How To Be Hands On In The Real Estate Market With Jeff Gopshtein X Zain Jaffer
In this episode, we break down the basic tips for being hands-on in the real estate market. From understanding your target audience to gathering information and getting listings, you'll learn the basics of becoming an active player in this exciting industry! Here are some great tips for how you can make money in the housing market.
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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How To Be Hands On In The Real Estate Market With Jeff Gopshtein X Zain Jaffer
Jeff, you've gone through quite a journey to break into real estate. You started by studying finance and going into corporate finance, wealth management and private equity. You went ahead and got your broker’s license, specializing in residential, joined a couple of funds of different sizes and scales and then started investing yourself. That's a lot of exposure and often people just go through one of these paths. What experience did you find in particular was the most helpful for your understanding? Did you learn more about buying with your money, during the internships or studying? What advice do you have for anyone that wants to break into real estate as a principal and investor?
I would answer this in two parts. The most help and understanding I had while working at these large funds and businesses was corporate structure operations. These are very important things once you start a business but the second part of this is that there is no substitution for getting your hands dirty. I firmly believe that. It's something I saw myself where I thought I was the smartest guy in the world because I worked alongside all of these large multifamily owners but when I started doing my deals, I was something as simple as, “I don't know what a toilet, sink or cabinetry in a kitchen costs.” It’s because my experience was limited to underwriting these deals, understanding the financials and seeing it from the capital market side and institutional side.
I almost skipped stepping stones 1, 2 and 3. I went straight to 100. It's very important to get your hands dirty and learn from your mistakes. I can't emphasize enough how good it felt to go into a Home Depot with my credit card and load up a shopping cart full of tiles, floors, backsplash and toilet and go through the labor cost of my general contractor. As much as real estate is a sophisticated capital business, it's still a very hands-on business that requires a lot of labor, input, physical work and material goods. Being a good investor developer requires you to have that perfect mix of understanding of capital, debt, return metrics and financing but also having a very good understanding of the cost of materials and labor.
What does turnover cost? When a tenant leaves, what do three buckets of paint cost to make the unit look nice again?" My advice to people is the sooner you can get started on your own in any capacity, it doesn't require money. You don't need to have money to be involved. If you can get your real estate license and sell a small house to somebody that they're going to renovate, rather than take a commission, ask them if you can put that money into the deal with them, partner with them and be involved every step of the way. You will learn almost ten times what it takes in this business by being there and being present than you would ever being behind a computer screen and dealing with investors and banks.
When I tried to break into real estate, I started as an LP, investing in different funds. The advice I got from one of the funds’ GPs was very interesting. It was like, “If you have the patience and you want to get into this, go buy a property and manage it yourself.” It's not until you get cooled up at 3:00 AM because the toilet's flooding and there's a pest control issue or the tenant hasn't paid their rent. The bank's calling you because you need to cut the mortgage. It's not until then you'll realize what goes on in running an actual property and the operations. You can create all the fancy spreadsheets you want in the world. You can come up with the best investor-facing IRR but the execution on the ground is what truly matters.
That stuck with me. I started buying single-family and multifamily. I start doing construction loans and investing in everything. I’m like you. I took a different path in real estate. Nothing beats when you've got your skin in the game. When you can't defer to someone else, the buck stops with you. Suddenly, you're overwhelmed like, “I don't know what color or material we should use for the siding on this building.” What are the pros and cons? Until you understand like you're at Home Depot loading up your shopping cart with toilets, you’d appreciate what this game is made out of.
No matter how smart you are, there is no substitution for getting your hands dirty.
The advice I would also give is to bottom-up and get your hands dirty, put some money into a project where you can be hands-on even if you get your real estate license and roll that commission into a deal. Get moving. Human beings are very logical. I'm not criticizing your path. You admitted to yourself that getting hands-on is better than following a structured plan. There's a lot of safety coming up with, “I'll go study real estate at MIT.” It’s a fantastic course. I've met a lot of people from there. “ I'll go get a job at a big GP. I'll buy multifamily, workforce or residential.” None of that matters until you're on the ground and doing the hard work yourself.
I agree with that advice. That would be my very opinionated way. It looks like I found an agreement with you here. Talk to me about getting your real estate license. That's something people think a lot about. Should I get a real estate license if I want to break into real estate? I've heard many things. One view is, “There's no point in trying to get a real estate license to save on the commission.” Frankly, sometimes people don't like dealing with you as a real estate broker. They prefer to work with you when you've got representation. Brokers should be independent and others say, “No. You can build your empire and cut that 6% or 3% down.” What are your thoughts or advice there?
A lot of your readers are very eager to read the question and the answer to, “Do I need my real estate license to be in real estate?” The answer is hard no. You do not get your real estate license to be successful in real estate. Some of the most successful people I know do not have a real estate license.
Also, I’ll add that they have a real estate license but they don't even use it.
It's sitting in escrow somewhere and they have no idea what its status is. Real estate licensure is an important component and stepping stone if that's a path that you've identified that you can take to break into the other side. The other side of this is people look at the celebrity real estate agents of the world, the Ryan Serhant, the Million Dollar Listing groups and say, “I don't want to touch toilets and deal with tenants but I love the concept of walking into a building and selling it.”
Get your real estate license at that point. Find a good broker who's going to hold your hand where you can learn, apprentice and intern under and become the best in your market. Some of the most successful investors I know in the Philly region-specific started as residential realtors out of Keller Williams, who then segue their way into dealing with small-time investors and duplexes and learn their way of how the investor thinks, works and looks at deals.
They were able to replicate that and say, “I've made enough commission selling this. I see what all my clients do. Let me get into this myself.” Getting your license is a good stepping stone. I don't think you need it to be successful in this game. I also think that by being in investment sales, you get into that network. There are two ways of breaking into the network. There's the way that I did it where I was working with all these institutional groups and by doing so, you begin to interact and network with a lot of these LP investors and brokers. Your network of real estate people grows that way. The second way is you don't get an institutional real estate job at a school. Maybe you're doing something you don't like and you want to get into this real estate game.
Get your license. Go under a brokerage that has an arm specializing in investment sales. Learn the business and how deals are underwritten. By default, without even knowing it, you will start getting in the same room as investors, investment brokers and property managers. You grow your network that way and see which side of the business you want to go to.
I will say that the real estate license does doors but by no means, is it a cheat code or a magic pill that you swallow that you end up being in a game? It's like a college degree. It's all about the person. You get your real estate license and you don't want to do anything else, you're going to be sitting on your couch with a real estate license. It's up to the person. You don't need it to be successful but it is a good stepping stone and a good way to open the door.
For you with a startup, it's very convenient to have that license because you're in the industry. In some ways, it puts you closer to it. You're a tech-enabled brokerage, ultimately. It makes a lot of sense but otherwise, to break into an investment, I agree. There are a couple of critical roles that you get in making it in multifamily investing. One side is raising money from people. The other side is hunting deals. A different side is operating, managing and development. All three are very different skillsets.
If you can nail down a niche in real estate and own that, you will ultimately be the most successful version of yourself. No one wants to be a Jack of all trades and master of none.
If you're not sure where you want to go, go see what you like. Some personalities are much better tailored to hunting, finding deals and calling people up versus the sophistication of creating investor-facing materials and working with institutional investors or even family office investors or high net worth individuals versus dealing with the minutia and detail of how to manage the asset itself, the refurbishments, management and collections of rents and everything. Do you think that's a fair comment? Is that a fair way to break down three big categories of where people can build skillsets? Would you add anything to that or agree with that?
I wholeheartedly agree. I would also add that if you can nail down a niche in this business that you like and own that, you will ultimately be the most successful version of yourself. You don't want to be a jack of all trades and master of none. If you look at the most successful people in real estate, if you put it on as an umbrella term, they have a very specific focus. This guy is the largest debt broker who specializes in single-tenant net leases in the Sunbelt. He is the go-to guy. That is his brand. This guy is the largest urban infill developer class A property owner. He sets the comps.
We have a group here in Philadelphia that goes into a market. The average per square foot rent is $350. These guys go and lease up their building at $5 a square foot because they have a product like no one else has seen. You think you're in a six-star hotel resort when you walk into their lobby. This is not something that people need to do early on. This is a by-product of being in this space, networking and seeing what you don't like. It took me five years of being in an institutional apartment owner group to understand that I don't like institutional real estate. I don't have the patience to hopefully become a partner when I'm 55 years old.
To me, I get more excitement and it gets me out of bed in the morning to know that somebody might send me a deal that costs $80,000. I'm going to have way more fun working on that than I would when I worked on an $80 million deal at my last company. You need to own the niche that you like and that will come as a result of seeing what you don't like.
In some ways, you start to gain exposure. Pick an area, become a specialist and crush it so big that your specialism turns into a generalism where you own the asset class entirely. There's a lot of danger in listening to other podcasts where people come on and glamorized multifamily investing and TT1 markets. As a listener, you can easily walk out feeling like, “I need to own lots of multifamily in California and Texas.”
That's the wrong way to go about it because you are competing with massive institutional investors who built their way to where they are blocked by block and dollar by dollar. You can't compete with that infrastructure, the vendor relationships they come with or the access to capital. The return profile is going to be a lot lower for them than it is for you because they have that track record that’s less risk.
“Focus on a niche.” I love that comment. There are no shortages of niches. Niches might be, “I buy in the ZIP code. I know this market inside out,” or it could be asset classes like strip malls. It could be car washes, certain types of hospitality assets or even something more emerging. That's where a lot of people trip up and screw up. They try to be too general too quickly. They don't develop any core competency or secret advantage.
One of the things that I respect is one of the groups I was working for that had that valuation approach where it’s like, “It doesn't matter what the market price is. This is where we're buyers.” They were an old business and they never veered outside of their core competency. By doing that, the chairman or the CEO could walk onto a deal for four seconds and without ever opening a spreadsheet, it can tell you if it's going to be a good deal or a bad deal. That's something that comes with owning your expertise. A lot of people can attest to this. If you buy single-family rentals that are in disrepair in 1 ZIP code, you can know off of 3 variables in a text message if you're going to spend any more time on this deal.
I'm a core believer in spending and allocating your time where you have the most return. If you have a core competency in one asset class and this is where you make money and you can do it with your eyes closed, yes, there is maybe some merit to going outside of your comfort zone and finding new types of deals. If you and I were buying single-family rentals, we know exactly what material costs are and our general contractor charges, why would we ever go and buy a carwash in Indianapolis? We don't know the cost of running it or the expense ratio. You are going to take away all this opportunity cost of searching for better deals in your area that you know because you would decide that you want to be a generalist.
I wholeheartedly agree with what you're saying. There's a time and place where you expand outside of your comfort zone but that's once you nail down what you own. It's almost like once you're “bored” of it. If you've done very well, you've done enough deals to know exactly what it is and you have the infrastructure in place to be able to afford to go dabble in something else, that's when you do it. My advice and this would be what I tested earlier is to own space and see what brings you enjoyment.
Something else that's important is don't go where the returns are. It doesn't matter that a cap rate on a motel in a sub-tertiary market is higher than a cap rate on a class A apartment building in a small town. At the end of the day, a lot of these things you take with a grain of salt. We could do a whole two-hour show on the fact that a lot of these deals are misrepresented anyway.
You need to go where you naturally know how to wrap your mind around. By doing so, you will do better than most of the people who are hunting for yield and where the highest return is going to be. At the end of the day, it's a very efficient market. Real estate in my mind is fairly priced unless it's very distressing. You need to be where you think you have a better understanding.
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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.
Important Links
- Jeff Gopshtein
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- Https://Apple.co/2Izoznu – The PropTech VC Podcast
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- Https://Bit.ly/2H7s6c0 – The PropTech VC Podcast
- https://Twitter.com/ZainJaffer
- https://ZainJaffer.com/
- Https://Zain-Ventures.com/
- Https://www.LinkedIn.com/in/ZainJaffer/
