Mar 26, 2022
Ever heard of a deal where you get the benefits of both multifamily and single-family homes? Steve breaks down exactly how this is done through fourplexes as well as the considerations to make this process flow smoothly as possible.
Steve Olson is the director of the Fourplex investment group. They build master plan fourplex communities in Utah, Idaho, Arizona, and Texas. Listen as he shares the strategies to employ when dealing with fourplexes for better positioning.
[00:01 - 04:30] Opening Segment
- Steve on discovering real estate in college and realizing that it’s better than law school
- How buying land in 2010 was insane and building fourplexes are a good idea
- Bridging the gaps and producing value-adds on fourplexes
[04:31 - 11:19] How Fourplexes Generate the Benefits of Multifamily and Single-Family
- Identifying the investor in the deal - fourplexes owned by different investors
- Adding value for higher potential stabilized cap rates through projections
- The virtue of patience and constantly building relationships with investors
[11:20 - 18:22] Why the Name of the Game is Flexibility
- Getting the investors cross the debt finish line
- Steve shares the Idaho deal story - realizing adjustments to make in the process
- Defining affordable housing by considering the investor
[18:23 - 19:05] Closing Segment
- Reach out to Steve
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- See links below
- Final words
Tweetable Quotes
“As long as you do right by the investors and you deliver the product, it [finding more investors] doesn't tend to be a challenge. But that can ebb and flow with the challenges in the market.” - Steve Olson
“You got to focus on those markets with population growth, low unemployment. If you're building real estate in markets like that, and you're patient, you will generally win.” - Steve Olson
“The name of the game is flexibility.” - Steve Olson
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Connect with Steve Olson on Linkedin. Visit his website and email him at solson@fig.us
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Want to read the full show notes of the episode? Check it out below:
Steve Olson 00:00
Take more time. Give yourself as much flexibility as you possibly can because we are in unknown waters right now. And while there's a tremendous demand for the product, it's difficult to bring it to the market. I will say it comes with a good thing. The rents are just going up when it's difficult to get products on the market. And there's a huge demand for that product. I don't like planning on higher rents, but I've never not seen it over the last 18 months. It’s definitely happening.
Intro 00:28
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we will teach you how to scale your real estate investing business into something big.
Sam Wilson 00:40
Steve Olson is the director of the Fourplex Investment Group. They build Master Plan Four-Plex communities in Utah, Idaho, Arizona, and Texas. Steve, welcome to the show.
Steve Olson 00:50
Good to be here. Thank you for having me, sir.
Sam Wilson 00:52
Hey, man, pleasure’s mine. Same three questions I asked every guest who comes on the show in 90 seconds or less. Can you tell us where did you start? Where are you now? And how did you get there?
Steve Olson 01:01
Well, I started in real estate. When I was in college, I worked for one of the late-night infomercial gurus just shipping boxes and administrative stuff. His name is Robert Allen, many people probably know him. And I just inadvertently heard some of the real estate coaches talking about real estate. And I thought, hey, that kind of sounds pretty good. And at the time, I wanted to be an attorney, I was going to go to law school. And I thought I could flip some houses and go to law school. And then after I did my first deal, I realized, why would I go to law school. This is way better. And so I have been involved in this business in one way or the other. Since then I've been through a couple ups and downs, I made it through the crash. I want to say I made it through COVID. Who knows what that even means anymore. But I'm still here. And I've worked with the four Plex Investment Group building these masterplan communities. I eat my own cooking typically try to acquire a couple of these a year and have started putting together some bigger deals as well with some of our investors. So I don't know that answer your question?
Sam Wilson 02:02
It does. Tell us about the Fourplex Investment Group. What is that?
Steve Olson 02:07
That's a group of five companies that partner together, we're based here in Utah, where I'm coming from today. The concept was hatched back in 2010. If you were in the business in 2010, you know that nobody was buying land, right in 2010, at least in the markets where we operate predominantly to Western US. And if you were buying land, people thought you were completely insane. And we were still reeling from Oh, eight, what is this all mean, so on and so forth. But there was still a lot of cash out there, a lot of cash on the sidelines looking for a secure return, a recession-resistant return. And really a four Plex is an excellent way to achieve those goals. So the whole concept was hatched that All right, if we could build new four Plex communities, and put them within an HOA because you and I both know, these old dilapidated four Plex communities that are in every neighborhood in America, right, they were built in the 70s and 80s. And they look like garbage now, because there isn't a continuity in the ownership. So the thought was to build a new, let's put HOA investor own control over the top of them. It gives people the advantages of multifamily because they have multiple tenants servicing that debt, but they have that great single-family debt 30-year fixed true 30-year amortized. So it gives you a way to kind of bridge both those gaps. So we've been building these communities ever since. And we're in four states right now, the secret sauce is a pre-construction deal. That's our value add, if an investor is willing to come in and close on a construction loan, and go through the build, go through the stabilization process, we can actually sell it at a better cap rate than they can get on the open market. So as an example, if you hire a realtor to go find you a four Plex right now, in a lot of these growing markets, that cap rates in the fours right now, right, that's what it's gonna take, right? And if it's higher than that, then there's some hair on that deal you don't know about yet, right? So we just disclose the hair, we say, well, it's not built yet. Right? You got to go through this construction process. And right now that's something everybody feels because that takes longer interest rates are going up. There's some risks that you absorb in the new construction world. So in exchange, we say in a market where you're trading at a four and a half, five cap, we're selling at six and a half. And that's the investors cherry on top for going through that process.
Sam Wilson 04:31
So walk me through that. I'm sorry if I'm a little bit slow here today. But when you say that's the investors cherry on top, it may be just, break down the whole who the investor is, what part they play in your process. I'm not sure I quite grasp that.
Steve Olson 04:45
No, that's okay. You and I, we went in cold on that one, so no worries. So take it like this. Let's say we identify 10 acres in Phoenix, Arizona, and we go through all the preliminary plat issues we determine yet can be a four Plex community, right? We're going to pre-sell or pre-reserve that entire project. So we'll subdivide it up into 54, plexes. Right. And then we go out to our investors, Bob, the doctor Susie, the attorney, Fred, the business owner, right? These are the kinds of people that say, Yeah, I want a four Plex in that community. Right? So we're the builder for the entire community. But each of those four Plex lots is closed on and acquired by a separate non-pa type investor got it, right. That's who the investor is. Our property management company does all the lease-up all ongoing management, our HOA division does all the community maintenance and Community Supervision. But if you drive through that project, it looks like all bunch of townhomes. Right. But in reality, it's platted as for plexes, and it's owned by different investors.
Sam Wilson 05:55
Got it. I see. And they can get traditional 30-year debt on that. And, you know, just like you're saying the benefits of owning a single-family home, except you've got, you know, a four Plex to go with it. So that's really intriguing. And then what were you saying about the cap rate? Why, what's the value-add there? Or what's the play on the cap rate, rewind that for me?
Steve Olson 06:16
Well, just to kind of go foundational level here, at the risk of being too complicated. We all know, in an apartment complex the value add, the traditional is, okay, I'm going to go find a dilapidated apartment complex that's underperforming for one reason or the other. And over the next 18 months to two years, I'm going to get that complex in tip-top shape, right, I've added value. Now it's making the most money that it can its expenses and income is all in line, right? Well, you want to buy that apartment complex, when it's stabilized when it's when the value has been added, you're gonna pay top dollar, you're gonna pay it for four and a half cap rate, right? Same thing goes for a brand new four Plex that has tenants in it, right? You're not just gonna walk into that thing at an awesome cap rate, and all the risk is taken out of the deal, right, then that's what somebody is gonna want to sell it for sure. So what we're saying is, hey, look, here's our projected income expenses, here's our projected cap rate, when this is done, we're willing to sell it at, say, a six or six and a half cap, because you coming in taking the construction loan where we don't have to go borrow that money, we don't have to go through that brain damage that's valuable to us. So you're taking that risk, you're saying that four flex doesn't exist yet. But I believe this pro forma, I believe that in 18 months, it'll have an NOI of X amount of dollars, right? So I'm willing to take that risk, all about future value.
Sam Wilson 07:40
And for that, and for taking that risk, you sell it to them at a higher potential stabilized cap rate, say six and a half or whatever it is they go. Right. Got it. Okay, sorry, I'm running a little bit slow, must not have…
Steve Olson 07:54
No, no, it’s a new concept. It really is.
Sam Wilson 07:57
I mean, it's not something we've explored this model on the show yet. So this is kind of fun to really dig into the nuance of it. It seems like there would be some challenges on a couple of fronts and tell me, I'm missing this somehow. But challenge number one, I would assume is, let's say you're developing 10 acres, and you're putting 54 plexes on it finding 50 investors who want to invest in that style of project, is that a challenge?
Steve Olson 08:24
Occasionally, it's been a challenge. Right? Now, if we had 500 of these things, they'd be gone tomorrow. It really depends. If you select your markets and your neighborhoods, right? We're constantly building relationships with the investors. You know, at first, yeah, this was a mind blow, what is this thing, right, and somebody will dip their big toe in, they'll be very careful at first, understandably so right. But when that thing turns over, they get their certificate of occupancy, the leases start coming in, they start getting rent payments, that's when they call us and say I'll take two more in the next one. And here are my three friends. So as long as you do right by the investors, and you deliver the product, it doesn't tend to be a challenge. But that can ebb and flow with the challenges in the market. Right? Sometimes things happen in the market, that make it take a little longer, it's a little tougher to deliver that. And that's not hard to understand, right now, when we're dealing with supply chain construction, right? stuff just happens. So sometimes the market is nice and easy, and the investors line up. And this is easy. Other times, it's brutal. And you know, you got to work together to get to that finish line. But typically, once you get there, and those rents start coming in, and then people go Yeah, that's worth it. Because you got to focus on those markets with population growth, low unemployment. If you're building real estate in markets like that, and you're patient, you will generally win. Right? Right, that becomes difficult to screw up. But between those two points, you don't control all that the market can change. So you got to be flexible.
Sam Wilson 09:59
Finding investors is one thing. Do you guys handle all of the lease-up for them? Is this really four Plex build for rent turnkey, where they just they own it, but yet you guys own it and manage it or not? Do they own it, but you manage it, you find the tenant, you lease it up? I mean, this is completely turnkey. Is this what I'm hearing?
Steve Olson 10:17
You know, to the extent that new construction can be turnkey This is it. Right? Well, when you're taking something from Roger, all the way to least up with tenant, there's going to be things that happen along the way, of course, right. But yeah, our property management company that we're affiliated with handles the lease-up, as well as the ongoing management. There's a tricky thing in this business model that we had to work through long ago. And it's kind of similar to the HOA side if we build 54 plexes. And tell all the investors Hey, good luck, go lease them up. Oh, man. But that's you can just It's horrifying. Right? Right. So we actually have a requirement, and it's built into our CC and ours that you use our management company. And most people go along with that they understand every now and then somebody gripes about it, we have to hold their feet to the fire, because when you let those horses out of the barn, it's tough to get them back in.
Sam Wilson 11:10
Yeah, I can only imagine. And then just the chaos that would surround you know, two of the 5054 plexes being run by somebody out anyway, that could be a mess. How about getting your investors across the debt finish line? I mean, that's a whole series of people and processes. I can only imagine that you say, Hey, me, do you have preferred lenders they have to work with? How does that work?
Steve Olson 11:34
Yeah, that's another one we learned a long time ago, you've got to have a solid preferred lender that knows investors, because you know, the investor, they're going to look at it from the standpoint of, well, I know a guy, he's really affordable. And that's great. But there's a detailed process here. And affordability, that can quickly get trumped by inconvenience. And really, our guy works on volume anyway, very rarely beat out. But the big key here is to get a construction loan on the front end, you've got to be qualified for the long-term financing. Right? They call it a Fannie Mae, a US approval automatic underwriting system. And when we can deliver that to a local bank that likes to give construction loans to our investors, they'll give that because they know Okay, Bob, the doctor is approved, he can refinance out of this construction loan when the property is built. So our test then becomes conditioning Bob that Hey, Bob, don't go buy a Lamborghini for the next 12 months, don't go do anything stupid, that's gonna affect your ability to qualify for a mortgage 12 months from now, and Bob generally behaves himself. We've had a couple of instances where he did not. So we helped him sell it, we helped him get some kind of a portfolio loan, but really 99 times out of 100. It works.
Sam Wilson 12:53
Right. Yeah, I wouldn't have thought about that. You're not dealing with one person that could make you know, again, serious changes to their lend ability, if that's even a word you're doing a lot of is now like that, thanks for the vote of confidence. Yeah, yeah, sure. That's really absolutely intriguing. What are some, and you've been pretty candid and told us a lot of things. I think that you said, Hey, we, you know, we've learned some of this the hard way. Is there anything else you can think of, he said, Hey, here's some kind of learning curve or learning moment, things that happened in the build for rent for flex base?
Steve Olson 13:26
You know, what's on my mind this morning. We have a couple of projects, these are specifically in Idaho. And we are just getting brutalized on overages, construction is going to take a lot longer. And in our contract with the investors, it's a fixed bid 12-month contract. And these contracts were entered into a long time ago. And so it's going to cost millions to pay the investors the penalties that will be owed to them, because of going over the 12 months, right. And so to me, when you're building to the name of the game is flexibility, right? Not committing to anything too far in advance, giving yourself longer construction loans, just because it's just even when you build the volume that we do getting the subcontractors to show up regularly and streamline that process. It's tough because you know, that can oh, wait a lot of these subcontractors, right? The tile guy, the framers, a lot of these guys went out of business and never came back. Right. And now we have all this demand, but we don't have that trade base. Finding these guys is just really difficult. So you know, take more time, give yourself as much flexibility as you possibly can because we are in unknown waters right now. And while there's a tremendous demand for the product, it's difficult to bring it to the market. I will say it comes with a good thing. The rents are just going up when it's difficult to get product on the market. And there's a huge demand for that product. I don't like planning on higher rents, but I've never not seen it over the last eight 18 months. Definitely happening.
Sam Wilson 15:02
Right, yeah, absolutely. Good point. Yeah, that's intriguing. I mean, like you said, Well month to get it built. And if you don't get a built man, that's a lovely piece. Yeah, that's a lot of heroes. And how you deal with that, I guess, that'll determine where you go next in business. And, again, how you rewrite your contracts. I mean, maybe at this point in time, you know, I'm sure you guys are rewriting stuff where you say, hey, looked, well, it might be 18. I mean, materials, supplies availability, it just I mean, there are a lot of things happening right now that are outside of everyone's control. So that's right.
Steve Olson 15:29
We've made a lot of changes for when we roll new product out the door, but we have to live with the past two, we've got honor those commitments and get them to the finish line.
Sam Wilson 15:37
Right. Wow, Steve, thanks so much for taking the time to share today. I love what you guys are doing. That's really intriguing. I guess one last question on that the big hot button topic is affordable housing, which we won't get into why housing is unaffordable, necessarily. But yeah. Right. We'll be here for way too long for that. Yeah. You know, tell us on this front, is there opportunity to build fourplex affordable housing? Do you see that as a, you know, possible, you know, next move for you guys?
Steve Olson 16:04
Well, I just want to qualify that statement. Because when you say the words, affordable housing, right, it really depends on who you're talking to. One person is going to hear that is Section Eight, government subsidized housing. And generally when you say affordable housing, that's what is intended, but some people hear, I just need some housing that's affordable. Right? That's not sky high, you know, because these apartment complex keep getting renovated up to class A status, the rents are ginormous. So I see it on two fronts, we actually are just working on one. Here in Utah, where the city did require an affordable component, we have units that will be rented at 6080 and 100% of the AMI, the area median income, and that's we're getting a little bit into affordable weeds there. So they required us to peel off some of those. And you look at the cost of building those versus what the rents that you can charge are. And there are some perks that we get with that, that we can pass on the investors that make it worth it to them to acquire a unit where the rent they can charge is capped right. Now luckily, that rent flows with the AMI as it adjusts. But then you look at housing that is not affordable housing, but it's just affordable. It's easier to afford for a market renter, right. And we're certain I actually think that's what we are, you know, we're not building these giant club houses with a Ritz Carlton style pool and a trash valet. But we're not building you know, you can't build C class we're like a high B, right, where we get some good amenities, but we're not going over the top. So there are a couple 100 bucks less a month and they are for a class A apartment, and that has served us very well. Even though it's not the definite definition of affordable housing. It's a little more affordable, right? Therefore it's beneficial.
Sam Wilson 17:56
Yeah, and I think that's absolutely intriguing. Just like you said, the amenities aren't required in this style of bill. It just everything you've talked about on this product. I haven't pictured those Class A amenities I'm picturing a place to live. So yeah.
Steve Olson 18:11
We give them some good things. You know, they get a garage, right? They have a little more square footage, but we don't have your trash valet and you're not gonna be able to have a banquet at our clubhouse. You can work out there. We got pool, but it's nothing crazy.
Sam Wilson 18:23
Right, man. Absolutely love it. Steve, thanks for taking the time to come on today. If our listeners want to get in touch with you or learn more about you what is the best way to do that?
Steve Olson 18:31
Just go to our website. It's easy fig. Fig like the fruit.us fig.us
Sam Wilson 18:36
Awesome. Steve, thank you for your time today.
Steve Olson 18:39
Thank you.
Sam Wilson 14:34
Hey, thanks for listening to the How to Scale Commercial Real EstatePodcast if you can do me a favor and subscribe and leave us a review on Apple Podcast, Spotify, Google podcasts, whatever platform it is you use to listen. If you can do that for us that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories so appreciate you listening thanks so much and hope to catch you on the next episode.