Stas Grinberg is the co-founder and managing principal of Vision & Beyond Capital Investments, which pursues off-market value-add multifamily transactions. In this episode, Stas discusses the advantages of bringing property management and construction in-house, how to scale these operations alongside your growing portfolio, and how he’s keeping operations lean during times of economic uncertainty.
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed and I'm here with Stas Grinberg. Stas is joining us from Houston, Texas. He's the co-founder and Managing Principal of Vision and Beyond, which pursues off market value-add multifamily transactions. Their current portfolio is around 300 million in assets under management, and they are vertically integrated with property management and construction management in-house. Stas, can you tell us a little bit more about your background and what you're currently focused on?
Stas Grinberg: Yeah, absolutely. Thank you for having me on board. I started investing around 2011, while being an active IDF officer from Israel, and myself and my partner started investing passively in the US real estate market. And we've done so all the way up until 2017. At the end of 2017, we were done with the passive investing journey and we decided to start our own company, and we did it from the ground in Cincinnati, Ohio, from the ground up. We started by driving a car with two binders and a printer, and finding off market deals, single family, and grew up from there, to small multifamily, to larger complexes and etc. And then we extended the geographical approach, and the management systems accordingly. And that's what got us to where we are today, with over 100 employees and over $300 million portfolio.
Slocomb Reed: You started in Cincinnati, you're in Houston now... Where is that portfolio currently?
Stas Grinberg: The portfolio is diversified between Cincinnati, Columbus and Dayton, Ohio, Lexington and Louisville, Kentucky, New Albany, Indiana, and Houston, Texas. So if you look at it from a higher perspective, it's two main markets. One is the Texas market, and the other one is the Midwest market, which all the farthest properties in the Midwest are two hours from each other.
Slocomb Reed: What you're saying about the Midwest makes a lot of sense. I'm based in Cincinnati as well, and all of those other markets you just mentioned are within an hour and a half's drive of Cincinnati, which is really literally at the center of all those. So that makes a lot of sense. Are you primarily a value-add investor, investing to a relatively five-year hold period, looking for a disposition after five years?
Stas Grinberg: So historically, we were; it's funny to say historically, because we're a fairly relatively young company. So far with over 120 transactions, around 115 of them were massive value-add approach, taking a complex or a property that is underperforming, adding value, and with an objective of holding it five years or longer. Some of the deals that we've done were nicer class properties, or type A, where we saw that there is was a different type of value added possible, like a financial value-add, or pushing rents, or occupancy, or just the management, driving it a little up. Today looking into approaching deals, in the current market condition it's very hard to see how can you take a heavy value-add deal, how can you approach it, because the operational expenses are hurting tremendously the lower class properties, and the ability with low rents to carry those operational expenses seems at the moment as an unresolved question for us.
Slocomb Reed: You all exclusively do multifamily, correct?
Stas Grinberg: Yes, now we're focusing on 100 units and above multifamily complexes, with the objective to have the staff on-site to every new property that we bring on board. It's been like that for the last three years, and we want to continue with that; between 100 to 450 units complexes, where it's a little below the heavy institutional competition that they are willing to pay high prices for low returns, and it's above the level where we need to have a portfolio and concentrated management; we want to have property management people on the site, running the property day to day.
Slocomb Reed: Stas, how large was your portfolio as you were scaling? So you started with single families and small multifamilies... How big did the portfolio get before you scaled into larger apartments, and then how big was it when you decided to focus exclusively on 100+ unit properties and on-site management?
Stas Grinberg: We got to 658 units of the clutter side portfolio, of smaller type complexes, all the way up to 60 units apiece, mostly in Cincinnati; it was one concentrated office that was running and managing those units, which is still in place, and we're still managing this small, diverse portfolio... But then was the time where we decided to approach our first multifamily complex of 116 units. We did it without investors, with only company money, to buy this complex and to see how we run this type of property... And then we never wanted to go back, and to buy smaller properties again, because as a company that is able to scale better, it's very hard to scale to 10,000 units having 2,500 4-units. It's really not practical, and it's hard, and it's hard to keep good service level, and good ability to oversee the complexes when you have so many... But currently we are at 3,100 units, and 3,100 units, besides this clutter side portfolio, is 13 complexes, which is fairly easy and doable as a company to manage the right way.
Slocomb Reed: Stas, I mean this in a positive way - you have scaled your portfolio fairly conventionally, beginning with single family, small multifamily, the kind of deal that almost any investor can go ahead and take off the MLS, handle themselves, scaling into larger properties, and now you said 3,100 units, and focusing on much larger properties. Given that you started with significantly smaller stuff - you said you also started while you were in the Israeli Defense Force, so of course, not local to Cincinnati at the time... How early on did you bring property management and construction management in-house?
Stas Grinberg: Property management was from the very first property; we were the guys to do everything, A to Z. And at the beginning it was just me and my partner doing all the roles; we were answering the phones, we were going to meet the potential tenant, we were showing the apartment, we'd drive him to the ATM if he needed to withdraw money in order to pay the application fee... We then placed him into the apartment, we'd hear about the complaints about the apartment not being ready, we were the ones telling him by tomorrow morning it's all going to be ready, come back... We were giving him the keys, we were doing everything. And then we started hiring people to do that, and that we did internally, all the way up until today.
We tried to work twice with an external management service, like a third party, and we failed miserably. In our business it's just very hard to expect from a third party management company to do value-add for you... Because a significant value-add takes too much effort for someone to do it for someone else. And on the construction side we did try to work with third-party contractors and we failed miserably the first 40 renovations; we didn't meet in any of them, either the timeline or the price that we intended to pay. The timeline or budget - we've failed in either in the first 40 renovations. This is when we started building an in-house crew, and then grow it, and then understanding that -- even today, I use some level of third party services in the renovation piece, but my true business understanding is that I can do that effectively only if I have in-house the full ability to replace this contractor the next morning. If he knows and I know that tomorrow morning this contractor is trying to not meet the timeline or the budget, I can tell him "Thank you", separate, and continue to work on the next day, then I can manage third-party construction crews. But if I don't have the capacity in-house, the leverage he has on me is an unfair business relationship, and it's going to fail.
Slocomb Reed: Stas, I want to call attention to the last thing that you said there... You're willing to work with third party contractors now only if you are capable of handling those projects in-house if necessary, because of the amount of leverage a contractor has in the contractor investor relationship, when the investor doesn't have anyone else they can go to replace the contractor. That makes a lot of sense.
Stas Grinberg: Yup, that was a painful lesson.
Slocomb Reed: Stas, I'm an apartment operator in Cincinnati, Ohio, building a portfolio similar to the way that you're doing it. Property management has always been in-house; I want to say that my luck has been a little bit better with third party contractors, but it has still driven me to want to build out my own crews and handle as many things in house as possible, including currently and eventually all of the licensed trades; I want all of those guys in house as well, not just general rehabbers.
I have a couple of rehab crews currently working for me; they're independent, but effectively full time. I'm working on tradespeople. My management portfolio is just under 200 units. To give you a perspective, the largest property is 26 units in that portfolio. As I scale, what should I be keeping in mind when it comes to construction management and property management, keeping those in-house?
Stas Grinberg: Number one on the construction management - of course, the biggest challenge and the biggest contract you have between you and those people, bringing in professional tradespeople, which is a significant value-add to your own ability to grow your portfolio. It is a significant step to bring those trades in house. And the unwritten contract that you have between you and those guys should always be that you will have limitless amount of work for them. The premise that you have for them is that they will never need to look for clients; they will never need to be handling the business aspect of their business. They should only run and do their professional job, and you will take care of everything else. This is what you need to be worried about. And unfortunately, currently, in the market situation, I'm currently in the market condition the first time that I am not able to meet this promise, because I cannot buy deals that don't make sense to buy. And we've finished all the value-adds predominantly on all the portfolio that we have... So I actually had to let some of those people go. And this was a very painful decision for me, and it's a painful period. But this is something you need to be worried about, and especially because it also serves your interests, because you don't want to be paying them and they would not work. This would be a disaster for you. You need to make sure that bringing construction in-house, that the billing system is working right, that if you're applying work to the right project, that you're able to charge the project, especially if you have different partners on different projects, and you're not ending up paying their salaries and they're renovating stuff that you're unaware of... Because it happens; if you have complexes, and you have investors, and you send a plumber, and three other tenants talk to the same plumber and say "I have a leak" or "I have a problem", and he goes and fixes it, and he ends up spending there the whole day, and you weren't even aware. So then you end up paying his salary or his materials, and the LLC that owns the property gets those fixes for free... And eventually the idea that having those trades in house will get you less profitable, because you're paying for everyone. This is one of the biggest challenges there.
Slocomb Reed: A couple of points there, Stas. As soon as I had three crews, or I had three or more renovations occurring in different locations at the same time, I went and got a renovations coordinator. Not someone very sophisticated, experienced, but someone who could touch base every day, possibly multiple times, with each of my guys, ask how things are going, "Are there any issues? Do you need to go to Home Depot? When do you think this project will finish?" And then checking in on those things like the plumbing issues that divert their time, and figuring out what they actually did all day. I had to get that off of my own plate, but also realized that needed to happen. So I totally resonate with that.
Another thing I'm considering as I scale - let me ask it about you though, Stas... Your projects have slowed down because of market conditions making it difficult to acquire at the same pace that you were acquiring when interest rates were literally half of what they are now... Why not go third-party with your contractors and your construction management and do it for others?
And let me say about that, that what I'm looking at and going third party myself - again, significantly smaller scale than you're at currently - is that if I know that I can go third-party, I know that I can keep those quality people on my payroll happy, busy, focusing on their craft instead of their business, the way that you said, while also generating some income, but primarily keeping the engine oiled and the ship afloat while I wait for my own next big project. Is that something that you were considering?
Stas Grinberg: Absolutely. It was a big debate internally, and the only reason why not is because I'm not the only one slowing down right now. The whole market slowed down; the whole industry pumped the brakes. The transaction level of January and February was the slowest in the last 21 years; there was never two months straight with so little transactions as happened. And currently, what I need to really be worried about first and foremost for my investors is that I don't financially collapse in the crisis. And this financial crisis - the both of us cannot predict how long it's gonna take. It could be another year, it could be another two years, it could get somewhat worse... There are some scenarios that are talking about the need to raise interest rates all the way up to 20%. No one has a crystal ball, no one can predict the future, but we need right now to be as lean as possible as a company to be able to have strong survival ability and to get to the other side of the storm, which not all the companies will be able to get. And then to thrive on the other side of the storm by buying the right kind of deals and unfortunately having to rebuild some of the systems that we have built with so much effort.
Break: [00:18:21.25]
Slocomb Reed: Stas, I think you're hitting on something that's going to resonate with the vast majority of our listeners... Two questions here. The first is, we're recording at the very beginning of the second quarter, early April 2023, so hopefully, this episode dates well. We're headed into a time of serious economic uncertainty. I'm not even going to say out loud, again, the interest rate that you just quoted, because I don't want to hear it out loud again... But there are wide ranges of possibility; especially without a lot of acquisitions, a lot of us are feeling the need to go lean. Stas, what else are you doing to go lean with your operations right now to make sure you can ride out the storm that could be coming?
Stas Grinberg: Everything from cutting manpower, cutting those professional trades, some of them from the company, reducing salaries of executives, the board members that are advising to the company - I removed their retainers, and they still want to run with the company for the long-term, and those are stronger people that can allow it, and they were perfectly okay with it, and they continue advising to the company, and they understand that eventually, when we are transactional again, then they will be able to get paid again. But truly, we've reduced our expenses to the very minimum, to run the portfolio as effectively, as efficiently as we can on everything we have, but understanding on the other side that there is a possibility that we're not going to make any transactions in the next six months, or in the next 12 months. This is the reality, because even though the company has to be transactional as a real estate company to make money, you don't want to solve your problems by getting into deeper problems, and by acquiring new problems.
There's a quote from one of the agents that tried to sell me a deal, that was telling me "Sometimes you need to drink some poison." And I don't believe so; I don't believe in that. I believe that buying real estate, you only need to do it with deals that you truly believe in. And if you're thirsty, drinking poison is not a solution. And you need to wait and not be transactional. Actually, one of the most important advice I can tell in that situation is for other people not to jump on deals that you feel in your gut that are questionable. Because right now strong investors are saying, "Okay, I'll just not buy for the next 6-12 months." And then under-pressure investors are saying, "I'll just go in and try anyway, and see what I can do", and what ends up happening is that they are losing money on earnest money, they're losing money on inspections, they're losing money on trying to be transactional, they are failing in that, and while they're failing in that, they're losing money faster, and they're ruining relationships, and they're getting into litigations. It's harder sometimes, but it's the right thing to do to stay put until the market gives us enough certainty to be transactional. Because putting a deal now under contract for three months from now, you barely are able to determine if you're getting a good price or not. It doesn't matter what the price is; it could be 40% lower than the deal price 12 months ago, but it still could be a bad price relatively to three months from now. And because of that point, you need to only be transactional if you truly are finding a deal that has very little to no downside, but a very high upside opportunity.
Slocomb Reed: Stas, last question before we transition this episode - going into the rest of 2023, with the levels of uncertainty that you are sharing here, I can't help but think now... I'm -- again, significantly smaller portfolio, but also completely vertically integrated. At present, everyone who touches my properties on my behalf may not report directly to me, but is hearing from me on a regular basis. Let's give a sales pitch to our listeners, Stas. I want you to pitch our listeners on the value of bringing property management and construction management in-house heading into uncertain times. What do you see as the biggest advantages to -- well, I might be giving up the goose here, but having the levels of control that investors like you and I have, while also carrying payroll to get our apartments turned and shown and leased.
Stas Grinberg: I can show the benefits of it from the opposite perspective. When we are now looking for deals, when we know that we will be able to buy some deals for a significant discount, one of the first places I look at are properties that are managed by third parties. Because I know that I do my absolute best within my organization, with my property management, and we manage all the properties between 90% to 98% occupancy and 90% collection. And doing that, some of my properties are now barely breakeven, if breakeven. I know that the operational expenses in the market grew significantly. It's not only the interest rate crisis; everyone is talking about the interest rate. But this is one piece of the puzzle. There are other pieces; the operational expenses grew significantly. Water expense, electric expense, insurance...
Slocomb Reed: Utilities, yeah.
Stas Grinberg: Insurance is the absolute worst. In Texas, the Insurance Group tripled itself. In Florida, it's sometimes four times higher, and sometimes it's unattainable; people that are coming to renewals, the insurance companies tell them "Sorry, we're not going to insure it, no matter what the price is", because juries in insurance cases were giving ridiculous amounts of compensation to plaintiffs, and what happened is that insurance prices went through the roof. With the catastrophes that happened, with Ian, with the Louisiana flooding and everything else, insurance companies are driving prices up, because they're not profitable; they're losing money, and they have to drive prices up, and it's going to continue growing.
So with absolute perfect control, and with absolute perfect property management, currently most of the properties are not cash-flowing, are barely breaking even. And most of the properties in the country are in technical default situations with lenders. Third-party management will forever do the bare minimum that they can to not get yelled at by the owner, and sometimes to get yield to an extent. Because the difference between managing property management's level six, which is just making enough to keep the ship rolling, and making property management by absolute top performance, 9, 10 KPIs, stronger people, hiring better people, not using temp services - those things will only happen by the true ownership that doesn't mind to pay a little bit extra, and truly leading the people, because he has all the incentives to do that. Third-party management companies don't have those incentives; that is not their objective. Definitely not the small ones, that don't always even know how to do it. And the big ones are preferring to grow their business by buying other property management companies, and growing the number of units they manage; it helps them significantly more than trying to do perfect results for the ownership by spending so much more on manpower. So they will try to not do it; they will try to cut corners. It pays off for them to cut corners. And people don't have a choice anyway, because those are investors -- there are a lot of investors from New Jersey, from New York, that are having complexes all over the country, and they're not going to go and manage them by themselves. They're not going to build an operation for that. So the third party can simply do barely enough. And it's a significant, significant difference.
So that's my perspective on it. And definitely, one of the areas I'm looking for the first deals to show up because of significant losses of the ownership, and the ownership gets beat up and tired, and the ego of trying to sell properties for last year's prices will not be in place, are properties that are managed by third parties.
Slocomb Reed: That makes a lot of sense. Stas, are you ready for the Best Ever lightning round?
Stas Grinberg: 100%.
Slocomb Reed: What is the Best Ever book you recently read?
Stas Grinberg: The Fountainhead by Ayn Rand.
Slocomb Reed: What is your Best Ever way to give back?
Stas Grinberg: Together with my partner we established the company Commanders Club Foundation, that is accepting retired company members from the Israeli army. Those are people that fought for the country for 8, 9, 10 years, and they are being released from the army at the age of 28. They're behind all their younger peers by education, and by professional experience for the business world. But on the other side, they have proven leadership skills; they have the ability to make decisions, they have a solution-seeking mindset... So we are taking those guys and we are creating an environment for them where they can learn, they can move up quickly in their society, and where they are helping each other, and we're helping them to start their business or to get into companies and grow into management routes, or to go into the education and educate the next generations in Israel to be good leaders. So this is what we're doing. We have over 900 retired company commanders in this club that we're supporting.
Slocomb Reed: Nice. Stas, thus far in your real estate investing, what is the biggest mistake you've made, and the Best Ever lesson that resulted from it?
Stas Grinberg: I think we'll continue with this line of conversation, because the biggest is a hard competition, that's hard to measure; I've made a lot of huge mistakes. So we'll continue with the one that is hiring third-party management for my properties. I tried to do it twice; once in Cincinnati, once in Houston, as we transitioned here, because I thought, even though I knew it's a mistake, I will hire a third party, I will this way saddle into the new market. Meanwhile, I'm building my own operation strong enough to take over. And I just needed to take over right away, and not wait until the end of the year, because within three months, they were able to provide me such poor results, such an inability to see the clearer picture, such lack of control over the numbers, such lack of control over the tenants... I couldn't tell, at either of my properties, which are the vacant units, who is paying, who's not paying, what is the process and procedure that is happening with tenants that are not paying... There's so many steps in property management that you can mess up just by doing your job poorly. And third-party property management didn't get to a place where they know that they have the people that are coming to the property every day. They had used temp services, and other temporary patches and replacements that now the tenant could have leadership. Property management is leadership; it's leadership of the community, and of the complex, and the tenants crave it, and they deserve it. And then, if the tenants don't get it, then you also cannot expect to get good results from your investment initiative, because it's not going to happen. You need the people to be happy and to be cooperative and to pay the rent and to do what it takes, and also to be able to enforce certain things when people are not paying rent, to take over and to take control over the situation. And neither of that could happen if you don't have full control, and you will not have full control with third party management.
Slocomb Reed: On that note, Stas, what is your Best Ever advice?
Stas Grinberg: To who, specifically? To someone who's building a company, or to an investor?
Slocomb Reed: To an investor.
Stas Grinberg: I would say number one advice is there is no such thing as a passive investor; there is a myth of passively investing. Everyone has responsibility to truly learn. You don't need to quit your job, you don't need to do it full-time. It's okay to invest and let a developer manage your capital, or an investment firm, or an investment fund to manage your capital. But you need to understand what's happening, you need to understand what's going on, you need to understand that you're putting your trust and your money with the right people. And you need to go and see the property with your eyes, you need to make sure that there is a bank in the deal that is believing in the deal and can do those checks much better than you can as a passive investor... So you need to do your homework and take responsibility over your money, because as an investor, not losing is significantly more important than making profits.
Slocomb Reed: Last question - where can people get in touch with you?
Stas Grinberg: They can get in touch on my LinkedIn, at Stas Grinberg; it's my name. Or on the website, vmbinvest.com. I'm approachable through both.
Slocomb Reed: Those links are in the show notes. Stas, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend you know we can add value to through our conversation today. Thank you, and have a Best Ever day.
Stas Grinberg: Thank you, Slocomb, for having me.
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