Shattering Blue State Myths in Real Estate Investment with Expert Insights

Discover the true color of profitability in real estate as we sit down with Michael Volgarakis from Southgate Real Estate Ventures, who offers a fresh take on investing in the vibrant Puget Sound market. Bucking the trend, Michael lays out how an affluent tech and medical workforce has created a market ripe for investment, contrary to the stigma surrounding 'blue states.' With a keen eye for the exceptional stability and growth potential, he elucidates the lesser-known fact that the financial robustness of tenants in this area often negates the perceived risks associated with less landlord-friendly regions. Our conversation is a masterclass in understanding that the stereotype of tenant-landlord battlegrounds doesn't hold up against the backdrop of a wealthy tenant base, with evictions and collection losses being surprisingly minimal under quality management.

As the episode unfolds, we navigate the benefits of vertical integration in property management and construction, revealing the crucial role it plays in managing cash flow margins in growth markets. Michael shares wisdom on the importance of understanding stakeholder motivation and the nuanced reality of recession resistance in real estate. He also arms passive investors with strategies to analytically evaluate market demand and supply dynamics. By the end, you'll have a new appreciation for the opportunities at Southgate Real Estate Ventures and be equipped with the insights to make data-driven investment decisions. Join us for an episode that redefines the investment landscape and challenges the status quo with hard evidence and shrewd analysis.

Contact Michael @ https://sreventures.com/

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Transcript

Speaker 1: 0:01

Hi everybody, david McElwain, with another episode of Brick your Gold in Handcuffs. Today, I'm super excited to have with me a buddy of mine and a friend, michael Volgarakis of Southgate Real Estate Ventures. Southgate's acquired 24 properties over eight years in the Puget Sound region of Washington state with 14 full cycle deals 14 out of 24 full cycle deals. People Michael oversees operations, capital raising, asset management as well as investor raising, and is involved in deal sourcing and underwriting. His prior professional role. His prior professional roles include 17 plus years of institutional experience in underwriting and asset management for value added, stabilized and ground up construction of multifamily retail and office assets for both national and regional owners, operators as well as lenders. Some of his key highlights in his history he's underwritten over $1.6 billion of commercial real estate loans. His asset managed 300 million of commercial real estate assets. He's valued $3.3 billion of commercial real estate assets and he's got a master's in commercial real estate finance. In other words, folks, michael is the real deal, so welcome.

Speaker 2: 1:14

Michael to the show. Thank you for having me. I appreciate it.

Speaker 1: 1:18

Yeah, I'm super excited to talk with you because, as you know, you and I have done some work together. We've never actually consummated a deal, but we definitely had some dialogues around some of them and it's fascinating. So tell me, why are you focused with all of this experience? Why are you focused in the Pacific Northwest?

Speaker 2: 1:38

Great question. The simple, high level answer is high paying tech, biotech and medical job growth. You know, with those jobs comes the need for housing, and the Puget Sound region just has a deficit in housing. And when you marry that with people that make on average $115,000 in the region, with a supply shortage in housing, what you're going to get is a good, strong market to invest in that is a true high growth market.

Speaker 1: 2:25

Fascinating. So so many people in the individual or the retail investor world say run away from blue states, only invest in landlord friendly states, and you're one of those contrarians whom I respect. That says something different. So, as the retail investors that listen to this show gain some knowledge, what do you say to them about the whole landlord friendly versus non-landlord friendly states?

Speaker 2: 2:58

I would say that their heads aren't necessarily in the wrong place. I mean, they're thinking about things prudently, right. It is easier in some respects to operate properties and invest in properties in more landlord friendly states, but the I think the question that people really need to ask is how high of a financial quality, like how high is the financial strength of the tenants in the buildings that I'm investing in? Meaning, if you're investing in a landlord friendly state and your tenants are making an average of $50,000 a year, they are typically going to be you know it's unfortunate, but they're going to be on the lower socioeconomic rung of the ladder and if there is a disruption in the economy, if the local plant closes down, those people are going to have a hard time continuing to pay their rent. So what we have in Puget Sound, seattle proper, is people that are incredibly highly educated that are making an awful lot of money. Our average tenant makes $85,000 a year and these are folks whose skills are in demand and many of them can work from almost anywhere in the world due to some remote work. So what ends up happening is we, because we're investing in properties with these high quality tenants, we don't have any collection loss issues. We don't have eviction issues, so that this notion that well, if we have, you know, tenants are gonna stop paying rent and then we have to evict it is an extremely rare circumstance in our portfolio. Over the past eight years, having owned a couple hundred units, we've only had two evictions, and that's all through COVID. And the only reason we had to evict two tenants, unfortunately, was because of mental health issues. They just refused to acknowledge us as the new owners of properties.

Speaker 2: 5:20

We did everything by the book, by the law, and what ends up happening? When we renovate a building, we have, you know, we installed very high quality, well paid, highly educated tenants. And what does someone do typically if they are in that socioeconomic rung? They pay their rent in on time, consistently, and what they want in return is a quality product with best in class service. If something's broken, we make sure to fix it right away and we get their questions answered right away. So you're really talking about two different classes of renters in some cases. Now, if you're going to invest in a building in some more landlord friendly state, the higher up you go on the economic ladder, the same thing will be true for you. But at the end of the day, we have these high quality tenants and we just don't have these eviction issues. No one's hiding behind any laws and people are paying their rent and we provide a service to them.

Speaker 1: 6:35

So this goes against the whole libertarian thing that you know. You have to have as little regulation as humanly possible because mankind is basically and I'm not saying this quite correctly. So there's a theory out there maybe I misquoted, so let's start this over. There's a theory out there that tenants are going to always take advantage of you, and your thesis proven out over eight years and only two evictions over multiple hundreds of doors, which is less than one tenth of 1%. Your thesis is that good people want to pay their bills if you treat them right, correct.

Speaker 1: 7:13

So, therefore, the landlord laws do not matter. Is that what I understand?

Speaker 2: 7:19

Yeah, they don't matter at that level of income. Now I can't really speak for, you know, let's say, a class C, c minus apartment building in the region. We don't own anything like that. Perhaps they're having more trouble with tenants than we are. Oftentimes we're taking a class C, c plus property and making it into a B property. But what we've ended up finding out is, first of all, the laws are. In some ways they're simple, in some ways they're complicated. I know that's a contradiction, but what I mean by that is the tenants that we have. They're not paying attention to the laws.

Speaker 1: 8:06

Right, they don't care about them.

Speaker 2: 8:08

They don't care. They're not trying to figure out a way to hide behind them. If they just want a quality product with close proximity to employment centers, retail, entertainment, et cetera, and they want to pay their rent and return, have it be provided a great product.

Speaker 1: 8:27

I mean this goes back to Alex Hermozzi's number. One thing about business is product, product, product. Yes, and what you're saying is the product generates the quality tenant.

Speaker 2: 8:40

Correct. I mean there is a price point for that, right, I mean there is a rent for that, but providing something that is, we are not in class A assets. Right now, the people that can afford a class A go to class A. The people that can afford a B typically a newer graduate, slightly younger demographic 20s, 30s. For the most part they're trying to enjoy their lives and they've worked very hard to get where they are, to educate themselves, to get that job, and they're concerned about their credit scores more so than trying to duck out of a month or two or however many months of rent.

Speaker 2: 9:25

They really wouldn't think about it for the most part.

Speaker 1: 9:28

And I love the way you've laid this out because it really is know your customer Absolutely and as an investor, that's so crucial to this right, which kind of makes me want you know, we were talking a little bit in another conversation months ago and you talked about a financially strong and a credit worthy tenant and a real estate deal and why does that matter and what I can take away from this is pretty powerful. But can you speak to how you analyze your deals a little bit about the credit worthiness of your tenants?

Speaker 2: 9:57

Yeah, we, you know it's a simple approach. I mean we look at if we're looking at acquiring a building, you're looking at the existing rent roll and you're trying to understand how long have people been living there. And we try to work with the individuals that are in a building. Right, we are not kicking people out, as so many people think landlords do right In the city of Seattle speak to that just as an example. You have to provide a six months of advance notice for any rent increases. So the day we buy an asset, the letters go out via certified mail. That letter gets emailed to that tenant as well and the letter gets posted on their door. So they have received that letter one way or another and we tell them this is who we are. We were the new owners. Start paying your rent on this portal. If you have any maintenance issues, here's where you go. Let us know if you have any questions.

Speaker 2: 11:02

But if we have to provide that six month notice and some people would say, well, that's a long time that really must set you back and it really doesn't, because that gives the tenants enough breathing room in a very, very tight housing market to figure out do they want to stay with us? Do they want to leave? And oftentimes we end up having what I would call old fashioned phone calls with tenants to discuss whether they want to stay or go. Can we work with them by moving them to another unit that perhaps is a little cheaper, or do they? Some people upgrade units, some people downgrade their units, you just don't know. We always want to work with, have tenants that communicate with us, that don't stick their heads in the sand and try to avoid communicating with us, and we just keep those lines of communication open to make sure that we do have a satisfied tenant base.

Speaker 1: 12:05

Yeah, fascinating. So you know, I skipped the first question. I almost always ask guests. Yeah, and that is have you ever had golden handcuffs?

Speaker 2: 12:18

Um, I have had close to it. I wouldn't say I've had golden handcuffs. I don't necessarily. I haven't experienced it, so I can't really really talk to it. I've been in some very good roles at some very good companies, but there is something inside me that has always burned to go out there and, you know, as they say, hang up shingle and try to, you know, have my own business. I mean, I have a partner who founded the company, but this is sort of the drumbeat that I'm going to and I've always gone to.

Speaker 1: 12:59

And it sounds like if you hear the drumbeat, as an entrepreneur, we know we hear it. It's quiet inside of our souls and bounces and bounces, and bounces against our heads and eventually we recognize it and it's fascinating. So, as an entrepreneur, you guys have built a vertically integrated property construction management company. Talk to me a little bit about that, and why is that valuable in your point of view?

Speaker 2: 13:27

Well, vertical integration for property management and construction management I think is most important in our type of market, which is a growth market where it's not a heavily cash flowing market. I mean, we could get a deal that cash flows better somewhere else in the country but because of investment demand you have to watch every single dollar that's going in and out of a property to make sure there is that margin there. And no one will manage your property like you will. It's you know, because I can't remember what the term is called. But there was a study that was done on and I'm referencing residential realtors a while back and they showed and they proved that if a realtor is selling their own house versus selling someone else's house, on average they get a whole bunch of points higher, meaning they typically sell their houses for higher on average than what they sell other people's houses for.

Speaker 1: 14:48

Now I'm a broker so I got to jump in on this. Sure. I think the theory, I think the reason why is really simple. We take our own advice. I can't tell you the number of clients that I've said you need to do X, y and Z and you'll get $10,000 more and they're like I don't want to. Okay, then we'll sell it for A Right and the agent that does their own house knows they'll get that money and they'll put in the investment.

Speaker 1: 15:22

But your point, I think, is also that there's a motivational factor here which no one can devalue.

Speaker 2: 15:31

Correct. You know to push for an actual extra $50 in rent. If we're paying a third party manager, the incremental commission on that for them is not necessarily worth it. It's a $3. Correct, it's a bird in a hand type of situation, so it's understandable. It's all about how does the money flow and what are people's motivations. I'm not disparaging third party property managers by any means at all.

Speaker 2: 16:04

No, no, not at all yeah it's simply, you know, another four phone calls to get in three emails to get another $50, which you said is another $3, $10, $15. It's just not worth it and there really is nothing like having boots on the ground overseeing the assets. Someone who can, who's on your team, part of your company, that can drive to your asset within 15, 20 minutes and see what's going on and not just letting someone else who is not properly incentivized to run your asset.

Speaker 1: 16:43

Yeah, I can't agree with you more. I've had both endeavors and I will tell you that the motivation is crucial. My first billionaire that the first billionaire I worked for taught us that motivation is the number one decision in every sales transaction and while it may not be number one, it's definitely top three.

Speaker 1: 17:05

And people often forget that they talk about distress and recessions and you know, as we think about it, the motivation of a seller right now might be to avoid bankruptcy and if you understand that motivation, it's very different than the motivation of a seller who is going to squeeze every penny from the stone and they're very different behaviors, Absolutely. I can't speak enough to how much motivation has impacted my career. When I was in the advertising world, motivation was about simplicity. If you're doing simplicity in the real estate world, you're probably going to lose.

Speaker 2: 17:45

I would second that. Yeah, yeah.

Speaker 1: 17:50

So that makes me think about the idea of right now. We're in a very volatile economic situation and people are talking about recession. The Fed has paused raising rates twice, two months in a row, for the first time in 18 months. So people talk about multifamily being resistant, commercial real estate being recession resistant, and I'd like to hear your thoughts on this. Is multifamily or recession resistant, play or not so much?

Speaker 2: 18:21

Well, this is going to sound a little cliche, but it depends. And what does it depend on? It's going back to the basics of supply and demand. If there is not enough demand for an apartment unit during a recession because the local job base was decimated or there's some other economic shock and people cannot afford to rent that unit, then it is not recession resistant. So, yes, you can raise the rent, perhaps to keep up with inflation, on a building that is in a location that has an incredibly strong and diverse economy. But if you're in a market that is not as diverse as perhaps it should be, or it's exposed to industries that are susceptible to a downturn, maybe they're going the way of the buggy whip, maybe they.

Speaker 1: 19:19

The buggy whip.

Speaker 2: 19:20

Yes, I'm showing my age now, right.

Speaker 1: 19:24

For those of you who don't know, he's referring to a horse and a carriage from the turn of the 18th century.

Speaker 2: 19:30

Correct. So is the business going to be there in the future? Does it have legs? Is it going to be there for another year, five, 10, 50? However long your horizon is? And it's really about supply and demand. So I would urge people that are investing to always take a really good look at the supply and demand dynamics, not just the returns on the deal. You can show project great returns on a deal, really sexy stuff, but all of that can vaporize if you do not have financially strong tenants which are really just backed up by local industry, which is your demand driver ultimately.

Speaker 1: 20:22

As a third party and not necessarily third party, but as a passive investor it's really hard to quantify demand in a given place and the sponsor comes out and says we have got great demand, we've got great supply constraints. How does the passive investor really get to know this? What would you say is an advice for those guys or girls you have?

Speaker 2: 20:43

to get your arms around metrics. The blanket statement that it's a great market, that there's a lot of demand, is fine for an introduction, but beyond that, they should be elaborating. Show me the data, multiple data points right. There shouldn't just be one. You should cross reference. Housing starts with existing housing units, with forecasted demand, with forecasted job growth. If you're looking at all those things, then you should have a good handle on where the market is headed and whether or not you're building that you're considering investing in is going to be has a high likelihood of being recession resistant.

Speaker 1: 21:38

So I've got a question on that because I have a hypothesis, and let's hear your answer first, On housing starts, I would assume that you want no housing starts because that creates competition for you. Or you could also think about it as you want housing starts because that infers growth. Where does your head sit in this kind of thing?

Speaker 2: 21:59

Oh, that's a great question. I would say it's a bit of both, because you're right on the first point. Right, if there are no housing starts and you own units, the demand is going to creep to your favor, right? You're going to get that demand showing up and tenants knocking on your door saying, hey, I want to rent your bill, rent your unit If there are housing starts can get muddled by a number of things and in the past year I think it's been 20 months, maybe 20, 22 months since the Fed started raising rates. That has certainly had an impact on multifamily housing starts right.

Speaker 2: 22:45

The cost to construct has simply gone up from both the labor and material standpoint. Then you add on higher interest rates. So you have a squeeze where housing starts have significantly slowed down in and I can't speak to other parts of the country, but impuget sounds it has definitely slowed down. I think 72% of projects that were permitted didn't move forward and are not expected to move forward in 2024. So all that demand is being pushed out until rates come down or until-.

Speaker 1: 23:20

Three out of four projects have been paused indefinitely.

Speaker 2: 23:24

Correct, correct. They're not putting a shovel in the ground at this point. So that is a yes. It's a good thing for the buildings that we own and the buildings that we plan to buy in the future. That said, there is a human side of this that can't be ignored. The region needs more housing, and more units leads to more affordable housing, so that you can have a diverse city that has people from all walks of life in it. It's not a city if you don't have people from all walks of life in it. So I think that anything the city can do to promote that growth I am all for, and it just so happens. People might find it shocking, but the city of Seattle and the state of Washington and the other cities within the state, they are pro-growth, they are pushing development, they are upzoning land, they are doing what they can do at a state level.

Speaker 1: 24:25

They can't control interest rates or construction costs, but what they can control, I think they're doing a wonderful job of so man, I really want to dive into that, but I don't know if we have enough time because I think our readers will tune out. Our listeners will tune out at some point. But you know that idea of accelerating growth in the city and a city being pro-growth If the city quits becoming pro-growth, they die Absolutely. I can think of many, many illustrations of this, where, when a city is no longer pro-growth, jobs leave and as soon as jobs start leaving, you've got a problem. This is playing out in San Fran, correct, without a doubt. And if you read any business press, san Francisco and everybody's mind is just having terrible problems. And it's not that San Francisco is necessarily anti-growth, but there's a job vacuum and that's what you're talking about. And some of this housing starts creates more job command, jobs bring people, people bring economies, economies bring diverse economies, et cetera et cetera, et cetera.

Speaker 1: 25:32

So, hey, I always ask a couple of questions about my guests and I think they're always great answers. So tell me what's a piece of advice that you wish you had 10 years ago that you know today?

Speaker 2: 25:45

I would say that Whether you are, whatever your endeavor is, whether it's a career or you're looking to invest in a building or you want to become a syndicator I would say that recognizing when you need help with something and seeking out advice from people who have been there before is something I wish I had done more of when I was younger.

Speaker 1: 26:12

Man, that is spot on. I think about it as know what you don't know and then ask to learn it. Better said, definitely better said. I don't know if it's better said yours was pretty nice, and then, if that's a great piece of advice, what's a piece of advice that you followed that was really bad or that you wish you had ignored?

Speaker 2: 26:34

Well, I didn't ignore it, to my own detriment, but it is don't rock the boat.

Speaker 1: 26:43

I have a hard time. I know Michael rocked the boat, did you A little bit?

Speaker 2: 26:48

A little bit, but I think there is this still in many, whether you're a parent or an educator, or you own a business or you're a boss somewhere, this idea, like we've always done it that way, let's just keep doing it that way, even though I think many people in your audience would probably recognize the change of the pace of change, rather, is so rapid these days that if you are standing flat footed and not trying to do things better, faster, more efficient, more accurately, your lunch is probably going to get eaten as sooner than you think. So, always educating yourself on the latest technologies and trying to find a better, faster way to be more profitable, make your company more profitable. I don't think that ever goes out of style.

Speaker 1: 27:52

Yeah, as an employee, as a highly compensated employee or any member of a big team, profit focus is always crucial.

Speaker 2: 28:01

Absolutely.

Speaker 1: 28:02

Yeah, no doubt about it.

Speaker 2: 28:04

If you can draw the line between proposal you have for your boss, let's say, and the profitability, that's the quickest way to get to their heart To approval, yeah.

Speaker 1: 28:16

Absolutely. Yeah, there's no correlation between profit and project. Don't waste your time, absolutely. And then tell me, is there a thought or a quote or an axiom that moves you or that you think about, that you'd like to share with our listeners?

Speaker 2: 28:34

In general, I would say that relationships are everything and the most important thing, and I mean that on all fronts, whether it's your personal life with your family, your children, extended family, and it also that carries over into the working world, no matter what you're doing, and having good quality relationships, which to me means that you're communicating and expressing yourself adequately to the individuals you work with. I think it just goes so far and we could avoid so many issues that we might run into if we would just pause and say I don't think we're understanding each other. Let's talk this out.

Speaker 1: 29:24

Amen. Say it again right, I wish I had known in my 50s. I wish I had known in my 20s what I know in my 50s about relationship. Absolutely Me too, and relationships really are the magic of life, without a doubt. So wonderful conversation, michael, tell us and our listeners if you're interested in learning more about Southgate. How do we contact you?

Speaker 2: 29:52

Easy Go to our website, which is S-R-E Ventures, so it stands for SouthgateRealEstateVenturescom. There's an investor button on top and then there will be an investor form there and we'll reach out to you once we have your contact information.

Speaker 1: 30:12

Great. So, Michael, thank you so much for joining us today and you've been listening to another episode of Break your Golden Handcuffs. Thanks for having me, David.