In this episode, we delve deep into the world of commercial real estate with Jay Balekar, a seasoned investor who has scaled his portfolio significantly in just two years. Jay shares valuable insights into strategies for success, market conditions, and tackling the affordability crisis. Whether you're a seasoned commercial real estate investor or just starting, you won't want to miss this conversation.
Key Takeaways:
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Transcript
Joe Cornwell (00:09.591)
Hey, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever show. I am your host, Joe Cornwell. Today, your episode is brought to you by Presario Ventures, a private equity real estate firm based in the booming, awesome Texas market. To learn how you can invest in the future of Texas with Presario Ventures, visit info.presarioventures.com forward slash best ever, or click the link in the show notes. Today, I am joined by Jay Balekar. He is a Cincinnati-based investor. He's been on the show before.
It's been almost two years since Jay has joined us on the show. And since then, he has scaled an additional 400 plus units in his portfolio as a GP and LP, as a personal owner and operator. Jay has a lot of experience and he's scaled in a very short window. That's why we asked him to join us today to talk about his journey, the things that have changed in the last two years, and all the lessons along the way. So Jay, thank you so much for joining us. Tell us a little bit more about...
Just big picture things that have changed in the last two years since you've been on the show. And of course, we will link to that show that Jay was on previously. So you guys can watch that if you didn't catch up on it already. So yeah, Jay, take it from there.
Jay Balekar (01:22.666)
Yeah, thank you for having me, Joe. It's great to be here again. So a few things have changed since the last time I was on the show, which was, I think, I believe in December, 2021. Back then I was still in my W-2 job. I'm focusing on real estate full time now. And I think you would agree that a lot changes based on your focus, right? So I was focusing on my job and I was focusing on the real estate portfolio, and then your focus is kind of divided, the growth is gonna be a little bit slower. So now that I'm focusing on the real estate full time, as Tony Robbins says, where your focus goes, energy flows. I think I kind of saw that happening. We added about 400 doors to our portfolio as a lead sponsor. So mostly these deals were done in a JV vehicle because most of the people that we work with are friends and family people we know through our real estate circles. But we also did a couple syndication deals during this time. So it's mainly focused in the Cincinnati market, if you will, which is where I live. So that's my backyard. And we feel a little more comfortable doing that because we understand the market. We have better relationships with brokers and property managers and lenders. And...if there is a fire drill that happens at any of the properties, I'm around and I can take immediate action rather than relying on other people to be able to do that. And I feel that's important, especially when we are working with investor capital.
Joe Cornwell (02:59.871)
Yeah, I couldn't agree more. I mean, I feel like you and I are actually in the probably minority when it comes to multifamily investors who only invest locally, you know, obviously a lot of investors will invest anywhere in the country or internationally if the deal is right and from a philosophical standpoint, it does make it more difficult to have control of those assets if you're not local. And it becomes even more important if you're not local to have really strong management. And that can obviously be a challenge. We're both based in the Sin City market. I think probably one of the most common complaints I hear from investors is how many issues there are with some of the local management companies. And so it's certainly easier if you can have a really hands on approach that you are doing.
So let's break down some of that journey the last two years. So I know you said you added over 400 units, which is incredible. That's really incredible growth, and especially in the competitive market that we saw the last two years. So tell me a little bit about how you shifted from your previous portfolio into that rapid scale.
Jay Balekar (04:09.938)
Yeah, no, that's a great question. So I think the last time when I was on the show, we had started to do some joint venture deals. So we had just started to use investor capital, if you will, because we had realized that to recycle our own capital, it's a slow process. It takes about 12 to 18 months to acquire an asset, to get it ready for renovations, complete the renovation, stabilize it, build that stable NOI for at least three to six months. So it's a long process. So my goal after I transitioned to real estate full time was to buy more investment worthy deals with other investors, where we can actually do more using the investor capital. And by that point, we had also built a little bit of a track record. So we were able to attract some of that capital. So essentially we closed in all of 2022, and so far in 2023, a total of about, I'm trying to count about eight to nine deals. So those 400 doors are across about eight to nine deals, which will give you a sense that none of these deals are like massive two, 300 unit apartment complexes, because a lot of times what we are seeing is deals that size are most likely heavily marketed and you're competing against institutional money and the numbers are just not making sense. So we usually target small to mid-sized multifamily properties where the opportunity for value add is much higher than just, you know, changing laminate countertops with granite or changing black appliances with stainless, you know. So in my mind, that's more of a gravy, but if you know that you can get an asset that operationally you can add a ton of value to, but also physically in terms of the condition, something that's really dilapidated and you can redo everything, you can immediately add a ton of value in it. And at that point, you're not solely relying on the market's rent growth and job growth. You're actually physically adding so much value in it that no matter where the interest rates are, you can still come out okay, if you have to exit from that deal, you know, year or two down the road. So that was kind of our main criteria. And about, like I said, about eight to nine assets in that 20 to 60 unit range.
Joe Cornwell (06:36.255)
Okay, so let's talk about the movement on rents there. So I know you said you're going after deals that are heavier value add, that's the same exact strategy that I use as well. So these deals you picked up in the last few years, and again, I know they're all gonna be a little different, but if you had to kind of average them out over your portfolio, what were your average rents going in and what are your market rents on the backend when you're after renovations?
Jay Balekar (07:04.086)
Yeah, so I think because majority of these deals were heavy value add deals. So for example, for one bedrooms, there's a huge inventory of one bedrooms in our market, especially the older multi-family properties that exist. So we went from roughly about 450 to 495 in-place rents to about 925 to 995 post renovation. So of course, I mean, these were pretty heavy renovations.
They were not cheap, you know, anywhere between about 20 to 25 per door. So had to redo almost everything and including the holding costs, the numbers do add up. But then if you are spending about 20 to 25 a door to get 450 to $500 in rent bumps, the ROI is definitely there. Now, one of the assets that we bought, we had more of cosmetic renovations. So that's where we spent more like 10 to 12 per door in renovations. And then we are getting about 250 to 300 in rent bumps. So we are usually targeting anywhere between 25 and 35% ROI on the renovations that we do. So that's kind of our target.
Joe Cornwell (08:17.943)
Yeah, that's an interesting way to look at it. And those numbers sound incredible, you know, I mean, especially on the ones where you're almost doubling your market rent from the renovation. You know, without having the numbers in front of me, I can kind of picture them in my head and that's gonna be a massive, you know, valuation, increase in valuation at the end of the day. So on those deals where you're, you know, you said you're doing these cosmetic renovations and you're targeting somewhere between I guess the way I look at it is mathematically it's a little different. So the old school of thought, at least for me in the philosophy I've used, was where if you could get a 1% rent ratio return on your construction costs, usually it was worth the renovation. So that was like my baseline. So for example, if I'm going to spend $10,000 on a small cosmetic renovation, I better have a bare minimum hundred dollar increase in rent on that unit. Obviously.
Again, that's the absolute baseline. Anything less than that, it probably doesn't make sense to do. Now, in the current market we're in with 7%, 8% interest rates, that number becomes increasingly difficult because now the cost of financing, especially if you're doing construction draws, the return's not going to be there on something like a 1% rent ratio. So how has that changed in the last year or so with rates increasing? How has your strategy changed?
Jay Balekar (09:44.07)
Yeah, I think that's another great question. And I asked this question to a lot of other real estate investors that I know, that how are you guys changing your strategy? And I think, at least personally for us, the only thing that makes sense is adjust your underwriting and sales price and offer price based on the current lending terms, the cap rate adjustment, and also insurance pricing. I mean, insurance pricing has been going up.
There is a lot less appetite for certain things like aluminum wiring, cast iron plumbing, which was not the case. We would still find providers who would ensure properties from early 60s, but there are more and more providers who are refusing coverage for properties that are off the 60s and 70s vintage. So that is definitely throwing a lot of hurdles. So...and the asking price versus the offer price, there's definitely a huge disconnect. So, I mean, we haven't closed a whole lot of deals in the last three to six months for that exact same reason. But I think the seller expectation is beginning to come down slowly because it's a completely different market. The interest rates have more than doubled, but the property values have not come down by a whole lot. They're just beginning to come down. But in my mind, unless you're actually adjusting the offer price based on some of these moving parts, there's just no way to make it work in a conservative fashion.
Joe Cornwell (11:13.299)
Yeah, I couldn't agree more. I think that's one of the biggest challenges. And, you know, again, you and I operate very similar spaces and most of the deals that are available, which there aren't many. So it's still a massive shortage of supply, which is, you know, causing the, you know, continue the elevated competition that we've seen the last few years. It it makes the deals very difficult to pencil out, especially with the way seller expectations are today. I talked to a broker the other day and they were kinda telling me that they're just now, like you mentioned, slowly, slowly seeing seller expectations adjust from the way they've been the last couple years. So this is kind of a side note to that. I hear this in these circles that we're in very often where you hear, oh, there's gonna be this big influx of inventory, there's gonna be this big crash in multifamily real estate. So what are your thoughts on that? Are you seeing what people are talking about? Are you anticipating the same things? So give me your take on that and then I'll give you mine.
Jay Balekar (12:14.526)
Yeah, I hear about it all the time that there's going to be a ton of buying opportunities in the marketplace. But I think every market is different. And there are certain markets that are extremely exposed to short term floating interest bridge debt. I don't see a whole lot in our market, especially in the Midwest in general. And, you know, in Cincinnati specifically, there are a few large groups that own a lot of the large multifamily. And if we actually look at the debt that's on it, it's mostly agency debt and it's long-term. A lot of these properties were refied in 2020 through 2022 when interest rates dipped. So you don't see a lot of properties where the debt is coming due or there is an exposure to bridge debt. Now, if you're talking about certain other markets like...Texas, Florida, Arizona, where there were just so many deals that syndicators did in the last three years, and they bought these properties on bridge debt. Many cases, they didn't have an option because it was not a stabilized property. Now, they are having trouble refining at current interest rates. So in those markets, I do think that there would be some opportunity to buy these larger deals. But in our market, I think there will be a little bit more motivation, but I'm not, I'm not expecting a tsunami of deals and it's gonna be like Black Friday shopping event in real estate in our market at least.
Joe Cornwell (13:43.675)
Yeah, I so in my perspective, very similar. You know, I hear this a lot both in residential and commercial multifamily space. And, you know, everyone keeps saying there's going to be this, this big event and it's going to cause all this inventory and, you know, we're going to be back to 08 09 pricing. And it's like, it's hard to imagine a scenario where that is a reality or even a black swan type of event. And I guess that's the definition of a black swan as you can anticipate it, kind of like COVID. But it's hard to imagine another scenario that would cause a market like that to shift so rapidly. And when I think of, well, what type of environment does that put us in? Let's say that does happen. Well, are we gonna be back to 08, 09 where...you know, the banks aren't lending. Maybe banks are going out of business. So it, even if that were the case, I think it also creates a dynamic in the market where just because there could be more supply, a massive influx of supply for, for some reason, then there creates other problems where it doesn't necessarily just make it, you know, an advantageous buyer's market, or maybe we have a massive rent correction, right? Or so now values are dropping and just because, you know, maybe a bank has to repost some of these, doesn't mean they're going to be a good deal for a buyer if rents all of a sudden have a massive correction. So it's interesting to play what if game, and that's why I like to ask that question. But yeah, I agree with you in principle. I don't see any massive correction coming that's going to really change the dynamic of the market in the short term anyway.
Jay Balekar (15:19.694)
Agreed, yeah. And I think what's happening today with the high inflation, it's slowly beginning to get under control, but we are still in high threes. If we compare to what's happening today with early 70s, when the dollar was no longer backed by physical gold, in Nixon era, when that happened, that was a very similar, there was a lot of money that flooded the market at that time, which was kind of very similar to $3 trillion printed during COVID. And that suddenly gave rise to a lot of investors. The value just went up. That effectively caused a lot of inflation. And then after that, there were fears of recession. So that happened in early seventies, like 70 through 75, if we look at history, and then we looked at the interest rates actually skyrocketed at that time. They went from, they went to almost 17, 18%. And that's basically what Feds are doing now. And they didn't really come back down for quite some time. So when a lot of people say that, oh, you know what, in 2024 or 25, the interest rates might actually come back down and they'll settle at maybe four or 5%. I'm not quite sure if that will happen, right? So I'm not banking on it. But I do think that the price correction would have to happen. Otherwise the transaction volume is just gonna come to a screeching halt.
Why would investors buy if the properties don't cashflow? I mean, the whole point is to buy cash flowing assets. So I think that seller expectation has to change over time. But to your point, by no means do I think that we'll find a ton of properties at a very steep discount. It's just the adjustment of prices based on what the market is doing.
Joe Cornwell (17:09.675)
Yeah, I mean, it's interesting to think of what could change from a fundamental standpoint in our market, talking about the US economy in general, that would allow for something to give, something to change. So I mean, maybe massive unemployment increasing, if that number goes up significantly, that could obviously cause the Fed to then try to lower rates to help offset a recession caused by unemployment. That's one possibility. I think that there's just so many things that are unlikely to happen though, that would lead us down that path. And again, to your point, earlier this year, a lot of investors were talking about how, well, we think that by the end of 23, there's going to be a big change or maybe early 24. And it's like, looking at the relatively...
I don't want to call it stable, but the relatively linear progression we've had in the market, it doesn't seem like anything in the short term is going to cause a massive market shift. So maybe, you know, I, this is, I've heard this and I agree it could be a possibility. Maybe commercial banking turns into longer amortized periods where if prices have to stay, or if they do stay stabilized, well then, you know, they're going to borrow money for longer terms, longer amortizations. I know they've, that's been thrown around on the, in the residential space as well, going to like a European model with a 40, 50 year amortization as a possibility for the unaffordability of residential property. But it'll be interesting to see what happens in the next year or two.
Jay Balekar (18:47.052)
Absolutely.
Joe Cornwell (18:49.696)
So let's talk a little bit about your actual strategy. And I know you covered it briefly. You said you invest locally, you're based in Cincinnati. Is your entire portfolio here in the kind of greater Cincinnati area?
Jay Balekar (19:05.138)
Yes, so all the deals that we are lead sponsors on or deals in my personal portfolio, they're all in the greater Cincinnati area. We have done some co-GP deals where we have helped raise capital for other good operators in our network. And those deals are not in our backyard. Those are in South Carolina, Alabama. So they are a little bit more spread out. But again, I mean, we try to not co-GP and not raise capital for...usually other people's deals because unless we are completely sure about that operator's track record and are personally invested in that deal, we don't feel comfortable doing that. So which is why majority of our deals are done here locally in Cincinnati, where basically we have found the deals and we actively manage those deals.
Joe Cornwell (19:55.663)
Okay, and on your stuff that you're overseeing management, and it sounds like you have third party management in place for all of your Cincinnati based and obviously out of state based properties, is that correct?
Jay Balekar (20:09.194)
That is correct, yes.
Joe Cornwell (20:10.323)
Okay. And so what is your strategy again with the difficulties we mentioned in the beginning of the call? I know most markets face this. I hear that it's not an uncommon thing, but Cincinnati, in my opinion, has historically faced challenges with good management companies. So what is your approach to making sure your assets are successful with third-party management?
Jay Balekar (20:35.346)
Yes, I think also in different parts of Cincinnati, we have different property managers that we work with. And primary reason for that is majority of the portfolio that they manage is in that part of town. So if you have someone who is mainly active in Northern Kentucky, and if you have an asset, let's say in Dayton, which is an hour and a half up north, and have the same property manager manage, they are going to struggle because now they have people traveling. So you're basically paying for people just to be on the road, right? So that really segregated the property managers based on the neighborhoods and the markets that we are in. But additionally, we are fairly hands-on, given that these assets are local. I'm at these properties personally, at least every two weeks or so. So I actually know what's happening at the property. So if landscaping was done and I show up and it's actually not done.
I'm able to catch that pretty quick. Similarly, just the common area cleaning. And some of these things might sound trivial, but all of these things have an impact on how happy your tenants are. If the common areas are unclean, if the landscaping is not done correctly, the tenants begin to start noticing that the property is being ignored, and then you start having vacancy issues. So it's just a...
You know tsunami of things that can hit you if you're not on top of these things But having these assets locally we are able to be on top of property management Companies as much as possible as asset managers, right? So that's definitely been helpful and which is why we primarily invest in our backyard to be able to have that attention So now I mean having said that You hear a lot of people say that live where you like and invest where numbers make sense.
I don't disagree with that, but then you need to have a trusted boots on the ground partner in a new market if you want to invest remotely in a new market.
Joe Cornwell (22:39.627)
Yeah, and I want to touch more on that here in a second, but back to your point about physical appearance of a property, common areas, all those things that, like you said, I think many investors take for granted, and I admittedly took for granted early in my investing journey. It's so interesting to see the dynamic change when you come in as a new owner or manager of a property, and you kind of want to change the culture, let's say, of an asset.
You clean up the grounds, right? You clean up all the cigarette butts and the beer cans. And you know, like the last property I just purchased, this was very critical. So it's timely that you said that. It's interesting to see how quickly some of the tenants can adapt because fundamentally I think tenants, even in D-class assets wanna live in a nice, safe, clean area, right? I mean, as humans, we all want that. So I'm gonna actually relate this back, you know.
For anyone who doesn't know, I'm former law enforcement. And there's a theory they teach us in the academy called the broken window theory. And I don't know if you've ever heard that, something like that. Basically, it says that as law enforcement, if you allow broken windows in your town, it's going to invite further crime. It's going to invite further vagrancy. Because it sets the tone and the culture of that community that that's acceptable. And that's OK. So it's interesting. That was the first thing that popped in my mind when you said that. That.
You know, when you change the culture of an asset, when you take over, you clean it up, you don't allow people littering, you don't allow people throwing cigarettes in the bushes, you don't allow 50 stray cats, you know, to be fed on the doorsteps. It creates buy-in from the community, or at least that's the goal. So yeah, I think that is a very important thing that many investors, especially if they're out of state and they're not able to keep an eye on the property physically, like you said, having a partner or a resource to do that is critically important.
And another thing I wanted to touch on that you mentioned. So when you talk about, it sounds like your approach to finding the right manager is finding somebody that has a micro expertise or dominance in that neighborhood. Can you expand on that a little bit more?
Jay Balekar (24:51.678)
Right, because I mean, real estate business is a very hands-on business, right? So you need to have the systems, processes, people in that neighborhood to support the business. And what I've seen is, especially for the assets that we have, which are smaller to mid-sized assets, the type of property management companies who are willing to manage these assets are also on the smaller side, right?
Property managers who manage 20, 30,000 units, they don't wanna take on a 20 unit. They wanna manage a 200 unit apartment complex. So you don't always have options. So if you're working through the options you have, and as you're going through the list of these property management companies, you want to really get a sense of what they're really good at and in which markets they primarily manage properties, right? Which neighborhoods really. And if your property is an hour away, no matter how good their intentions are, they are going to struggle because they just don't have those systems and people in place an hour away where your asset is located. So, although we may have property managers who we have excellent relationships with, if they are not active in that market, we just choose not to work with them unless they are acquiring other assets in that market and actually spinning up an entire team in that neighborhood. In that case, we would consider, but otherwise we just find another property manager in the area where our asset is. And that mainly comes through talking to other people in the real estate community. So referrals and references are key. And even after all that, you might still come across companies who are not doing a great job. And at that point, you just have to do what's best for your asset and what's best for your investors and make a switch.
Joe Cornwell (26:44.599)
Yeah, I mean, so to summarize, it sounds like from a tactical standpoint for the listeners, if you want to find at least a better opportunity at a successful management company, find somebody who has a footprint in the specific type of neighborhood you're buying in. And it is okay if, if there's not a better option, even if you're in one major Metro to work with several management companies because you can find the best one for that particular neighborhood that has the resources the footprint and Isn't going to be sending you know leasing agents and contractors and maintenance people across an hour to our drive That is obviously inefficient and going to probably cost you more money at the end of the day if you're paying those bills Awesome.
Okay, let's transition a little bit to how you found these deals. So, you know, again, one of the reasons I wanted to have you on today is you scaled up in a pretty impressive way. So in the last two years, how were you finding all of these deals that you ended up buying?
Jay Balekar (27:45.802)
Yeah, a lot of these deals actually have been on market. Some of the smaller ones that we had initially picked up in 2020, 2021, some of them were right on loop net, or one of them was on Redfin. So they were really accessible to everyone who was looking. But in some cases, we saw something about the asset that maybe other people might have missed or...because maybe we had some level of competitive advantage being local and having in-house construction team, we were probably able to get these renovations done for cheaper having an impact on our projected returns. Now, some of these deals were off market. Doesn't mean they did not come from brokers. They still came from brokers. So I think just engaging with brokers and real estate agents, and keeping in touch with them and building meaningful relationships with them. And if they send you something, underwriting the deal and providing feedback on what numbers make sense to you, and if the deal doesn't work, why it doesn't work, that's always helpful because a lot of times people, you know, if the deal doesn't make sense, they just stop communicating. And if you have to realize that there's a person on the other side and they're waiting for feedback, so.
You've got to engage in communication, make sure you're offering feedback. So over time, even the brokers know exactly what you're looking for. So next time a deal comes across their desk that meets your buy box or your criteria, they think of you. And they think of you not just because you've been communicative, but also because you have actually actively engaged in building a relationship with them, right? So that has been helpful. There's always room for improvement, but I think the broker relationships and...keeping in touch with brokers, either through one-on-one sober coffee or meeting them at real estate meetups, like the best ever meetup that we have last Tuesday every month. That's always been very helpful. So that's how majority of our deals have been sourced.
Joe Cornwell (29:55.019)
Yeah, that's really good advice and I will admit that has been one of my biggest weaknesses. I've been trying to move into the mid-size multifamily space for many years. I've been able to finally find a couple of properties and it is exceedingly difficult with the limited inventory, especially in our market. The brokers do seem to control that market, as you mentioned. So even whether it's on or off market, quote unquote, it's very rarely are those deals transacted outside of the commercial brokers.
And I have been, you know, definitely not following up. And even to your, you know, to your better point, I have not been giving good feedback. So I look at a deal that comes across, I get an email, I get a text, and I'm like, oh, I know in 30 seconds this isn't a fit for me, but that's it, right? Like you said, I leave it, I leave it there. And instead, I could be giving them feedback on why it's not a fit for me, and you know, any feedback on the property itself to just to help strengthen those relationships.
So that's great advice. I'm going to write that down for myself here. So looking forward, we mentioned briefly, we know we're in a challenging market as investors, especially investors looking to scale. There is 8% rates being floated around most days. What are you looking for now? What does your next six to 12 months look like? And talk a little bit about your future goals here.
Jay Balekar (31:21.226)
Yeah, no, great question again. We are still looking to acquire, you know, we want to buy, but we want to buy at numbers that make sense in today's environment based on where the lending terms are at, where the insurance pricing is at, taxes are going up throughout. So I think as investors, we are really getting squeezed from all different directions. And on top of that, you know, in the last three months or so we are seeing, consistently seeing reports of you know, negative rent growth and contraction there, vacancy rates going up. So there's a lot of changing things in the market, but at the same time, no matter what type of economy or market you're in, you can always buy right. You know, so your underwriting just has to change based on that. So we are still looking to acquire. We are being a little more patient and a little more conservative now, more so than ever. I think patience is a virtue, especially now.
And what I'm trying to say here is inaction is not a good thing. So you've got to continue to underwrite deals. You've got to continue to talk to brokers and see what works. But if none of the deals work for the next six months to a year, that's OK. I mean, I don't think we should be compromising on our criteria just to make a deal work. That would be kind of our strategy. So if the next year is a little bit slow and the year after finally the seller expectations come down a little bit and we see better pricing. That's when we'll jump on deals. But if the numbers don't work, we don't move. So that's basically it.
Joe Cornwell (32:59.263)
Yeah, and I think that that's a great strategy. I completely agree with what you're saying. And let's talk a little bit about the realities of, as you mentioned, increasing costs, right? So I know across the board, most of my properties on insurance renewals, some of my premiums nearly doubled. Obviously here in Cincinnati, Hamilton County, we had our tax assessment done this year. Some of my properties assessed values doubled or tripled.
And now that's not necessarily like a one-to-one increase in tax and tax rate But it obviously is across the board can increase the property taxes significantly for property owners And so how are you? counteracting some of these ongoing expenses like what is your strategy for dealing with that?
Jay Balekar (33:47.774)
Yeah, I mean, if insurance taxes go up, there's not a whole lot you can do for that. But then what we can do is if you have any capex planned, you have to be a little bit more judicious about how you're spending those capex dollars. It might actually make sense to keep those capex dollars in reserves and probably do a basic turn itself because even after a $12,000 capex, you're probably not seeing those crazy rent upside that you were seeing a year or two ago. So I think conserving capital and focusing on operations, reducing operating expenses, try to find where the inefficiencies and bottlenecks are in your business and trying to really work on them would be really the focus for us, right? So my mentor says that, you know, that's this year 2022 and 2023 is truly the year of operations. And I firmly believe that, really focusing on operation, building your teams and making your processes more efficient, that's gonna pay its dividends in the long run. And that's gonna make you a little bit more competitive than some of the other people who are not doing that. So to kind of compensate for these rising costs, that's kind of been our focus, if you will. So track those KPIs a little more closely, et cetera.
Joe Cornwell (35:10.195)
Yeah, and that sounds like a really good strategy. I guess the basis of my question is, at the end of the day, all investors, whether you're active, passive, general partner, or limited partner, you're chasing a return. Fundamentally, that's why we do investment real estate. And at the end of the day, the tenants always bear that ultimate cost, because that is the business. We provide housing, the tenants pay the rent.
Joe Cornwell (35:41.571)
To me, the only real solution when counties increase significant cost on property taxes, when the insurance carriers increase significant costs on that, that's going to ultimately hit the wallet of the tenant at some point, whether it's short term or long term. We've seen the rate increases dramatically over the last few years during COVID.
And I will say, at least personally speaking here, and since I market across my portfolio, I haven't seen any rent stagnation. I have seen slower growth, but I'm tracking for about a 5% across the board increase on my portfolio this year. And that's on the ones that were at quote unquote, market rates. Obviously the ones that we were still turning and renovating and some of those are doubling in rent. But again, those were under market. So what are your thoughts on that? And I guess,
To summarize my question, what are your thoughts on the affordability crisis, especially in the Midwest, and where do you see that going? What's the answer to that in the next couple years?
Jay Balekar (36:45.434)
Yeah, that's a great question. So affordability crisis is very real. But the thing is that, you know, investors, I mean, we live in a capitalistic country and money is always going to chase returns, right? So unless the local policies are designed to help actually solve that problem, the financial policies, that problem is not gonna get solved. So if investors are actually investing in affordable housing but then they're getting penalized on taxes, they're getting penalized on rising costs and on top of that, there is rent control, why would investment dollars go in that direction? So to solve that problem, I think the local policy and government policy has a big role to play in that direction as well. That's just my personal opinion.
Of course, as local investors, we can do the best we can to help address that problem. But by the end of the day, it is a business and it is not a charity, right? So whether you talk about small investors or institutional money, they're all chasing returns, like you just said, right? So if we are trying to solve a problem, but then there's no returns, why would the dollars be allocated to solving that problem? So it has to be the solving of that problem has to be also made financially lucrative. And that's when the private investors will jump and solve that problem. And I think some municipalities, some counties have done a very good job at it and some haven't. And we clearly see, you know, where affordability crisis is growing and where it's not so much of an issue. You know, in the country, we can clearly see certain markets, the problem is way worse than others, right?
Joe Cornwell (38:38.699)
Yeah, and something I've heard, and I'd like to hear your thoughts on it, is...as America reaches into its 200th to 300th year of existence is is our late stage capitalist economy moving more towards a European model? You know, obviously Europe's economies have been relatively stable for, you know, a thousand years, let's say, as far as countries and things like that. I don't want to get into a history geography lesson, but, you know, it's, it's obviously got a lot more timeline of established economy. So with that in mind, do you think that the answer may be more of a European style where there's much more government subsidy for housing? Is that going to be the answer to the affordability crisis, both on home ownership and on renters? Is it something like you mentioned where local governments are going to have to step into, try to reduce cost for property owners that would then hopefully trickle down to tenants? I mean, where do you see...the answers coming in the next 5-10 years on an affordability standpoint.
Jay Balekar (39:55.766)
Yeah, that's a great question. My personal opinion, and again, you know, the opinions differ based on who you talk to, is not really handing out dollars to people directly, because those dollars often get misused, right? But for example, especially in the areas where affordability crisis is real, the rents typically are lower, right? So let's say if your rents in...
Workforce housing, for example, in our market of Cincinnati, is roughly about 800 to $900 for a two-bedroom apartment. Now, if there is a shortage of those apartments, and if a developer has to come and build affordable housing there, cost of construction is closer to $180 to $200,000 per unit, and it's not gonna make any financial sense for the developer to put more affordable housing unless they can actually put that somewhere else and charge $2,000 for rent. Only then it makes financial sense. So if you're actually rewarding the developer so that the cost of construction in these areas significantly goes down, and there are programs like that already, like the LIHTC program there, you're getting a lot of tax savings, basically no taxes for 15 to 30 years for building assets in these areas. So programs like that, I think, are better long term than actually handing out money and subsidies to the end consumer. Because a lot of times the end consumer is not financially savvy and they don't know what to do with the checks that they're getting from the government. As we saw in COVID, a lot of people just went and bought flat screen TVs. So I think how you use that money is really the question.
I see that European markets are also, many of the economies are not actually doing well. So I don't firmly believe in that model. I do think that incentivizing the entrepreneurs to actually and private investors to help solve that problem is probably the better route.
Joe Cornwell (42:10.707)
Yeah, that's an interesting take and yeah, that makes sense to me. I would love to see something like that happen, especially here in the Midwest where, you know, they can create a system that allows for affordable development of new housing, you know, single and multifamily, uh, because like you said, obviously one of my, one of my goals is to get into new development and it is very difficult to make the, uh, the numbers work, so it does create a bottleneck on creating the housing supply that we desperately need across the country, which would then hopefully create more affordability for the in tenant or in buyer. Awesome, man. That's been a ton of great info. Let's transition into the best ever lightning round. Are you ready?
Jay Balekar (42:52.95)
Yeah, sounds good. Let's do it.
Joe Cornwell (42:55.219)
Awesome. What is best ever book you read recently?
Jay Balekar (43:01.782)
My best-ever book remains Who Not How. It's just had a tremendous impact on me just because I've struggled with delegation in the past and that book helped me identify the core areas that I'm good at and focusing on those and using the team on the other areas.
Joe Cornwell (43:24.364)
Best ever way to get back.
Jay Balekar (43:27.458)
Best ever way to give back. I do think there is a lot of need in our society. So I do like to volunteer at local charities because although these social programs exist, there are people who always slip through the cracks. And there are a lot of people who have a dire need for no fault of theirs. Some people are in a bad position because of the poor decisions that they have made, but there are some people who really have the need. So I think the best thing to give back, in my opinion, is your time, because that's the most valuable resource you have. So if you can give your time back to local community, and especially focus on education, that's the best gift that you can give.
Joe Cornwell (44:14.607)
The deals that you've done in the last two years, give me one of your biggest mistakes you made and your lesson learned from it.
Jay Balekar (44:22.642)
Biggest mistake, I think the biggest mistake probably because we focus so much on heavy value add deals is probably overestimating on how quickly these renovations can be done, right? So there have been multiple instances where a large renovation project that we projected for eight months actually took 12 months and those holding costs do add up and also stabilization does not just include renovations, but it also includes lease up of that property. And lease up of a four-family versus putting people in a 20 unit going from a completely empty building. We definitely underestimated that. So that has been my biggest lesson learned. We actually ended up filling that property completely by ourselves because it was slowing down in terms of lease up. So that that's been a biggest lesson learned. Just make sure that you're projecting the whole time correctly for these deep value add deals.
Joe Cornwell (45:23.331)
Best ever advice.
Jay Balekar (45:28.054)
Best ever advice for me, I think I've, I come across so many people who want to get into real estate investing actively. So I would say that I actually have two advices. One is take action, but that's a common advice that everybody tells you, take action. You know, don't be just stuck in analysis paralysis. But I think especially in the time in the economy that we are in now, a lot of people think that real estate is a get rich quick scheme and it is absolutely not. And especially now more than ever, you gotta be extremely careful. So be careful who you listen to, which guru you choose, which books you read, because don't just look at those feel good YouTube videos about how in one year people quit their jobs and are now driving Lamborghinis. That does not happen, that's not sustainable. So you gotta put in the work. I think that would be my advice to people, especially people starting out.
Joe Cornwell (46:28.967)
and best way for the listeners to get in touch with you or learn more about you.
Jay Balekar (46:35.114)
Best way to reach out would be Facebook and LinkedIn. Our firm is called Compounding Capital Group. So compounding with an ING. So you can follow us there. And on both platforms, I'm personally also active. So if you drop me a message, I can definitely get back to you in about 48 hours. So Facebook more than any other platform, pretty active on that platform.
Joe Cornwell (47:01.695)
Awesome. And we will be sure to link to those in the show notes for anyone interested in getting in touch with Jay. Jay, thank you so much for joining us. I've actually spent two years since you've been on the show. Your journey has been amazing. I wish we had more time today to talk more details and hopefully we'll have you back soon and make this a more regular conversation, not wait another two years to talk. But again, I appreciate your time. I learned a lot. I hope our listeners learned a lot.
Viewers, if you did learn something today, please give us a five star review on the platform of your choice. Follow us on social media, follow us and subscribe on YouTube. And I hope you all have the best every day.
Jay Balekar (47:42.816)
Thanks for having me, Joe.