Mike Kaeding is the CEO of Norhart, which is committed to solving America’s housing shortage and affordability crisis. In this episode, Mike shares how Norhart plans to strategically drive down the cost of housing on a national level, his advice for bringing trades and expertise in-house, and the importance of building the right company culture.
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomv Reed and I'm here with Mike Kaeding. Mike is based in Forest Lake in the Twin Cities area of Minnesota. He is the CEO of Norhart, which designs, builds and rents apartments. They are committed to solving America's housing shortage and affordability crisis.
In their current portfolio are 12 properties in Minnesota totaling over 800 units, all built by Norhart. Mike, can you give us a little bit more information about your background and what you're currently focused on?
Mike Kaeding: Yeah, so overseeing at Norhart, our big goal is to drive down the cost of housing. Imagine someday if your rent was half; imagine if your mortgage payment was half. We are already developing ways to do construction that drive down the cost 20% to 30% less than anywhere else we see it. And there's a number of techniques we use to execute on that. But our dream is to get to a point where we have 50% or more reduction in the cost of construction of housing.
Slocomb Reed: You know, the follow-up question that begs itself, Mike, is how do you do that?
Mike Kaeding: I'm glad you asked. There's a lot of techniques that we apply to this. I will give you some sense of it. One technique we do is bring everything in-house. So typically, the owner is different than the general contractor, who's different than the contractor who is doing the work, getting things done, who is different than the supplier, and the manufacturer... We brought all of that in-house. We have the plumbing, the electrical, HV/AC, we do the site selection, we own or lease the properties; we are producing precast concrete panels and planks. We're producing wall panels. When you do that, you can now unlock things you can't normally unlock. Our current project is a $100 million project that we're working on, and we typically take like 15 months to complete; we've gotten that down to like nine months. And what happens is you can take a building and subdivide it into its sub components, [unintelligible 00:03:36.22] and we then measure how fast we can produce every unit. And right now we're down to a point where we can produce each apartment unit every five hours. And we think we can get that down to two hours and less, and we're working with groups like Toyota, who in their world they produce a car every 55 seconds. But you do that by just compressing the area the places that people work with that project, and you save money that way. There's several dozen techniques like that, that we can apply to driving down the cost of housing.
Slocomb Reed: So because you have everything in-house, from owning the deal, to planning it, to building it out, the subs are not necessarily subcontractors, because they work for you. That is where you are seeing the cost savings and the time savings, which leads to additional cost savings. Is that a fair summary?
Mike Kaeding: Yeah, that's one key point. Another one is just the staff. One of the things we really work hard at doing is finding the world's best staff. Like, literally world-class. We fly people in to work every week at our site for doing certain tasks. In another sense, we have one guy that Steve Jobs [unintelligible 00:04:49.25] iPhone in 2007. He walks off stage and this employee then followed up Steve Jobs on that same stage afterward. So we've got a very high caliber of team; we build a culture that's very different than the construction industry. Construction's typically rough, and tumbled, and difficult, and rough... We don't bring those kinds of people on; we bring on upbeat, positive, engaged kind of people. And if they're high-caliber, positive people, they come together and they change the way things are done. Just an incredible team; it is another part of that puzzle.
Slocomb Reed: This puzzle seems remarkably complicated, Mike. I think that's probably the number one reason that there aren't that many companies doing what it is that you do, and realizing the affordability in construction that you are realizing. As the CEO, are you the founder of Norhart?
Mike Kaeding: My parents originally started the business, and kind of an interesting story in that they really wanted me to join the business, but I didn't want anything to do with it originally, because I didn't want people to think it was given to me. I was always driven to try to make some meaningful impact on the world. And eventually, I worked past my own ego to realize what an opportunity we have here to take this really small business at the time, and grow it into something much larger. But what's interesting is that within a few years of joining, my dad unexpectedly passed away. And overnight, I had what felt like the weight of the world on my shoulders, and we needed to get in there and solved things. And then what's interesting is I really didn't know what I was doing. And in some ways, that was the key. Because we started questioning everything, we started questioning, "Why are things being done the way that they're being done? Why do you have all these different trades and stuff separate?" And we didn't know how hard it would be to bring it all under one roof. As you mentioned, I think if I knew what I know today back then, I might be a lot more cautious because of the pain and suffering that goes into making all this happen... But I'm grateful for having that naivety back then to be able to push us in a way that we can really meaningfully impact the cost of construction.
Slocomb Reed: Meaningfully impacting the cost of construction, and solving the affordability crisis. Are you building what would be considered affordable housing?
Mike Kaeding: Great question. This is a bit of a misconception; we are not building affordable housing. We're actually building some of the highest quality properties in Minnesota. The way we look at it is we want to drive down the cost of construction, scale up nationally, so we're already working to expand to Texas, we've got a factory here in Minnesota, as well as building one in Mexico... But we're expanding out this process nationally. And then if we can do that at the national level, and provide enough units to the marketplace, then supply and demand factors start impacting things, and now we can sustainably, nationwide reduce the cost of housing for everyone.
So our goal is that long-term perspective, that decade or longer to get to that kind of level. But that's the kind of impact I think we can have to sustainably, meaningfully change the cost of housing. If we just lowered rent today on one building - yeah, it's great. It's one little nugget in the vast sea of the United States. But if we can do it in a way that it impacts everyone, that's much more [unintelligible 00:08:16.14]
Slocomb Reed: What does that kind of scale look like, Mike? I'll come back to that question... The corollary or the parallel that comes to mind for me is Amazon. They have made themselves so ubiquitous by focusing on scale for a long time before profitability, building out what a lot of people thought was too complex, too complicated to work... I'm not saying this to promote Amazon or their business model, but they obviously achieved the critical mass required to greatly impact the industries that they work in, whatever you want to call them - shipping, delivery, consumer goods. What does that critical mass look like in apartments, Mike?
Mike Kaeding: I love that analogy brought up. Say what you will about Amazon, love them or hate them, one thing they have done is drive down the cost of providing a high quality product at your door overnight. It's amazing. In some ways, we're working to execute in a very similar strategy; because they have now shipping and stuff in-house. It's incredible what they've done. For us, we've been doubling in size every year, and our goals over the next 10 years is to reach about 192,000 units is our goal right now, and scale up to about 60,000 units per year in production pace, in about 10
years.
Slocomb Reed: 60,000 units of production pace... That's massive.
Mike Kaeding: Yeah.
Slocomb Reed: At what point are you projecting to have some semblance of control over the supply and demand balances in apartments in the US, or in the markets that you're working in?
Mike Kaeding: To produce enough units to start meaningfully impact price - honestly, it's probably a decade, or even a little bit more than that. It just takes a long time to reach that kind of scale.
Slocomb Reed: Gotcha. So a decade to get there, and then another decade to build at that pace?
Mike Kaeding: Well, I think once we start hitting those kinds of paces, we can meaningfully impact the markets we're in. We're already getting close to the point in Minnesota that we can have a meaningful impact... But yeah, to do it nationwide, it's going to take a decade or a little longer.
Slocomb Reed: We are recording in mid to late January 2023. I don't expect it to be too long before this episode airs, but how have the current and recent economic and real estate market climates impacted the way that you all do business?
Mike Kaeding: It's a great question. What's interesting is because our costs are so low, we can typically build buildings for a lower price point than what banks have been willing to lend us cash for. There's certain rules, as your audience probably knows, about having cash into a project. But we've worked with our banks in a way that we can pull that cash back out in a pretty quick timeline. And so we've been able to grow and actually generate cash at the point of construction with each project we do, which I don't know of anyone who was achieved that kind of level. What's interesting though, is now that interest rates have risen, and that banks have become more skittish and debt service coverage ratios are hitting, we're seeing proceeds go down. So prior, we would have 75% of value they would provide a loan on; now it's probably more like 55%, 60% of value. And now we're having to put cash into projects. So that has been a change for us; it's accelerated our push toward driving down the cost even further, and we are now launching over the next few months an invest platform. It's made for more retail investors to put money into an account that feels a little bit like a savings account. It isn't, but it earns a rate of return that's much higher than a typical bank account would. So we're submitting our SEC approvals here right now. It's gonna take a few months before all that completely launches up. But that's going to change for us just to how we raise capital.
Break: [00:12:19.26]
Slocomb Reed: Mike, I am feeling some of what you're saying within my own business. I'm an apartment owner-operator in Cincinnati, Ohio. As my personal portfolio has scaled, I have started a property management company, and then taken on third party management clients to scale the management company, so that I can deliver a better service to everyone. After starting the management company, I started a renovations company, general contracting, whatever you want to call it, primarily for the purpose of maintaining renovating my own portfolio and my managing portfolio, but also taking on third party projects so that I could scale to the point of delivering a higher-quality product, while keeping everything in-house. And now I'm branching into doing some third party heating and air installs and service. I'm thinking about adding electrical and plumbing to get that kind of mechanical Trifecta. In a lot of ways, there's money to be made there doing it third party, but also it gives me a lot more control within my own portfolio, when I have my own H back technician that I can dictate what he does, where he goes. We service everything in the portfolio in the fall and in the spring, so that in the winter in the summer we have no issues... And I'm following a similar "bring it in-house" path to what you are.
Best Ever listeners, I'm going to hijack the show again to really just ask questions for myself and hope you gain value from them as well. Mike, based on what I've said thus far and your experience building Norhart, what advice do you have for me in bringing in-house trades, expertises that I've never had myself as I build out my companies?
Mike Kaeding: I would say first, make sure it's part of a cohesive strategy. So if it's just miscellaneous random stuff you're adding on, it'd be tough to continue that long-term. But if you have a strategy, if you know the overall pattern of what you're doing, then I would say be mindful that when you first bring someone in house, it's going to be more painful initially. What we often find is that that first few months, the first year, or so figuring out those details - we don't actually save money on bringing something in-house. But after you get past that, then yes, the savings do come, and driving down some of those costs.
To give you an example of that just recently, it was precast concrete. So precast concrete are these giant beams, columns, planks that go into the foundation, [unintelligible 00:15:56.11] structures; they can also help build up very tall buildings as well. And there's only a couple of companies in the state that can do that kind of work. Their lead time was six months to a year, and I think in places like Texas, it's longer than that. It's like a year to two years right now, and we just couldn't do that. So we took all that in-house, which is great, because now we're in a better spot because of that. But the initial period of time - it's painful. So just be ready for that pain, be prepared for that. And then lastly, that pain goes down if you hire the right people. So if you get a really good caliber, a high-quality person, that pain goes almost zero. I've had that where it's gone really well, and I've also hired people that "Oh, shoot, this is a mistake", and now you're going through trying to find somebody else, trying to work all that out. So get the right people as well is a really important piece.
Slocomb Reed: How do you know when you have the right people?
Mike Kaeding: So we are a little crazy about this. We really push to find the world-class, top of the top, best people. We have got, I think, 14 recruiters on staff right now, that just proactively reach out to people... Because the right people are not looking for a job. You've got to reach out and find them. But then we do behavioral interviews; I think that's helpful. I think we do multiple rounds of interviews. But even so, even the best people I've talked to, that have done this well, the ratio is about 50%. We get it right 50% of the time for finding the very, very best people.
So I think another piece of this is just being honest about that. In our orientations, we talked about having a really high bar, and we off board people really well. With a strong severance package, we help people find jobs, we give people letters of recommendation on their way out as well... And so just realize that you can't always do it perfectly, and just being better about helping people out of the organization after you realize it's not the right fit.
Slocomb Reed: Digging a little bit more into that, hiring great people, the right people, and people who are not necessarily looking... What recommendations do you have for structuring a compensation package, or other benefits, or something beyond that, that is going to compel these people to join you at Norhart, and join me at my companies?
Mike Kaeding: Yeah, I'd say number one is build the right culture. So for us, that culture is very different than traditional construction. So for the people that like the rough and tumble environment, they're just gonna be not excited about our group. But typically, the ones that are more positive, engaging, just a better overall person are going to become more attractive, just because that's the culture that we built. So that's one.
But as far as compensation, my philosophy is pay top of market. Pay and benefits should never be a reason why someone leaves our organization. And the reason that is, is the best people, even though they're more expensive, are worth it. They produce at a level that's 2, 3, 5, even 10 times as much as the average person. And most business leaders don't truly understand that, so they try to cut costs by getting someone that's 10% or 20% or 30% less. Don't do that. Get the best people.
As far as creative benefits, we don't look into our industry. Frankly, I don't think construction and real estate is the most cutting edge in the world. We look at tech, for example. Google, Netflix, Amazon. So we have unlimited paid time off for all of our construction workers, even frontline people. Basically, everything that Google offers, we offer, except we don't have childcare on site, just because having childcare on a construction site - I don't know if that's entirely legal. But pretty much all the benefits those other platforms have, we just copied.
Slocomb Reed: I imagine with unlimited time off, you're pretty strict on holding to construction deadlines. Is that fair?
Mike Kaeding: Not in a way that makes people feel like they can take time off. I think the key there is if you hire great people, you don't need a bunch of rules. So you back away, you give them freedom and flexibility... But great people are self-motivated to do what they believe is the right thing to do. And if they're not in that camp, if they're not self-motivated, if they're not pushing themselves to be the best in the world at what they do, they're just not going to be a fit here a long term. But it's very rare that I see abuse in the unlimited time off, just because of the caliber of people we have here; it's not really a concern.
Slocomb Reed: That's awesome. Within compensation, have you ever considered, or do you do anything like profit share?
Mike Kaeding: We don't. There's bonuses, there's a lot of that stuff we've thought about... The older I get, the more I realize that if I hire great people, things just kind of work out. So what we do is, let's say other companies are offering $150,000 a year for a position, and they offer a $30,000 a year profit share bonus. We'll say, "Okay, great, we'll offer you 185k." So we'll just assume all of that is just part of their base compensation. Employees tend to like it, because they know there's nothing around it; they're just gonna get their pay no matter what. And it simplifies everything. And we have great people, that are not as motivated by whether or not they get their bonus or not. We just give it to them upfront.
Slocomb Reed: That makes a lot of sense, that you put such an emphasis on hiring great people, especially when you are engaging in so many new initiatives, even within your industry; that makes a whole lot of sense. What other advice do you have for people who are looking to replicate, imitate, align with that part of your business model of bringing every component of your business plan in-house?
Mike Kaeding: Be okay, with the unknown. I think we are all afraid of new space, new ideas, new ways of doing things, and whether or not we're conscious of it or not, we hold ourselves back a little bit. So you have to build up the confidence, you have to put the fear aside, you've got to hear it, you've got to see the possible pitfalls, but you've got to just jump in and push forward and have some trust that your tenacity or grit, your hard work and the quality of people who you have around you are going to solve the problems as you encounter them.
Slocomb Reed: Mike, unfortunately, this is a short-form podcast, and we're coming to the end of our time; it's time to transition. Are you ready for the Best Ever lightning round?
Mike Kaeding: Yes, I am.
Slocomb Reed: What is the best ever book you've recently read?
Mike Kaeding: "No-rules Rules" by Reed Hastings. It talks about some of these concepts that we're talking about now; about finding the best people, reducing rules and restrictions, and empowering them to do great things.
Slocomb Reed: I'll be looking for that on Audible later this afternoon. What is your best ever way to give back?
Mike Kaeding: You know, when you have great people, they find ways to give back to the community. One recent one we did was Hearts and Hammers; it was literally half of the company showed up on a Saturday, not paid, and we went and repaired this elderly man's house. It was really heartwarming to see.
Slocomb Reed: Thus far, Mike, at Norhart, what is the biggest mistake you've made and the best ever lesson that resulted from it?
Mike Kaeding: It's gonna sound similar to what we've just talked about, but I didn't always understand the importance of hiring the best people. Actually, I'm a bit embarrassed to say this, but at one point we had to hire on temp employees and have them try to do construction. It was a disaster. It does not work well. So eventually, much smarter people than me came around and said, "Mike, nice attempt, but let's help you get to where you need to be." And hiring the best people is hands down the one thing that changed everything for us in our company.
Slocomb Reed: On that note, what is your best ever advice?
Mike Kaeding: Hire the best people. You might be scared, it might be more expensive, you might think you don't have enough money to pay for it, but honestly, jump into it and they will way outperform what you ever anticipated, making the cost well worth it.
Slocomb Reed: That's awesome. Last question. Where can people get in touch with you?
Mike Kaeding: You can visit our website, Norhart.com. And you can see things like our new podcast that we're launching, as well as that invest platform.
Slocomb Reed: Awesome. Those links are in the show notes. Mike, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained as much value from this episode as I have, please do subscribe to our show, leave us a five star review and share this episode with a friend, so that we can add value to them as well with our conversation today. Thank you, and have a best ever day.
Mike Kaeding: Thanks for having me.
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