Josh Cantwell: So, hey, Mike. Thanks for carving out some time. I know you’re in the process of some city meetings today. So, thanks a lot for carving out some time for Accelerated Investor. Thanks for joining me.

Mike Woodfield: Yeah, absolutely. Thanks for having me. I appreciate it.

Josh Cantwell: You bet, Mike. So, let’s talk about that. Like, I usually love to talk about current events, especially with somebody kind of new that I’m just getting to know. You know, we’re kind of getting ready for the show about some new construction that you’re working on. So, what are some projects and things that you’re passionate for that you’re working on right now that you can tell our audience about?

Mike Woodfield: Sure. We have about 500 units, mostly multifamily units under development here in the Austin or greater Austin area, Texas. And that’s kind of our focus is Central Texas and the surrounding areas. We just see it’s just huge growth corridors here. We were meeting with the City of Taylor. And if you read anything about Taylor, Texas over the past year, Samsung announced their $17 billion acquisition development that they’re doing. It’s a chip manufacturing plant that they’re putting out there which should bring about 3,000 or 4,000 jobs to the market, and they actually announced in addition to that, which is another $10 billion addition that they’re going to do. So, Samsung is heavily invested in Texas and in this area, we have an 84-unit townhome development that we’re doing out there that we actually bought the dirt on a year before Samsung announced they’re coming and the development should be complete about six months before Samsung completes their development. So, we’re kind of right in time. We hit the market at the right time there.

And then we have another project here in Leander, Texas. It’s 84 units, multifamily, and 10,000 square feet of commercial. So, it’s a smaller mix. And we are close to getting permits on that. We’re taking that from raw dirt to the rezoning process to getting that fully entitled with the city so that we’re able to get a construction loan and build it. We raised the money for it. So, we’re ready to rock and roll there. And then a few other multifamily deals that are under process that are a little bit further behind. We have one that’s actually close to lease up. So, that’s our furthest project along at this point as a multifamily deal here in Leander. So, we’ve got all kinds of new construction keeping us busy and a few other acquisitions and value-add and yield plays that we’re doing along the way.

Josh Cantwell: Got it. Why move? Because I imagine you did the yield plays and the value-add stuff first. At least that’s my guess.

Mike Woodfield: Yes.

Josh Cantwell: What led you to new construction? I ask that for selfish reasons because we own a value-add portfolio and we’re about to build a 11, 12-story tower that’s about 100 units kind of an infill deal in a really nice suburb. So, tell me about your jump into new construction and what did you learn about that?

Mike Woodfield: Yeah.

Josh Cantwell: What are some of the constraints? Why did you do that? Why did you go that route?

Mike Woodfield: I think the numbers just led us there. We were able to flip some of our old value-add stuff in 2018 and 2019 and it will get a good chunk of money, which you definitely need in development. And it just made sense as the replacement costs for units were lower than what you could purchase them at. You know, we’re building stuff in Austin between 160 just on construction costs, 160, 175 a door. And brand new class-A stuff is still trading in 250, 265 a door here. So, there’s just enough meat on the bone where it makes sense that if you can get it through the entitlement process and build it and complete it and occupy it that you’ll make some money. You know, there’s been a little bit of relief in the cap rates. We’ve seen some decompression of those cap rates over the past few months because of interest rates, which I think we’re just getting back to a bit more of what a reality actually is. You know, I’ve been saying for the past two years that these interest rates are artificially low. It’s to stimulate the economy through a downturn because of COVID. And it certainly did.

And now that we’re experiencing inflation, the one way to hedge that is to raise interest rates, which they’ve done. And you’re just going to see the market slow because of that. So, I think we’re getting back to reality here with where cap rates should be and you should be able to get some yield on some bills here coming up. And we’re heading to a good spot, I think.

Josh Cantwell: I’m curious. I love where you’re going with that. I’m curious because cap rates tend to lag the market, right, the Federal Reserve can change interest rates in a heartbeat. The ten-year treasury can change the cost of permanent financing or bank financing in a heartbeat. Cap rates usually lag, right, three, six, nine months because there’s deals that were under contract four months ago that are just trading now.

Mike Woodfield: And those are fallen out of contract and those are being re-traded left and right. I mean, people walking away from earnest money just because deals don’t pencil and people will not buy when they can’t have at least some yield or the promise of some yield because banks won’t lend. You know, these underwriters are tightening up the belts and they’re looking at it and saying, “Guys, you’ve got to be a bit more realistic.”

Josh Cantwell: And how has that changed your model? What adjustments? What kind of flexibility you had to have?

Mike Woodfield: I think, you know, we bought far fewer deals in the past three years than we have in the past eight. You know, one year, we bought 2,000 units. We were very aggressive. We closed the portfolio of eight properties in a year and we were up to 5,000 units under ownership. I mean, we had all kinds of deals coming but we felt really confident in our country’s leadership at that point. We felt really confident in the economy. I think most people in business felt the same way. So, people were spending, people were selling properties. The market was great. Our strategies changed a bit where on current acquisitions we really only buy for cash flow. So, I’m no longer looking at, you know, I do look at value-add because that’s naturally where I go. Where can I create value and increase the NOI? But I’m looking for going in cash flow. Is that debt service coverage ratio just barely where it needs to be or do we have some cushion? And that has forced us to buy fewer deals. But all of our deals that we own right now are very comfortable and cash flowing very well.

Josh Cantwell: Yeah. I think there’s a time to take some of that risk, right? And just money is cheaper and you feel like the leadership is in support of capitalism. It’s time to do that. And a lot of times, you kind of pull back and kind of wait to see what happens. One of the things that I teach is this kind of nine traits of elite entrepreneurs. And number one is to invest for cash flow now and invest for cash flow three years from now when you could execute a huge value-add play and then it starts to cash flow down the road. We’ve certainly done those deals. No question about even today. Waiting for some cap rates to get more realistic, especially in line with the cost of debt so that deal will cash flow. I have a deal that we’re actually closing in two days. When I penciled it, it was cash flow breakeven. After paying the expenses, the debt service, and a pref return to investors, it was perfect. Now, because of cost of debt, the ten-year treasury has gone up in the last 60 days, it’s going to bleed about $35,000 a year. It’s not a huge deal. It’s only $6.5 million purchase. So, we’re going to buy it anyway but that’s a real example, right? And if you buy a $30 million deal, then you 5X everything I just talked about, now you’re bleeding a pretty substantial amount of cash. That’s what’s happened in the last 60 to 90 days.

Mike Woodfield: Right. Yeah. We have a relationship with a seller in Tennessee, and we bought a deal from them before. He has a big project, really, really nice class-A project that we’re trying to go after. And he had it under contract with some guys and they failed to perform because the interest rates were hiking. So, I think what you’re seeing is a turn of these sellers that are saying, “Okay. What’s realistic now? I’ve had some deals. Fought a contract. Where’s my strike price and how do I get there?” So, I think that the lag that you were talking about with cap rates is really seller driven, you know, it’s broker driven. And really I think all of those players, the brokers I’ve spoken to, they’re starting to convince these sellers like, “Hey, these cap rates they need to go up a little bit to get people comfortable,” especially banks. Because if the bank says no, then there you go, the rubber meets the road there or your leverage goes to 50%. Who wants to put up 50% on the cap stack? Not many investors. So, there’s fewer doors trading hands at that point, right?

Josh Cantwell: Yeah. No doubt. Help me understand, Mike, because I’m in Cleveland, Ohio and Columbus, which is it’s almost like a gateway market now. It very much operates like the Sunbelt. But what’s it like operating in Austin? Everyone here is like, “Wow. Austin and  Houston and Dallas and these Denver, these kind of gateway markets with this incredible growth. I’m just curious to hear from your experience. What’s it like? What’s really happening there?

Mike Woodfield: It’s insane. I mean, you have a city that has stayed small for a long time. Austin has prided itself on being small. And when you have the big boys come in like Tesla and Samsung and Dell who’s been here for years, or Google who are making these billions and billions, or Apple just built the second campus here, 15,000 employees. I mean, they’re making a statement that, “Hey, Texas is a good place to do business.” And Austin is convenient for those California companies because let’s just shoot each other straight here. You know, most of these people on the West Coast, blue and that’s how they vote. And they love that Austin kind of feels a little bit like home. You know, it’s a blue city. It’s like the blue island in a red ocean. So, it kind of gives them the warm and fuzzies. They can feel at home here and still get the benefits of being in a red state. So, I really think that we’re just going to continue to see rent growth and values grow. We’ve seen some retraction in the residential market. You know, people just can’t make sense of huge value increase with a huge interest rate increase. It just doesn’t work. So, those are coming down. But I think with rental growth, especially with the hike in interest rates, I just think that we’re going to continue to see rent growth. You have to because the demand is just so heavy.

Josh Cantwell: Affordable housing is so little and like the ability for builders to build new single-family homes is they’re paying more for debt that we were already like a million units short per year. We needed like 2.1, 2.2 million units built to get the demand. Builders were only building. 1.2. 1.3 million. We’re already 900,000 units short. And now because debt is going up, they’re actually retracting and pulling back on the number that they’re building. So, it makes the gap wider, which means if you’re an apartment, the rents have to go up because there’s nowhere to live.

Mike Woodfield: Yeah. They have to. So, how I’m looking at the market and what’s my insight to it, we saw a 30% rent increase from 2021 to 2022 and this year probably another 15% to 20%. So, you’re looking at nearly a 50% increase in rents. It’s forcing a lot of people to move out of the city. They’re going to the suburbs where, fortunately, that’s where I’m building. Glen and I, two-and-a-half years ago, sat down and said, “We need to get in front of the growth.” Glen used to work for one of the founders of Marcus & Millichap. He had a subsidiary company  that Glen worked for an asset management, and he always used to preach, “Get in front of the growth. Get in front of the growth. Get in front of the growth.” And that’s what we’ve done. You know, Taylor, Liberty Hill, Leander, these suburbs that are all around, they’re just growing by virtue of the City of Austin growing. And we’ve been able to capture, we’ve been the catch basin for a lot of these people fleeing the huge rental increases in Austin. But I mean, I really think that this market isn’t going to stop growing until it’s like L.A. I think that that’s where we’re headed. We’re heading for the cap rates L.A. sees, which we’ve already experienced. We saw 2.5, 2.7 cap deals trading in Austin. And I think we’re looking at $3,000 or $4,000 a month for a two bedroom, two bath in Austin.

Josh Cantwell: Wow. Unbelievable. You’re going to have a Skid Row there too.

Mike Woodfield: Yeah. That whole… Well, it got really bad, and actually that directly affected one of our deals in Austin. The way the City of Austin operates, it operates with the city council. So, the mayor has one vote of like 10 or 11 votes. So, they came in and they voted to do away with the ban on public camping. And that happened three years ago. And basically, everybody that goes to the City of Austin on the weekends to eat, or go to concerts, they just stop going because it was like Seattle or L.A., where it’s like you’re dodging needles and whatever. It was really bad. And they actually revoked that and they now don’t allow public camping.

Josh Cantwell: So, if you’re coming to town for the weekend, why not just bring your own camp, bring your own tent?

Mike Woodfield: At least with some of these people that are there, find a place for them to live. You know, we can write $40 billion to Ukraine. Certainly, we can find housing for these individuals that are on hard times. And to the credit of City of Austin, that’s what they’ve done. They’ve gone and bought old hotels and they’ve renovated them and they’ve turned those into some temporary housing for folks that are fallen on hard times. So, anyways, you know.

Josh Cantwell: Once it hits that hard, it’s tough to manage it for everybody, right?

Mike Woodfield: Oh, yeah. These big cities are just magnets too. So, it is what it is.

Josh Cantwell: Yeah. Mike, you mentioned getting in front of the growth, so just peel back the onion on that for me a little bit. Like, what strategies or what are you looking at? What data? What statistics? What news? What can someone do if they’re in a different market? Let’s say it’s not Austin. Let’s say pick one. Raleigh, North Carolina, whatever. And they think that there’s growth happening. I want to get in front of the growth. Is there a couple of things, a checklist or something that you can look at, some specific data points that you would say, “I would reference back to this, this, and this to see where the growth is going?” Is there any guidance around that?

Mike Woodfield: Sure. Absolutely. I mean, you can pull your standard reports and see where population trends are going. We all know that residential always precedes commercial. So, if you’re a commercial builder and you want to build some retail or something like that, if they’re building on 10,000 multifamily units in that area, yeah, that’s probably a good place to go and put some commercial. But some of the metrics I look at and they may be silly to some people but they sure do mean a lot to me is I like to look at some of the lots that are bought by big box retail people. Like, locally, H-E-B is a really, really nice grocery store that people love here. And so, if H-E-B’s bought land and they’re planning to develop there, I think, okay, they hire people to do projections and growth projections. They talk with every municipality and city. They know where the growth is going or else they’re not buying dirt there, right? Or like Starbucks, for example, I mean, some of these, Chick-fil-A, there are some of these chain restaurants that do so much market research to see where growth is going, that if you can kind of piggyback off of, okay, if they’re willing to put their money here and open a restaurant or a Starbucks, there’s a reason why.

So, it’s kind of silly but if you can look and find those folks, it makes sense. The other thing that I look at is the number of jobs coming to a market, right, because you want people that can pay their rent, obviously. So, if you have, like us, here we have an endless amount of jobs so it makes it a bit easier. If I’m in Raleigh, North Carolina, what economic factors do you have that are showing positive growth? I’ll give you an example that’s not here. We look a lot like the Bowling Green, the Clarksville, the Nashville area. And we look at the economic drivers there, too, right? In Bowling Green, they have a university in Western Kentucky. They also have the largest textile industry in the States there. Hanes and Jerseys and all those things are manufactured right there in Bowling Green, Kentucky. You know, I have to ask myself, do I see that industry growing or do I see it shrinking? What’s going to happen? Are universities growing or are they shrinking? And you have to ask yourselves those types of questions and look and see. We’ll meet with the Chamber of Commerce and try and pick their brains, local business owners, “Hey, what can you tell me about the growth here? Who’s coming here? You know, what jobs can we see in the future?” and that type of thing.

So, it’s a lot of just data. And then also building relationships with folks that know what’s going on in the city will tell you what’s coming. I was in a meeting with the City of Taylor today and I got a contact given to me that’s their direct contact with Samsung. And I’m going to call this guy and I’m going to offer him to buy our project from us so he has housing for his employees that are going to be there. So, it’s relationships too. It’s trying to get in there and meet the right people in the city that know what’s going on. You know, who’s the city planner or city manager? Call them. Talk with them to get this intel.

Josh Cantwell: If you’re part of the growth plan for the city, they’re going to share data. It’s not like it’s…

Mike Woodfield: It’s not a secret.

Josh Cantwell: It’s not a secret. This is…

Mike Woodfield: It’s not proprietary information. Yeah.

Josh Cantwell: You know, are you part of the plan? Are you part of the help? Are you part of the progress? And if you’re a citizen, you have the right to know that information regardless.

Mike Woodfield: Yeah. You can set up a meeting with the city planner or one of his employees or whatever. And you can sit down with him, say, “Hey, look, I’m looking at this lot of land and I’m really wanting to build multifamily there. I know that the city needs some multifamily.” You can look at absorption rates. You know, if you have access to CoStar, you can pull absorption rates in the city and be like, “You guys need 1,000 units and you only have 200 under construction. I want to help the city get there.” Every city will have a map to growth if they plan on growing, right? So, they’ll say, “Well, that’s not really the growth corridor we had envisioned. We kind of more envisioned along this street here having multifamily.” You’re like, “Okay. Maybe I’ll go over here and look for dirt.” They’ll tell you where they want things built. A city that’s planning to grow should have a plan for growth. So, you can get a lot of that detail from them without doing too much work yourself. It’s just asking the questions and being willing to sit in the room with them, you know?

Josh Cantwell: Yeah. That’s great, Mike. I wasn’t planning on going this route with this particular interview but I’m really glad that we did because I got to learn a little bit more about Austin and a little bit about being in one of those gateway super growth markets and learn a lot more about looking for dirt and looking for new construction, looking for build. We had a great conversation around cap rates and interest rates, so really fantastic staff and great content for our people. Mike, if they wanted to reach out to you, learn more about you in just a short 20-minute interview, we don’t have time to cover everything, where can our group go to engage with you, learn from you, invest with you?

Mike Woodfield: Our website, ObsidianCapitalCo.com, or you can just email me, mike@obsidiancapitalco.com. I’m happy to talk. If you’re an investor, I’d love to show you what we have in the pipeline. If you’re a developer or an aspiring developer or entrepreneur, I love to chat. Happy to have you to our office here. If you’re in the Austin area, come on by and see us. So, we’d love to have anybody by.

Josh Cantwell: Fantastic. Awesome stuff today, Mike. Listen, thanks for carving out a few minutes for us in joining me on Accelerated Investor.

Mike Woodfield: Absolutely. Thank you for having me.