Commercial Real Estate: A New Untapped Market
Many people often overlook commercial real estate. But it's a market that has the potential to make you a lot of money. But you have to know where to look. In this episode we will share some tips on how to find commercial properties and what pitfalls you should avoid when investing in them!
Yieldeasy is a digital marketplace and brokerage for everyday investors that use scalable technology to democratize real estate investing. They are disrupting the archaic process of small multifamily brokerage and bringing transparency to buyers and sellers.
Visit: https://www.yieldeasy.com/
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Commercial Real Estate: A New Untapped Market | Zain Jaffer & Jeff Gopshtein
We are here with Jeff Gophstein, the Founder and CEO of Yieldeasy, where we will be discussing multifamily apartments and PropTech startups. Jeff, tell us a bit about your background.
First of all, I appreciate you having me on. I’m super pumped to be with you. We will jump through a lot but we will go through my background. I'm from the Philadelphia area. I grew up here. I lived in the suburbs and migrated to the city for college. I went to Drexel University, where I majored in Finance and had a concentration in real estate. All of my internships, if you will, were always in private wealth management, private equity, and finance in general. That was the direction I was going in.
I was always interested in the stock market. I didn't have a grip as to where exactly I wanted to spend my time, focus, and energy. My family immigrated here from Eastern Europe in the late ‘80s. I was born here shortly thereafter. They had a very entrepreneurial hustle background and do what it takes attitude. I always knew at some point I wanted to do something for myself. I didn't know where I would break in and how I would do it.
Finance was the logical route. Drexel University had a great program. They are called co-op, which is an internship on steroids where you are pretty much working 9:00 to 5:00 Monday through Friday for an entire semester. It's a full-time job. I jumped around every year where one was at a large wealth management fund. They had about $8 billion in assets under management, where I was supporting the analysts, associates, and managing team.
Another one was I worked at Susquehanna Growth Equity, which is a very well-known private equity shop. I was finding my rhythm and my groove in there. Real estate pretty much came on my screen and radar very unnaturally. I have always had an affinity for homes, houses, architecture, and buildings. I didn't wrap my mind around the fact that you could build a business around it. When you look at a Ferrari, you are like, “Look at how nice that car is.” It was always like, “Look at how cool that building is.”
I learned at the age of eighteen that you could get a real estate salesperson's license and sell these things. I never sold anything in my life but I got a real estate license. It was shortly thereafter that I realized I can't stare at a Bloomberg Terminal screen all day long. I don't enjoy finance. It was an umbrella term for business, if you will. I did the whole sell-a-house-to-my-mom's-friends type of deal and showed a couple of units in Center City as rentals. I was picking up traction there and said, “This is fun and enjoyable because you are your own boss and on your own schedule.”
Traditional real estate brokerage and being a salesperson is very competitive. It's a very fierce market. A lot of the business goes to the guys who have a track record and a book of business. When I left Drexel and graduated in 2017, I was looking for a full-time job at that point. I had the license. I never thought about using it as a full-time role because I had the traditional thought process of getting into a big investment bank type of role where at some point, you will scale up, grow through the ranks, and then climb the ladder.
See how much value you get when you buy something most people don't want to touch, similar to Warren Buffett's whole methodology for buying undervalued stocks.
My first job accidentally happened to, by coincidence, be at a large development shop. They are a private equity urban infill group in Philly that does Class A apartments. I started there as an intern right out of college and had to learn everything from scratch. I threw out the whole residential real estate lens into the garbage can because it had no parallels to what I was doing. There, I learned everything from underwriting deals, raising equity from investors, how investor relations work, what it takes to get a $15 million loan, what full recourse means, and what it means to build 100 units in a suburb or go to a board meeting.
I fell in love with how much goes into it that you don't see and how many kinds of different hats you wear. That, to me, appealed given the entrepreneurial lens that I had where there isn't this mundane day-to-day pull-up-an-analysis-sheet-and-scope to this business. That attracted me to commercial real estate. My brain kicked on and said, “This is where we need to play. Now, you need to find what's most replicable and at some point be able to do it yourself.”
I spent about a year and a half at this company, working closely with the acquisitions team. We bought up half of a big chunk of a high-income suburb of Philly where they ended up building close to 300 luxury apartments. From there, I went to a large workforce housing owner. They have about 9,000 units under management. They are all throughout the Midwest and the Sunbelt. That was super interesting because that was a different side of real estate commercially where they weren't building anything. They were pretty much buying undervalued and distressed assets where they could inject value add that everyone likes to call it.
These are not class A apartments. These are workforce housing.
It's something where the traditional ownership is out of state. They are not staying on top of it. There's a lot of loss to lease. For the non-real estate folks, that means people are not keeping up with the market and losing rent and upside by not paying attention to their assets. This was a very shrewd owner who was providing a great experience to the tenants but, at the same time, creating value for shareholders. I saw this as a wow moment.
Naturally, I'm a lazy person, and I like to take a lot of shortcuts. I saw that on one side of this business, you have the development where from the moment you buy a piece of land to the time your tenant signs their first lease is almost a 2 to 3-year thing. Here, you go in, and at the closing table, you are buying 400 existing apartments with cashflow from day one. You have a business plan to hire and increase the value of this asset.
To me, that was very replicable, notwithstanding the fact that I had no money at the time. It’s a very capital-intensive business. My brain was thinking, “Is it possible to do it on a smaller scale? How can I break into this space, buy undervalued apartment buildings, whether they are small, and round up family and friends’ money and go through those hurdles?”
I spent two years there. I bought close to $20 million to $30 million worth of real estate with them. I hunkered down on underwriting, how these buildings are appraised with banks, and what the investor questions are. At the same time, I was learning the business but also seeing for myself what it takes to be in this game. I finally ended up at a very large institutional-backed owner-operator of a very similar asset class but they were hyper-local to the tristate PA Jersey Delaware area where I had more of a senior role.
I was running the acquisitions department. That, for me, was the first taste of entrepreneurial spirit where it was like, “Here's what we are targeting. Go find it.” It was a game of turning over rocks, underwriting five deals a day, hauling owners off-market, and interacting with brokers. One of the most interesting deals we did was a very large deal in Delaware that we bought out of special servicing. It was, people in the business like to call it, a deal with a lot of hair on it. This was a massive property that was super vacant that required so much work.
Seeing how much value you get when you buy something that a lot of people don't want to touch was what attracted me to the space. It’s similar to Warren Buffett's whole methodology for buying undervalued stocks. When you have something at baseline that's already worth something and you can buy it for pennies on the dollar because people think it's ugly, that's when you buy.
We ended up buying close to $100 million including renovation costs worth of the real estate. I had an associate and an analyst on our team. It was the time. We were gunning. The real estate market kept getting hotter. The principles of the company would not move. Something I respected was they never changed their window. It doesn’t matter how hot the market is. We are not paying over a certain price because that's going to eat into our returns. I'm very young, and as a young person, I'm sure a lot of people can attest to it.
You need that structure and discipline. It's very easy if you haven't lived through multiple cycles to come in and play the market game where everyone is overbidding and finding a way to make the deal pencil.
As there was downward pressure on cap rates and the cost of capital became lower, it became a game of financial engineering and who could underwrite the deal the most efficiently even if the assumptions in the deal were the most insane things you've ever seen. I'm sure you know very well yourself that some of these things that these brokers put out are almost laughable.
It became a very competitive game because you had a lot of guys who were proprietary dollar guys. It was their own money and partner-owned company competing against the syndicator groups who were doing crowdfunding or whatever it may be. They frankly don't have the best interest of their investors in mind. The business slowed down at that point when a lot of the silly capital came in. I figured that was a good time to look at the stars and say, “What do I want to be when I get older?” and take that leap of faith.
The fastest way to pass savings on to these owners is through tech enabling your platform.
I ended up jumping back into investment sales working with a buddy of mine who had a boutique brokerage here in Philly. We were selling middle-market-sized deals that were $10 million to $30 million. We did that fairly successfully. At this point in my story, we are gearing up toward COVID. It is right as things were starting to get a little weird. I was taking my commission dollars and buying sub-tertiary. The non-fancy way of saying that was I was buying distressed homes in the Philly area where a lot of people didn't want to buy them.
Was this single-family or multifamily?
I was buying single-family rental homes that needed the basic bathroom, kitchen, and floors. It was too small for the sub-institutional owner but it was too big for the guy who was doing the home flipping stuff. My whole thing was to go in, build a little brand around affordable luxury single-family rentals in up-and-coming parts of Philadelphia, and grow a little SFR portfolio. That was my first jump into entrepreneurial real estate.
I had a GC, a property manager, and a bunch of mortgage brokers that were running around trying to find me the best refinancing structures. We were going at it. My head was going in this direction of building a small portfolio and organically scaling up, bringing on friends and family investors where we can find bigger assets. As we grow, we build that same model similar to the places where I've worked at.
I was in one of my homes. When I decided I don't want to make the jump into small multi because there's more efficiency and it’s better for tax repercussions, it was almost as if I was speaking a different language with the realtors and brokers I was working with. Anything outside the realm of a single-family rental became, “There is the component of a rent-roll. There is the component of a different way of underwriting these deals. Everything is under one roof. One unit is a month-to-month lease.” A lot of the audience here will understand what I'm talking about. It's very different from SFR to small multi.
My cofounder and I saw how fragmented the space was. We've always talked about this how there is no efficient way to transact in this small multi-space, and it's for a variety of reasons. The first is you have brokers in the space who, given the barriers of entry to getting a real estate salesperson's license, is passing a test and networking your way in. The same time and effort it takes to sell a 7-unit building, 8-unit building or 9-unit building is the exact same effort, time, and stress it takes for a 30-unit building. Any reasonable, logical human being is going to spend their time where there's the largest reward.
A lot of these deals were going to these institutional brokerage houses like JLL, Marcus & Millichap, CBREs of the world, and some of the boutique names in Philadelphia as well. These deals were “the crumbs that were left over that nobody wanted to touch.” It was too big for the residential realtor and too small for the institutional guys. You had this emergence of this new player in this space that's known as “resimercial brokerages,” which is a fancy way of saying a residential realtor who takes on an investment property with no real understanding, background, and track record of selling these things.
We started digging into the numbers, and some of the things we saw were very staggering. I'm not going to bore your audience with numbers here but we dug up the fact that over 53% of multifamily in the United States are small multifamily. That's anything smaller than a $5 million deal or from 2 to 15 units. It was the largest segment in multi, yet it was the most underserved due to the fact that there was no efficiency in brokerage in this space.
A lot of the owners in that segment also were used to paying 5% or 6%. When you tell a mom-and-pop investor who wants to sell their turnkey rental property that's fairly straightforward to understand that they need to pay 6% of their price to sell it, these people are going to find an alternative route. People will start selling principal to principal and owner to owner, and that takes a lot of opportunity off the table for investors who are willing to buy these things. They also short themselves because their market is one person. It's the guy down the street that's going to buy it.
Segueing into what we are building, our initial plan was, “Let's build a brokerage that specializes in small multifamily that brings that institutional sophistication and quality that people are used to.” These guys that were selling their $30 million deals sometimes were paying 0.75% or 75 basis points of 1%. My thought process was, “Why do mom-and-pop investors not have the same efficiency? Why should they pay a larger ratio of the price when it's a more straightforward deal anyway?”
We were going to build a discount brokerage model where we were going to be the best in what we did and build a brand around small multi. We realized that the fastest way to pass savings on to these owners is through tech-enabling your platform. When you look at the traditional brokerage model, you have a broker of record, a large office or presence, and you have a lot of agents running around finding these deals. Every agent has overhead because they have insurance. They have everything that costs to keep a brokerage running. That's a lot of the reason that these fees end up accruing and getting passed on to the sellers.
Our thought process was if we make this a tech-enabled platform where we don't need people, it's still a very people-focused business but make it more efficient through the use of the internet and eliminate a lot of the overhead associated with a brokerage, we can run a profitable business while still passing on savings to owners and bringing efficiency into this market.
What we are as Yieldeasy is we are an end-to-end platform and brokerage marketplace that specializes in small multifamily that gives investors and sellers the tools needed to transact seamlessly. We have a lot of channel partners, such as a lender that is going to be a tech-enabled capital market platform where you are buying the property on our site. You are submitting everything. You need to get financing. You're getting a term sheet in 24 hours. You are getting funded in a week. We are plugging you in directly with property managers in the areas we are aggregating these deals.
We have a title component that's all in-house that's going to allow you to see what's going on with the title search close with us. By bringing it all in-house, making it simpler for the buyer, and making it more cost-effective for the investor and for us in our company, we aggregate all these things under one roof. We own a piece of every single component of a typical multifamily transaction.
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How to Build a Client Base for Your Enterprise in PropTech & Real Estate https://www.youtube.com/watch?v=1ryTePn9vww&feature=youtu.be
Strategic Techniques in Solving Business Problems https://youtu.be/62wfS6yKp7g
Fundamental Facts About Zoning Data in Real Estate https://youtu.be/qvxUtET0zKg
About Zain Jaffer:
Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle, after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780m.
His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as “Forbes 30 Under 30”, “Inc. Magazine’s 35 Under 35,” and the “SF Business Times Tech & Innovation Award.” He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.
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