John Casmon | Real Estate Background
- Founder of Casmon Capital Group which aims to help busy professionals invest in real estate without taking on a second job, focusing on multifamily investments.
- Portfolio: $40MM as GP. Total investment experience as a GP is over $100MM.
- He closed $20MM in 100 days in 2021
- Based in: Cincinnati, Ohio
- Say hi to him at: casmoncapital.com/sampledeal
- Best Ever Book: The 80/80 Marriage: A New Model for a Happier, Stronger Relationship by Nate Klemp PhD
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TRANSCRIPTION
Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today, we have John Casmon with us here. How are you, John?
John Casmon: Hey, Slocomb, I’m doing great. Thank you for having me today.
Slocomb Reed: Great to have you. John is the founder of Casmon Capital Group, which aims to help busy professionals invest in real estate without taking on a second job, focusing on multifamily investments. Current portfolio of $40 million as GP, total investment experience as a GP is over $100 million. He’s closed $20 million in 100 days in 2021. He was on this podcast five years ago, and the title was something like from two units to 13 units. John’s been busy. He also has his own podcast called Multifamily Insights. A lot going on, John…
John Casmon: Yeah, man. There’s been a lot of growth since that very first interview around five years ago. Ironically enough, it was around the same time of the year when we did the interview at that point. It’s actually really nice to be back on the show and happy to be talking to you.
Slocomb Reed: Great to have you. So tell us about this 20 million in 100 days. Is that the past 100 days?
John Casmon: Not literally the exact 100; within 100 days. It was basically from late July to early November. The short of it is, and I think the key here is when we were looking at our business, for these two deals, they just stacked up where we were able to close them back-to-back. Now, that may not seem that big, but for us the thing that was actually important was we didn’t do a deal in 2020… Between COVID and so many other factors, we actually didn’t close on a multifamily apartment building in 2020. Even though we had plenty of experience in other deals prior to that, in 2020 we didn’t do a deal. So to go from not doing a deal to doing $20 million worth of real estate in 100 days; it took a lot of work and took a lot of action, and quite frankly, talking to a lot of other investors and just getting them back online, and let them know what we’re working on. It took a lot of communication, but we’re really excited to close on both of those assets and continue to grow from there.
Slocomb Reed: And the market is a lot softer this year than it was last year. It’s just so much easier to find deals now. That’s a joke. Where do these come from, why is it–
John Casmon: I was like, “Man, is he serious?” [laughs]
Slocomb Reed: I was just making a joke. These two deals now… It’s not like multifamily went on sale when COVID happened, so not buying in 2020 makes a lot of sense. I didn’t buy anything in 2020 either, come to think of it, other than some small little single-family flips. Now you’re buying in 2021 – what changed? Is it a shift you’re seeing in the market? Is it your underwriting criteria? Is it just you having more time now to adapt to the market that we find ourselves in?
John Casmon: Yes, a great question. I actually intend to blog for the Best Ever blog, so that’ll be up soon, and I go into it a little bit. There were a couple of things that were really important to make this shift. The first thing was I had to step back and I had to get some advice… Because the reality is there were people around us doing deals, and I knew there was something that we must have been missing. There was something that we weren’t doing, something we were missing. We had to step back and understand what are you looking at when you’re doing these deals? What’s your approach? So I spoke to my advisors and I got some counsel from them to say, “What are you seeing? What are you doing? How are you adjusting?” That really informed the strategy from there.
The second thing was getting a bit more creative. I think sometimes we sit, we underwrite deals, and if it doesn’t fit to how we’ve been investing in real estate up to this point, we don’t do it. Well, the reality is the market is very different today than it was five years ago when I was on the show after doing the eight-unit property. The market is different, the numbers are different, the investing strategies are different, the capital that is looking to go into real estate is different. If you’re investing with the same strategy that you had five years ago, you’re not making any progress.
So we had to step back and recognize that we need to get a bit more creative, we need to figure out where there are opportunities to adjust our approach while still staying true to our fundamental principles. I think that’s the key part, you have to have strategy, and principles, things that you stand for, things that you believe in. But there have to be other elements where you are willing to be a bit more flexible and adjust your approach so that you can react to the market as it is today, and also what to anticipate the market to be in the future to protect yourself.
The third thing that we did a little bit differently was really starting to get more aggressive. When I say aggressive, I’m not talking about the underwriting, I’m talking about our actions. So how many deals are you actually underwriting? How many deals have you torn? How many offers are you putting it? How many conversations are you having with people? At the end of the day, if you’re not seeing enough deals, putting in enough offers, then you’re not going to get that deal. We had to step up the number of deals we’re looking at so we could actually get something that worked.
Slocomb Reed: That’s awesome. John, aside from getting more aggressive and just getting in front of more opportunities in 2021, what other tangible ways did you adapt your strategy to get these deals?
John Casmon: Well, I think we took a different approach. Typically, we’re looking at medium value-add deals where we can come in, renovate the units, add value, look at other ways to add value, and increase the NOI. Part of what we try to do is, say – you and had I play poker together before, and part of it in this market is instead of playing chess or checkers, sometimes you’re playing poker. You’re trying to understand that other owner, what are they looking for and how do you craft an opportunity where it can be advantageous for yourself?
I was speaking to Ash Patel the other day, and I know Ash is pretty involved in this show as well. What Ash and I talked about were properties that were mis marketed or mismanaged. If you could find those properties that are mismanaged or mismarketed, then you can create value. That’s where that poker aspect kind of comes in, because now it’s not about me trying to beat every other investor in the world looking at the same property, it’s really a matter of understanding what that owner is looking for, or that broker if a broker is involved, and then how do we create a win-win solution for ourselves, the owner, and the broker.
Slocomb Reed: These two deals in 2021, were you direct-to-seller or were they brokered deals?
John Casmon: Both were brokered, but they were both pocket listings, I guess you could say. One was actually an expired listing and the other one was a listing, but it was being mismarketed is the way I would characterize it.
Break: [00:07:33] – [00:09:12]
Slocomb Reed: Expired listing still went out to the public, mismarketed listing also going out to the public. What is it that you saw that other people who had the opportunity to offer on these didn’t see?
John Casmon: Well, great question. On the one that was expired — and I guess technically didn’t expire, but they stopped marketing it. So it went from being listed and available to it wasn’t being shown, they weren’t talking about it. But the owner was still interested in selling. And times changed. When we underwrote the deal, I think it was 18 months prior to that or two years prior to that, the numbers just simply didn’t work. Over time, as cap rates compressed, and we see more upside of the market, rent start to go up, and the operations improve, now this started to make more sense that there was an opportunity. In addition to that, we also expanded our exit options and we saw that there was more value to be created than we initially anticipated when we first looked at that deal. So that’s one of the things on the first deal. On the second deal, they didn’t understand the story. In my opinion, I don’t think they understood the story, the broker–
Slocomb Reed: The brokers didn’t understand the property.
John Casmon: I’ve never seen this before, but the offering memorandum was seven pages, and that included the cover page and the Contact Us page. There were five pages of information on this property and I just don’t think they did a good job of really highlighting the value-add opportunity. It’s an opportunity where we almost passed on, we almost didn’t underwrite the deal because we didn’t see the story right away. It wasn’t until we got on the phone, talked to them, and really learn more about the property and where things were that we saw where there was an opportunity for us to take this to a different level; really digging into the comps, figuring out where the market was, and understanding how we could create an opportunity here. So it took some creativity on our side, but to be honest, we almost passed on the deal ourselves for the same reasons other people did. They didn’t tell the story, and in this market, brokers are extremely savvy. So they understand how to show you all the ways you can make money on a property, even if it’s not generating that income today. And because this deal didn’t do any of that, we almost missed the opportunity.
Slocomb Reed: Where is this property?
John Casmon: That was in Louisville, Kentucky.
Slocomb Reed: What part of the story was not being told? You’ve closed on this now, right?
John Casmon: We closed on it, yes.
Slocomb Reed: What is the value that you’re adding or what is it about the market that was not being recognized?
John Casmon: Well, first of all, in the OM and the offering materials that were sent out, none of the story was being told. They basically said, “Here’s the property.” You only have five pages of real information that just say, “Here’s the property, here’s where rents are, here’s when it was built.” It didn’t tell a story at all, it didn’t show how you can create value, it didn’t highlight that there was an upside in the market. So initially, we didn’t think there was either.
We dug into it and look at comps and it took some work to really understand the market and this property, because this property was a new asset. It’s a new asset, but it’s a B-class asset. It was difficult for many investors to understand how they could create value on a new B-class asset. We love that fact, because one, we’ve got a better-quality property than what most of the B-class properties have. But on the same note, we don’t have…
Slocomb Reed: You’re talking about a new construction in a B area?
John Casmon: 2019 built property, yes, but in a B area, that’s right. A property, B area, which typically, we wouldn’t want to see. But because there’s so much demand in the market right now, we actually believe in trying to get higher quality assets today.
The way I would think about it is if you’re buying a car — used car prices shot up during COVID. If you’re buying a brand-new Cadillac, and let’s just say they want $60,000 for it, and a five-year-old Cadillac has been available for $55,000, you might say, “Hey, for the same amount of money, or for something very close to that, give me the new Cadillac.” And at a certain price point, you’d rather have the higher quality asset than trade down and have to increase the value and all that yourself.
Slocomb Reed: And for the next five or 10 years, it should be lower maintenance, right? Both the Cadillac and the apartments.
John Casmon: That’s exactly it, and that’s the logic for us, was to say, “Hey, you know what? We actually think there’s more opportunity here, because we won’t have all the repair and maintenance expenses that you typically see when you’re buying a 40 to 50-year-old property. You’re buying something that was built two years ago.” So that was really important for us as we underwrote that deal.
We also had to step back and rethink and re-approach the way we underwrite a deal, because it wasn’t the 40- to 50-year-old property where you expect a certain amount of things to break every single month. You do expect the property to maintain itself a little bit better. Now you still have to have some repair maintenance for sure. All properties, no matter brand new or 50 years old, all properties need some kind of repair maintenance, but certainly not to the same extent as maybe an older C class type property.
Slocomb Reed: Sure. How much has the pandemic rent growth factored into the way that you’re looking at deals now?
John Casmon: Not much. We don’t really boost up our numbers based on that. Obviously, right now, demand is really hot, but we don’t foresee that being the case for three to five years down the road. So really, we’re buying based on current market rents, where we think we can take market rents too, and we’re using some of our historical averages as far as the rent growth opportunities going forward. But we’re not banking on double-digit rent growth. I don’t think that’s realistic to put into your underwriting, so we’re not using that at all.
Slocomb Reed: The Best Ever listeners know now that you and I are friends, that we know each other outside of this podcast. I hold your opinion and your experience in high regard, John, so I’m going to get selfish and state an opinion here that my personal opinion would be pretty close to this. I want to know what you think of it, and I want the Best Ever listeners to get a couple of minutes of us having this conversation. Please, whether you agree, disagree, hit me as hard as you can… I want to know where you’re coming from on this.
The majority of my current portfolio right now would be C-class. Workforce housing is not a term I always enjoy, but it qualifies in this regard. One of the things that I’ve seen during COVID, including at the end of March 2020, which is when the state of Ohio got our shelter-in-place order, a lot of people lost their jobs, but a lot of employers jumped in with $15 an hour jobs, all over the place. Anyone who lost their job could go make 15 bucks an hour somewhere; there were opportunities available.
We’re seeing, not necessarily the minimum wage on a federal or legislative level going up, but we’re seeing within the C-class employment that wages have gone up. I don’t think that’s going to go anywhere, I don’t think that people are going to be willing to work for eight or nine bucks an hour anymore now that they know that they can get 15 somewhere. I think that also does a lot for the rent that those people can afford, and I see C-class rents rising and staying higher, because wages are staying higher. Volatility in the job market – yes; but there were jobs available to these people all the way through COVID if they were willing to change industry, learn something new, go make 15 an hour and be able to afford higher rents than they could before. So C-class rents are going up, they’re going to stay up, and anyone who’s buying right now is going to be able to see increased rents in C-class workforce housing. Alright, John, what do you think?
John Casmon: Man, it’s a very interesting observation. I agree with much of the observation. I do not believe you’re going to be able to get people to go back to 7,25, or whatever the minimum wage is right now, if you can find jobs that are paying 13, 14, $15. With that said, as an investor, I think the minimum wage is not a thing you should be focused on. Because first of all – we’ve got an international audience. When you’re thinking about this, you have to think about your market. What’s really important is understanding affordability. When you think about affordability, you’re talking about people who have maybe 30% of their income is what they should be spending on rent. If you’re in a market, or you’re talking about C-class residents who are spending more than that, then it’s not affordable. If they’ve got to spend 45% of their income on rent, that’s not affordable. So yes, they can make more money but the reality is, is that they’re still pretty tight. Those individuals just don’t have the bandwidth for different expenses that may pop up, and a lot of times there’s lifestyle creep.
Slocomb Reed: To be clear, John, to your point, I’m in Cincinnati, I’m in a Midwest market. I’ve pulled into too many Wendy’s recently. When every Wendy’s is hiring at $13 an hour, that makes a big deal in the C neighborhoods in the Midwest and in the South. I’m really talking more specifically about these higher cap rate cash-flowing MSA’s. But please continue.
John Casmon: Yeah. But to your point though, what I think it does is it raises the floor. In these markets where we invest in the Midwest, and part of the reason is we believe that rents will continue to go up in a lot of these markets, because they are very affordable, and as people are making more money, they will have a little bit more disposable income. Lifestyle creep will definitely kick in, but you’re also going to see that they’ll have a little bit more money and they’re willing to pay that. That’s why you are seeing rents in some of the markets like Detroit and St. Louis – these markets have had 12%, 17%, I believe 11% growth in rent from the previous year. The only way you’re able to see that kind of rent growth in what many would consider a stagnant market is because they were pretty affordable to start out with. When you look at New York and San Francisco, you saw rents come down in markets like that. The reason is there’s a level of affordability where there’s a supply and demand side that comes into play. And people recognize that “Hey, the rents we have here are really affordable.” Now if they’re making more money, they can afford to pay more. And there’s also the quality of housing that’s available.
So I do think that you will see rents continue to increase, especially in the C-class properties, but I think you should pay close attention to affordability. Just because we’re talking about this doesn’t mean you should go out there and expect to get $1,000 for a studio if you are in Cincinnati or some of these markets; you really need to understand what’s affordable to the resident and understand rent projections based off of that.
Break: [00:19:30] – [00:22:27]
Slocomb Reed: I want to boil this down to one quick question and get your answer. In these higher cap higher, cash flow Midwestern and Southern markets where we’ve seen serious lower-income rent growth, if we can find places, John, where lower-income wage growth has outpaced lower-income rent growth, we can project increased rent growth. Yes or no?
John Casmon: That will be step one. I think you also understand supply. How many apartments are there? What’s the rent growth? Because rent growth is not about how much someone makes; rent growth is a matter of demand and what are their options. If you’ve got 100 new apartments there, then you’re competing on your rent number based on those 100 other apartments. If you’re the only play in town, if you’re the only thing that’s affordable, then you have a lot more leeway as far as what you can charge there.
So I think it’s more reflective of supply and demand, but I will say that wage growth absolutely opens up the door for rent growth, because people can and will pay more. Think about it logically – if someone was making say $10 an hour, they get a pay increase that’s 50%, they go to $15 an hour. What’s going to happen? They’re likely going to look for a better apartment than the one they had before. So now there’s more demand for maybe a B-class property or a B-class apartment. What happens to that same person who was making $40,000 and now they’re making 60,000, or whatever it is? The point is, they’re all trading up. In a great market, people trade up for better quality properties and then rents go up all around because guess what, there’s more and more demand for these kinds of properties.
So I do think you’ll see that trend play out but I think it really comes down to demand and you really need to dig a little bit deeper into the numbers to understand what’s really going to play out from in your neighborhoods.
Slocomb Reed: So you can track wage growth as a correlation to rent growth, but you also need to be tracking inventory supply, to make sure that that wage growth will actually translate to people being willing to pay higher rents for what you have, as opposed to trading up.
John Casmon: Yeah, and I think people typically want to trade up to something nicer. So if there are new developments happening in the market or something like that, that may have a pretty big implication or impact on where you see your rents as well.
Slocomb Reed: What is your Best Ever advice?
John Casmon: Take action do the thing that’s a bit scary. When I was on this show five years ago, it was the first time I was ever on a podcast, and didn’t think that I was ready to be on a podcast. Here we are. And I’ve hosted my own podcast now for four years, and we’ve done over $100 million worth of real estate. Part of that comes from taking action and doing the little things that make you a little nervous and maybe give you some trepidation. But it can snowball. Those things are really important if you do want to see success in business or your life. You’ve got to take that first step. So take action, do the thing that seems a little bit scary, and continue to build on those steps of success.
Slocomb Reed: Awesome. John, are ready for the Best Ever lightning round?
John Casmon: Let’s do it.
Slocomb Reed: Great. What is your Best Ever way to give back to the community?
John Casmon: Search for Water. Search for Water is a nonprofit organization that invests in sustainable water solutions for global communities. I’ve been a part of the organization for four years now. I just love that every dollar that is donated goes directly to the field and directly to help people in need in countries like Dominican Republic, Haiti, and we have three or four other countries; the Philippines… We’ve got about three other countries that we impact.
Slocomb Reed: That’s awesome. What’s the Best Ever book you’ve recently read?
John Casmon: The 80/80 marriage; not really real estate, but your home life is so key to having success. It is a relationship book. The book basically talked about not shooting for 80/20 or 50/50 in your relationships, but trying to shoot for 80/80, which means both of you go above and beyond to help take care of anything that your family needs. Or in this case, if you’re talking about real estate, that the business needs. So less about looking for equality and more trying to over-deliver on your side and hopefully you’ve got a partner that is looking to over-deliver as well.
Slocomb Reed: That’s awesome. And John, where can people get in touch with you?
John Casmon: The easiest thing to do to get in touch with me is we have a free sample deal on our website. You can go to casmoncapital.com/sampledeal and check that out there. Whether you’re going to be passive or active, it gives you a sense of the kind of information you should look for in a deal if you’re going to work with investors. The other thing is to check out our podcast called Multifamily Insights.
Slocomb Reed: Great. Well, John, appreciate you being here. This has been very insightful. Best Ever listeners, we hope you have a Best Ever day and we’ll see you tomorrow.
John Casmon: Thanks for having me, Slocomb.
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