The Money Fast Track: How to Build a Real Estate Investment Company

Hey, welcome to another episode of Making Billions, I'm your host, Ryan Miller and today I have my dear friend Elaine Stageberg.

Elaine is the owner of Black Swan Real Estate where she manages a portfolio of get this $300 million in assets under management. Black Swan has delivered exceptional returns to hundreds of passive investors through their unique investor focused private equity funds.

So what this means is that investors in Elaine's funds enjoy no sponsor fees whatsoever, leading to a reported 100% return of capital to investors before any splits.xFIaijmY0pxL7j0J4hTm

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[THE GUEST]: Elaine is the owner of Black Swan Real Estate where she manages a portfolio of get this $300 million in assets under management. Black Swan has delivered exceptional returns to hundreds of passive investors through their unique investor focused private equity funds.

[THE HOST]: Ryan is a Venture Capital & Angel investor in technology and energy. 

Transcript

Ryan Miller  

My name is Ryan Miller and for the past 15 years have helped hundreds of people to raise millions of dollars for their funds, and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, this show will give you the answers, so that you too can enjoy your pursuit of Making Billions. Let's get into it. 

Ryan Miller  

Did I just make a mistake by building a career in venture capital? I didn't think so until I just listened to my next guest who left her career in psychiatry to go on and amass a cash flowing real estate portfolio north of $300 million. Join us as she walks you through her competitive advantages so that you too can enjoy your pursuit of Making Billions. Here we go. 

Ryan Miller  

Hey, welcome to another episode of Making Billions. I'm your host, Ryan Miller and today I have my dear friend Elaine Stageberg. Elaine is the owner of Black Swan Real Estate where she manages a portfolio of get this $300 million in assets under management. Black Swan has delivered exceptional returns to hundreds of passive investors through their unique investor focused private equity funds. So what this means is that investors in Elaine's funds, enjoy no sponsor fees whatsoever, leading to a reported 100% return of capital to investors before any splits. So Elaine, welcome to the show.

Elaine Stageberg  

Thank you so much for having me, excited to be here, huge fan of the show. I've had a great time connecting with you and excited for our conversation today, it's gonna be really good. 

Ryan Miller  

Yeah, folks, you're gonna want to stay in here to the end, where Elaine really opens up on a lot of her tasty tips, but before we get into all of that, let's jump right into it, hidden between the eyes. You're in real estate, you do a lot of things and you've built a level of management assets under management that a lot of emerging fund managers that listen to the show aspire to get. So I was a beginner at one point, you were a beginner at one point, what advice would you give to people who are starting out to build their portfolio in real estate or early any portfolio but will stick to real estate? What advice would you give them to A how to win and B how not to screw it up in the yet? What would you say? 

Elaine Stageberg  

Yeah, such good questions and you're absolutely right. Like not only did we all start somewhere, but we're all a beginner every single day, right? Hopefully we're all growing, we're all moving into the unknown and we never lose that beginner's mindset and the enjoyment and the excitement that comes from growth. Well, I think all the way back to you know, when I first started, my husband and I have always invested together. We run Black Swan Real Estate together today and our business model has always stayed the same. We've always done a BRRRR business model, we've never sold a single asset. And we just grew and grew and grew based on that premise, having helped many, many investors through the process of starting their real estate investment journey. Kind of a hiccup that I'll see that people will get sort of psychologically stuck is when they're deciding do they want to do active real estate, or do they want to do passive real estate? And the number one thing I would say to that is that is not an identity decision. And I think people like really get wrapped it up a bit of like, okay, well which path am I going down, because once I'm once I've gone down that path, I'm kind of stuck down that path. And the way I encourage people to think about it is for this dollar in this moment for this dollar in this moment, do you want to do active investing, or passive investing, because things change. Maybe you just closed a bunch of active deals and you have some extra cash laying around and you want to put it passive so that you can focus your efforts on your active deals.  Maybe you just had a baby or a career change or something going on and you want to put money into the hands of a passive deal so that you can leverage their expertise. 

Elaine Stageberg  

Regardless of which path, active or passive, remembering the real estate is very much a team sport. I was so lucky in the beginning, I always had my husband as our teammate, but always building that team. You know, if it's an active team, you need things like an investor specific agent, not just any old real estate agent, but an investor specific agent who can help you with numbers with rent comps, maybe even help with renovation guidelines, those sorts of things. Property Management is huge. We always chose to self manage, and then we eventually vertically integrated a property management company. I really think that property management is the most important thing and that's true for either active or passive who is going to manage either the deal that you own yourself, or what is the property management that's in place for a passive deal. Bookkeepers, contractors, subs, you need all of that for your active team and then you create a similar team if you would like to do passive investing. You're working with either operators or sponsors, figuring out who they are, what their track record is, what is their investment philosophy, do their goals align with you? And then even in that specific deal, some deals are really cashflow heavy, others are maybe more, you know, equity growth heavy. So not only just knowing that operator or sponsor as a whole, but understanding the specific deal that they have available that doesn't align with your goals. Real estate is, you know, they're such big decisions that the people you surround yourself with is a huge part of success. Again, all the way through, you know, not just in the beginning, but we're always beginning, we're always growing to just really, you know, focusing on that.  

Elaine Stageberg  

A thing that I highly recommend is buying for cash flow, I think of cash flow a little bit differently than I think typical investors do. I don't think of cash flow as the ticket to financial freedom, I came from a career in medicine that came from a career in tech, we were replacing large six figure incomes. So even at say, you know, $500- $600 a door, you need a lot of doors to replace that level of income. So I think of cash flow as a defensive metric, that after real accounting of all of your expenses, all of your management, all of your capex, all of your reserve vacancy, all of the expenses, you still have cash flow, so that you never have hungry alligators that are in your portfolio that can take you down. And then I really think of real estate as a wealth driver from not only cash flow, but debt paid down, forced appreciation for renovations, market appreciation, and then holding those assets a long time. 

Elaine Stageberg  

And then of course, I have to talk about a cash-out refi strategy, that's the strategy we've had all the way back our very first property that we bought, I kid you not, was $35,000, it had been vacant for nine years. Yes, like all of the horror stories that you're probably thinking in your mind about those two pieces of data like they were all true. Looking back now I'm like, I'm not even sure what we were buying here. But we fixed it up, we did a cash-out refi, we got all of our capital back in about four months. Placed a lovely family into it, we still own that property today. The number one thing that I think of for deal flow is, can I acquire this property and improve the value either through physical renovations, that's more on the single family home side, or management improvements, that's more on the large multifamily side, because they're valued based on net operating income, and get all of my capital back in the shortest time period, so that I can own that property indefinitely, with no cash and continue to benefit from all of those wild drivers for years and years to come. Not only is it great because it allows someone to scale their portfolio, but it's obviously very safe because once you have all of your capital out, then you're in an incredibly protected position. 

Ryan Miller  

Yeah, brilliant. If you can't tell, this is a master class. So not only have you mastered medicine and psychiatry, but now you've gotten into master real estate. So you are definitely a superhero on this show, so... 

Elaine Stageberg  

Oh , thank you.

Ryan Miller  

Oh ya, you're incredible. 

Elaine Stageberg  

Learning as I go every single day. 

Ryan Miller  

Ya, brothers and sisters on the path some of us are ahead, some of us are behind, but we're all on the same path and this show is about bringing people together and bonding those relationships, and really sharing that knowledge. And democratizing a lot of that in private and alternative investment spaces so that we all can represent our individual funds that win in our industry. So that being said, how do people not lose? In the beginning you can get some great points on the board or not, so you can buy 35,000 and struggle through it on that house. But what about some of the rookie mistakes? I know I've made my fair share that's happened. Maybe you can unpack some of those hard lessons you've learned and help some of those beginners to avoid some of that, what would you say? 

Elaine Stageberg  

I would say the thing I've seen the most over the last several years, like let's say pre 2023, because the market obviously really shifted in 2023 with interest rates. But say from like 2017-2018 to 2023, as there was exuberance in the market, is I saw that the folks who were buying for ego, tended to not have as good of outcomes, as folks who are buying just like plain Jane, trueblue real estate. So what I mean by that is like ultra luxury class A units without experience in that if someone has a big portfolio, has a lot of experience, has the management piece in place has access to the capital, great, by all means go after class A. But doing that in the beginning, I think can be a bit of a mis, a misstep, because typically the higher the class, the fewer the headaches but that also in general, the lower the return buying say like huge beachfront properties that never could serve as actual housing. They're basically like quasi hotels, instead of just, you know, little three and four bedroom homes and typical neighborhoods throughout America. I'm a huge, huge, huge believer in Class B real estate, the extreme majority of our portfolio is Class B. We have some that I would say are like A- and then we really try to buy really distressed properties in Class B neighborhoods. So when we acquire them, they're very much class C, we've had a few that are even Class D, which I categorize that as if there's like real crime, that's Class D. But we do these huge turnaround projects and not only are we benefiting from the effort that we put into the renovations, but from the neighborhood as a whole at any infrastructure and changes and new schools and new parks that are happening in those neighborhoods as a whole and that rising tide lifts all boats. 

Elaine Stageberg  

So I just encourage people to, you know, think of real estate as somewhat boring. It's just a place where people live, they want a safe, clean place. They want to be able to lease it easily, have good marketing, good contacts with a leasing agent, have good maintenance on a timely schedule and that's it. And I find that the simpler someone keeps their real estate portfolio, the better their outcomes and I find that the more experienced someone is, the more comfortable they are with the fact that their portfolio is pretty bland. In the beginning it's like oh, I want a boutique hotel and a beachfront property and brand new class A unit's and then the real experience operators are like, yeah, I just want Class B housing that any person or family would be very happy to live in, close to transportation and close to jobs close to schools, kind of similar to that is something that I've seen over the last several years. 

Elaine Stageberg  

I'm a huge fan of Dr. Benjamin Hardy, I'm a psychiatrist, he's a psychologist, right, we have a kinship there, I love his work. I've been in Dan Sullivan's Strategic Coach program for about three years, Ben Hardy trained with Dan Sullivan. I love his concept of who not how, I think people have taken it a little too far. I don't know if it's the midwesterner in me or what, but I really think that someone should try to build a core competency in themselves, before they bring it before they bring in team members where they outsource it or they delegate it. That doesn't mean that someone needs to be, say, a CPA, but it does mean that they do need to know how to really read a P&L balance sheet, a statement of cash flows. Understand, you know, basic calculations that the bank is going to make, and then bring in that team or bring in that team and have that team teach that person. I think there's been a bit of too much of a push toward, I'll just hire a team for everything and I'll just delegate and outsource everything and remembering that as a leader, you have to bring something to the table. So you have to bring the ability to quarterback that team and that, like think about all the great coaches say in football, like they're not on the field, but they know how to be and that's how they're able to lead their teams. So just encouraging people that it's totally okay to do hard work, it's totally okay to roll up your sleeves in the beginning, way back in the beginning. That was Nick and I literally painting, laying tile floors, hanging light fixtures, anything we could do that didn't require a permit, you know, we would have to vend that out. And then today, it's trying to make sure we have some basic expertise in all of the different domains in our company and then of course, having experts, but at least being able to speak to them intelligently and being able to lead them. 

Elaine Stageberg  

Another thing I would say that's you know, top of mind right now in early 2024, is avoid variable rate loans. Variable rate loans, gotten a lot of people in trouble over the last several years, good operators with good heads on their shoulders that just got swept into the euphoria of the really low interest rate debt that was available through COVID. Remember that there are always patterns, right, you can look at the historical interest rates going back 50 years, what goes down goes up, and what goes up does go down. So I think we will have reprieve here in the next couple of years, but fixed rate debt saves the day. Fixed rate debt allows you to sleep well at night. I love fixed rate debt that has as low of a prepayment penalty as possible, so that as you increase the equity and or interest rates do go down, you have the ability to refi. Just yesterday, I signed like 8 million of five year fixed rate debt with no prepayment penalty, so that as interest rates come down, say over the next year or so we're able to refi that into a lower interest rate, and have really good relationships with your bankers.

Elaine Stageberg  

I think there's a lot of emphasis in real estate on the deal, how many units? Where is it? What's the renovation plan, what's the per unit cost, what's the total purchase price, all of those things, and maybe not as much emphasis on the debt, the debt isn't as fun to talk about. It's, it's just it's not as sexy, it's fun to talk about, I'm buying a 200 unit building and this is the huge plan we're going to do and this is what its gonna look like afterwards and this is how much I'm going to increase the NOI, that's a little more boring. I really think of it as the deal plus the debt together is the magic and I do think that as an industry, we've moved that way in the last couple of years, as people have seen that variable rate debt has been so damaging to so many otherwise good deals. But just remember that even when lending is easy, which it will be again in the future, right, everything is cyclical. Never forget to spend an equal amount of time on your deal, as you do on the debt so that you can have both pieces of that magical puzzle.

Ryan Miller  

I often think Elaine about is, when thinking of who not how, I've seen that and there are some poor roll ups or rollouts of good information and so one of those areas, folks, Elaine is saying is you got to get the right people in the door and in the right seats. I always think about it as a skill that's wrapped in a person and so those two things that you need is the skill. So that's where you start saying what skill do I need or outcome do I need and then wrap that with a person to say and what kind of temperament and things you know, maybe it's person with horrible dad jokes like me, or whatever it might be is to say what, how does that persona really work. So starts with the skill set, wrapped with that person and personalities and all kinds of things. It really helps to guide that if that's helpful for any of you listening and the other thing that you mentioned is fixed versus variable. 

Ryan Miller  

Now I'm a recovering CFO, so I'm still, I still have a few bad habits, but one of those might be, you look at volatile activity in your business and part of great financial management, you're just getting my opinion, part of great financial management is you have to smooth out income and expenses. And so you really as a responsible CFO, we'll assume that one of my jobs if I'm running the ship, at least the financial aspects of it is, I have to figure out how to smooth out revenue and expenses. And so one of the great advanced tips that Elaine is providing is some of those things that if you had a CFO and you're paying 4 or 500,000 a year to help you out, one of the things you're going to do is exactly what Elaine's telling you, for free, so you don't have to spend $400,000 on CFO and a crazy person with with horrible dad jokes, you could just pull this off right now. So think about how you smooth revenue and your expenses and one of those big ones, especially in real estate, is your debt payment. You do not want to be surprised on such a huge thing, especially on foundational items like your capital stack. Would you agree?

Elaine Stageberg  

Absolutely, absolutely and try to anticipate changes, particularly around time of transaction, contact the local county and see how they anticipate the property taxes might change, be in constant communication with your insurance agent, even if you're not filing any claims and even if you're not, in a disaster prone area rates are just always changing because of the huge fluctuations that are happening in the property insurance market. So be in communication with your insurance, just be in communication with the places on your P&L that are your largest expenses, exactly like you said, so that you can smooth them. Or if it's somewhat out of your control, like say property taxes, you at least can anticipate it and can start to build reserves around that and be thinking about how that impacts the business plan.

Ryan Miller  

Brilliant. I love that. So I'd love to just transition, so you beginners, he just got a huge earful of solid advice from Elaine. Let's talk about the market, so what are you seeing out there and then maybe we can move into where do you think everything's going? What are you seeing out there?

Elaine Stageberg  

Yeah, so it's early 2024 right now, and I would say I have seen things in my market, I'm principally in Rochester, Minnesota and Tacoma, Washington, I'm sure we'll talk about those markets as we go along in our time here together. But what I have seen in those two markets is things have really shifted just in the last say 10 to 12 weeks, 2023 was a challenging year in our markets. We closed four deals, we closed two in Tacoma, two in Washington, but we had gotten them under contract in 2022. We didn't get anything under contract in 2023. We had tons of conversations with brokers, bankers, sellers, and buyers and sellers were just on completely different planets because of interest rates. Sellers did not want to acknowledge that interest rates had radically changed in the year or so before that, and they're like, Well, my neighbor sold for 25 million, so I want 27. And we're like well, your neighbor sold for 25 million when interest rates were 3%, like, I'd love to give you 27 if you could find me, you know 3% interest rate debt like and I think sellers are seeing now that all of the buyers are saying the same thing. It's true that interest rates have gone up, even though they didn't want to admit that and then there's also just I think pent up investor demand. I think a lot of investors kind of sat on the sidelines through 2023. Even if they wanted to get into deals, there was just so little deal flow in the market and now as inflation is stabilizing as the Fed is signaling that they're very likely to have interest rate cuts this year, as sellers are kind of becoming aware that yes, in fact, the landscape has changed in the last year to year and a half, there's just a little more sense in the market.

Ryan Miller  

Thank you for watching, if you've made it this far, we must be friends. So don't forget to like subscribe and click that notification button. Now, let's get back to the show.

Elaine Stageberg  

And of course, we have to mention that there are distressed deals, so two of the deals that we have in our pipeline are from great operators that have been in business for a long time. But in order to refinance their debt, they would need to bring a significant amount of capital and they're just not able to do that. So they need to sell so that they can at least try to preserve, you know, whatever investor equity they already have in the deal and it's just because interest rates have gone up so much. 

Elaine Stageberg  

So I think 2023, in my opinion, was a kind of a quiet year for a lot of people. We focused really heavily on our vertical integration that year, we do our own property management, we had already started doing our own maintenance. Last year, we brought in our own facilities, which is like cleaning unit turnovers, our own landscaping, lawns, no, really saying, hey, if we can't acquire new deals, how can we most optimize the deals that we already have? But now in just Q, you know, we're on like the last couple of days of Q1 of 2024, we have four deals under contracts that will be closing here in the next 30 to 45 days two more that we're in very, very serious conversations, I suspect we'll get one or both. So I think 2024 is gonna be a good year. I don't think it will be like 2020 to 2022 when it was just make hay while the sun shines, I guess. But I think it will be more similar to those years than, than to 2023, there's very low inventory, right now we do both single family homes and large multifamily. 

Elaine Stageberg  

Those markets are very similar, but they're different and I have found that over the 14 years that we've been doing this, they've become more different in the last several years, because the debt on them is so different, right? Your typical single family home owner has a 30 year fixed rate debt. Your typical large multifamily community owner has three, five, maybe seven year either fixed or variable rate debt. So those markets are diverging, but the thing that unites them is that there's very low inventory, right our country is in like a game of musical chairs and there's just not enough chairs. And so you can think about when you were a kid and you know when there's one more chair, you're playing along, you're kind of laughing and joking with your friends when there's the exact number of chairs as there is kiddos you're getting a little aggressive. But when there's one fewer chair, you're not talking to your friends, you're not joking around, you are going for a chair. Well, that's what it's like for people looking for housing in the United States, which is good for those of us that own real estate, right, because it rises asset values, it rises rental rates. It's not necessarily good for the general population, because it makes housing less affordable in terms of deal flow, it absolutely slows things down. As a country, we need to build our way out of that problem and that's going to take, you know, years, that's not a month long thing, with interest rates permitting, building code changes that have happened over the last several years labor force changes that have happened, it's gonna take years for us to build ourselves out of that problem. But if you already own real estate, it's great, because your asset value is protected. 

Elaine Stageberg  

One of the things that we did differently in 2022, and 2023, that we have never done before, is we have always been, our main business plan has always been cash out refi, all the way back to that very first deal. We've never sold anything, we've always harvested our equity as quickly as possible, capitalize assets, we've done subsequent cash out refi is on the older parts of our portfolio. So we had to ask ourselves in 2022-2023, how do we continue this business plan, despite the fact that interest rates have gone up so much? All of our debt is with local regional banks, so we have great relationships with all of our bankers, and they all know that that's our plan, it's never a surprise to them, we tell them before we ever close the first time around, we want to close this loan. And then we want to come back as quickly as possible and get a new loan from you after we've completed the renovations and so we said, hey, how do we do that? Now that, you know, hey, we have a three and a half percent mortgage on this building. Interest rates are now 6%, but we've put in all this capital into renovations, we've improved management, how do we unlock our equity? There's no way we want to give up that three and a half percent debt but we also don't just want to let this equity set and we don't want to sell, we've never sold anything. 

Elaine Stageberg  

So what we found is that banks were pretty eager to do a second mortgage. So it's a second lien, which typically banks don't like because it's a less favorable position, but if the same bank has the first lien and the second lien, well, then the relative weakness of the second lien is somewhat removed, because they also have the first lien. And they were eager to do that, because they understood our business plan, they saw the physical renovations, they saw the pre and post rent roll and it's also important to note that most loan officers are compensated based on commission. So they felt the crunch and 2022-2023, just the same way, you know, we all did in real estate, and they wanted to lend, they wanted to lend to good solid borrowers with good solid projects. So all of the projects that we had that were on scheduled to have a cash out refi in 2022, or 2023, we were able to keep them right on that same timeline, we just had to come up with a creative solution that we had never done before. 

Elaine Stageberg  

We had always just done a traditional cash out refi, you know, getting a brand new mortgage and I think the lesson there is strategy doesn't have to change, if you don't want it to. Of course you should always be open to the idea that as you change, as your investors change as the market changes, should you pivot your strategy? For us, we looked at that and we're like, no, we don't want to, we love creating these golden geese, we don't want to sell anything. So how do we change our tactics so that we can still accomplish the same strategy and just being open to being very nimble learning? You know, kind of like I said, at the beginning, like always having that beginner's mindset of, well, how would I do this if it was the first time I was doing it? Or, who do I know that's done this before that I can call and ask? Or what's a creative solution I can come up with that maybe I hadn't ever thought of before and just being curious about how you can constantly improve your portfolio. 

Ryan Miller  

Holy smokes, so that is incredible. So where, now based on all that, where do you see the market going? So getting a second mortgage is a great way because pricing is a little funny, given the effects of interest rates. So obviously the, especially when you're messing with the market, so I call it messing with markets. But regardless, we got some volatility or some changes. So based on those changes, you're going to have second third order effects, and those are going to trickle forward. So based on that, where do you see the market, your particular market, where do you see it heading in the future? Where are the opportunities? 

Elaine Stageberg  

So, I think the market as a whole, the two stories that will unfold in 2024 are, well really three stories, but there's a subplot to the first story, what's happening with debt? So for people who have variable rate debt where they've, you know, run out of cash flow or their loan is coming do well, they have a workout with a bank, right? The Fed has signaled to local and regional banks to do workouts, extend notes, do other things, because the Fed does not want to see a collapse in housing, which I don't think will happen, I don't think anyone is thinking that will happen. But we as a country learned from 2008, banks don't want to own real estate, they want to have good operators owning real estate. So will there be extensions on that debt workouts, IO periods, other things. 

Elaine Stageberg  

For people who don't have local or regional debt, say they borrowed from a debt fund or other more sophisticated lending options, will they need to sell? Will they be able to at least return investor equity, you know, for when they closed on that deal several years ago? Will there be investor equity loss, you know, all of that is you know, will, will play itself out in 2024. And I think, you know, deals will be very specific, based on the operator, how many capital reserves they had, did they do a capital call? What type of lending did they have? What options are they able to come up with their lender? How quickly does the Fed lower rates? Right, they've held steady for the last several meetings. What are they going to do in July? Typically, if you look at election years, interest rates do come down. So it's likely that interest rates will come down this year, how much you know that that all remains to be seen. 

Elaine Stageberg  

And then real estate is very hyper local, right, so some areas of the country are still seeing rental rate increases are still seeing asset value increases, despite the headwinds in the market, and others are seeing, you know, decrease in asset value, decrease in rents, increase in vacancy, increase in rental concessions. I think a lot of that is about local supply and demand, so the areas where there has been a lot of development over the last several years, say like Phoenix is a great example. It's bad for real estate investors, when there's new development, it's great for the general population, right, because it provides more housing to the market. So there's more competition, lower rents, more concessions, those sorts of things. 

Elaine Stageberg  

A big part of the reason we're in Rochester, Minnesota, is its home of the Mayo Clinic, and the Mayo Clinic has created what's called the Destination Medical Center, which is the largest ever private public partnership in the state of Minnesota and the largest per capita spend in the whole country. And then they also announced a $5 billion hospital expansion, where towns only 150,000 people, so a $5 billion infrastructure project in a town of that size is huge. So think about your local area, you can know your local area better than anyone else better than what someone can find on Google or the Census Bureau or Niche or any of those websites. Where are the schools going in? Where are the roads going in? Where are the parks going and what are the neighborhoods that are transitioning and focus on that and if you stay hyperlocal, and you get good debt, and you focus on supply and demand, and what unique advantage you can have, 2024 can be a really good year for a lot of people. 

Ryan Miller  

Brilliant, you know, you and I've been talking a little bit about how single family, multifamily work together, they move together and that is a traditional trend, but we're seeing a divergence of that trend. Maybe you can walk me through a little bit about what you just taught me. 

Elaine Stageberg  

Yeah, so despite the size of our firm, some people are surprised to hear that we still do single family, we started in single family, we love single family, about a third of our portfolio is single family. I love them, because I think of them as like little piggy banks. And you can buy them, do a renovation and like 4 or 6 weeks, get the cash out and just churn them. Families tend to stay a little bit longer in them because they tend to be, you know, a little further in their life trajectory, those sorts of things. So we still do single family and we do large multifamily and historically, they've kind of behaved the same way. Inventory was generally the same, deal flow was generally the same and in the last several years, I think those two markets have really diverged. I alluded to earlier, it's because single family housing in general has 30 year fixed rate mortgages. A lot of people moved throughout the pandemic, even people that had been in their homes for 20-30 years, they jumped onto the refi bandwagon that was happening because rates were so low. 

Elaine Stageberg  

So so many people have fixed rate, very low rate, fixed rate debt and so even if they want to move, they feel a little stuck. They're like, wow, I could go to a house half the size, but my mortgage payment would still double, I'll just stay here and close off some bedrooms or something like that. Whereas multifamily tends to have shorter term, either fixed or variable rate debt, but it's short term. It's, you know, 1, 3, 5 years, maybe 7, maybe 10 and so the markets have moved apart. And what I have seen is, the multifamily market has been more impacted by interest rates, because they're it's valued based on net operating income based on how much the bank will lend on it with a DSCR. So it's more tied to interest rates. Single family market, in general, should be tied to interest rates, it should be that as interest rates come up, prices go down, but the law of supply and demand is a stronger economic law than the law of interest rate price inverse correlation. And so even as interest rates have gone up, there's so little inventory and so many buyers, both owner occupants and investors, that prices still continue to go up in many, many markets. Our market had a like a 10% year over year, price escalation in the like the report just came out for February of 2024. So from February 2023 to February 2024, we still had a 10% increase in asset value on single family homes, despite the fact that interest rates have gone up so much in that time. And I think it's really because of the story of inventory, that that law of supply demand is a stronger law than a lot of interest rates.

Ryan Miller  

Okay, there you have it straight from the front line, thank you. So, you know, with all of your experience, you've picked up some great lessons, no one gets to your level without learning a few things. Now, you've been very generous with all of your advice and your insights, but let's see if I can get a few more out of you.

Elaine Stageberg  

Absolutely, my pleasure. I love to talk about this stuff that I love to just share the knowledge with others, I've learned so much from other people and just tried to pass it on.

Ryan Miller  

Perfect. Yep, you and I are both, we're kindred spirits. So that being said, I'm wondering if you could share maybe two or three things with our listeners around the world on some of the advice that you would find. So if you had to go back and say, look, if I came to you and I say Elaine, I don't know anything about real estate, but I want to be really good in this industry. What advice can you share with me as I'm starting out and as I continue on, to help me to gain a competitive advantage right out of the gates, what would you tell me?

Elaine Stageberg  

I think right now, the story is very much about operations, in the last 10 years, that hasn't been as true because there's been so much wind at our backs as real estate investors. So even a ho hum investor could buy a half decent deal and half decently renovate it, and half decently manage it and sell it a few years later and do very, very well, both in single family and large multifamily. And there's more pressure right now, right, the debt market has changed, labor is more challenging, wages have gone up, materials are still, you know, much more expensive because of the expansion and inflation. So right now, I think it's all about the story of operations, whether you're, you know, an individual investor, and you have one single family, maybe a couple streets over from you, and yourself managing it, or you have a billion dollars of assets under management all across the country, and you're managing them operations, operations operations, right? How do you control that P&L? 

Elaine Stageberg  

And I really think that one very strong advantage that people can have in the market is vertical integration. So what that means as you control pieces of the value chain, you can basically think of it as you look at a P&L and you say, what are my largest expenses and instead of hiring that out to a third party vendor, how can I bring that service in house? So in real estate investing, the number one thing that you think of is property management, then things like maintenance, landscaping, lawn snow, cleaning, even things like roof, electrical, HVAC, those sorts of things, trash service, you can just go on and on and on. By bringing those things in house, it takes time, it takes effort, right, this isn't something that just like falls out of the sky in a few weeks, or even a few months. But by bringing those capabilities in house, not only do you increase quality and control, and you can have a standardization across your portfolio, that you can communicate to your residents. This is our standard around maintenance, this is our standard around cleaning, this is our standard around how quickly you get a return phone call on you know if you, if you submit a ticket or those sorts of things. You also have drastic cost savings, right, because think about just basic business fundamentals. 

Elaine Stageberg  

Someone doesn't own a lawn company for fun, they own a lawn company for profit. But if you can remove that third party vendor and bring those services in house and keep that profit at the asset level, well because of how real estate is valued based an aligning cap rate, real estate has a huge multiple, and my market the multiples like a 20x multiple and like a five cap market. So you can save $1 that you would pay to ABC Law and Company, keep it at the asset level that increases the value of the asset by $20, which gets, which gets you to a cash out refi faster, it gets you to subsequent cash out refinance faster. If your business model is to sell, it increases the value of the building at the time of sale and it also gives you a tremendous amount of asset overwatch. 

Elaine Stageberg  

So what I mean by that is, you could have the best cleaning company in your entire town and if you hire them to do a unit turnover clean on unit 101, they're gonna come in, and they might pass a little dog poop in the lawn and they walk in the front door and there's like some scotch tape from a previous announcement that was never taken off and like, you kind of can't see it. But you can kind of see it, you know, it's just like, it's just like, itches the eye, right, you just don't like it. And the package room is all Helter Skelter and maybe there's some like dust in the elevator. They go into unit 101, they do an amazing job, you don't have any complaints, the resident that's coming in is happy, the cost is great. So objectively, you're like, my cleaner's doing a great job. If you have an in house cleaner, they take care of all of those things along the way because they know that their role is to manage the entire asset and it's just a totally different way of thinking. 

Elaine Stageberg  

The way a cleaner thinks of a building, is different than the way a leasing agent thinks of a building, is different than the way a maintenance person thinks of the building. And when you have all of those professionals on your team, and you say hey, leasing agent, yes, your job is to have amazing customer service, return phone calls, get showings, give people a hospitality level of service. But your job is also to report any problems you see in the building, any areas for improvement, because you're not just there to lease, you're there to run the whole building because we're a vertically integrated team. The amount of asset overwatch that you get kind of essentially for free because it's already built into your payroll is worth all of the benefits of vertical integration combined. So you get increased quality, you get increased control, you get decreased cost, and you get huge amounts of asset overwatch. I think everyone, whether you have one single family home, or you have a huge portfolio should be thinking about how can I increase vertical integration in my portfolio so that I can optimize my operations, optimize the heck out of my P&L, so that I can stay competitive in this market despite all of these headwinds in the industry right now.

Ryan Miller  

Yeah, brilliant. So vertical integrations, great way to just make sure not only is, your are your assets, your portfolio better managed but also, I'm assuming there's some cost savings in there as well. 

Elaine Stageberg  

Huge, absolutely.  

Ryan Miller  

Love it, what else would you say to give a competitive advantage for people that are starting out or maybe mid-career on this journey? What else would you say?

Elaine Stageberg  

So one of the things that I love to talk about you mentioned earlier, I'm a psychiatrist by training. So I trained as a psychiatrist at the Mayo Clinic, my husband and I were building our real estate portfolio along the way, we reached financial independence, he left his career in tech, I left my career in medicine and now we run Black Swan Real Estate full time. As far as I know, if there's someone listening that knows differently, I'd love to meet this person, but as far as I know, I have the only psychiatrists own property management company in the country. And so I love to think about property management, from the perspective of psychiatry, and before medical school, I got a master's degree in public health, so I think a lot about population health as well. The things that anyone can implement, again, whether you have a single family home that you're managing yourself or huge portfolio, is we need to remind ourselves in the industry that property management is about building communities, and is about hospitality. And I think the industry has gone toward, you know, there's even like pejoratives of like, oh, we're adult babysitters, or we're like low level policemen and we're just there to like punch maintenance tickets and collect rent, that couldn't be further from the truth and residents sense that. And that's maybe that worked in like the 80s or 90s, that does not work in the 2020s. 

Elaine Stageberg  

People are desperate for community, in the world of you know the digital era and then particularly the societal changes that happened through the pandemic, people are so hungry for community. They want to know that they live in a community, that's, that doesn't have to be hard. That can be things like having a common language that all of your property managers, leasing agents, maintenance staff, you have a common language that everyone uses, like one of the phrases that we use, is we want our residents to have a premium living experience. And so we just say that over and over and over, we call the people who live in our buildings, residents, not tenants, little shifts that are right, we never use the word complex, we always use the word community, no one wants to live in a complex sounds like you live in a prison, you want to live in a community. 

Elaine Stageberg  

Building community events can be very simple things can be free events, like calling a couple of local food trucks saying hey, I have a, you know, 100 unit building or 200 unit building, and you can come out, you can park there. We're going to advertise it, we're going to do everything we can to drive revenue engagement, residents maybe even pay for their own meal. So you could technically do these events for free, maybe you pay for drinks and the residents themselves pay for their meals or something like that. Obviously, the more you can provide the better, but I'm trying to give examples, that if someone's thinking, oh, I'm already in a budget crunch, like I can't do a community event. I want you to know you can do a community event for free, or for just a few $100. 

Elaine Stageberg  

And the amount of engagement that it will drive in your community, your residents will tell you during the event, what they love about living there, what they don't love, and then you know exactly how to improve. They'll give you feedback on your maintenance people and your leasing people and all the people that are taking care of them. It will drive up renewal rate, because if you treat your property like a commodity, this is ABC Apartments, then the only thing you can compete on is price. So if your price goes up, or the neighbor's price goes down, they're just gonna move across the street to 123 Apartments, because why wouldn't they you know it's, it's just a commodity, it's just a box to live in. But if they feel like I live in the community of ABC apartments, and I know my neighbors, and we have a few events per year, and I get a birthday card and I get a year end card. We try to give cards to all of our veterans, if we know that they have a veteran status, for example, things that are relatively inexpensive, relatively easy to implement a ton of fun for your team, right? It's this, of course it's work, but it's a different type of work than being in the office all day. They're excited to go out and meet people, have some tacos together, whatever, it totally changes the way your team feels about what they're doing. It changes the way your residents feel about where they live and it just creates so much goodness financially for your portfolio, and also for the community. 

Elaine Stageberg  

And then one thing I want to add that I you know, kind of alluded to there is thinking about motivating a team, right? The labor market has absolutely shifted through the pandemic and even just the generations are all very different, right? They have different desires, and people will no longer just work for a great paycheck. That worked in the 50s, 60s, 70s, 80s, that's not enough these days. I highly recommend the book, The Infinite Game, by Simon Sinek, probably one of the top three books I've ever read. And he talks about the idea of a just cause, which is your team needs to understand, why are we doing what we're doing? Property Management is not a very sexy job. Right? It is a lot of like doing paperwork, collecting rent, making phone calls, doing maintenance tickets, 24/7 work, right. But if people understand, we're creating a community, we're creating a living experience for people. People spend more time in their home than anywhere else, the correlations between where someone lives and how they feel about their living experience, and their health and social outcomes are indisputable. That's why we're here, that's why you're taking that leasing call, that's why you're handling that maintenance ticket. That's why you're going out at four in the morning to take care of that, you know, emergency leak or whatever it is because we're changing people's lives and their health and the health of the community. Again, this kind of going back to my perspective as someone trained in public health, but pick up the book, The Infinite Game, by Simon Sinek. Read about just cause, it will help you motivate and lead your team, that any of the management books out there, like, they're all great to read all of those too. But understand just cause and how you can motivate your team, that they understand why they're doing what they're doing and you'll have phenomenal outcomes.

Ryan Miller  

Brilliant, I love that, you know, thinking about a community, it also, I mean, your workplace could be a community as well. It's not just bricks and mortar, but it's a sense of belonging, right, I'm just totally projecting my interpretation, what you're saying. But more than just real estate, or giving your residents or your employees a place that you are needed with this, what I tell my kids is without you, there's no us. And so as like you are needed here, you are part of this community, which we call them, the Miller family. But either way, we're saying you belong and that is very powerful, and giving people a place of belonging, that can create huge profits, lifetime value of all these metrics that I go through on the other side of venture capital. But all of those things, at the end of the day, if you're running companies, you're running assets, you're working with people, make sure from advice of Elaine. Is make sure that you create it in a way that people feel like they belong, and they're needed and they have a purpose for being there, I absolutely love that. So putting in public health into your portfolio, I can see why you're growing the way you are, this is great. So let's say one final competitive advantage for our listeners around the world who are on this path or other ones or want to be on this path. What's the third one that you could provide for our listeners? 

Elaine Stageberg  

A third one that comes to mind, I'll do this as like a sub example and I'll give kind of the overarching example. is there's likely going to be huge buying opportunities in real estate in the next say, two to three years, right? It's a little hard to predict how things might go after that, but I think we all agree that there's going to be some huge buying opportunities in the next couple of years. You can follow the trends and you can go to a red ocean market, so red ocean is where all the sharks are swimming around, they're eating a school of fish and there's blood in the water. You're a shark you say oh over there, there's blood in the water I'll go over there I bet there's some lunch. 

Elaine Stageberg  

Or you can go to a blue ocean. There's a book Blue Ocean Markets, by W. Chan Kim, highly recommend that book as well. A blue ocean is where you're swimming in the ocean all by yourself and you're saying I'm gonna go out and find my own school of fish, I'm gonna go out and find my own lunch. I think that as you're thinking about acquisitions, in the next couple of years, instead of following the trends, you should think about what's a blue ocean market where I could invest, where I have a unique advantage, where I can create the market, I am the market. So we're in Rochester, Minnesota and Tacoma, Washington, half of you listening when you're done listening, you'll think you're in rock that we're in Rochester, New York, like that's how obscure Rochester Minnesota is. Not many other people are investing at our scale, particularly in Rochester, Tacoma is a bit of a bigger market. In the last five years, we became the largest housing provider in all of that southeastern Minnesota. So basically, once you get out of Minneapolis, St. Paul in the southeastern part of our state, that's a blue ocean. So because of that, we create the market, we create the market in terms of acquisitions, we create the market in terms of rental rates, concessions, those sorts of things. And even in Tacoma, where we're not large enough that we're creating the market there, we're still in a market that's not like the Sunbelt, Phoenix, Jacksonville, the Carolinas, and we have so much more strategic advantage because of the blue ocean. So learn about the blue ocean concept and think about that in your acquisitions in the next couple of years. 

Elaine Stageberg  

And then the broader lesson there is never be afraid to innovate, absolutely learn from your peers, absolutely learn from the best practices in the industry. But if you have an idea in your heart that you're like, I really think this could work and here's why. So like just a little micro example, we have an indefinite hold period, which is very odd and private equity, we had an indefinite hold period in our own personal portfolio. So as we scaled into private equity, we just said, I know this isn't like the typical model, but it's what works for us. So we're just going to bring this innovation into private equity and our investors love it. So if you have something on your heart, or like, I know, this isn't what everyone else is doing. Go do it, right. Think of all the great innovators of our day, like Steve Jobs went and said, like, I'm gonna create this thing that we put in our pockets that connects us to the entire world, like people thought he was crazy. And look at what good he created for the market, that can be you, so never be afraid to innovate. It's kind of a subset example of that is go out and create a blue ocean market for yourself read that book, The Blue Ocean Market. In terms of a blue ocean, the two things you want to think about are population growth and job growth. You need to have people there, like that game of musical chairs, right and then those people need to have good abilities to pay the rent. I love medium sized towns. Small towns are a little bit shaky for me, because their population dynamics can shift so quickly. But what's a place that you know of? Maybe you live there right now and you're saying you think, well, no one invests locally, everyone invests out of state. Innovate, invest locally, we've always invested locally and we've had great experiences with that. 

Elaine Stageberg  

If that doesn't work for you, and your particular sub market, is there somewhere you can go say two or three hours away? One car right away without even a bathroom break, where you can really build relationships in that community, really get to know that community very well visited, you know, once a week or even once a month, and really build that area knowledge. And if those two don't work for you, think about a place where you have some sort of connection. Maybe your parents live there or you went to college there or you live there at a different time of your life, that you already have some sort of established area knowledge. And then you have a reason to be in that community as you're building your portfolio there. You don't have to just follow the trends, you can go out and create a blue ocean market, never be afraid to innovate. 

Ryan Miller  

Brilliant, I love that. As we wrap things up, this has been a phenomenal time and we shared some good stuff together. I'm just blown away with all the knowledge. 

Elaine Stageberg  

I've had a ton of fun, thank you for having me.

Ryan Miller  

Yeah, that's great, it's good to have you, we'll be in touch on some other stuff as well. But, you know, as we wrap things up, I'm just curious as their final remarks. Is there anything you'd like to say ways people can reach out to you if they want to learn more about Black Swan or you? What would you say? 

Elaine Stageberg  

Absolutely, we love to serve and to teach and just to be in communication. Our website is meetblackswan.com, meetblackswan.com tells you all about our history, our portfolio, our upcoming fund offering which will be Black Swan fund 4 you can sign up for our newsletter, we have a free passive investing guide to get people started. Once per month, we do a live community hour where we teach on a particular topic, sometimes we bring in guest speakers, whatever we think might add value to our community and then once per quarter, we do a live portfolio update. And then all of those replays, of course, go out to our mailing list, all of that there on the website at meetblackswan.com. 

Ryan Miller  

Brilliant, thank you. So just to summarize everything that we talked about vertical integration, it's the key to winning in this challenging environment. The second thing that Elaine taught us for competitive advantage is pricing your rents. See building a community and a place of belonging that is the same as building a premium in your pricing. And finally, seek out blue ocean markets where there is both population growth and job growth. You do these things and you too will be well on your way in your pursuit of Making Billions.

Ryan Miller  

Wow, what a show. I hope you enjoyed this episode as much as I did, now if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guest even better and make sure to come back for our next episode where we dive even deeper into the people, the process and the perspectives of both investors and founders. Until then, my friends stay hungry, focus on your goals and keep grinding towards your dream of Making Billions.