Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and your investing with The Accelerated Investor Podcast.
Josh: So, hey, everybody, welcome back to Accelerated Investor. I am excited to be with you as always, and share amazing content about raising money, doing deals, both single family, multi-family, large apartments. And I hope you’re staying safe and healthy in the middle of this kind of uncertain economic times. This virus business, I’m lucky and excited that I’ve been working from home for over 10 years, off and on. And so this is nothing new to me. So I finally, if you’re finding this on YouTube and or hanging out in my home office, I’ve got two offices. And today the wife is working upstairs in the other office. I’ve got the basement office, which is fine by me, but we’re having a good time. Also wanted to announce that we just closed one hundred ninety six unit deal literally an hour ago before we’re about to get going with Scott. In this interview. So 20 million dollar deal. Mobile, Alabama, deals are still happening. And that was the workforce housing deal. And today, I want to introduce you guys to a relatively new friend of mine. His name is Scott Choppin and Scott is the founder and CEO of an organization called the Urban Pacific Group of Companies. He is a developer builder of workforce housing, specifically the urban townhouse model, and has developments going on, has been in commercial real estate for over 20 years. We’re going to talk about his business and the development opportunities before this virus. What’s going on today? What he’s experiencing and what he sees going into the future. So, Scott, we’re excited to learn more about you and your company. Thanks for jumping on.
Scott: Yeah, great to be here. By the way, congrats on closing that deal.
Josh: Oh, thank you. Appreciate that.
Scott: That’s some good news. I like it.
Josh: Yeah. You bet. Thank you. So, Scott, tell us tell our audience just right now. Not virus stuff, but tell us about what you do. What are you doing a month ago, when things were quote-unquote normal, what does your company do? What do you develop? How does it work? How many units do you have? Do you develop for other people? Just help us. Give us some foundation about you in your company.
Scott: Sure. Help me remember all those questions, by the way, because I’ll get into it and I’ll go. I’ll go off the rails. That’s all good. I’ll get it. Yeah. Hey, great to be here. So we’re a real estate development company. You know, we do hold assets and now are starting to hold, you know, all the assets on a go forward basis. But really a ground up, new construction, real estate development company have been doing that. Personally, I’ve been in the business for thirty-five plus years, professionally since nineteen ninety five. I have a family background and real estate development. So I grew up around, you know, my Uncle Mike and my dad carry a building, you know, apartment projects. So got a taste for it. And then when I was 18, I decided that it was something that I wanted to do as a career. Read a few great how to invest in real estate books. Yes. Got me excited about being an entrepreneur. And I knew what that was in the real estate development business, because, you know, that business is not necessarily, you know, mainstream. People know what that is and that’s fine. So we really specialize in urban infill, meaning building inside the city perimeter of, you know, predominately in the West Coast and western at states doing different product types over the year. So we’ve built podium buildings, you know, middle density, high density residential. But we’re really apartment guys like you.
Scott: You’re gonna look at our track record generally. And then in the last couple years, really about three years, we’ve been focused wholly on our workforce housing model we call Urban Townhouse, which you mentioned before you reach for short. And really what happened in 2016 is we finished up a couple of very significant apartment development assets. Four hundred fifty three units and Westminster, Colorado, that we did in a joint venture with lee-na few podium assets in Southern California. But when we got done with those gave us we had a little gap in our production cycle. So it really gave me the chance to look around the marketplace in late 2016. We’re seeing some changes in the marketplace for Calpol, the ability lending and equity and a lot of product coming online, right? A lot of supply. And in the real estate development, new construction business over supply is always an issue that we need to be tracking closely. And we don’t have that problem so much in California because we’re generally under-supplied. But, you know, certain micro markets would certainly produce oversupply potentially. And we were seeing that. And so it gave us the opportunity to really start to look around and say, what do we want to be doing that’s different?
Scott: We see a lot of great developers doing these, you know, studio one-bedroom units really hitting the Gen Z, millennial demographic, micro stuff. Yeah. Yeah. Micro units. Studios, ones really fitting that younger demographic and, you know, great demographic to serve. Right. You know, Gen Z, millennial largest demographic cohort in U.S. history, but also a lot of competition. And so we’re always looking to be. Uncommon offer be where people are serving markets that are under-supplied. So we through our background and doing some affordable housing and a lot of market rate apartment projects knew both sides of the spectrum of that development. You know, those development businesses and recognized that there was a space in between those. Right. Really thinking middle income working families that were, you know, gainfully employed. Several incomes in a household usually made too much money to qualify for true affordable. Right. Overqualified, but didn’t necessarily want to afford a brand new luxury, you know, downtown sexy, you know, studio unit or they had a large family that didn’t make sense to live in that type of housing anyways.
Josh: Yeah, wanted at least a tiny yard. Yeah. Well, you know, need bedrooms, need bathrooms, need garages, to park cars. Right. So what we started to explore were some assets that we found, some land deals that we bought very, very inexpensively and gave us the capability to experiment in a small way without taking huge amounts of risk. And so one particular site sort of ended up evolving into what was UTH, meaning it was a product project, rather, that the zoning limited the unit count, but didn’t necessarily limit the size of the unit. And we wanted to maximize the development of this particular parcel. It was in downtown Long Beach where we’re based. And we started to sort of design the idea of doing multiple bedrooms in a given unit. Right. Unit count was restricted. But let’s maximize rental income. How do we do that? Right. So we start to increase number of bedrooms, we start to increase bathroom count.
Scott: And then, you know, we ended up with a garage. Right. Private garages for apartments is a rarity. So we thought that it might have some value in the rental marketplace. So we did that project and ended up underwriting twenty six fifty for the rents and went out into the market and got twenty nine fifty like a ranged from twenty nine fifty to thirty two fifty for this unit that we underwrote at twenty six fifty. So when that happened we knew hey this is there’s a story here. Right. So that ended up being the first UTH project. And then we started to design to produce more projects. Scale the idea. Right. Scale meaning more projects. Bigger projects. And then we refine the idea of UTH, which now is a three-story townhouse. The original one was a two-story townhouse. Oh. Shrink the footprint. Still keep the garage on the ground floor. Get more units on a given piece of ground right up the density. But still, you know, hold to what was that large family demographics. We ended up at a five-bedroom, four bath, three story townhouse unit to our direct access garage on the ground floor, intended specifically to serve multi-generational middle income working families.
Scott: You know, will we have roommates that, you know, pair up or, you know, get multiple roommates in a unit? So we’re open to that, too. And really started to expand the idea of UTH. And it really fit a great niche. Josh, with which was in California and many urban markets, you have these middle-income working families that are basically being priced out of the marketplace that need to rent. But they want a unit that’s coherent with our lifestyle, meaning they have a family, right. That nobody was serving them in place. So we’ve basically expanded, you know, fairly rapidly into that marketplace. Of course, always being cautious given the oversupply story and downturn. So when we came out of. Let me stop you there.
Josh: Well, no, I was going to say I love the idea that and this is what I find with a lot of other successful entrepreneurs. Very few of us go into an idea with the intention of that exact idea. It’s just about getting going right and seeing something. And then it’s like, oh, I stumbled onto this idea and then I stumbled onto that idea. When you say multi-generational, you’re talking about potentially grandma and grandpa. Middle aged parents with children. So that’s multigenerational. But doesn’t say. Right. And that’s what you think. Like, how the heck can they fill a five bedroom? Well, that’s you talk about families building up and down lots of space, but up and down with room for a garage to the point where, you know, three thousand dollars a month in that California market with those kind of incomes out there. It works. You probably roll into this thinking that’s exactly the product I want. The market just told you what the market wanted. And a good entrepreneur or what they do is they listen to the market. And often that’s not the exact idea that the entrepreneur has at the beginning. It’s the market telling the entrepreneur, this is what the market wants and you are smart enough to listen to that. So I just want my audience to hear that. And I say this over and over again, that what does it matter what kind of real estate you’re doing? Could be a single family. Could be. What is the product? What is the market want? What are they willing to pay for? Where is their under-supply? And a lot of demand? Don’t be married to a strategy. That’s right. Married to what the market needs. That’s all I wanted to ask Scott.
Scott: Absolutely. And you hit on one item which was under-supply. Right. That’s a real key for me. And this is true for whether doing value add. But like you say, any real estate transaction investment development project, you know, I’ll give you an example and a conversation. So we do some advisory for third party companies that want to do real estate development, usually in the commercial sector. We have a team that handles all that. So we’re a real estate developer on behalf of others, like services, if you will. And I had a guy approach me and he says, hey, I want to do this project. So I start asking him what, you know, what’s your design? He goes, I’m doing, you know, I can’t remember the size of the project, 50 units. He goes, I’m doing all two bedrooms. I go, What? Why are you doing that? And he goes, well, that’s what I think, you know, is needed. And I go, okay. You know, I don’t want to offend the guy. But I go, did you. What research did you do and what did that come up? Oh, no, I didn’t do that. And I said, well, let me stop there. It happens in Southern California. Two-bedroom units are the most common. You know, housing stock across the entire Southern California marketplace. And I said, look, why would you go in to compete in the most competitive part of the entire rental market? Do something different. Now you know, for us doing five bedrooms, that’s a pretty radical departure that we now knew where the concentration of housing stock was. And we wanted to be on the on the outside of that or be in the space that’s undersupplied, still be competitive, still be undersupplied. And a market that has demand is sometimes, you know, if there’s no units being developed of that type, maybe there’s no demand for that. That’s one of the stories that you could be in. But there also could be that it’s so different or people don’t recognize a part of the market. So that under-supply really go in a place you go, What can I look for that’s undersupplied that I have some confidence of execution? Right. We still have to execute.
Scott: But the build we still have to market and finance and acquire land and all those things that we do, can we do that competently? And for us, the three story, in fact, that arguably, Josh, the three story, you know, build is the most, the simplest build we’ve ever done right. Well, our history was urban infill. So a lot of podium buildings, podium being, you know, an underground parking structure with a unit stack on top of it. Right. You know, going underground, sub grade PT, you know, post tension, you know, concrete decks, very complicated. A lot of coordination need high level subs. And so from our experience of that, we knew that complexity always made it harder to execute cleanly. In fact, my saying is complexity is the enemy of profits in real estate development. Right. Simplify. Think of like how the homebuilders do it right. Like any market that you’re in, the homebuilders will always have, you know, plan ABC, you know, maybe they don’t, like describe it as simply as I am. But what they do is they want to build the same unit over and over again. So their subs know the product. They know how to price it.
Scott: They know how to execute on it. They can strip out all the complexity that’s that they can to really just get a very smooth production cycle. And so we’ve always write admired that, always wanted to accomplish that. But, you know, in our market of doing urban infill podium buildings, every building is different. Right. Every building’s it’s one off design. So now with the UTH model, we basically use that same unit footprint, the five-bedroom four bath unit, and then we just lay it out on the site. You know, each site is configured differently. One is square one is, you know, whatever rectangular. But we’ll lay the units out with that same footprint. We just design it on a piece of ground that way. And then we have, you know, subs that do this. These units, these projects. So for us over and over again, the same framers, you know, saying, you know, concrete guys, you know, doing the foundation and flat work. And we just want to really wring out every little hitch, every little friction point in this along the cycle in the construction. We do that now for land acquisition entitlements, which we can talk about. But the model really is intended. We’ve always designed it from the get go that every step of the development cycle had simplicity as the overarching, you know, goal. I mean, we need to be profitable. We need to execute well, right. Of course, we need to produce yields for our investors. But the way we do that is by stripping out the friction and the process.
Josh: Keeping it as simple as possible. And that’s what I find very successful entrepreneurs. It matter what niche they’re in. I was sitting down with Matt Rodock, for example. Matt is a young guy, probably 30 years old, founded a crowdfunding platform. Called Fund that Flip was doing, you know, basically fix and flip loans at scale in 25 different states and a lot of Wall Street money that he recruited. And when we were sitting on his conference table, this was just about a month ago, he was telling us his number one goal was to get the money to market at as cheap and as fast as possible. And what I heard was, let’s make it a simple and repeatable and scalable as possible that essentially the same thing you’re saying when with large infill buildings can be very complicated, very dense. Yeah, a lot of buildings and people right on top of each other. Yeah.
Scott: But Aultman is not a simple business, right?
Josh: So, right. So, Scott, what have you learned along the way, I’m curious to know about you, the entrepreneur. Right. I always like to talk in this podcast about deals and deal structure, but I always like to know what’s going on behind the scenes of the actual entrepreneur or the CEO, the founder. So what have you learned along your journey? Like what? What about this business is fulfilling your growth and progress needs? What is it about the business that excites you on a daily basis? What is the things that challenge you on a regular basis running the show? Kind of being the guy, pulling a lot of the letters?
Scott: Absolutely. A great question. So, you know, one of the I’ll just you know, the complexity, right? Stripping complexity is one of the things I learned. I mean, I learned that from a series of projects. I mean, you know, we’ve done you know. You know, thousands of units at this point. And so you learn how to sort of, you know, wring the complexity out of these deals. But, yeah, you know, really, I think where I go with it is an underwriting to answer your question about, you know, what have I learned along the way? So we you know, I think most everybody certainly you and I went through the 2008 recession that a lot of very hard but well-learned lessons. And one of those that I came away with was, you know, how to better underwrite conservatively. The joke I make is when I was a young project manager working for, you know, major real estate development corporation, like my mode was every deal can work. Right. There’s no deal that I can’t work on that I can’t problem solve.
Josh: Jam it all in there. Let’s just see what happens.
Scott: Yeah, it’s very like I could get you know, I can do this, right? Yeah, I am totally the opposite today. Now, yeah, I’m at a different risk profile. But, you know, when I first started my company now 20 years ago, like I was, you know, I mean, I think a lot of entrepreneurs are optimistic. Certainly real estate developers Right. Real estate people in general. But what it was, was to basically just underwrite in a way that is like foundational. Right. Like we ground all the assessments. So let’s say a project when you underwrite it has 100 variables, right? I mean, every project’s different. But let’s say there’s 100. You need to get good grounded assessments, grounded research, information on probably 50 of the most important ones. The second 50 maybe. You know, you just have history or historical numbers that you can work from. And to then plug those in. And either the deal doesn’t work or it does. Right.
Scott: And if you see it not working, you might like research more. And maybe there’s some data that you can get that can update rents or operate expenses or this or that. Right. But I really now if it’s not a clear picture very early and underwriting of a new deal, you know, as our acquisition teams bring us deals and we look at them and we assess them and there’s a story there, we’ll continue to underwrite more definitively. But any step along the way, if it’s clear to me that there’s one major variable that is not changeable, like rents just cannot be. You know, that classic story, you know, for a lot of people is, oh, well, if rents are, you know, three thousand a month. And this deal is not working at three thousand. Maybe let’s boost it up to 3250. You know, that can make that pro-former work man. You can make any Pro-former work if you try hard enough.
Josh: It’s just numbers on a spreadsheet. You could jam them all in there. We look at it backwards of deals. And one of the first thing you’re trying to do, just like we’re doing new development UTH, is how fast can I kill this deal? Like what are all the ways I can kill it? If a deal just won’t die, then it’s just got legs potentially. Right. All right. As if that’s right. A lot of guys don’t look at enough deal flow. I think that’s where it starts. Don’t get enough deal. So they’re trying to jam in like I need a deal. I need to keep my guys busy. I want to do the next thing. I’ve got capital. I’ve got investors that want to do a deal. So then they do something that’s marginal. And then all of a sudden some shit happens like the Corona virus that that deal they probably should have done to begin with, that they were too optimistic about. Now it bites them real bad. Yeah, right. That is becomes now a thorn, something that they’re half developed in or they already own it and now they’ve got to own it. You know, commercial real estate is not something you just exit tomorrow. It’s something. Once you buy it, you’re kind of married to that thing for a while. And we buy all of our stuff to own them forever. We don’t buy to sell them. We buy to own them forever. Obviously if we get an offer, we’ll sell that thing at the right price. But yeah, fine, except forever. So you get married to a deal. So you kill it, kill it, kill it as fast as you can. That’s the rule, right?
Scott: That’s right. That’s right. Yeah. In fact, I you know, I tell my teams I’m like super brutal. Right. In the underwriting process, if there’s any whiff of difficulty, you know, tough city, you know, rents, just we just can’t get there on rents or, you know, entitlements like us in California. Zoning and entitlement processes are exceptionally difficult. In fact, we designed you age when we created the program to only purchase sites. Zoned already. Like we only bought by right now we’ve expanded as we want to scale up. We’re having to take on a little bit of a little bit of additional autonomous work. But if I look at a site today and it needs re-zone and General Plan Amendment and site plan review and, you know, et cetera, et cetera, I got no, I won’t even touch it. And it’s interesting because, you know, it sounds like not so much fun, but I honestly, like you, right. I know how to put this. I enjoy killing the deal because I know when a deal makes it, it’s fun to execute on it, because then you’re you have more safety, you have more margin or cushion. Like we’re way, like way over construction right now.
Josh: Confidence is so important in this business. When you get into a deal and you’re constantly second guessing yourself, it can weigh on you as an entrepreneur every single night.
Scott: I mean, Josh, it weighs on you anyways. You have a well underwritten deal. I still like you know, you probably do. You know, you’re in the acquisition value add moats. It’s a little bit different. But, you know, when you buy it, you know, you just close that deal on Mobile. You said, right? Yeah. You know, you still got to execute on the upgrades. You still got to capture the upside and rents. You know, you’re in the coronavirus environment. You bought well, I’m sure. You know, you jump on the purchase. And so but it does bring you more like you’re more subtle to go, look, I underwrote a safe deal. So I’ll give you an example what I’m doing right now. You asked about where you are now. So we’re seeing land cost and construction costs drop. Like I mean, it’s only been three or four weeks and it’s already dropping. So we have we’re pursuing a land asset in Long Beach. You know, they had already dropped the price because it wasn’t selling. And we came back to them with, you know, more of a reduction because we just said, look, this is the environment. You know, we’re already seeing people drop costs on deals that we track. Right. And then construction on our Montebello project, which is another UTH project, we had a huge increase in labor. Right. I mean, guys showing up on the job site. Hey, I want, I’m a framer. You got work. And of course, you know, we leave that to the subcontractors to deal with. We basically how we do as a home builder model, we go direct to all of our subs. We don’t use a GC. So I called the home builder model.
Scott: In other words, the owner going direct to subcontractors is a way to think of it. But we do know when more labor shows up, we’re going to have two things happen. One is immediately we should start moving more with more velocity on the construction. And we’ve already picked up probably 20 or 30 percent in speed of execution. And then we’ll look to because labor is your biggest component of your subcontract costs generally that we’re going to already starting to see contract drop, you know, bids drop, rather, and then lower contracts. And then we’re hearing, you know, and we don’t wish this. Of course, Josh, we want everybody to be feeling good and be confident in the marketplace. But, you know, subs are already saying, look, this job when I finish is the last job I have in my pipeline. Yeah, they’re looking at no work and I don’t like wish that. And, you know, we’ve been there as the developer. When you go hey, there’s nothing more in the pipeline. And sometimes that happens. And so we’ll, you know, our good subs who say, hey, look, you’re going to get all of our work. You know, we’re still producing projects even in this environment. And we can talk a little bit about that later. But, you know, we’ll keep you going. Right. And we can’t promise you that we’ll be rock solid, you know, unending work for the next three years. There may be gaps, but you’re our go to folks, give us good pricing and you will have the work. Right.
Scott: And that’s the compact we made with them when times were good. Hey, you know, I know you got a lot of other demands to go to other projects. We’ll always give you our work. Right. If you take care of us, you know, that usually was about pricing. And so that shows that pays off. Right now we’re in an environment. And, you know, I don’t want to, you know, our intention is not to crush anybody. We need to keep these guys alive, keep them, you know, making profits. But we’re all going, hey, look, we’re in an environment where everybody’s less profitable. Right. Ostensibly. So those are the kind of things that that we move with, you know. So we talk about building networks of good subs, good vendors, good land brokers. Right. We got good identity with those in our networks. Like we take care of people, you know, treat them fairly. We pay them well when it’s you know, it’s when we have the capability. We ask them for discounts when we want to keep them working. So all those things pay off. And I mean, and these are generalizations which are true and value add investments generally. But, you know, that’s just I think, you know, as an entrepreneur. So, you know, we’ve learned how to underwrite conservatively. You know, we’ve learned how to build powerful networks. We’ve learned how to build, you know, reputation, identity. Right. So these would be lessons that, you know, I learned over the years.
Josh: That’s the stuff that’s going to carry you through, Scott in this next could be six months to 24 months. Yeah. You’ve got to lay the groundwork for that stuff before because now as everyone’s a little bit uncertain what to do. You go back to the guys or the gals that you have confidence in, you go back to the subs you have confidence in. The investors that you have confidence in. The bankers and the lenders you have confidence in. You know, you go back and look at, OK, if you’re a buyer of land or buyer of a value-add deal and the sellers have to drop their price. But they know that you’re a player. They know you can execute. They’re looking at you even though the price might be lower to say, hey, I know Scott. He might have been even 30 days ago willing to pay more today. He’s willing to pay less. But I know he can close. I know he’s trying to buy.
Scott: You’re saying the same thing I am. But it’s like trust, I can trust this sub’s going to perform. And the sub says, hey, I know they’re gonna give me their work. Right. You’ve always been fair and, you know, like, you know, held their commitments. That’s incredibly important generally. I mean, in all business like. Trust is just fundamental everything.
Josh: Relationships, no doubt. Scott, help me understand on your deals that you guys are now buying the land, developing and then holding. Right. Just refinancing a bunch of your stuff to hold. Tell me a little bit about your investor profile, like who’s your ideal investor? What’s kind of like the structure of a typical deal that you work on with your UTH product?
Scott: Yeah. So what’s happening right now, I mean, this was a story that was generally successful because housing costs were high and we offered a more affordable version that was also coherent with the family lifestyle. Right. So that was the story, pre-recession and pre coronavirus recession. After that, we’ve always anticipated and known that these families were generally they live defensively. Right. So they’re working class. They’re blue collar, you know, salt of the earth. And they always lived, you know, defensively they had been tested previously. Like we talked about being tested as entrepreneurs. They were tested, as you know, in their lifestyle and how they work. You know, guys in construction who had layoffs and they saved their money and prepared for that would be an example. And so we’re actually seeing an acceleration in this marketplace, which is, you know, not typical, contrary to what the sort of mainstream story of what’s happening. You know, obviously people are speaking about distressed assets coming. And so we’re what we’re seeing is our model is a a model where people come together to economically share costs for housing.
Scott: See earlier you talked about, you know, multiple family members, multiple wage earners. Right. Those people live defensively and also they have the capability to sustain in upset times. Right. If one person loses their job. There’s three other income earners in the family that can pick up the slack and continue share, you know, incomes and expenses as what we say. And so we’re seeing an acceleration of that because now families are coming together. Right. It’s the reverse of new family or new household formation, which in the apartment market you always look for as a sign of, you know, demand for rent, you know, rental units in the future. We’re in the opposite mode right now where people are going. I’m getting out of that unit. I’m a single earner household. I lost my job. I can’t pay this rent. I’m out. And so where are they going? Well, they’re going they’re moving home.
Josh: Consolidate with someone else, right?
Scott: Yeah. Consolidation. Right. That’s a great word for it. And they’re you know, they’re moving home with parents. They’re getting roommates. They’re getting more roommates. And so we actually are very well positioned to accept like our product lives well for multiple people. We have five bedrooms and most importantly, have four bathrooms. Right. Think about having bathroom capacity, both roommates or family. So what that has us doing is we’re being, you know, cautious in our underwriting, but we’re accelerating. So we’re looking at acquiring and are, you know, looking at new land assets now. And we’ll pair that with before I mentioned lowering or, you know, reduced land costs and reduced construction costs. So we’re in this interesting positive position right now for, you know, raising capital where we have a good long term asset. Right. We’re still undersupply. Right. When we come out of this thing in, you know, 18 months, two years, whatever the time period for the recovery will be, you know, California’s still undersupplied. That’s not going away. In fact, arguably, we’re going to reduce housing production over the next 24 months, which is only going to exacerbate when we do recover.
Josh: Too much demand and not enough supply. Right. Right. What you’re saying, Scott, too, about the you know, the infill type of stuff, people that want to live in the urban core, but still family units. Yeah. And workforce is the fact that in a recession, the people that are in luxury class A like you said, they’re gonna consolidate or move down to workforce. And in an expanding economy, people that are maybe like a C class private property or B-minus, they’re going to upgrade to workforce. And so it becomes the product that’s got that perfect band within the middle that’s elastic that you have people on both top and bottom moving to where you’re at. That’s exactly why we invest in workforce value add stuff. We don’t move for luxury anywhere. I just looked at a building. I mean, the diamond type of project in downtown Cleveland, the Rockefeller building built by John D Rockefeller himself. The top floor. Thirty-four vaults. Wow. Basement. Massive vault. All marble John D Rockefeller kept his actual money in these vaults. Yeah, he’s unbelievable. We talked earlier about micro units. Right. So, yeah, but developed buying the building could buy the building for 13 million dollars. Amazing deal. Currently office. Convert it. Eighty three million dollar conversion. All in for about one hundred million dollars. Problem is. Right. Unbelievable opportunity to do micro units downtown like right across the street from what will be the new Sherwin-Williams world headquarters.
Josh: But the reason why you don’t do that, why we opted out of that deal is everything just happened. One, it’s a very specific core product for a specific niche people was partially, you know, dependent on Sherwin-Williams, who have now, of course, in this environment has kicked off and postponed the development of their new world headquarters. It was one of the fallen off. That’s why you do things that might not be the sexiest product, the luxury product or your relative to C-Class. The highest yielding product is often the cheap stuff is the highest yield. Why you go workforce doesn’t mean if it’s a single-family rental, urban townhome or, you know, value, add value, add apartments because it can last in any type of economic time. Yeah, very slight.
Scott: And also add to that why workforce makes sense. What you know, any of those products spectrum’s you described you like the middle class is right now and under-pressure, right. So incomes are stagnant and housing prices at least up till a month ago, were going up. Right. Say on the very much longer term after we come out of this recession, I would expect housing costs to continue to rise. Right. And so what’s happening is it’s creating a gap between housing costs generally and incomes generally. Right in the old days. You’d hear the story of, hey, I got my you know, I got my first job and I had my family and I made enough money to buy a house. Right. Or, you know, nobody says this but rent a unit. Right now, you can’t. You get that starter job that does not afford like anything in most markets. I mean, you know, every market is a little bit different, but I think generally. So the gap is where workforce housing goes into and the gap is between housing costs generally and incomes generally. Right. And incomes are not going up and housing costs are generally rising. Right. So you’re going to have this ever widening gap. So when we get out of this recession, we will come back to that, because in the United States, we’re still generally under building. And even in markets that are development friendly, we’re not building enough housing for that. And so this middle income, this middle class is getting dropped down the food chain. You know, either have to, you know, occupy inferior housing or in California, a major metro markets have to pay more as a percentage of their income towards rent. Right. In California, 50, 60 percent of income towards rent is very typical for your moderate income family. Scott:So where we are with it, and I think you’re in the same mode, is that we love the long term story of these families being incredibly stable, working families right there, salt of the earth right there. The middle class of that we think of when we think of the United States and America and they’re just not being taken care of well enough. And so you and I as entrepreneurs are going into those marketplaces. And you’re right, it’s not the sexiest product. You know, we through our ways. You guys can, we can produce, you know, great yields to investors and a solid, stable population for a long time. Right. So we are so excited about that story, just like you are, that we’re we converted a year ago to everything. We’re holding everything. In fact you know, like you said, I say the same thing internally. Like, I want to own everything forever, even to our investors who I say, hey, invest with us for, you know, seven years, 10 years. Right. Ten’s our preference right now. You know, we’ll put a mechanism into the into the, you know, the operating agreement for the LLC that we have the capability of buy them out in the 10th year. And, you know, we’ll produce their yield for them. But I, you know, I also know this because I look at all the assets that I sold over the years. And I kick myself.
Scott: Yeah. We’re showing every one of them. Right. I should have held that. Think it’s worth 4x what I sold it for, you know, fifteen years ago and you know, and obviously the market cycle and the ups and downs are gonna change the you know, how much you make when. But it’s sort of like the stock market and Warren Buffet, he says, look, in the long run, you know, you want to be invested in the marketplace. And if you look at on a 30 year window, you are going to make on average 8 percent in the marketplace. And yes, some years you’ll get your butt kicked. Some years, you’ll do great. And just hit it out of the park. And you don’t look like by the way, housing is still a fundamental biological need. Humans will never run out of the need for shelter. That’s right. And so I was like, it’s a defensive space in the long run.
Josh: I love it. So as we kind of round third here head for home. What I love about what we’re hearing is a couple of things from an entrepreneurial perspective. Right. Is that often it’s in the seeking of creating value for others that the entrepreneur finds sort of their wheelhouse. And that’s kind of what happened for you looking. What can I create that everybody else needs? Was it exactly what you were set out to find? But you found it working. It’s amazing. It’s a big lesson I think we take away from this interview. Secondly is relationships building that network, expanding the network for the long haul. Also to hear you say, you know, because I feel the same way, every asset that I sold, I wish I still owned. And I think that’s a lesson for our audience is, look, when you invest for the long term, the sooner you can put your long term hat on, you better know life comes up, need money from certain things, have to sell some assets. Scott:It happens. Josh:I get it to me before happens, everybody. But if you can find a way to stay liquid in the troublesome times and hold the assets, it’s going to serve you forever. So don’t be transactional in what you’re doing, whether you’re a developer, whether you’re a builder or you’re a private lender, whether you’re a single family home investor, whatever. Find a way to get in for the long term. Now, the tax advantages, the true wealth creation is from owning the assets long term. Those are all the things that really make a lot of sense.
Scott: Yeah. I would add to that, I think one of the key differences in my thinking that that, you know, had me have the capability to hold long term because, you know, as you know, when you’re you know, when you’re an investor or a sponsor value add or a developer, particularly a ladder to you know, it’s always, hey, the next deal is going to pay me X, I can be profitable. I can sell the deal. Right. That puts, you know, a big chunk of money in the bank. And that’s always a great event. But really where I turn the corner on that was once I started creating multiple sources of income. Right. So I mentioned earlier the advisory team. Right. We have an a team of people who are working constantly on diversified commercial projects, you know, restaurant business, although that’s under pressure now. You know, we’ll advise you know, other parties that need to do development but aren’t developers. And I would just counsel people that once you can create that source of income, keep your household costs low and then, you know, create that second source of income. All the sudden, you can be patient and you know, now you don’t have to sell that property. Right. And so get out of that. Like both put that thinking on. But, you know, for me, the strategy was, hey, create that second, third, fourth source of income, whatever it is. Right. That can be, you know, like coherent with your investing and your development. Then all of a sudden you got oh. Now, I don’t have that driving need to, you know, ever be putting a big chunk of money. And it’s great. Like I’ll never resist, you know, big wire transfer into a, you know, company bank account after a sale of an asset. That’s an excellent thing. At the end of day, all these assets will, you know, eventually you want to be monetized in one way or the other. And they’re really, really a homerun. Right? Right. So that’s a key.
Josh: Yeah, multiple streams of income filling in at other times and being resourceful. I think it’s one of the top criteria of being a good long-term entrepreneur is being resourceful because you just don’t know what you don’t know. You walk in to an environment like this with this virus that nobody could possibly ever seen coming. And you’ve got to be resourceful is having a lot of it is relying on relationships, investors, your team, your connections and learning. What are they doing, what’s working for them? How can I incorporate that into my team to help us get through this, be profitable, have multiple streams of income and then go back when things are good, then go back to really honing in on the one or two things that you’re really great at and driving that during economic expansion times. Really, really good advice there. Scott, for our audience that wants to reach out to you, whether it’s investing in your deals, learning more about how you build. People that just want to connect with you. Do deals with you potentially bring you land deals? How can they reach out to you? What’s a good place for them to connect?
Scott: Yeah. Great. Thanks for asking. So best place to go. Our Web sites, www.urbanpacific.com. Go to the contact page and our entire team. You’ll get direct access, you know, phone numbers, email. So, you know, we’re reachable on multiple channels. Check out our YouTube channel under Urban Pacific Group of companies, a lot of good investor education, a lot of videos on our Web site, a lot of articles. You know how to underwrite deals, you know, a lot. Like, you know, you know, knowledge-based information there. And then I’m on LinkedIn so anybody can find me on LinkedIn. Anybody can find me on social media channels, Twitter, Instagram. But Web site and YouTube are great resources for investors that want to learn more about investing generally and, you know, investing in a workforce housing.
Josh: Fantastic, Scott. Well, thanks so much for joining us today on Accelerated Investor and from my audience. And make sure you give us some feedback. You know how we just love and crave your feedback, comments, questions, reviews, any of those kind of things. Put them right onto our YouTube page. Right on to our AcceleratedInvestorPodcast.com page or i-Tunes so I can feed those over to Scott, get answers to you, connect with Scott. We’ll also put Scott’s contact information right inside the show notes so you can reach out to him as well. Scott, listen, had a fantastic time spent with you today, learning more about your business and growing as an entrepreneur and also love the concept of really focusing it on your kind of ideal and specific way that you make money with your UTH projects. Thanks so much for being on today.
Scott: Thank you for the invite. Appreciate it.
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Everyone is always going to need shelter, but what consumers flock to may change depending on the economy. A good entrepreneur listens to the market, and pivots based on where the under supply exists. Scott Choppin from Urban Pacific has found his niche in workforce housing building UTH units. He shares with me how he shifted into this market and where he sees it going in the next two years.
The UTH model that Scott has been building is focused on the idea that people come together to economically share housing costs. In California, where housing costs have priced out Gen Z and Millennials, the UTH model of five bedrooms/four bathrooms allows a household to shoulder the costs together.
I like workforce housing because even in a recession, it will be consistently rented as people’s budgets shift around. Scott talks about why he targeted this segment of population, and how it’s benefited his company.
Because of continual underbuilding in the U.S., Scott doesn’t think the gap between housing costs and income is going to go away. He has some predictions for where the recession will put families in terms of affordable housing, and why he thinks UTH will fill in that gap.
Even as developers are beginning to feel the effects of the coronavirus pandemic, Scott’s been able to consistently keep people busy. You’re never going to go wrong as a developer when you build a strong network of good subs, good vendors, and good land brokers. The relationships he’s built will help him as we go into this recession.
- Complexity is the enemy of profits in real estate development.
- Don’t be married to a strategy; be married to what the market needs.
- How continual underbuilding in the U.S. will impact the housing market for the next 24 months
- Why workforce units will always beat out sexy class A luxury buildings.
- Relationships and trust become even more important in a downturn.