Anthony is the Co-Founder and Managing Principal of Red Knight Properties, a value add multifamily and mixed-use investing company. Anthony shares some insight on purchasing commercial real estate and explains the differences between multi-family and commercial properties.
Anthony M. Scandariato Real Estate Background:
- Co-Founder and Managing Principal of Red Knight Properties, a value add multifamily and mixed-use investing company
- They have over $500 Million of Commercial Real Estate acquisition experience and control 9 properties
- Based in NYC, NY
- Say hi to him at http://redknightproperties.com
Best Ever Tweet:
“Try to find a niche.” – Anthony Scandariato
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Anthony Scandariato. How are you doing, Anthony?
Anthony Scandariato: I’m doing pretty good, Joe. And yourself?
Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Anthony – he’s the co-founder and managing principle of Red Knight Properties, a value-add multifamily and mixed-use investing company. They have over 500 million dollars’ worth of commercial real estate, acquisition experience, and currently have 9 properties with their company. Based in New York City, New York. With that being said, Anthony, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Anthony Scandariato: Sure. That was a great overview, Joe. I appreciate it. And for your listeners, we’re actually right outside of New York City, based in New Jersey; about a half an hour outside of Midtown Manhattan.
Joe Fairless: Where in Jersey?
Anthony Scandariato: [unintelligible [00:01:46].29] Morristown area.
Joe Fairless: Okay.
Anthony Scandariato: So we’re pretty close to New York… And we started our company – my partner and I – about a year ago. In terms of the acquisition experience, I worked for an institutional real estate operating company in New Jersey, where bought office buildings up and down the East Coast, where we were renting to Fortune 500 companies and doing value-add plays, but on the office side. I kind of realized that for a long-term investment strategy, or even a short-term investment strategy, that office wasn’t the best thing to be in, at least in this point in the cycle… So I kind of decided to start buying a few deals on my own, deals that I could just buy and build a track record, and then bring on additional partners and investors once some of these deals came to fruition and returns were actually realized, to feel comfortable to actually be taking the leap doing this full-time at Red Knight in 2020.
Joe Fairless: You bought office buildings up and down — what did you say, the East Coast? Did I hear that right?
Anthony Scandariato: Yeah, we bought anywhere from pretty much New Jersey, all the way down to Florida.
Joe Fairless: Okay. Purchase price ranges were what?
Anthony Scandariato: For your listeners, very big range. It was anywhere from 10 million to 287. That was our largest.
Joe Fairless: Alright… Where was the 287 property?
Anthony Scandariato: It was a building in downtown Charlotte, Wells Fargo Center. Great market, for sure, for any asset class, I would think.
Joe Fairless: How many years were you working at that institution?
Anthony Scandariato: About 5,5 years.
Joe Fairless: 5,5 years, okay. And what was your role during those years, and did that role evolve or change at all?
Anthony Scandariato: Absolutely. So I graduated from college actually in ’14, so it was essentially a role out of school; I started out as a very low-level analyst, analyzing different opportunities for the company’s investment strategies. Then I kind of evolved into taking over the acquisitions department, and also at the same time getting involved with a boutique company and seeing everything from the acquisition, to the asset management, to property management, to development, to negotiating with lenders… Almost like running your own within the shop. So a great experience, and I’d recommend it to any of your listeners who are thinking to get into commercial real estate on their own long-term, but kind of want the experience beforehand, and kind of learn from really good mentors who have been successful.
Joe Fairless: To use your words, “a low-level analyst” – what do you do exactly in that role?
Anthony Scandariato: I wouldn’t really call it low-level, maybe that was the wrong term… But more of–
Joe Fairless: Entry-level?
Anthony Scandariato: Entry-level, yeah. Entry-level market studies, feasibility reports, comparable reports… Almost like a basic form for appraising properties. And then after you master that skill, you can look at analyzing investment opportunities for the company, and presenting to the company if this is a good opportunity to pursue, and if we’re gonna pursue it, are we gonna partner on it, and who are we gonna partner with… And kind of run it soup to nuts. It kind of just evolves from there.
Joe Fairless: Talk to us about a feasibility study that you would do, just the components of that please.
Anthony Scandariato: Sure. So you would obviously do a market study, which could be broken down by obviously started with the state, and then it could be broken down by submarkets is what we call them, in certain regions in different states… And as you dig deeper – it depends what asset class you’re looking at, but you look at historical trends for vacancy, you can look at historical trends for rent growth, and average rental rates, look at trends for any new construction, any new development coming on the line, looking at historical sales data, price per square foot… For a lot of your listeners, multifamily is price per unit, and cap rate… Many different metrics to determine if it’s a good investment to underwrite and present to either a limited partner, or another general partner you’re trying to acquire the property with. Nothing else starts without that general feasibility study.
Joe Fairless: Those different data points that you were talking about are variables that are assessed… I imagine that you all had a subscription to some third-party research company or database to pull a lot of that information. Is that correct?
Anthony Scandariato: Yeah, that’s the benefit of also working for a larger company. You have the [unintelligible [00:06:25].18] which is, as you know, the largest commercial real estate information company, at least in the country right now, and they’re trying to take over more… Reis is another good resource, primarily more catered towards the multifamily… And obviously, different news cycle reports, we could speak to different brokers on historical market reports… There’s many ways to get market intel.
Joe Fairless: So as an analyst you go get this information, but I imagine that doesn’t take very long to run these reports, because you’re just logging and running the reports… What are you doing with the information as an analyst?
Anthony Scandariato: So once you’ve found that information, typically — it depends on what asset you’re looking at, and what asset type it is. For example, I was buying office buildings. Typically, they come with an offering memorandum, which is the same that you see in multifamily properties. You go through that, verify all the information the brokers are presenting to you are correct and accurate from your third-party sources, and then putting together after that a comprehensive financial analysis [unintelligible [00:07:38].18] you can use, and also working for a larger company, they’re able to buy subscriptions to software such as Argus, which is very expensive relatively speaking to just a general simple Excel spreadsheet.
With office properties there sometimes could be a hundred tenants at the property with different reimbursement methods, and different lease expirations, and [unintelligible [00:08:03].09] and expense caps… So it’s pretty comprehensive software. I haven’t really seen an office building modeled on Excel from scratch, but if anybody’s ever done that, I’d love that template. [laughter]
So you kind of gather all the market information, verify what the broker is presenting to you is accurate, underwriting the property in either Excel or Argus to the best of your assumptions, and then seeing based upon your return criteria seeing if it’s a good investment or not, and then kind of presenting to your internal investment committee, and then it kind of goes from there, depending upon how you’re structured.
Joe Fairless: When you’re looking at the third-party research information and cross-referencing it with the information the brokers provided to verify that it is correct, when it is not correct, what are they typically fudging the numbers or their facts on? What categories or what stuff does that typically involve?
Anthony Scandariato: The number one thing I’ve seen is rent growth. Whether you’re buying a hotel, or self-storage, whatever it is, typically the brokers like to fudge those numbers, so that’s the first thing I look at – what did they assume for rent growth? Let’s just say you have a tenant paying $1,000 for a one-bedroom unit; did they assume that you’re gonna get a 7% increase year one, and then year two a 5% increase, without any renovations or justification for it? Even if you wanna compare that to your historical data, most of the time generally cut that in half, what the broker is saying… But it depends on every asset class, and where the properties are located.
If your property is located in a hot market like Charlotte, for multi I had to look at the 10-year historical average year-on-year rental growth there, and see if whatever they’re underwriting makes sense. And if it doesn’t, we adjust, and then we see how our numbers shake out, and we would go to the broker then and make an offer; sometimes it’s accepted, sometimes it’s countered, or sometimes it’s not accepted at all. That’s generally an overview of how we come up with an analysis.
Joe Fairless: For 5,5 years you were focused on buying value-add office buildings, correct?
Anthony Scandariato: Yes.
Joe Fairless: And you learned within a structured organization, but you were able to get a lot of really good hands-on experience, and have different roles over that period of time… And then you decided “I’m gonna take this experience and I’m gonna pivot in the multifamily.” Now, earlier you briefly mentioned that you moved to multifamily because office near and long-term wasn’t as good as multifamily… But let’s talk about that more. Why not office? Because as you were totally aware, I know, office is not as competitive – at least my perception of it; I’ve never purchased an office building. My perception is multifamily is much more competitive than office… And if you have that skillset of being in the industry for 5,5 years, it seems like that would be a great play for you to just double down on office, since you’re bringing that skillset already…
Anthony Scandariato: That’s a good point. What I would say to that is if you’re looking to pivot asset classes, I would try to find a niche within the asset class you’re trying to pivot to, that not many people are looking at. For example, for many obvious reasons [unintelligible [00:11:36].01] multifamily historically has been very recession-proof, and we can go into those details, but we’ll spare them for another time.
It’s more the fact of you kind of have to know your local market, and understand where all the investors are flocking to, and where some of the investors aren’t, because they’re not aware of the areas.
For example, I live in New Jersey, which we mentioned, and it’s very close to New York City, within half an hour… A lot of investors in New Jersey won’t touch anything West of the waterfront, which is Jersey City, Hoboken… Basically Hudson County. So we don’t stay in those markets at all. We like to go West of that, because that’s number one where we live, and number two where we know, and number three where we’re able to focus on kind of the middle market deals, anywhere from — a small scale we did was a million; we’re closing on our first syndication now which is 5,5 million, we just got another one under contract for 7,3…
So if you’re in between that 1 to 20 million dollar range, if you bought in Hudson County and you had that type of money, you’re probably gonna be buying only 15 to 20 units, whereas if you go further West, you can start to get in the 50 to 100-unit properties, with less competition and buying from very non-institutional owners, where you can really create value, and not many people are looking right now in those areas. But once the waterfront gets heated up, everything trends West, historically as well.
But office in general, to answer your question, you could be really good at repositioning office buildings. It takes a lot more time to do that, in my experience, than repositioning multifamily…
Joe Fairless: Why?
Anthony Scandariato: Vacancy… It depends where you’re at. I’ve done deals anywhere from Jersey to (like I said) Florida, Atlanta, Charlotte, Louisville, Baltimore… Even if you’re in a pretty hot market, lease for office buildings take sometimes months to negotiate, even if they’re only 10% of your rent roll and they’re signing a three-year lease. Sometimes it’ll take four months to negotiate a lease… And then you have to deal with the construction, which could take another 2-3 months, or potentially even six months, depending on how big the tenant is. And then they start to pay rent… And then you’ve gotta do it again. You’ve gotta keep constantly doing it…
So it’s a little different than multifamily, where traditionally you had your leases, and just kind of an expected turnover rate every year, and you kind of forecast that as you build your portfolio and you’re able to plan for it. So office is very fluctual, especially when you have a downturn as well.
Joe Fairless: If you were forced to only buy office, what would your approach be?
Anthony Scandariato: I’d say pretty similar to the multifamily – trying to find a niche. Stay out of C, B, D locations, in gateway markets such as New York City and Chicago and Boston. I would go to secondary markets, which we have, very similar to what we’ve been doing. The cap rates in terms of the spread between multifamily and office – they’re getting tighter. I’m seeing about 100 basis points spread right now on a stabilized property between office and multifamily, which is not anything to write home about.
Joe Fairless: Did I heard you correct, for your first couple deals you’ve used your own money?
Anthony Scandariato: Correct.
Joe Fairless: So what was that first deal?
Anthony Scandariato: It was a two-family house… [laughs] I still own it. I think it’s a great way to start out. It could be relatively affordable…
Joe Fairless: We’re gonna skip past that. What’s the next one?
Anthony Scandariato: Okay. Two-family house, and then I bought another two-family… [laughs]
Joe Fairless: Next… What else?
Anthony Scandariato: Another two-family, but I sold it…
Joe Fairless: [laughs] You got three two-families.
Anthony Scandariato: Basically, I started with three two-families, and then I met my partner through a mutual friend. My partner played for the NFL for eight years, Brian Leonard. He’s a great partner to have. He played for eight years as a fullback, so he’s local to the area that I live in. So we ended up partnering on our first deal. It was a very simple split between the two of us.
Actually, we bought a mixed-use building together. It wasn’t 100% multi; it was about 60% retail, 40% multi… A year ago, which we just turned around and did a really nice cash-out refinance.
So we went from the two, two, two, to essentially a ten. Then we bought another ten, and then we bought a 13, and then we bought a 20, and then we bought another 20, and then now we’re closing on a 51, which was our first syndication, and now we’re doing a 64… So you see the progression.
Joe Fairless: Yeah. Is the 60% retail, 40% multifamily the only mixed-use you’ve purchased?
Anthony Scandariato: No, we actually have three mixed-use properties, but the first property we bought was very local to the area I live in; I knew the building and I was very comfortable with the retail. The other two properties that we have, that have retail only, have one or two tenants, whereas the first building we bought had four retail, so the income from the residential and the other ones were anywhere between 70% and 80%… So it looked less risky.
Joe Fairless: Right. Okay. On that first one that you bought, that is 60% retail, what did you do that the person you bought it from did not do?
Anthony Scandariato: Sure. It’s a great case study. We bought it from a farmer family. They actually had 9 siblings that owned the property. Then what happened was there was a fire at the building a year ago, prior to when we bought it, that occurred. One of the tenants left the candle in the curtain over night, and the next thing you know the whole building was on fire.
It was a little bit of a disaster, but structurally, the building was still sound. They had a nice insurance claim that they collected on, and redid essentially the whole building. But this family is very non-sophisticated, and what they ended up doing was they kept everybody’s rent the same after that occurrence, even though you had brand new apartments and brand new retail space now, that they paid for. So everybody’s rent – let’s just call it $800 or so, on the market is more like $1,400. So we went in there and obviously we were able to increase rents, and we also were able to add a little bit more upgrades that the insurance company didn’t add.
So we added some upgrades, we got a substantial rent increase from all the residential, in addition to leasing up some vacant retail that was sitting vacant for years.
Joe Fairless: How do you go about leasing up vacant retail?
Anthony Scandariato: It depends how big the space is. With a local broker. In this instance it was 1,000 sqft. It was actually like a lot style, it was kind of lower-level… We didn’t even think we would rent it, to be honest, for a while, unless we gave it away… But we rented in two weeks after we bought it, and we just put it on the market with the broker.
Joe Fairless: Huh. How much?
Anthony Scandariato: We got $10/sqft, so about $1,000… But if [unintelligible [00:18:06].16] you just add a lot of value to your building, with one lease. So that happened, and there was also a retail tenant that was below market, that we knew was leaving. Every time we buy a building, we like to interview the tenants, if it’s retail or office; obviously, it presents more risk than apartments, and we like to see what’s going on.
So we knew they were gonna be leaving, but their rent was $500 below where somebody else new would come in… So they ended up telling us they were leaving, so we kind of planned. We had the broker market the space already while they were still occupying it. When they left, they got somebody paying actually $550 more than the previous tenant, with no turnover, no vacancy. That was really a slam dunk deal.
Joe Fairless: What type of business is it?
Anthony Scandariato: The new tenant – it’s like a curated goods for men’s supplies. They have men’s deodorant… It’s kind of a cool, crafty space. The space before that was a high-end women’s boutique.
Joe Fairless: Okay. Last question on that, and then I’ll ask you the question I ask everyone… How much did you buy it for? …and I believe you said there was recent refinance – what did it appraise for on the refi?
Anthony Scandariato: Sure. Pretty crazy numbers, and we weren’t expecting this… So we bought it for 1.285 million. Our all-in basis was around 1.3. It appraised for $2,110,000.
Joe Fairless: Excellent. Over what period of time?
Anthony Scandariato: A year.
Joe Fairless: Wow. I’m glad that you talked about what you all did, because that is what attributed to the value increase. Anything else that you didn’t mention, that attributed to the value increase?
Anthony Scandariato: People were flocking over the building when we were making offers. I think we positioned ourselves well. I was friendly with the broker, and we showed a proof of funds, and it was kind of a no-brainer… But we were very fortunate. Maybe it was a little bit of luck and market timing, but very fortunate to have bought that, and really looking to that as a case study for our future success… Even though every deal is not gonna be like that, but… A really good start.
Joe Fairless: What percent of money did you get out on the refi?
Anthony Scandariato: 100%.
Joe Fairless: And how much of that was Brian’s versus yours?
Anthony Scandariato: It’s a very simple 50/50 split.
Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?
Anthony Scandariato: Like I said before, find your niche, and find your niche asset class. Know your local market and where you think you think you can add value if you wanna be a value-add investor, which I’m assuming a lot of your listeners do. For cashflow reasons you could buy a very safe product that’s not gonna go anywhere, but you’re probably only gonna make maybe 5% to 6% on your money. Some people might be okay with that, but… I would say find your niche if you’re trying to create value, and eventually syndicate and bring on other partners… Find your niche.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Anthony Scandariato: Sure.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: What deal have you lost the most money on?
Anthony Scandariato: Knock on wood, nothing yet.
Joe Fairless: Best ever deal you’ve done?
Anthony Scandariato: I don’t think anything could beat the deal I’ve just described right now…
Joe Fairless: What’s the best ever resource you use in your business?
Anthony Scandariato: I think Costar is a really good resource for market intelligence.
Joe Fairless: Best ever way you like to give back to the community.
Anthony Scandariato: We do a charity event every year for children with cancer, that my partner runs. We like to donate a part of the profits to that. And we run it in New York City every year.
Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing.
Anthony Scandariato: You can visit our website, RedKnightProperties.com. Like us on Facebook, or you can add me on LinkedIn. I really appreciate the time, Joe.
Joe Fairless: Yeah, I appreciate you sharing the office experience that you have, and how you’ve applied that to apartment buildings, as well as some mixed-use projects that you’ve done, and how you and your business partner have created the company. I love the case study, as well as just talking about your approach when you were an analyst, how you approached the feasibility studies and the different components of it, and what you look for… And then trust, but verify on those offer memorandums brokers provide, especially the rent growth; as you said, that’s the number one thing you wanna make sure is accurate, is those assumptions.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.
Anthony Scandariato: Great. Thanks a lot, Joe. I appreciate it.