Lee Ripma is a broker and founder of VestMap, which helps investors analyze neighborhoods and demographics surrounding potential properties. In this episode, Lee discusses why she is focused on small multifamily investments — specifically fourplexes in Kansas City — how she finds deals, and why she believes people have such a massive impact on real estate projects.
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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 Lee Ripma. Lee is joining us from Overland Park, Kansas. She's a principal at Lutz Sales and Investments, a small multifamily brokerage in the Kansas City Market. She's also the founder of vestmap.com. Her current portfolio includes 53 units, all small multifamily, which they define as 2 to 72 units. Lee, Can you tell us a little bit more about your background and what you're currently focused on?
Lee Ripma: Yeah, absolutely. Thanks, Slocomb. So just a quick background on me - I grew up in the San Francisco Bay Area, and I started out in the sciences, so I worked professionally as a biologist for 13 years, and I have an undergraduate degree in ecology, and a master's degree in evolutionary biology. So back in 2016, I was living in San Diego, and I was working away at my W-2, helping clients comply with the Endangered Species Act. And I came home from work and I told my wife I could no longer work for other people, and I had to work for myself. So about six months later, I bought my first six doors in Kansas City, and I left my day job as a biologist in 2019, once I had built up a small portfolio in Kansas City> Then I started working full-time in real estate in LA, while I was still buying up rentals in Kansas City.
So I really liked what I was doing in LA, but when COVID hit, LA really shut down, and I decided to actually move to Kansas City. So I teamed up with my broker in Kansas City, so now by day I help other people invest in multifamily in Kansas City, and then I also have my own small real estate portfolio, and then I'm the founder of vestmap.com. So that's kind of my background.
Slocomb Reed: Lee, when you say that you help other people invest in KC, what is it you're helping them with? Are you transacting as their broker?
Lee Ripma: Yeah, absolutely. We're a small real estate brokerage; we really focus only on multifamily.
Slocomb Reed: How is it that you decided on the Kansas City Market back in - did you say 2013, you bought your first ones?
Lee Ripma: I bought my first ones actually in 2017. So at the time, I was living in San Diego, and I was looking "Where can I invest?" And there's a really big barrier to entry in the California market. And I was looking around in all these different ideas, and my business partner at the time was a Kansas City Chiefs fan, and I had come to Kansas City one time in college when I was 19, so I knew that Kansas City was cool. And I googled the top 10 cashflowing markets in the United States, and Kansas City was on that list, and I said "Alright, Kansas City. Let's do it." I flew to Kansas City, and I came home with the six doors under contract, a duplex and a fourplex. So that's what really kicked off my love of small multifamily.
Slocomb Reed: So a combination of affordability or lower cost of entry in Kansas City along with the cash flow. That makes a lot of sense. I hear a lot of really good things about the Kansas City market, and the growth that's happening there, too. So you spent some time earning your income in California in the Bay Area, and then in Los Angeles, investing in Kansas City, and then with all of what COVID was, and lockdown was, especially in Los Angeles, you found yourself moving to KC and focusing exclusively on real estate and real estate investing, and brokering deals, which makes a lot of sense, because you already had experience on the acquisitions side. VestMap.com is a location analysis tool?
Lee Ripma: Yes, exactly. So when I first started out investing, here I was googling "top 10 cash flowing markets", and I really didn't know what I was looking for in location. You can invest anywhere in the United States, but what's the difference between somewhere in Wisconsin or somewhere in Kansas City, or Maine? There's so many different locations you can invest in. So the idea with VestMap is that you can look at a location, and decide if you would invest in a location in about 30 seconds. So you vet locations first, and then, if you like the location, then you underwrite the deal; instead of underwriting the deal without understanding the location.
So really, what I'm looking for now is growing affordable markets in landlord-friendly states. So both Kansas and Missouri are very-landlord friendly; California is not landlord-friendly. So that's what VestMap is; it was something that I came up with. I had sort of a laborious way of doing it myself, based on my background in geospatial analysis, and when COVID hit -- COVID really changed my life. So when COVID hit, I was like "We can all be dead in six months. You should probably start that company that you've been wanting to start." So I built out a minimum viable product website, and just launched, and people really like it, and we have hundreds of clients now, and some really big names in real estate. A lot of hedge funds and developers use our product.
Slocomb Reed: The location-based analysis - how specific of a location does VestMap get into? If I give you a particular address, how localized is the data?
Lee Ripma: It's very granular. So you can search any address in the United States, and it will come back with what's called a "Discern report." So it'll give you demographics, income, crime, school ratings, expansion, which is population growth, and income growth, rent rates, and then neighborhood indicator stores, like Starbucks and Dollar General, and things like that. So it's very, very granular data; much more granular than the 1, 3, 5 that we're used to seeing in broker packets. So it goes down to the census block, which is the smallest census block that you can look at. So it's very, very granular data.
Slocomb Reed: And for those of us who are less in this industry of analysis than you are, how long are these Census Blocks?
Lee Ripma: They're actually done by population size. A census block has between 600 and 300 people, usually around about 2000. So a census block in New York City is going to be smaller than a census block is going to be in rural Kansas.
Slocomb Reed: That makes sense. What you're saying about -- what did you call it, the N in DISCERN?
Lee Ripma: Neighborhood, so it's neighborhood indicator stores. So some of the ones that we have are Starbucks, Panera, we have Walmart, Target, Home Depot... So these are national brands. And you can piggyback on the demographic research that they do before they build their stores, by looking at where they're located. So one of the things that you'll see in a DISCERN report is what is the nearest store. Is it a Starbucks? Is it a Home Depot? Is it a Dollar General?
Slocomb Reed: Lee, I'm an apartment operator with a similar portfolio to yours in Cincinnati, Ohio, and also a more residential real estate agent; I wouldn't say broker, but I've done a lot of commercial multifamily, as well as residential multifamily sales. That's one of the things I told my clients, was while you're trying to figure out the area you're in, look at the nearest stores, nearest restaurants - where are you going to get your coffee? Where do you go late at night when you're hungry? Because there's a big difference between, like you said, if Panera is the closest place, or Chipotle, or Wendy's, or Richie's Fast Food. So it makes a lot of sense.
Your 53-unit portfolio in the Kansas City area... Which of your properties is the largest by unit count?
Lee Ripma: My largest property is a 19-unit apartment, which is actually in Overland Park, Kansas. It's three-minute drive from my office.
Slocomb Reed: Nice. Do you self manage that?
Lee Ripma: I usually self manage while I'm renovating, and then I turn it over to a property manager. So I like to hand off a stabilized, occupied property to a property manager.
Slocomb Reed: I'm sure your property managers are very grateful for that. The conventional wisdom is that you start with smaller things, like a duplex and a fourplex, and then you scale into things like a 19 unit. is that the trajectory that your portfolio has taken? Have you started with the smaller stuff, and then made your way up as 19 units, your most recent acquisition?
Lee Ripma: Yes. I never owned single-family homes, but I started with a duplex and a fourplex. And yeah, then I bought fourplexes, and eight units... Then I had a 24 unit, and then I had a 19 unit. So I have gone bigger through time; however, I love fourplexes. So I will still buy a fourplex today, even though I own bigger apartments.
Slocomb Reed: You and I are in the same camp here. I love fourplexes as well. Why is it that you like them so much, though?
Lee Ripma: I think tenants really like living in small multifamily, especially townhome style fourplexes, I really like; you don't have anyone over your head. The expenses are very low for a landlord, because everything is sub-metered, and you just get families who want to stay in the fourplex for a long time, so you have really low vacancy, and then they come like a little community. So it's a very cooperative type feeling between the tenants, and they tend to be in more suburban locations... And so yeah, you kind of have families that stay a long time, your expenses are really low, and then if you do a nice finish in a good school district or a well rated school district, you can get pretty good rents on a fourplex. In Kansas City - I don't know if you have this in Cincinnati, but we have what we call the Stucker quad. So Larry Stucker built literally thousands of these things around Kansas City. It's a townhome style, three bedrooms, two bedrooms, two bedrooms, three bedrooms; so they're these big units, everything sub metered. They're built 1980s or later, so you have modern plumbing, modern electrical, and you can really just go in and scrape the popcorn ceilings and paint and flooring, and have a really, really nice product without having to worry about some of those big ticket CapEx items that you'll deal with in older buildings.
Slocomb Reed: That makes a lot of sense; if we had that inventory in Cincinnati too, I'm sure I'd own a few of those as well. Is your plan to continue to scale into larger properties with the same investing strategy you've currently used? Or are you planning to stay in that smaller multifamily space?
Lee Ripma: That's a good question. Because I'm so focused on brokerage, I actually don't do that much of my own investing. So a lot of times, I'll actually just invest with my clients passively, just because I don't have the time to go and turn these properties around. So I guess my ultimate goal is to get into the more passive stuff. So buying triple nets -- I guess that's kind of the dream, right? To just get into the really, really passive stuff. So buying up strip malls that are completely triple net, and - like, a ground lease would be like the most passive thing that you could own.
So I think instead of scaling with number of units, I actually want to scale with passivity. So I always use this metric that I call "Effort-adjusted returns." So something like a ground lease - your efforts are very, very low; and your returns might be low as well, but it's no effort. So I think once you force the equity on a lot of multifamily properties, then you can trade up into more passive investments.
Break: [00:14:23.24]
Slocomb Reed: I know a lot of investors who get to a number where "If I can have this much capital deployed, at this percentage of return, I know I can cover my lifestyle", passively or residually, depending on the lingo you want to use. Lee, given your personal emphasis on analysis, due diligence, and you're brokering in this small multifamily space for other people, as well as your own acquisitions in Kansas City - we're wrapping up Q1 of 2023; give us a summary of what's happening in the Kansas City market when it comes to small multifamily right now.
Lee Ripma: Great question. Obviously, interest rates are having a huge impact on real estate sales, and there's this disconnect that I'm sure you have a lot of people talking about, which is the sellers want yesterday's prices, and the buyers want tomorrow's deals... So there's this disconnect between buyers and sellers. And I think it is still a seller's market, because there's such low inventory. And yet, the buyers have just wanted it to be a buyers market for so long, that they're looking for that distress, they're looking for the deals, and if you ask me, that is not going to happen. We're not seeing lots and lots of distressed sellers.
I think that 2019 was kind of a once-in-a-lifetime event; that isn't going to happen again. So what we're seeing is this disconnect between buyers and sellers, and what we're trying to do is put together deals that work now. So if you can make a deal work in today's interest rate, then when rates do go down in the next five years, the deal is going to just be that much better.
So we're using some strategies to get lower interest rates, and one of the big things that we're using right now is a program called MOBUCK$. It's a deposit from the state of Missouri into a local bank; so a link deposit program. So the state of Missouri is putting in a CD into a bank at a very, very low rate, and then the bank is turning around and giving it to the investor at a very low rate. So we're closing deals between five and five and a quarter interest rates using MOBUCK$. And that really makes these deals work, and they still work for the buyers, and they still work for the sellers.
So what we saw a lot the later half of 2022 is there was a lot of listings, there was a lot of sellers who just pulled their deals off the market because of interest rates; they were unable to get the price that they wanted, and they had no distress. So their option was sell for the price, or pull it off the market. So in 2023, we're seeing people adjust to those interest rates, and we're finding ways to bridge the gap between buyers and sellers, and one of the ways we're doing that is finding interest rates that still make deals pencil for the buy side.
Slocomb Reed: Lee, that was very well explained from one transacting agent to another. That's definitely coming from the perspective of someone who's brokering deals. Lee, let me summarize what I'm hearing you say, because I think the experience in Cincinnati, Ohio is very similar, but also across the Midwest. Interest rate volatility - there are a lot of people who are predicting that this interest rate volatility is going to bring prices down. And nationally, that doesn't seem to be the case, and we're still seeing prices rise in Midwestern markets like yours and mine, because the primary factor in prices is still supply and demand. And what we're experiencing right now is that supply is incredibly low; there are very few sellers right now willing to disposition, and we still have a lot of capital and a lot of non-local capital trying to get into our markets, because they still cashflow, even at these higher interest rates; they don't cashflow as well as Kansas City deals did in 2020, and '21, but they still cashflow better than other parts of the country do, which is why we're getting so much non-local investor attention.
We're also talking about a space, especially with those four-families where we are not likely to see a lot of sellers experience the distress of an expiring interest rate in the twos and threes, because those [unintelligible 00:20:55.01] did you call them Stucker fourplexes?
Lee Ripma: Yes, Stucker quads.
Slocomb Reed: Those Stucker quads - we have brick bunkers in Cincinnati, but they're much older. We're talking 1940s to late '60s. So a lot of the mechanical issues that you were referencing, we do have with our quads, and we have thousands and thousands of them. Those Stucker quads are on 30-year fixed mortgages for the vast majority of owners, who are never going to need to refinance, if they already have their low interest rate locked in.
So it's an interesting time, all things considered, in the Midwest in small multifamily... Because with everything else going on, the supply and demand factors in the market still have prices going up, simply because there aren't enough things being sold for all the buyers to buy.
Lee Ripma: Absolutely. I couldn't agree more. You don't have distressed sellers, and you don't really have much inventory. So prices are not going to go down. Maybe they would on office building that's 50% occupied, where the loan is expiring, and it's just not worth what it was three years ago. But for small multifamily - yeah, you don't have these distressed sellers. And most people who are owners have their rates locked in for 5, 7, 10 years, so they're not in a position of having to sell.
Slocomb Reed: Last question before we transition the conversation... Lee, now that you are the boots on the ground in Kansas City, and you're buying small multifamily there, where is it that you're finding the deals you personally acquire?
Lee Ripma: Most of it, I think would boil down to networking. I'm sure you experienced this too, because you're a broker. And I always give my clients the first shot at deals. So that 19-unit that I bought, it was an off market deal...
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