How To Turn Neglected Homes Into Profitable Student Housing With Special Guest David Schwartz

Join our host, Attorney Kim Lisa Taylor, as she interviews David Schwartz, whose successful business model is making targeted improvements to older homes and turning them into profitable student housing. Among the issues we'll discuss are complexities in the permitting process and the screening process David uses to get high-quality tenants.

Episode at a glance:

• Why student housing over other assets
• The business strategy David employs when looking at student housing
• How to determine if a property is viable
• Uncovering the risks involved in investing in student housing
• How David manages small properties and tenants 

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Transcript

Kim Lisa Taylor:

Hey, good morning, everybody. Welcome to Syndication Attorneys' free monthly podcast and YouTube stream where we talk about topics of interest to real estate syndicators and fund managers with the opportunity for live questions and answers at the end of the call. I am attorney Kim Lisa Taylor. I would also like to introduce Krisha Young, our co-host and business development associate at syndicationattorneys.com.

Before we get started, please note that this event is both recorded and will be on YouTube, and will be used for future promotion, posted on our website, or in a broadcast available to the public. You can ask questions at the end of the broadcast by raising your hand or typing your question in the Q&A. If you do raise your hand, then your voice will be recorded. So if you don't want that, type it in the Q&A. And if it's a very specific question, then maybe you want to go to our website and schedule a consultation instead. Or if it's a question for our esteemed guest, then you may want to gather his contact information at the end of the call, and you'll be able to reach out to him directly.

So today we're interviewing David Schwartz. Had to look and make sure we were being recorded. We're interviewing David Schwartz. I've known David Schwartz for a very, very long time, and I've known his family. They've been in capital raising for a long time, done a lot of different things, multifamily and some other types of investments. But David has created his own niche practice, and I think it's pretty brilliant. I think he's got a really nice background. We're going to have him tell you about that, but we're just happy to be able to have him on today and share a little bit of his knowledge with you of things that he's learned and about his business model and why it's unique.

Okay? So David, thank you so much for joining us today. We're happy to have you.

David Schwartz:

Thank you for having me.

Kim Lisa Taylor:

Yeah, yeah. So tell us a little bit about your background and how you got started in real estate investing.

David Schwartz:

Sure. So I studied finance in college, and while I was in school, I had noticed that there was a real dichotomy between low -housing that was kind of expensive for how not nice it was. And then on the other end of the spectrum, really nice new ground-up development with lots of amenities that was very expensive, and there was no middle-market product. So I identified this niche in student housing that would meet the demand from graduate students in particular for middle-market product and provide higher-quality housing for students who are serious about getting their degrees and master's degrees.

Kim Lisa Taylor:

Excellent. All right. Well that's interesting because we have so many clients that buy multifamily and it's got its own pluses and minuses, but I'm always fascinated by our clients that have carved out a specific niche for themselves and they've done really well in that niche, and certainly, you're one of them.

Because that's us, we found our niche. Our niche is helping real estate investors with their syndications or their funds, and helping people that have never done it before get comfortable with the rules so they know what they're doing and they understand the structures. So we like to interview other people that have niches because niches are really kind of the wave of the future. It's really hard to be a generalist when there's so much information out in the world today, but it is really easy and, not easy, but it is gratifying to be able to find a niche that works and really develop that niche. So I applaud you for doing that, David.

So tell us about your student housing business. Why did you pick student housing over other asset classes? You said because there's no middle-market product, but why not just do multifamily or self-storage? Why not do those things?

David Schwartz:

Good question. So when I first started the company, I had come from a background working as an analyst at a multifamily syndicator. I really liked multifamily. I think there's a lot of opportunity in the space, but there tends to be a lot more competition, especially in the larger 100-unit-plus multifamily projects. Everyone in the country is chasing after those kind of value-add opportunities, especially in the south. So I think that there is a lot of opportunity there, and it's a space that we do remain aware of and we pay attention to. But when I was first starting the company, I wanted to establish a solid foundation of investment and have the portfolio be as resilient as possible. When I was first coming up, I saw the tragedies and the pain that people went through during the 2008 Great Recession. People had been making a lot of money in multifamily, and some of those properties really suffered. And as a result, the owners and principals of those properties suffered.

So I really like the space. I think multifamily makes a lot of sense, but I wanted to start in something that had a little bit of a more resilient foundation. So I looked at different asset classes. I had been an intern at Marcus & Millichap in New York where my broker was working on commercial retail and shopping centers, free-standing triple net leases, a variety of different asset classes. And of all of the asset classes that made the most sense to me were self-storage and student housing. And because I was coming out of college and putting this model together as an intern, I was very familiar with student housing and had personally experienced this unmet demand in the market. It just made a lot of sense to me and they always say, invest in what you know. And it was a space that I was uniquely and particularly familiar with.

Kim Lisa Taylor:

Well, and it also sounds like you're passionate about it, and that really is the true hallmark of an entrepreneur, is when you're passionate about something, it's easy to convey that to other people, especially investors. And a lot of times they make their business decision not based on what you know, but based on how passionate you are about doing it and your mission and reasons for doing it. So that's great.

So let's see. How do you determine whether something is viable for your business model?

David Schwartz:

Good question. So I tend to be very strict with projects that make sense. I'm sure there are plenty of opportunities that come across my desk that may be good projects, but again, I'm really focused on building a portfolio of like-kind, relatively uniform properties with the idea that we can have sort of a quick learning curve and figuring out what kind of issues come up with this asset class.

I mean, there tends to be a lot more nuance to renovating an older building, versus ground-up. So really quickly addressing those issues and becoming experts at handling whatever can come up in a 100- plus-year-old building was something that I was focused on from the beginning, all the way down to the end of what does it look like for an exit strategy? How can we best market our portfolio for sale? For example, right now we have our portfolio down in Providence serving Brown University and Rhode Island School of Design. It's about a $10 million project, a portfolio of buildings that we are putting together for sale. And because they are so similar in building type and in geography, it lends to a larger investor in terms of creating more opportunity on an exit.

Kim Lisa Taylor:

I like that because that's really taking advantage of some of the smaller opportunities that might be available in some of our listeners' markets and realizing that, hey, you could just amass this group that later on might be more attractive as a single exit to other people. So, it seems like a pretty smart business play there. So what has been the most challenging part of your business?

David Schwartz:

Well, like you said, passion is very important, and I'm particularly passionate about working with people. I really enjoy building relationships with brokers. I make a strong effort to connect with the top brokers in the markets in which we operate, because finding supply of properties is probably the number one constraint that we deal with. So being at the top of any of the top brokers list is really important.

The biggest challenge right now, like I said, it's definitely supply. And then just running a company and being an entrepreneur, there's a lot of hats that you have to wear. And I guess I would say just fulfilling the responsibilities of things that I'm less passionate about tends to be a little bit of a challenge. So fortunately, I have a good team around me. It's important to build a team that is competent, that you trust, and can do a good job. So try to find my strengths and fill in for the weaknesses.

Kim Lisa Taylor:

Absolutely. Yeah, and that's really something that every one of our clients has to take the time and examine and really be honest about, is like, 'I hate doing this, but I love doing this.' And so whatever you hate or you just know you're not good at it or you don't feel competent in it, that's where you look to bring in other partners or paid staff. It doesn't matter which one, but you've got to bring in other people that have strengths in those areas that you're weak or that you just don't like doing, and that's what helps. And then also, you have to have the fortitude and the ability to delegate and trust. Right? It's the hardest thing when you're used to wearing all those hats yourself. Even though you didn't like doing some of it, it's hard to give it to someone else and trust that they're going to do it right.

And I guess I've learned in our practice over the years that there's people that can do that stuff so much better than me and think about things that I have no clue of how they do it, and I've learned that I don't need to know how they do things, I just need to know what they're doing so that I can understand how it fits into the big picture and help troubleshoot if something happens. But yeah, team-building is super-key and it's dynamic. Because you might be building a team in one area, and then you might have to bring in other team members from a different area if you're not in that geographic location. Or somebody brings you a deal or something like that, and you want to bring them in as part of that team. So team-building is dynamic.

And one of the mistakes we see a lot of our early clients making is they're trying to spend all the time building the team in the infrastructure before they ever do any deals. They get stuck in the process and they don't ever get to the deals. So we want to always try to encourage people. Sometimes you just have to go out and do it, and then you’ve got to fill the gaps as you go, but there has to be certain components or it's never going to work. You've got to have deal flow, right, David? You've also got to have relationships with investors that you're constantly building and developing those relationships so you can keep them both growing at the same time.

Cool. Very cool. All right, so you mentioned something about building brand awareness amongst the student body. Can you tell us about why that's so important?

David Schwartz:

Yeah, so operating in the student housing space, the community that exists on campus is really strong. And whether you have a good reputation or a bad reputation, I mean it matters all the time, but particularly on campus, word spreads fast. So if you do a good job, you're rewarded pretty quickly. And if you do a bad job, they'll let you know. So we work really hard to build a strong reputation with the university itself. We make a point of building a relationship with the housing office so that they're aware of the product type that we're offering and the quality of housing and convenience that we offer, which we found not many other landlords are providing this complete array of services, all the way down to the student groups. And we make a point of getting to know our residents directly. So we'll hold orientation events so that the new residents can meet each other, and we try to foster relationships across different buildings.

So like I said before, we'll have buildings that are of the same type, but also within the same geographic region, usually within about a mile of campus. So if we know we have a new resident at one building and then a couple streets later, another one at another building, and they share a common interest, we'll make a point of introducing them. Usually just a quick email or a message, or we'll invite them to the next orientation events so they can meet in person. And at the end of the day, we're really focused on building community and having a lasting positive impact for our residents. Again, going back to brand awareness and having a good reputation with the students. If they have a good experience, word spreads.

As an example, I had, in my first couple of years, we had a number of students from various countries in Europe, one guy from France and another guy from Italy, and they would cook together. It became this organic kind of friendship that developed. They would invite everyone from their apartment, and then it turned into everyone from that building, and then everyone from both of their buildings. And it sort of grew into this really nice experience where they had a lasting friendship over a common interest that spread throughout the community. And people still talk about it. I get photos years later of the two of them running into each other and throughout their travels, and it creates a really a nice feeling that we're actually doing something good for these students and for the community in addition to running a successful real estate business.

Kim Lisa Taylor:

That is super-unique. I think that's amazing, because a lot of these people, like you said, they're coming from another country. Maybe they only have a suitcase. They don't know anybody. They're nervous about meeting people. Maybe they're not fully even comfortable with the language. I guess they have to have some proficiency or they wouldn't be studying here, but it can be really hard to meet people. I think we've all experienced that when we moved to a new area, that it's hard to go out and meet people. And the fact that you're helping to facilitate those relationships, that's just really cool. I think that's great.

David Schwartz:

Thank you.

Krisha Young:

A great story too. I love that. The Italian and the French cooking together. Those would've been some epic meals, I'm sure.

David Schwartz:

I did get invited to one, and it was actually quite delicious. But just one.

Kim Lisa Taylor:

Well, it seems like they've maybe created lasting friendships, but they also remember you, and so you're just included in that tribe. That's awesome. That's really great.

What kind of specific maintenance issues do you see in this asset class that maybe are unique to these projects?

David Schwartz:

Well, typically people, especially investors' perception of student housing, is that the students and young people are going to trash the place. And I found that generally when we market and cater specifically to graduate students, that is not the case. And we make a really clear point from the beginning that we are not a party house, and if that's their intention, that they should live somewhere else. So we really want to create a community of smart, like-minded people who are really there to study and not just have a party. And I think the graduate students are a little bit more responsible in that way.

Specifically for maintenance issues, I mean, it would be surprising to some. For me, it was surprising. A lot of these kids have never really done anything for themselves, whether it's cooking or doing the laundry. So one of the things that surprised me from the beginning was that nobody was emptying the lint filter on the dryer. So we would get maintenance requests saying, “The dryer doesn't work, the dryer is broken.” So we'd say, “Is it plugged in? Have you run it?” Asking them all these troubleshooting questions. And we go in, and we find that the dryer filter has never been emptied. It is packed with three inches of lint. And I mean, frankly, it's actually quite dangerous. So we've now added that into, just a little point we make even in the tour, just reiterating how important it is to clear the dryer filter every time so you have clothes that actually dry. So that was kind of a fun surprise that who knew that people had never done their own laundry before?

Kim Lisa Taylor:

Well, you might also make a note of this. This happened to me once when I was a young tenant, don't use laundry detergent in the dishwasher. It would foam all over the place. It was insane. And then we had to call out a plumber, and they're like, “Yeah, did you use laundry detergent?” I'm like, "Oh yeah, nope, the soap, right?” And they're like, “Yeah, no.”

Yeah. I guess that's important, is you've got to think about, all right, what would I tell my kid if I was teaching them these things at home if they've never done it? What are the things? Those are kind of life skills. Wow, that's great. Okay, so what do you think the biggest risks are to your business model?

David Schwartz:

That's something we think about a lot. So in addition to the common risks that are typical of any asset class, whether it's other competing operators and investors, other people who are not just doing student housing, but that are doing condo conversions, whenever I go after a property, make an offer. I almost always find another investment group making offers that specializes in condo conversions, which actually ends up being a benefit to what we're doing, but I can explain a little bit more on that later. But the biggest threat I would say is direct competition from the university. Student housing tends to be a little bit insulated from, like I said, from the beginning about higher competition from other investment groups. But it's unique in that the university is really the king-maker. They set the rules, they set the housing policies, they have tremendous capability to allocate land and resources to build student housing.

So I'd say that in addition to competition from other operators and developers and all of the other risks that we all experience, the university's housing plans is probably the biggest risk. So we pay really close attention to the five-year plans that the university has put out. Again, we make a point of getting to know administration from the university, and even board members, people who are the ones driving the agenda for the university's housing plans. And if we notice that a university is planning on building or even has started to talk about building housing, it drops in attractiveness in terms of an investment market. And then the flip side of that, if we notice that the university is not allocating funds or land to housing, that's a very attractive market for us as the university itself increases its enrollment and the local market has an increase in demand and a decrease in supply. Those are really attractive markets.

So Waltham, for example, in Waltham, Mass., that has both Brandeis University and Bentley University, we really like the market there because we're seeing competing firms buying properties and doing condo conversions, which is actually taking housing supply out of the market. So as demand is going up, the supply is going down. And whatever remains, I mean, we can charge much higher prices than I even had originally expected. So the university itself actually, it doesn't serve them really to provide housing. Of all of the uses of their time and capital, land and human resources, they're for-profit businesses. And what makes them the most money is providing more lab space, providing more classrooms, providing office space for professors.

So the last on that list of what can we use as space for is housing. And as a result, they really don't have too much interest generally in building purpose-built housing. And we're seeing a proliferation of student housing projects, not only in the northeast in these top-tier markets that I'm focused on, but across the country.

Kim Lisa Taylor:

That makes a lot of sense. And I could see where the housing component could kind of get lost. In fact, in St. Augustine, which is one of the places I have an office, we have Flagler College here. And yes, they're looked at both with love and hate by the community because they provide vital services to the community. They bring in all these people, but they also consume a lot of the housing that might otherwise be available to other types of tenants. And sometimes their needs are adverse to those of the community at large, but also, there's a scarcity of housing, and it still has to be dealt with.

So yeah, I think that's a continuing challenge for universities on how to deal with that. And so it seems like helping build that relationship and trying to help fill that need might keep them from, I guess if you're able to do it on a large enough scale, you could eventually influence their decisions on how they're going to spend money if they knew that they had some outside developer or somebody that would be providing that type of housing. So maybe a little more scale than where you want to go, but I could see where that could have an impact.

David Schwartz:

Yeah, that's actually a good point. I just wanted to jump in. That's what we're looking at next. The university and the cities that they are operating in are in conversation about how to address both of those needs, the needs from the city to provide affordable housing and the needs for the school to give a place for their students to live. So I think that is the next “next,” at least for my company.

Kim Lisa Taylor:

Well, and maybe there's some tax credits or something that are going to become available for developers that are able to fill some of those needs. And by the way, we are going to be interviewing a tax-credit expert in one of our future podcasts that I just met recently. So that might be one that everybody on the call wants to hear. And David, you might even be interested in meeting him. So that's great.

So what about management? How do you manage these? Some of these are smaller properties. Like you said, you have a portfolio of smaller properties in geographic area. How do you manage those? Do you self-manage? Does there have to be a certain number before you could turn it over to other managers? How do you handle all of that?

David Schwartz:

Good question. When I first put this business model together, the plan had always been to hire a third-party management company, just it's not a particularly profitable business as compared to focusing efforts and activities to expanding and growing the portfolio and commanding more of the market. However, when we went into the market to see what kind of property management companies were available to hire, the options were limited and the competency was not where we wanted it to be. So it started by picking the best company that I could find. It happened to be actually run by the older brother of a friend of mine from school. And out of the relationship, I think he provided some really good service at the beginning, but after the first year, a lot of the responsibilities were delegated to some of the other members of the team, and we just weren't seeing the same level of service that we had come to be known for and to be demanded from our student population.

So we ended up bringing that in-house, which was definitely a learning experience. Running property management in general, there's a lot of nuance to managing tenant relationships and vendors, and I mean, it's an entirely different business. I had fortunately come from the real estate brokerage and agent side of the business, so I was familiar with a lot of that activity. But in terms of property management, dealing with the leasing team, managing the leasing team and the maintenance staff was new. So we ended up starting our own management company, brought it in-house. Over the years, we figured out how to do it. And it's actually been definitely a good experience, I'd say, in hindsight, because we're able to have a lot of cost control and quality control, which then just falls right down to the bottom line for our investors and the tenants that we have, have agreed.

I mean, we open up reviews for our property management company, which can be a dicey move. Generally, property management companies are not known for having great service, but we're really proud of the fact that we've achieved five out of five stars ratings from our residents. So running both the investment company, and my brother's actually running the management company. So that has been really convenient.

Kim Lisa Taylor:

That's great that you've been able to build a family business out of all of this. 

So Krisha, would you like to read our midpoint?

Krisha Young:

Yeah, and David, I just want to say I really like how focused you are, your true north here, of being focused on the values of your organization and not getting too lost in all the moneymaking of it, which is really important. It's very important to have that, but also, you're not losing the ethos of why you started this. And I love that that's present in every business decision that you're making, what you just talked about in terms of the management of it. I think that's wonderful.

All right. Hi everyone. So if you are not aware, we have two books on raising capital legally that Kim Lisa Taylor has written. One of these books is for beginners and one is for more advanced capital raisers. If you would like us to mail you a copy, please text the word SYNDICATE to our phone number at (844) 796-3428. And the word is SYNDICATE, S-Y-N-D-I-C-A-T-E, to (844) 796-3428. And you can also go to our website, syndicationattorneys.com, and there's a button there as well that you can click to get that as well.

Kim Lisa Taylor:

Excellent. Thank you for that, Krisha. 

So what happens if somebody doesn't pay? Is there a process for that or do you even have that as an issue?

David Schwartz:

Good question. A lot of times the students that we have are coming with parental guarantees. In fact, we require that they have a co-signer or a parental guarantor on the lease. And through the property management software that we use, the residents are able to set up their own payment method on the platform, and we encourage an ACH payment, which allows us to pull payment automatically.

So from the moment that they sign the lease for the entire duration, every month that payment automatically is transferred to our account. And if for whatever reason there is any kind of issue, we then also have the ability to pull that payment. So as a result, we've had 100% on-time payments and collections for the entire history of the company, which I know is unheard of in this business. And even before we used this as a tool in the new software that we're using through Yardi, I think we had maybe one, maybe two students who didn't pay. There was some kind of family hardship. And at the end of the day, it was just a matter of having a conversation. And as a result of working really hard to interview the students in advance and make sure that they were going to be good quality tenants with responsible membership of our community, we're proud of the fact that we have never had to evict any tenants.

Kim Lisa Taylor:

Knock on wood. Let's hope that stays true.

David Schwartz:

Fingers crossed.

Kim Lisa Taylor:

You had some effects from COVID, right? What happened during COVID?

David Schwartz:

Yeah, so COVID was definitely a big shock to the student housing community. A lot of the universities made a very sudden and abrupt decision to kick all of the students off campus, which at first was shocking, but ultimately ended up serving our niche really well. As a private developer, owner-operator serving students for off-campus housing, the propensity and preference between living on-campus versus off-campus dramatically shifted from on-campus to off-campus. So demand for our product actually increased even more than expected during COVID. We were already operating at a low to mid-nineties occupancy rate, and we hit over... I mean, we're at a 100%. We were oversubscribed during COVID. So what was a very difficult situation for many ended up being actually a good thing for our asset class.

Kim Lisa Taylor:

Wow, that's amazing. And then what about, it's a little bit seasonal though, right? Because there's usually a nine-month period where the students need to be there. And then what about the periods when they're not? Is that all just taken into account with the rents that you charge, so you have three months worth of vacancy that's accounted for, or how do you handle that?

David Schwartz:

So we do 12-month leases. Every student that comes and every resident is on a 12-month lease. We do offer the ability to sublet. And if the particular tenant knows that they're going to be away for the summer or whatever comes up, they're going to be studying abroad, if they give us enough notice, there is enough depth to the market that we can then offer that space available for the semester or for the summer and help them fill it. Ultimately though, the responsibility is on the tenant and their parental co-signer who's already automatically signed up for making 12 payments and monthly installments.

Kim Lisa Taylor:

That's a pretty cool service. Then what if you have tenants that are just... Because you've got a group of tenants that are occupying a building with shared common space? Is that how it works?

David Schwartz:

So it's very similar to any ordinary apartment. When we buy an older building, we'll typically try to maximize the number of bedrooms and bathrooms that we can fit into the space, while keeping the same number of units within the building.

So as an example, the latest project that we just completed, was originally a four-unit building that had just really large one-bedroom units. So it was a four-unit, four-bed, four-bath building. And through an extensive renovation, I mean, we really got renovated this place. We still had four units, but then we ended up with 13 bedrooms and 13 bathrooms, all private. And in that building, that's actually our new flagship building where we are breaking records within our own model for what we've been able to achieve in rental prices for the Waltham market. So I think we're getting over $2,100 from one student for one of the bedrooms there. So I mean, in a market that on average bedrooms go for around $800, $850.

Kim Lisa Taylor:

Wow. Wow. And that is really being creative, which is again, one of the things I just love about your model. It's that you guys have gotten so creative with it and you refined your model that you know what works, what doesn't. And I mean, it's just so remarkable that you're able to go into a building and envision what it could be when some of these things are probably pretty run down and neglected, and I don't think a lot of people have that vision.

David Schwartz:

Yeah. Thank you.

Kim Lisa Taylor:

Okay, well, so just want to remind everybody that we do have live Q&A. So if you have questions you'd like to ask of David or you'd like to ask of me or Krisha, please either put your question in the Q&A, or you can raise your hand, and we would love to get your feedback on all of this.

Krisha Young:

We do have a question here if you want me to ask it right now or later.

Kim Lisa Taylor:

Let's hold for a minute. What I'd like David to do is, can you tell... What are you looking for? How could people that are listening to this podcast or listening to this YouTube, how could they help you? What are your needs right now?

David Schwartz:

Okay, thank you. So we're always growing and expanding. So as any investment company, we are looking for new accredited investors who are excited about the asset class that we've identified and the niche that we are now specializing in and want to participate in the types of investments that I've talked about today. And I'd say the other need is supply of new product. I think that anyone who's in this space and in this industry today is well aware of the challenges that exist with respect to supply. As interest rates are going up or have gone up and are now flat, and hopefully coming down soon, people are expecting that there will be an increase in prices from here. So hopefully some people are motivated to sell, but right now we are in this difficult zone where some people can't afford to sell or refinance because the prices are now so high, and others are just holding and waiting.

So the result is that the supply of new product in the market is exceptionally tight, even tighter than it had already been. And if anybody is looking to get into this space or help out in any way, looking for bird-dogs, people who can find properties that are off-market or connect with owners who may be considering selling but have not yet started working with a broker. So any bird-dogging of properties in Walham, Mass.; Pittsburgh, Penn.; New Haven, Conn.; Philadelphia parts of Upper West Side of New York, near Columbia. I mean, there's a couple of markets that really work. Right now, we're very actively buying in Walham, Mass. So anyone who knows of any off-market properties, please send them my way.

Kim Lisa Taylor:

That's great. And then I would encourage you to call David and have a conversation with him so that you understand what he's looking for, so you're not just throwing him a bunch of stuff that doesn't make any sense. And I'm sure he'd be willing to share with you offline what specific criteria a building would have to meet before it could be considered, because nobody wants to waste time, either you as a bird-dog or him as an operator and developer of these types of products.

So what would be, I just want to mention also, David didn't mention this, but he does have a Rule 506(c) fund that he's working in building that portfolio with. So it is 506(c). It is open only to verified accredited investors. But if anybody is thinking about passively investing, and this sounds interesting to you, I encourage you to have a conversation with David and learn more. So how can somebody reach out to you if they want to learn more?

David Schwartz:

So the best way to contact me is by email or through my website. The company name is called Avance Capital. So the website is www.avancecapitalllc.com. And the word Avance, for those who are wondering, is exactly what you would think. It means to advance, to lead and to go forward, in Spanish, French, and Portuguese. But it didn't really mean much in English, so I thought it was a fun name. So when you're spelling it all out, there's no D in the word Avance. So by website, or you can contact me by email, david@avancecapitalllc.com.

Kim Lisa Taylor:

Okay. And maybe Krisha, if you could put those numbers in the chat. So just again, Avance, A-V-A-N-C-E, capitalllc.com, or you can reach out directly to David at david@avancecapitalllc.com.

Krisha Young:

It's in the chat.

Kim Lisa Taylor:

All right, let's go and see if we have any, it looks like we have some questions. 

Krisha Young:

Yeah, I put the website and your email in the chat, so hopefully everyone can see that. So we've got anonymous attendee ask, “Do students or some students get stipends to pay for using your student housing services?”

David Schwartz:

So I'm not sure about stipends, but there are a number of grants. Some of the students that come are on financial aid. So that financial aid can and sometimes does cover housing, but sometimes not. And in the event that it does not, there's additional grants that some students are eligible for. I know for a little while some of our students that were coming from East Africa, I think there were a bunch from Ethiopia and Tanzania, a couple other countries that were eligible for the George Soros scholarship.

And basically those students would write an essay and talk about why they wanted to come and study and what their objectives were and why they should be granted this... it was a grant. And those students would come and the scholarship would cover everything from housing to food, to transportation, all of the pieces that were missing outside of tuition. And the reason I know this is because the fund was a little bit slow in getting funds approved, but ultimately, it is a very good program that makes it possible. A lot of students that are coming are from families that can't necessarily afford the expensive private universities that we have here in the United States. So having those gaps filled by these types of programs is a really nice thing that they're doing.

Krisha Young:

Great, thank you. The next question, we've got a few here, Tariq. “Hi, David. What are the pitfalls and challenges on new development look forward and what have seen or to look for?” Okay.

David Schwartz:

Okay.

Krisha Young:

Pitfalls and challenges, a new development to look for. I mean, that's what he's asking.

David Schwartz:

So I think the biggest challenge right now is the cost of capital. New loans are more expensive than they had been. A lot of people are saying that they're very expensive, but I think it's important to remember that before the Great Recession, rates were in this range. So it's not outrageous in the realm of history, especially if you look further back. Some of my mentors like to remind me that a few decades ago, that rates were a lot higher than they are today. So I'd say the biggest pitfall and challenge is the cost of borrowing money and financing these projects. It's just a big change, and it's a very rapid change. The rates went up at such a quick rate that a lot of people have been shocked, and it's taken some time to adjust. As a result, pricing, the expectation was that pricing would also adjust, which we haven't really seen.

So I think on the one hand, it's again, shocking and surprising. And investors and the market in general don't like to be surprised. But then the flip side of that is that I think it represents the strength and resilience of the market overall. The really tight supply and the stability of pricing, I think, is indicative of where things might go from here. If the Fed decides that they're going to not just stop raising rates, but they actually might start to decrease interest rates, then I think from here, given the time that has been available for prices to come down, I think that they're going to continue to go up from here. So time will tell.

Kim Lisa Taylor:

Well, and David has a finance background, so certainly you sound like you're coming from a place of knowledge about those things that many of us don't really truly understand as deeply, I'm sure. So, go ahead.

Krisha Young:

Yeah, thank you. All right. So another questioner said, “Good morning. Would you please explain further what is carner conversion? Excuse my spelling.” So he spelled it C-A-R-N-E-R conversion.

Kim Lisa Taylor:

Oh, condo. He was talking about condo conversion.

David Schwartz:

Oh, condos. Carner.

Krisha Young:

Okay. There we go.

David Schwartz:

Okay. So condo conversion is basically taking an existing multifamily property that's usually rented as apartments and renovating them and improving the quality of the interiors and systems so that they are “condo quality.” And then selling those units, those apartments to end users. So they are no longer rental apartments occupied by tenants. Instead, they're owned by end users, and they're no longer part of the rental pool.

Kim Lisa Taylor:

Right. So condo, in case you don't know, and I'm sorry if I called you a he when I should have said she, but condo means condominium, condominium conversion. Yes. Excellent, excellent.

Krisha Young:

It looks like CD Mitch wants to speak with you. So I've got a phone number here. They said, “I'm currently working in that market and would like to speak with you.” So we've got a phone number here. And Tariq has a second question, “What is your return rate on investment and are looking for joining?” So I think maybe they're saying that they'd like to possibly invest.

David Schwartz:

Okay. So as Kim mentioned, we have our second fund open, registered as a 506(c). So we're accepting investment from verified, accredited investors who, like I mentioned before, are looking for exposure to this asset class. The target return for this fund is a 15% net internal rate of return to the investor, and that is just a target. This first project that I mentioned with the four units that we took from four beds to 13 beds, the projected return is higher than that. So to answer your question, 15% is the target.

Krisha Young:

That's great. Bobby Sharma is here. “How many properties have you bought and sold?” And there's a few sections to this, and I'm happy to repeat. “How many full cycle, what kind of loans are you getting? Any insurance coverage issues?”

David Schwartz:

Good questions, Bobby. Okay, so the first one. We currently have about a little bit over 40 buildings that we've bought so far. None of them have sold completely round-trip, as a round-trip cycle, but we have refinanced one of them. So that is a question I get all the time. For investors, they want to know how many have you gone round-trip on, what have you sold, and what have been your actual realized returns versus just the projections? So as I mentioned at the beginning, we do have the portfolio down in Providence currently being, I mean today, we have showings with a couple of investment groups, and the cap rates that they're using to calculate the projected offer in terms of sales price is better than we expected. So I'm confident that we'll be at least meeting, if not exceeding, our projections on those projects.

But to answer that part of the question, the only one that we've gone sort of round-trip on is we refinanced, we had two twin buildings that we ended up buying for a really good price with great financing, and we added enough value to those buildings that we were able to refinance, pay off the investor, get him his projected return, and ended up with the properties at the end. And the reason we did it that way was I had another project coming up, that investor wanted to free up some cash and then do the next one. So it was a way to book a win on that first one and reinvest the capital in the next available opportunity.

Kim Lisa Taylor:

And that's always a rule of thumb is, if you're going to cash an investor out of something, have something else for them to invest in, especially if you're going to cash them out of a property that you intend to keep, then make sure that you've got something else they can go back into right away. All right, well cool. Any other questions, Krisha?

Krisha Young:

Yeah, there's a couple more. Bobby also asked what kind of loans you're getting and any insurance coverage issues?

David Schwartz:

Sure. The loans we are most successful with, we work with a number of different banks. Regional banks tend to understand our business model particularly well. And again, I work really hard to establish good quality relationships with my lenders, and just keep up communication with them so that they're apprised of all of the updates that are going on, especially when we're in the construction phase of the project.

So we'll take out an acquisition and construction loan that will last for the eight to 12 months of construction, that then automatically converts to permanent financing. So the construction period of the loan, the interest rate is a little bit higher. Once we have completed construction and the building is ready for occupancy and in service, we’ll convert down to a little bit lower permanent financing amount. So that's an ever-changing number. It's been getting more expensive. And now it's coming down a little bit, and we're hoping we see those interest rates continue to come down going forward.

Kim Lisa Taylor:

And on those loans that you're getting from the regional banks, are they requiring personal guarantees?

David Schwartz:

Yeah, so that is one thing that I'm required with these types of loans, is that I have to give a personal guarantee. And one of the benefits to the investors is as general partner, I'm taking on that liability and I'm responsible for the debt. As a limited partner, the investor is not responsible for signing personally. So that's one of the attractive pieces of this structure that we've set up.

And then I see the last question was on insurance. We are seeing the insurance space is getting more expensive across the board. I know down in some parts of the country down in Florida, it's outrageous, but I think that the impact that the cost of insurance is having in some areas, whether it's climate change or whatever the issue is, the cost of operating insurance company is going up, and those costs are being spread across all who are covered. So we've seen quite a dramatic rise in the cost of insurance. And at one point, we looked at switching carriers and getting blanket insurance that would cover all the properties. Ultimately, the cost savings wasn't worth the coverage that we were getting, so we ended up sticking with the carrier that we've been using. But yeah, I mean inflation is impacting everything, including insurance.

Kim Lisa Taylor:

Right. Yeah, definitely seeing an increase in our rates in Florida, for sure. All right. Anybody else, Krisha?

Krisha Young:

Yeah, there's just one more here from Tariq again. “When you choose a market, what are the number one, two, three most important things that you're looking for?”

David Schwartz:

Great question. So this goes down to fundamentals. Whenever I look at a market, I want to see really strong population growth. So the two biggest factors are both population growth and job growth. If a market is becoming more attractive for people to live in, there's a tight supply of property that will lead to prices going up. So we want to see a history, not too long, because we want to be in early enough that there's value to be had, but we want to see the beginnings of a strong job market and population growth to that area, even if it's in that sub-market. So if a state overall is losing population, we'll look and dive down deeper, is this neighborhood becoming more attractive even if the state is not gaining population? So this is probably the two most important factors. And then because of the niche asset class that I am operating in, we look at the university really closely.

We want to see that the university's financials are sound and that the longevity is there, that they're going to be around for a long time, and that the reputation among students is positive. So young people want to go to these universities. One of the big factors that we look at is the yield, the acceptance rate, or how many people are applying to the school versus how many get in. Because another risk that we look at is competition from other universities. The higher education space is consolidating right now, less so among the top-tier universities and the level and echelon of schools that we operate in. But overall, the higher education space is consolidating. So, if there's a lower amount of people that are applying to any given school, the school could simply raise their yield, which we have seen them do at times. It's not common, but something else that ... We want the school to be able to pull some levers and operate for the long term, because we are, in essence, partnering with the school.

Kim Lisa Taylor:

Wow. I mean that in itself is an art, and just figuring out how to figure all that stuff out, how to do that kind of research. So really spend some time thinking through these markets and developing this program.

There is another question in the chat, I believe. Somebody asked, “I'm in real estate in San Diego. I've seen a similar model in San Diego, and there are a few of this model set up in LA. Are you guys in the California market at all?”

David Schwartz:

We are not in California at the moment. For a time, I was looking at some schools out in the Los Angeles area, but currently, no, not in California. Starting local, expanding from our home base here in Boston throughout New England, down the East Coast.

Kim Lisa Taylor:

Sounds like a good plan. All right, this is amazing amount of questions, David. You clearly have an interesting topic that a lot of our audience is interested in. You had a nice attendance today, and I know you're going to get a lot of listeners through the podcast and also people watching through YouTube. We've been super-excited to have you here. I hope it's productive for you as well, and we look forward to continuing to help you grow your business any way we can.

So I want to say thank you to everybody that came today. Krisha, thank you so much for coming and participating. Any last words, Krisha, that you'd like to add?

Krisha Young:

I just want to say thank you as well and remind everybody that David's email is david@avancecapitalllc.com or it's avancecapitalllc.com is the website. No D in there. And our website is syndicationattorneys.com for anything else that you might need in terms of getting your deals legally sound.

Kim Lisa Taylor:

If you didn't catch the way to get the book, you can go to the “free book” tab there. There's a lot of other free resources at our website. We have an entire resources area where you can access over 80 free articles, our previous podcasts, other podcasts that I've been a guest on. There's some free white papers in there. There's just a lot of information. Our goal is to help you have a really well-rounded education so that you feel comfortable and confident when you're going out and raising money, raising capital from investors. You're not going to learn what to buy or how to buy it from us. You're going to learn that from other experts in the field like David. And once you have that model and have worked with those mentors, and then that's the way that we've seen a lot of our clients get started.

So I just want to say again, thank you so much. Get a copy of one of our books. We also have a low-cost Pre-Syndication Agreement for any of you that don't have a deal, but want to get into our circle. We actually have a weekly Mastermind that's had some tremendous feedback from the attendees that have come, and it's something we really enjoy doing because it's a way for us to really connect with our clients and help our clients connect with each other.

So feel free to reach out to Krisha at syndicationattorneys.com, that's K-R-I-S-H-A at syndicationattorneys.com if you want to know more about that Pre-Syndication Agreement or any other thing that we might be able to help you with. So again, David, thank you so much. Everybody.

Krisha Young:

David. Thank you, Kim.

David Schwartz:

Thank you, Kim, it's been a pleasure. Thanks everybody.

Kim Lisa Taylor:

We'll talk to all of you later soon.

Krisha Young:

Bye.

David Schwartz:

Bye-Bye.