Steve Olson got his start in real estate while still in college, and he never looked back. In this episode, Theo Hicks talks with Steve about the pros of investing in built-to-rent fourplexes. Steve gives us an inside look at the fourplex business model, the advantages of fourplexes vs. other real estate investments, and how they ensure they’ll be offering a great deal to their investors.
Steve Olson Real Estate Background:
- Director of sales for Fourplex Investment Group (FIG)
- 17 years of real estate investing experience
- FIG Portfolio consists of 4000+ units
- Based in Salt Lake City, UT
- Say hi to him at: www.fig.us
- Best Ever Book: What It Takes
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TRANSCRIPTION
Theo Hicks: Hello Best Ever listeners and welcome to the Best Real Estate Investing Advice Ever Show. I’m Theo Hicks and today we’ll be speaking with Steve Olson. Steve, how are you doing today?
Steve Olson: I’m doing pretty good. I know we’ve been trying to get this one on the calendar for a while, so… Victory. 2021 is off to a good start.
Theo Hicks: Yes, victory indeed. Thank you so much for joining us today. I’m looking forward to our conversation. A little bit about Steve. He is the director of sales for Fourplex Investment Group aka FIG. He has 17 years of real estate investing experience and FIG’s portfolio consists of over 4000 units. Based out of Provo, Utah. You can learn more about FIG at their website, which is fig.us. Steve, do you mind telling us some more about your background and what you’re focused on today?
Steve Olson: Yeah, absolutely. I think I’ve been in real estate one way or the other my entire career. There’s been a few times where the ADD kicked in a little bit, but never really could get away from real estate. I tried once and realized that was a dumb idea; real estate’s always been good to me. I’ve learned some hard lessons, some valuable lessons, but also been very fortunate to be in the business for the time that I have.
I got started actually in college, and I’ve told the story a million times… Basically, the short version is I did my first ever deal when I was 12 credits away from graduating. I found out about it by getting a text message, which this dates myself. At that time, Theo, text messages were 25 cents to send and receive. They’re like this new, breaking technology. I got a text message telling me I had made 17,000 bucks and that there’s a cashier’s check for me at title. So I left college and never went back. Ever since then I’ve been involved — I’ve done everything from single-family to rehabs, the wholesales and assignments, raw land, multifamily and development, and many stops in many states along the way, and I couldn’t be happier about it.
Theo Hicks: So suddenly you’ve done it all and you’ve been involved in a lot of different asset classes. What’s your current focus now? What are you currently doing?
Steve Olson: I have a very specific niche right now, and that is build-to-rent fourplexes. We think there’s some really great advantages to the fourplex model. It kind of gives you a lot of the advantages that you get from a large multifamily, but also some of the advantages that you get from single-family rental ownership. That’s the focus, and we primarily deal in the Intermountain West and a little bit in Texas, too. Here in our main footprint, land is expensive, materials are expensive, and it’s really, really hard to buy a deal at a respectable cap rate on the open market. Our focus is developing these brand new communities through a pre-construction model, where investors can come in on the very front end, and they get a construction loan that we get them set up with. We build the fourplex for them, and as a result, we give them a better cap rate, because they’ve taken a good chunk of the risk off of our shoulders. It’s kind of a win-win across the board.
Theo Hicks: Do you mind going over some of those pros that you mentioned of the fourplexes compared to, as you mentioned, the single-family homes and doing large multifamily? If I’m listening to this, why should I invest in a fourplex and not invest in a turnkey single-family home or a large apartment syndication deal?
Steve Olson: Sure. I’m not going to tell you that you shouldn’t do any of those things, because you’re talking to a guy that also owns single-family and also goes into multifamily syndication, so I think there’s certainly merit to those things, otherwise I wouldn’t put money into them myself. But if we want to just shamelessly promote, then we will, so we’ll talk about the fourplex for a second.
When we talk about single family advantages, one of the big advantages on those is liquidity. We always know that the debt market is relatively liquid and the financing is readily available for the most part on those deals. I think the biggest part of it is the financing on a single-family is a true 30-year fixed rate mortgage. You have that interest rate for as long as you want it. Nobody is calling your loan due in 10 years like on a commercial deal, for example. The other side of that is every investor – and this has probably has been talked about on your podcast before – is allowed up to 10 conventional mortgages; we would call those Fannie Mae Mortgages, in their own name. It doesn’t matter if you’re Warren Buffett and you’ve got billions of dollars, you get 10 Fannie Mae Mortgages. Although he could probably persuade them otherwise, but I can’t for me; you probably couldn’t either.
You kind of have that limited resource. When you consider it that it’s a true 30 year fixed, it’s a great way to hedge against inflation and to really put some long-term money to work. That’s what happens in a single-family and you’re lucky that – yup, you can do that same kind of a loan on a fourplex, because it conforms to that. The biggest difference is, you’re going to have to put 25% down instead of 20%. It’s a great hedge against inflation.
Now, we all love multifamily too, because we spread our risk out. We’ve got 50, 100, 200 different tenants in that apartment complex, so our income stream is very, very broad. It takes a lot of crazy things to happen for that income stream to dramatically change and put us in a very bad position. Even though a fourplex doesn’t have near that quantity, we do have four tenants that are servicing that debt, that we can count on, that we can spread our risk out a little bit more as a result. I think that’s kind of where the two worlds emerge.
Break: [00:06:11] – [00:08:13]
Theo Hicks: My next question, on a similar vein – we talked about why fourplexes over… Not necessarily over, but other benefits of investing in fourplexes. Now let’s talk about why should I invest – you kind of already hinted at this, but I’m going to ask it more directly… Why should I invest in a, as you mentioned, a build-to-rent fourplex, as opposed to buying a fourplex that already exists?
Steve Olson: Fourplexes are kind of funny, because of this reason where, like I said, it’s where multifamily and single-family merge right at this point. What I’ve noticed is that a lot of investors want to buy fourplex’s based on the cap rate that they value them at. They want to back into the cap rate, pay the cap rate that they think is a good deal, but a lot of them want to use financing that is conventional – Fannie Mae, Freddie Mac, conventional financing. When was the last time a conventional appraiser cared about a cap rate? They go purely off the sale comps. It’s kind of a funny little area, because you get investors that are just investing because they have that financing, but they care about the cap rate a little bit, too. The reason somebody is going to go build-to-rent, and I think specifically on our model which you’re going to start to see more from other people besides us, is people are so starved for a return on their money. Put your money in a savings account, Theo, and you’re going backwards. So they need to put it into something that’s going to get them to work and they like everything that I just told you (the typical investor does) about fourplexes.
So cap rates on quadplexes, just like on multifamily, they’re compressed. If you’re going to go out and try to find something existing in performing, you can probably do it, but I dare you. Contact your local real estate broker and say “Hey, pull me some listings on fourplex tops.” You’re going to be pretty underwhelmed for the most part on what you find. They’re high prices, a lot of deferred maintenance, they’re 20 to 30 years old at the youngest, many of them are older than that. And granted, there’s some exceptions to that based on different little sub markets, but for the vast portion of the country, you’re going to be really underwhelmed.
The reason you’d go build-to-rent is, “Hey, look, if I can take a little bit of risk here by going through construction and lease up… And I understand the risks that come with that and I’m okay with it.” There’s a pot of gold at the end of the rainbow there. You typically have some forced appreciation, and you might see the market grow during construction or you might not. But if you can make it through that, like I said, in our model, we have to sell this at a more competitive cap rate. One that’s going to make you think, “Yeah, that’s worth it to me, I’m going to come in, put 25% down, wait for my construction to happen, wait for the lease up, because FIGs sold it to me at cap rate X, versus market cap rate Y.” Which we usually see a spread of 1% to 2% on that cap rate. It usually translates into some equity. I’m very careful about promising it, but there’s some concepts of the growth, the values and the forced appreciation… Just like you guys talked about on the show, a value-add. We go in, we kick out the bad tenants, we renovate units, we bring rents up over time. A build-to-rent fourplex is that same concept, it just happens in a different way.
Theo Hicks: How are you finding the locations to build these fourplexes? Then maybe the secondary layer, taking it back a step, are you doing this one at a time? Like buying one plot of land at a time, or is it buying large chunks of land and doing that full-on multiple fourplex on a row type of deal?
Steve Olson: We go all out. I would say that the smallest door count we’ve ever had is 100. So you’re looking at 25 fourplexes in that subdivision. If you’re going to bring that kind of inventory to the market, it’s a good amount of doors. It’s not gigantic, but it’s not nothing… Then you’ve got to make sure that the local market will support that. That you can get through that lease up, that people are going to be there and ready to rent these once you turn them over. On a macro level, we’re looking at metropolitan areas with a growing population and with a good diverse employment base. That’s why we’re in the markets that we’re in, because they’re growing like crazy and people need housing. That’s a box to check.
But then you also have to deal with the city, and your density, and what kind of price are we paying for land versus what density can we get? Will this be profitable for us, while still bringing a good cap rate for the investor? What’s most interesting, Theo – there’s a lot of nuances to it, but I think if I boil your question down to one thing, whenever you’re talking about build-to-rent, you start with rent, and then you have to back into a product that fits that. If you can’t do it, then that’s a hard pass. We’re looking at our rent, maybe it’s 1,500 bucks a door, and then we can start backing into, “Okay, floor plans, density, amenities, and timing… These city meetings we can see; are there other apartment developers coming into the area that we’re going to have to worry about competing with?” All that goes into it, but when you can start with the rents and back into it from there, you’re on the right track.
Theo Hicks: I like that concept of reverse engineering it from the rent. Thanks for answering it. Can you maybe you walk us through from your perspective how this model works? It’s like an understanding of, “Okay, so are you going out and locating a plot of land?” Then saying, “Okay, based off of the rents I can get and the cost of land per density, I’m going to build 25 fourplexes” and then you go out and get the investors? Or do you have investors first and then you go out and find what you can afford to buy based off of the investors?
Steve Olson: Well, we have a pretty broad database of investors. We kind of know what people want and what they’re looking for, because we’re always paying attention to this market. So we know what a better than average deal is and what will attract investors. With that being said, what usually happens is our land team – they’re always on the hunt. In fact, we’ve got a few that we’re looking at here in Utah today, where I live. I’m headed out after my interview with you to look at three new sites to see what we think about them.
We’re going to look at this and we’re going to develop a concept plan, we’re going to start getting together the development budget. What’s the land acquisition? What’s our financing going to cost us? What are all of our professional fees, costs, and infrastructure along the way to say, “Okay, where are we ultimately at per door to develop this?”
Then based on our concept plan from there, “What kind of floor plan can we get?” We’re not crazy on that; we have a few floor plans that we build, it’s not a lot of them. We might think, “Okay, on this plot we could put 50 of our fourplexes that are maybe like a two-story townhouse style floor plan.” Because that’s how we plot most of them, Theo. It’ll be four townhouses in a row, but on the county records, that’s one tax ID. It’s a fourplex. To a tenant driving through development, they think, “Oh here’s a bunch of townhouses.” They don’t know, nor does it matter to them that it’s actually a bunch of fourplexes. From there, we know our developer, we know our construction, and then we’re going to start looking at income and expenses.
What can we rent these out for? What’s our HOA going to cost? What do we expect insurance to come in at? Property management? Some of these other income and expenses. So then we can say, “If we sell at X, knowing our projected income and expenses are Y, that pencils to a cap rate of six, six and a half” which is about where we’re landing these days in our markets. Then we know, “Okay, it looks like we can make this one work.” So we probably kiss five of them for every one that we actually can make happen. They say you’ve got to kiss a lot of frogs, and we’re no exception. But that’s kind of a high-level summary of how we do it.
Theo Hicks: Then you send it out to your database of investors, and then, at this point, they all know you well enough that they just invest or don’t invest?
Steve Olson: Yeah, exactly. Naturally, they’re going to have a bunch of questions. We’ll say, “Hey, we’ve got this project coming up, it’s going to be 30 fourplexes. Here’s the proforma, here’s the concept plan, here are the elevations and renderings, here’s when we expect construction to start and when it would be done. Do you want to make a reservation?”
Theo Hicks: Is this just like a syndication model? These people are investing in an entity that’s then going to develop this portfolio, a fourplex. Is that how it works?
Steve Olson: It’s actually not a syndication. They’re getting the simple title. You’re the owner of the fourplex and you control it. When you make a reservation, you’re signing a real estate purchase contract, putting up earnest money, like a normal property purchase. But you have to wait until there’s a finished lot for you to close on and we’ll get you set up with a construction loan. We have local banks that we work with in these markets and then you’ll close on the land. You have a construction loan in place that our builder team draws from to go vertical and to build this fourplex; and you can sell it on the day that it’s done, you can sell it 10 years later, it’s yours. You’re not in a syndication where the management team is making that call.
Theo Hicks: The last question before the money question – I guess this is a two-part question. As someone who’s going to be passive investing in these deals, what types of returns do you offer? Let’s say one of the plots you’re looking at today, I’m going through the entire plan, the cap rate looks good, and you decide to offer that up to your investors. When you’re doing that, are you presenting them with a projected return? If so, what does that look like? Also, how do you get paid on these deals?
Steve Olson: The way we get paid, our company is actually comprised of five companies. There’s a builder, a developer, a brokerage, a property manager, and an HOA. Those all have their respective profit center for what they bring to the table. The brokerage makes a brokerage fee, the developer makes a developer fee, property managers obviously make their management fee. We will offer a price, we say this fourplex is for sale for 800,000 dollars, and that’s all inclusive to the investor, unless they’ve got some financing costs on top of that. But all the fees are baked into the cake there. You’re going to get a cap rate of six to six and a half, sometimes it’s been a little bit higher. That’ll usually pencil to a cash-on-cash rate of return of about the same, assuming a 25% down payment and a long-term interest rates somewhere in the low fours right now. Right now, they’re actually coming into the high threes, but that’s where it would land. That depends on some of the underlying assumptions, but your IRR will probably average somewhere in the high teens, low 20s over the first five years, because it’s taken into account everything that goes into IRR. But I know everybody kind of talks about that return differently, so I tried to hit on all of them a little bit. I hope that’s helpful.
Theo Hicks: Very helpful. Thanks so much for sharing that. Alright, Steve, what is your best real estate investing advice ever?
Steve Olson: To stay in the game and be patient. I think things tend to work out if you stay in the game. Anytime that you do something because you’re scared or greedy, that’s how you lose in real estate. If you’re patient and you stay in the game, I think you’re going to win.
Theo Hicks: Alright, Steve, are you ready for the Best Ever lightning round.
Steve Olson: I’m ready. Bring it.
Theo Hicks: Perfect. First a quick word from our sponsors.
Break: [00:19:14] – [00:19:45]
Theo Hicks: Okay Steve, what is the Best Ever book you’ve recently read?
Steve Olson: I recently read a book called What It Takes by Steve Schwarzman. He’s one of the founders of Blackstone and has a lot of great real-life stories coupled with some lessons that he’s learned over the years. I really loved it. Excellent read.
Theo Hicks: If your business were to collapse today, maybe you got fired from your job today, what would you do next?
Steve Olson: I’d go fishing and then I’d take the five people I respect most out to lunch. I’d pick their brains and see what they’ve got going on and what’s out there.
Theo Hicks: That is a very unique answer. I’ve never gotten that one before. Thanks for sharing that. What is a deal that you have lost money on? I know you mentioned you invest yourself… You’re investing, or maybe in a fourplex that your company invested in, lost money on – how much was lost and then what lessons were learned?
Steve Olson: It’s kind of embarrassing, but in my younger years I got scammed once because I violated a core rule, which is you need to understand what you’re investing in. If it’s some ambiguous thing with some secret sauce that you’re not privy to and the wizard behind the curtain is controlling everything, that’s a red flag. When you’re younger and you haven’t learned some lessons, if somebody tells you what you want to hear, you’re eager to believe it. I lost well over 100,000 dollars in what turned out to be a Ponzi scheme. It was a real estate related one. It’s because I didn’t verify it and I didn’t check into it. That lesson has stuck with me really, really well over the years.
Theo Hicks: On a more positive side, what is the Best Ever deal that you’ve done? It can either be financially or some other reason why it was the Best Ever?
Steve Olson: The Best Ever deal I did – it was fun, it was unique, it was an assignment of a large tract of land near Park City, Utah. I got under contract, I assigned it, and I made a healthy six figure assignment fee for what was maybe like 10 hours of work. Maybe it’s a shallow answer, because it’s purely around money, but I thought, well, that’s a cool return. 10 hours work in that deal. We can’t ignore it.
Theo Hicks: No, no, you can’t. What is the Best Ever way you like to give back?
Steve Olson: I like to give back by helping people in the real estate business that want to increase their knowledge. I’d love to see somebody’s eyes light up that’s hungry, that wants to learn. You recognize a fellow real estate addict when you find one. They’re easy to identify. I love that dialogue. And then there’s a charity I really love called the Operation Underground Railroad that I donate to; I think they have an excellent cause. Those are two ways I like to give back.
Theo Hicks: Lastly, what is the Best Ever place to reach you?
Steve Olson: Well, you gave out the website at the beginning, but my email address is solson@fig.us.
Theo Hicks: Awesome. Steve, thank you so much for joining us today and providing us with your Best Ever advice, as well as some of the advantages of the rent to own fourplex models. We talked about why you should invest in fourplexes and the advantages it has, from single-family homes as well as the multifamily advantages, as well as why to invest in a new development fourplex as opposed to buying something existing. As most Best Ever listeners are aware, I was getting PTSD when you’re explaining that, because I had an experience buying a portfolio of three fourplexes that were high priced, deferred, managed, and older. [unintelligible [00:23:18] with that story.
We talked about how you’re finding land and what can you look for in these areas. We kind of went over at high level, the business model from your perspective, how you get paid, how the investors get paid. Then lastly, your Best Ever advice, which was to stay in the game and be patient whenever you’re scared or rushed when you start to make mistakes. Steve, thank you so much for joining us today. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.
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