Jered Sturm is the co-founder and CEO of SNS Capital Group, a private equity investment firm with a focus on acquiring and operating large apartment communities in Cincinnati, Ohio. In this episode, Jered discusses why he’s going all in on investing in his operations, his journey from maintenance technician to real estate investor, and how he’s been preparing for the upcoming recession for over a decade.
Jered Sturm | Real Estate Background
- Co-Founder and CEO of SNS Capital Group
- Portfolio:
- 1,000 multifamily units
- Based in: Cincinnati, OH
- Say hi to him at:
- Best Ever Book: Breathe by James Nestor
- Greatest Lesson: Trust in others to do something better than you can. Delegate, and you will often be surprised with what people can do.
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, we are coming to you live from the T-Roc Contracting podcasting stage at the Best Ever Conference in Salt Lake City, 2023. I am Slocomb Reed, and I am here with Jered Strum. Jered is an apartment owner operator in Cincinnati, like myself, managing just over 1,000 doors... And he was a speaker here at the Intelligent Investor Real Estate Conference that opened the Best Ever Conference. Jered, can you tell us a little bit more about your background and what you're currently focused on?
Jered Strum: Yeah, thank you. I'm happy to be back on the podcast. I learned just before getting on here that out of 3,000-something podcasts, this is the first one ever that we went on a morning walk prior to the podcast with the hosts... So I'm honored. But a little bit more about myself. I have a unique background, that I started in real estate as a maintenance tech. So I was the guy changing the toilets, and hanging blinds, and doing those things... And then that evolved into a home renovation company, where I was doing ,kitchens bathrooms, additions, and I was the guy swinging the hammer, and sweeping up the floors, and those types of things. And then I used that skill set in about 2008, looked around and said "Hey, why are we working on these other houses? Let's start buying some houses for ourselves." And when I say "we", it was at that time me and my brother, who - we're business partners today.
So we started buying up real estate, one single family house at a time, putting our sweat equity into it, and then growing into fourplexes, tenplexes, larger units, and then ultimately landed in 100-plus-unit apartment communities specific to the Cincinnati, Ohio market. That's where we're at today.
Slocomb Reed: And you stuck to Cincinnati because that's the market that you know, that's where you came up, so you have some operational advantages and some market knowledge advantages there in Cincinnati. Correct?
Jered Strum: Yeah, for sure. Our core competency is quality operations. And I think the further you get away from home base, the easier it is to make a mistake and not have that core competency to lean on. So I'm sticking close to home in Cincinnati.
Slocomb Reed: That makes sense. And for those of you Best Ever listeners who have not been with us for the last seven or maybe eight years, Jered was one of the first guests on the podcast about, 3,000 episodes ago. So this should sound familiar to some of you. Jered, I want to ask more specifically about some comments that you made on stage at the Intelligent Investor Conference. There was a panel on this discussion, and you were asked "What is it that you are investing in in 2023?" And your answer was your operations; which is not the asset class that most people were expecting you to say. I was expecting you to say multifamily. Can you explain both the micro within your business, and the macro of commercial multifamily in Cincinnati, and what's happening in the market right now? Why is it that you're so focused on your operations right now, as opposed to acquisitions, or a particular asset class, or getting into another market?
Jered Strum: Yeah, I think that response was because it's accurate, but also to make the statement of "We don't have to be buying right now." There's a lot of people at this conference, a lot of really driven people, who like to lean on metrics of how many units added, or percentage of growth, dollars of assets under management... And I just think that that can be misleading in the really challenging times that I think we're in.
So I'm not saying you shouldn't buy, and I absolutely am trying to buy; I just have not invested in anything specifically in 2023, other than my operations. So that's because the macro-level and micro-level within Cincinnati is a very challenging market to buy, and I would rather invest in something that is going to yield me a return, which right now all I'm able to find that will do that is my operations. That will position me to then invest in real assets, which will be multifamily properties. When those opportunities arise in our market, I'll be better positioned to handle them, because my operations will be well polished. You had like two parts to your question; did I get both of them?
Slocomb Reed: Yes, especially the micro. Jered, tell us a little bit more about what you're seeing in the Cincinnati market, but also in the greater economy right now, that is making you focus on something other than acquisitions in order to grow.
Jered Strum: I'm no economist, but I guess what I'm seeing in the deals that I'm underwriting in my market, which is Cincinnati, is there's a delta between buyers and sellers right now. There's enough money in the market that some buyers have to place still, that it's supporting yesterday's prices, in my opinion.
So real estate is a very slow-moving industry, and until those funds burn off, we won't see a rebalancing of prices to reflect the recent interest rate movements. So what that requires of me as an investor is patience. So that's what I'm doing; and the appetite for growth, plus the patience equals investing in my operations.
Slocomb Reed: Jered, I want to ask you a question that I also have answers to; my answers are coming from being a podcast host, around 200 episodes and all the people I've interviewed and all the different strategies and circumstances that people find themselves in... It shouldn't come as a surprise to anyone, at least in the conference now or listening to a podcast like ours, that there is a delta between what buyers want to pay and what sellers want to sell for. To a point that you just shared, why is it that buyers are still buying at prices that they probably shouldn't do?
Jered Strum: I have my guesses, but I don't know... My guesses are that there was lots of capital raised in, let's say, six months ago, or six to 12 months ago, that takes a very long time to make its way out into the markets... Or you could even say the interest rates move so quickly it could even be 1031 funds that need to get placed. So that takes time. And it really hasn't been that long. Historically, the Fed hasn't moved rates this quickly, so I think it's just a timing thing. But six months is not really that long of a time, and we'll just wait it out and see where things rebalance.
Slocomb Reed: That makes a lot of sense. I was going to reference the 1031 spiral, I like to call it, if you didn't, that you sell, and then the way that a 1031 exchange is structured, which any listener could go google, is going to highly incentivize you to acquire something quickly, regardless of what's going on in the market.
There's another piece to it though, and I call it the cost segregation spiral; that when people aren't doing a 1031, and they get their profits returned to them after a sale, another way to avoid paying significant taxes on those gains is to get them into another property that you can cost-segregate. So there are a lot of people who are sitting on big gains, primarily from 2021 sales and very beginning of 2022 sales, who continue to acquire in 2022 because they had all of these gains, that they could get into a deal, especially with 100% bonus depreciation still being in play in 2022; instead of having to do the 1031 stack, they could just cost-segregate the next deal that they got into and save those gains from going to the IRS.
Jered Strum: Yeah, I think I'd also add that to be a seller, there needs to be a motivation. And at least within the Cincinnati, Ohio market, there's not a lot of distress; there's not a need to sell right now. So if you put yourself in the position of a potential seller or an owner, and you say "Six months ago my property was worth 10 million. Now it's worth nine, but it's still cash-flowing great", there is no motivation for you to sell, which then also just reduces the transaction volume within our market. So I think it's all of those things combined, has resulted in me not making any recent acquisitions. But again, it's not that I'm not trying; we just continue to turn rocks and see what we can uncover, and hope for the best.
Slocomb Reed: I want to talk about the Cincinnati market, and some of the things that we are hearing about commercial real estate and commercial multifamily while we're at the conference, and the sentiment in the room... First, I want to ask, focusing on your operations... Am I completely off base, or are you focusing on your operations in order to maximize the profit on the current portfolio? Or are you focusing on your operations in order to be more prepared to scale as the market shifts, or is it both? Or is it something else?
Jered Strum: It's definitely both. We have 1,000 units to service, and a great way to do that is to be really good at operating. But another way to be really competitive in the acquisition strategy is to be very good at operating, because it helps your underwriting, it helps your profitability... So definitely both, but yeah, I thought you were gonna go with the difference in the Cincinnati market compared to what we're hearing here from other operators, and cash calls, and things like that.
Slocomb Reed: To your point about Cincinnati, Jered... Yesterday morning you and I both sat in on a session with Neal Bawa from Grocapitus, who is an authority on the macros of commercial real estate for a lot of reasons... And he had a talk called "Crisis bootcamp. Save your bleeding property with best practices", cash calls, loan and equity injections etc. And he was talking about seeing incredible volatility and how much equity has gone out of the commercial multifamily market with the changes in interest rates primarily. Let me prime what I think you're going to say... You and I found each other right after that talk, and both said we're just not feeling this is in Cincinnati.
Jered Strum: Yeah, and I don't think it's you and; I think it's Cincinnati is not feeling this. It's alarming if that is accurate, some of the metrics he was showing, I think it was a 20% to 30% of syndicators are not able to service their debt, and it's projected at 40%. It was just scary numbers.
Slocomb Reed: Yeah, 40% in June of '23, 50% in August... Crazy numbers.
Jered Strum: Yeah. So I think you can attribute Cincinnati's cashflow to being able to service its debt, but then it's also the debt itself. So me personally, I have fixed-rate debt across all of my stuff, and maybe the syndication industry got a little beyond itself and started taking debt that it shouldn't... But it makes me think of a question I got from an investor... It was probably like six months ago, they asked me, "What are you doing to prepare for the coming recession?" And I kind of just had to pause and think about that question, because I've been preparing for the coming recession for a decade. That is basically all I do all day, is polish our operations to get really efficient, and put fixed-rate debt on our assets. And so I have been preparing for a long time. And I think what Neal is showing us through his presentation is there's a lot of people who didn't adopt that mindset. So rather than preparing for a harder future, they prepared for an acquisition, and nothing after that.
Break: [00:12:24.10]
Slocomb Reed: Knowing you a little better personally than most of our listeners, a couple other things that you've done to prepare yourself for a recession is focus on assets that create operational simplicity and operational efficiencies that are going to make it a lot easier to ride whatever could be coming with increased vacancy across the board, or reduced rents... Acquiring properties that allow you to have operational efficiencies that will make it easy to adapt... Another thing that you've told me is that you're focused on really B and C assets in Cincinnati. So you're not buying the things that are most likely to be most impacted if there's a major economic shift.
One more point there - I was having a conversation with another operator in the Midwest; he's in Pittsburgh, in Columbus, and Indianapolis - shout-out to Tom Higgins. He was on the podcast with me recently; we were having this same conversation... All of the charts that you see on stage at a conference like this when they're talking about what's happening in different markets in 2020, 2021 and early 2022, ours was not a market that hit those graphs, because our growth was not what people wanted to talk about. If you get to late 2022, 2023, and all of a sudden, it's the Midwest that people want to talk about. They want to talk about the sustained rent growth; not the high rent growth, but the sustained rent growth in Cincinnati, Cleveland, Columbus, Indi, Pittsburgh, other places like that... And we both came to the conclusion that when boring is good, you invest in the Midwest.
Jered Strum: Yeah. I think I said this to you off recording, but Cincinnati - when the coastal markets or the Southeast is skyrocketing up and you're envisioning that quantitative graph, it's described as stagnant. But then as these other markets start to go into their decline, it's described as stable. So it's just a perspective shift... But I've always been very happy with both. Because I like consistent, predictable cash flow, and Cincinnati has always given me that.
Slocomb Reed: Yes, and you, as many people do, are operating in a space where you have a deep level of market knowledge. So I've heard people talk about Kansas City a lot this weekend. If you or I were to go to Kansas City, we'd lose a lot of the market knowledge we have. One of the things that I've said to people is especially with smaller multifamily, if you give me an address and a number, a price, I can almost always say yes or no. The maybe margin, or the follow-up questions margin is really small for me, because of the market knowledge that I have in Cincinnati. You're very similar in that regard, and so it makes sense to focus, especially when you're focusing on operations. And let me say, when you're focusing on operations, a better way to put that is that you're focusing on the successful execution of your business plan, and making sure that when you are raising capital, focusing on operations means focusing on being able to deliver what you said you were going to deliver when you raised capital.
Jered Strum: Yeah. I think for me, focusing on operations, like you said, is focusing on the business. So when I'm raising capital, I'm raising capital to invest in a business... Where I think what has gone wrong, and what Neal is highlighting in his speech, where 20% to 40% of syndicators [unintelligible 00:16:31.11] they were only raising money for the asset as it was at acquisition. And we're not considering this investment as a business, because someone's got to run it.
So I think my focus is 90/10; we're going to look at the business, and my business acumen and competitive advantage is going to drive the value of that asset, where so many people are the opposite, 10/90, where they're like, "It's in this great market, and it will just take care of itself." It's a business. And when recessions hit and environments change, like interest rates, business gets hard, and you better be good at it, or else you're calling Neal for a rescue fund. So I'm very happy to say that neither of us feel the need for that phone call.
Slocomb Reed: Yeah, absolutely. And the long term fixed rate debt that Neal was opposed to earlier in this conference as well is a part of the reason why we're not calling in for a rescue fund.
Jered Strum: Yeah, I felt like that was a little bit contradictory, but I think he's saying fixed rate debt right now.
Slocomb Reed: Yeah. Absolutely. That makes sense. I remember you saying in a conversation we had earlier during this conference that the things that you've been acquiring recently have been smaller properties; let's call it not syndication size, not where it makes sense to raise capital specific to that particular acquisition. Can you tell us a little bit more about the acquisitions that you have had the last 12-18 months?
Jered Strum: Yeah. This will be a great opportunity to plug me as a sponsor, because I'll be able to highlight a really good syndication that we actually put together. So you said too small for --
Slocomb Reed: For which you are no longer raising; this is not an offer that's being made.
Jered Strum: No, this is not.
Slocomb Reed: You're just getting an opportunity to brag about yourself.
Jered Strum: Yeah. So thank you for giving me the opportunity to brag. In 2019 we bought 108 units in a market like we're in right now; it's really competitive --
Slocomb Reed: One property?
Jered Strum: Yeah, one property, 108 apartment units: we did really well with it. We renovated most of the units, added the value that we had projected, everything went really well, the market supported that business plan, we executed very effectively... I actually remember the numbers; we purchased it at 5.6 million, put about $890,000 into it, it appraised at 10 million... We did a supplemental loan on that initial 108, and bought the next-door neighbor, which was 48 units. We did that under the same syndication. So what that allowed the investors to receive is we went to them and we of course had to get it approved by a majority vote, but it allowed them to expand their investment from 108 units to 156...
Slocomb Reed: With an additional capital raise, or [unintelligible 00:19:11.15]
Jered Strum: Yeah, so all we did is we stripped the equity out of the original 108 and redeployed it into the acquisition and renovation --
Slocomb Reed: Instead of returning it to investors.
Jered Strum: Instead of returning it to investors. So they don't have to go find another investment; we're just redeploying it, which then - their initial contribution is still the same, but we have 48 more units pumping rent into this building. No new hires made, because we already have a leasing agent there, we already have a maintenance guy there... So the returns get juiced by all this additional income, with marginally less expenses.
So we went from 108 to 48, and that was a year ago. And that whole time I was calling the next-door neighbor to the 48 unit, pestering them, saying, "Hey, look, we're buying all these around you; we're able to offer you a fair price. We have economies of scale." And what we then did is we by that time had added value to the 48 unit, went back to the bank again and said "Hey, let's throw a supplemental on this 48-unit." Did the same exact business models, without doing a capital call; was able to acquire this 24 unit that sits right next door to the 48 unit. I hope the listeners are able to follow all this... But to sum it up, we went from 108 units to 180 units without any capital call, renovated all of them.
The initial equity contribution for this investment, that no one has contributed anymore to, was about 1,000,005, and The equity in the 180 units that we have now is about 8 million.
Slocomb Reed: Wow.
Jered Strum: So we were able to do that by being a little bit more creative and not just saying, "Hey, we're gonna buy the next 150 unit." We say "We're gonna build the next 150 units by combining these assets that are next door to us." And I think that's a competitive advantage that we have as a syndication sponsor, being more focused, is we can say we're really going to maximize these assets. And of course, all the investors are incredibly happy with that investment. And so thanks for the opportunity to brag about it; hopefully, you followed that...
Slocomb Reed: A couple things about that, Jered. One of them is, for someone who has had the focus on operational efficiencies that you have had, it makes a lot of sense to go for those smaller assets that are right next door, contiguous or very close, because of the operational efficiencies it lends. You can go get a 24 unit or a 40 unit because you already have 108 units under your operations right there. And because they're your operations, it makes sense to go for the smaller properties, because of what you can do.
One more thing - I've gotta call you out; you said that you can offer the neighbors a fair price. That's not what you said to me earlier. You said you could offer the neighbors more than anybody else could. And the reason that was still good for you and your investors is because of the operational efficiencies you had, that you were adding those -- you weren't trying to manage 48 or 24 units independently; you were trying to manage them as part of a larger portfolio. If there's a theme to this episode, it's operational efficiency. You are adding to a portfolio that already had scale for you.
Jered Strum: Yeah. And I think when you're making unsolicited offers, you'd better have that competitive advantage--
Slocomb Reed: You have to be more compelling.
Jered Strum: ...because you're gonna have to be compelling. So it's about making that seller understand why you're able to pay more than maybe the unaffiliated buyer that's just going to come in and buy that 24 units. Because, as I mentioned in that story, we didn't have to hire any new staff. Our maintenance man is already there, the leasing agent is already there, the office is already there, the printer is there, the computers are there... And so while we may pay slightly more to get that head turn from the seller, it is still absolutely a great opportunity as an investment, because of those efficiencies.
Slocomb Reed: It makes a lot of sense. Jered, are you ready for the Best Ever lightning round?
Jered Strum: Let's do it.
Slocomb Reed: Awesome. What is the Best Ever book that you recently read?
Jered Strum: Does this have to be real estate?
Slocomb Reed: No. But it has to be recent.
Jered Strum: Okay. So I listen to books, but I'm listening to one right now, it's called "Breathe." And it's basically about the science of breathing, and how it can change your body, change how you work, change your health. Who's it by?
Jered Strum: I don't know.
Slocomb Reed: We'll look it up.
Jered Strum: Okay. It's really good.
Slocomb Reed: What is your Best Ever way to give back?
Jered Strum: I really like combining giving back with our company. So allowing our employees to give back, because some of them aren't in the position where they can either have the time or financial capabilities to give back. So we'll do a lot of company events that allow them to do that while they're on the clock. So it's a way of me funding them, but allowing others to give back, which they frankly can do it better than I can. So while on the clock, we'll do company events that are charitable. Example - we gave groups, we paired our leasing agents and our maintenance techs that work together, and we said "You guys need to go to the stores and go shopping together. Here's the company credit card. Buy some toys for kids that need some toys." And then we had them go down and donate that to an organization in Cincinnati. And so it was like a teambuilding type thing, but I like to combine that, allow others that maybe don't have the opportunity to give, rather than just write a check to that organization. I try to combine the business side--
Slocomb Reed: That makes a lot of sense, yeah. Jered, specific to your real estate investing now in the commercial space, what is the biggest mistake you've made, and the Best Ever lesson that resulted from it?
Jered Strum: I feel like that's a hard question for me to answer because of how I frame mistakes in my head... So of course I'm making mistakes all the time, and it's just about using them as a positive. So I'm always learning lessons. I'm trying to think of one that stands out to me... I think anything to do with people; there's always lots of lessons. So as an entrepreneur, something I'm learning and getting much, much better at is that trust in others to do something better than I can. And I don't know if I can think of a specific occasion that taught me that lesson, but that's a pretty universal lesson, is being able to delegate, being able to trust, and once you give that to someone, oftentimes they can turn around and really do it better than you, and surprise you. So hopefully that satisfies the question.
Slocomb Reed: That's good stuff. Lastly, Jered, what is your Best Ever advice?
Jered Strum: Best ever advice... Invest in operational efficiency. So that should tie the theme of the podcast again.
Slocomb Reed: I'll go back to that, but last question here... Where can our listeners get in touch with you?
Jered Strum: You can find me on LinkedIn, Jered Strum. On Facebook as well, you can find me there, and then SnSCapitalgroup.com is our company's website.
Slocomb Reed: Those links are in the show notes. I will say, Jered - I always say thank you. Thank you especially for letting me do an episode about the importance of operations in commercial real estate investing, and the focus on being able to execute on your business plan and deliver on promises that you've made. Thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend you know we can add value to through our conversation about operations tonight. Thank you, and have a Best Ever day.
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