that in a year or two from now that doesn’t incur some sort of amount of inflation and then, you know, the Corolla is like, w you know, what does that mean for, for, for real estate?
Ryan (39m 14s): Yeah. Yeah. I mean, there’s the challenge that it’s true and it’s, it’s a reasonable position. When you look at how much, you know, supply money supplies, you know, all the different, you can go through all the different component parts, but the interesting thing is it hasn’t happened yet. You know, I think the peak peak inflation over the last 12 years, I think in the us, it hit 3%, one time for six months. And that’s the highest it’s been, you know, on the, on the average, I think the average us inflation rate over the last decade, it’s been about 1.1% where the Fed’s target is two.
So certainly, you know, there there’s an aspect that something has to change. And then the question is why, because it has to, because it has to, because it has to, and, and that’s, that’s the question of, of, of when that happens, but rather than to me kind of going through the, the, when it, and how it might happen to me, there’s a point where inflation will avail itself. And, and I think that’s really positive, you know, for, for owners of real estate. And so I’m, I’m the sooner that that happens to me the better.
And it’s actually, it’s a question I get regularly now, probably, you know, several times a week from this, this kind of, this point of view, which is what if interest rates do go up, you know, won’t bat crash, your model, so to speak. And, and, you know, to me, the way we see it is, you know, obviously the fundamental definition. And while I’ll say by my determination of a good business, as one that can pass inflation onto the customer, if you can’t pass on the place and you’ve got a really bad business.
So I, you know, real estate has historically demonstrated itself as a pretty decent, if not better than decent hedge for inflation. So the question is for my storage and mobile home park business, can we pass inflation onto the customer? And if we can, that inflation actually serves a pretty, pretty, you know, a pretty compelling role in the model because you know, the, the people, a lot of times people will say, well, okay, let’s say you buy a property today at 3% interest, which is what we just borrowed for recently at 3%.
And let’s say, you know, five years from now, interest rates are 7% and you’re jumping from three to seven. How can you afford that, that Delta, but you, at the end of the day, if I can pass inflation onto the customer, if my rates, my biggest expense in the business is debt and it’s fixed. Okay. If I borrow today at three and inflation comes tomorrow and I can pass it onto the customer that inflation I’ll have five years of arbitrage, right? Where my cash flows just growing and going.
And, and to the point where, when I refinance five years, or whenever I refinanced, I should have more of something in a lie fueled by inflation, potentially valued at a lower multiple, I’ll be at a higher cap rate, also fueled by inflation. My overall value. Shouldn’t change all that much if at all, you know, and then there’ll be some it’s not entirely part of, there’ll be some imbalances, but in the long run, inflation is largely positive.
Jesse (42m 21s): Yeah. I’m not going to lie. I sound really smart that day when I finished that podcast and somebody saying, I’m like, you know, you can pass it down to your customer. That’s a good investment. And I was just telling my buddies, like, that’s, it was a great way to think about it because you don’t just think about it from you get yourself out of real estate and think of the business, what businesses have the ability to do that. And then, you know, the thing, another thing where you said in, in the debate, and just now where you’re like, I’m actually bullish on inflation. If, if it happens for us, especially like, why are we in real estate? If, if, if inflation hedging is not one of those aspects and, and NOI can go up, I want to be mindful of your time here, Ryan.
So we have four questions. We ask every guest as we wrap up here and your view on mentorship in the industry.
Ryan (43m 9s): Yeah. I, so I, I’m a huge fan of mentorship. It’s, it’s an incredibly paradoxical process in that the people who you want to mentor you as the ones you can’t afford and would never except for the dollar. So how then do you find those people, you know, at glaze that’s, that’s, that’s, that’s the way I look at it, but yeah, I think it’s, it’s, it probably offers more value than any other thing that you can pursue, right.
Jesse (43m 37s): On most impactful book, real estate or otherwise,
Ryan (43m 42s): Oh, man. So many, there’s a book written by a dear friend of mine who I, I think is back to mentorship. He’s mentored me and he doesn’t even know it, but it’s a book called right away and all at once. And his name is Greg Brennaman and Greg was the president of continental airlines with Gordon buffoon and took it from worst to first and 40 X, the Capitol, which formed TPG. It was David Bonderman and deal. And then he went on his current director for home Depot.
He was the CEO of Quiznos and burger king. Anyway, he’s reporting. Yeah.
Jesse (44m 20s): Right on. I haven’t heard that one. I’ll check that out. Something that, you know, now in your business or your career that you wish you knew when you started out,
Ryan (44m 29s): You know, I guess there’s so many different things, but one is just, and this was the sound I rolling and kind of insert Yon here, believe in yourself. And what, I mean, I guess more specifically, as in every iteration of things that we’ve tried and done, there’s always risk that will it work? Will it not work well, people like it, will they not like it. And, and I’ll just say, we have not yet fallen flat on our face. So, you know, trust your instinct, believe in yourself, implement, but your best, your best product, your best service, your, your, the best version of what you can offer out there.
And, you know, that’s, that’s good enough
Jesse (45m 10s): Right on. And this one, as listeners know, inspired by a masters in business, on Bloomberg, you’d take yourself back to Ryan on the mound, a young guy, throwing heaters, first car, make and model.
Ryan (45m 23s): Oh, my first car make and model. Gosh, I think it was a 1988 Chevy blazer, right? W no interior and an unbelievable feature that when you hit the brake, the horn hot, which one is popular at spotlight.
Jesse (45m 44s): Yeah, absolutely. Especially a senior guy. You said you’re six, eight. I probably wouldn’t want that guy honking at me in a Chevy blazer.
Ryan (45m 51s): I had to pull up to the light with my hands out the window. So I wasn’t Hawking
Jesse (45m 58s): Right on Ryan for, for listeners. If they want to hear more, see what you’re up to aside from a quick Google search, where were they working? They reach out.
Ryan (46m 8s): So I’m on LinkedIn, Facebook, our website, which is elevation funds.com and anybody where we’re, we’re really easy to get ahold of. So reach out anytime if we could be helpful.
Jesse (46m 20s): My guest today has been Ryan Smith. Ryan, thank you for being part of working capital. You bet. Thanks for having me. Great, Joe. Thank you so much for listening to working capital the real estate podcast. I’m your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse Fragale, F R a G a L E, have a good one.