January 18, 2022

JF2695: 3 Advantages to Investing Multifamily in Opportunity Zones with Nick Simpson


It can be hard to find good deals in a competitive market, but Nick Simpson has found a possible, profitable solution: Opportunity Zones. Opportunity Zones are low-income areas that are set up to encourage an increase in economic growth. For Nick, these areas hold a lot of possibility for multifamily value-adds. In this episode, Nick breaks down two of his deals and shares why we should look to Opportunity Zones for investments. 

Nick Simpson | Real Estate Background

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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 Nick Simpson with us. How are you doing Nick?

Nick Simpson: I’m well. Thanks for having me.

Slocomb Reed: Great to have you here. Nick is the founder and CEO of Mentis Capital Partners which focuses on value-add multifamily, classes B and C, and ground-up development of multifamily and student housing that is Class A. The current portfolio of 60 million as a GP, he has 10 years of real estate investing experience. He’s based in Salisbury, Maryland. Are you doing most of your investing there in Maryland, Nick, or are you investing elsewhere?

Nick Simpson: Maryland and Atlanta recently, and then looking throughout the Sunbelt.

Slocomb Reed: Looking throughout the Sunbelt. Gotcha. Investing in Maryland because the market fundamentals are solid in comparison to other markets, or because it’s your backyard?

Nick Simpson: It started as the backyard, and we do all of our development here. I do think the market fundamentals are strong, otherwise, I wouldn’t waste my time or direct capital here. But we choose to do our developments closer to home because they take a lot of political connections, they take a lot of zoning connections, you really need to be kind of boots on the ground, unless you have a much larger firm and you can bounce around and monitor these projects pretty well. Right now, we have a 101-unit 14-story student housing project going up in downtown Salisbury. That has taken three years of planning and a lot of local connections just to get that done. But then doing the value-add multifamily picked two up in Atlanta, and continuing to try to search for properties but not overpay in this market.

Slocomb Reed: Salisbury, Maryland – looking at it on a map, most people would assume that’s Delaware. What kind of market is Salisbury? Is it close enough to DC or Baltimore to be a suburb?

Nick Simpson: No, it’s not quite that close. You’ve two to two and a half hours to the center of DC, depending on traffic in Northern Virginia. We did see during the pandemic, a lot of people come across the Chesapeake Bay Bridge and kind of come over to the shore of Maryland, call it the Eastern shore of Maryland. I think as far as Salisbury is concerned, the market here is focused primarily on agriculture, you have student housing with Salisbury University, [unintelligible [00:03:34].05] which is a driver of probably a few of the student housing projects around here. Then you also have hospitals, biotech, and tech companies. But the big thing that people don’t realize is you have Fortune 500 companies that maybe people don’t think about too often, like Purdue Chicken or Tyson, and they’re right here in our backyard and they bring a lot of employments therein.

Slocomb Reed: Solid employment base, nice. What got you into real estate investing, Nick?

Nick Simpson: I started about 10 years ago, right after the recession. I knew I wanted to get into business, but I didn’t know what. I picked up Rich Dad Poor Dad one Saturday, ended up reading it in one day; hell-bent on buying a house after that. And then one became two, then 10, then 20, then eventually into multifamily and commercial, and here we are today.

Slocomb Reed: Yeah, Rich Dad Poor Dad had a similar effect on me. I ended up a house-hacker just a few months after reading it. You do most of your development there in your backyard because you have connections. What led you to the Atlanta market?

Nick Simpson: Well, of course, you have population growth, all the normal things that we all talk about, the normal demand drivers. But I like the East Coast markets really, the Raleigh, Durham, Charlotte, Tampa, and Atlanta markets. While they’re very difficult to find deals in right now, I still think there’s yield there. We had a couple of contacts down there, so we were able to close on a deal that we think is going to do quite well.

Slocomb Reed: Tell me about that deal.

Nick Simpson: Well, I guess the most recent ones are in Decatur or DeKalb County, and they are right around the corner from each other, so it’s going to be one of those classic plays where we can have a little bit of economies of scale between the two properties. Both value-add; we always pretty much look for heavy value-add or very obvious value-add, something that we can actually truly force the appreciation on. In this market, we’ve just gotten frustrated with some of the bids that we were seeing on other properties that clearly just don’t have that type of yield built into it. But maybe they have a 1031 situation, or just have maybe a back office that’s extremely efficient. I’m not sure exactly how some people are getting them done. But we’re trying to really remain conservative on the underwriting, and make sure that, first and foremost, we feel comfortable putting our own money into the deal, putting our family’s money into the deal, and then of course, breaking it out and putting it in front of investors.

Slocomb Reed: Nick, what counts as true forced appreciation for you?

Nick Simpson: For me, you have to actually physically fix the asset. For instance, the parking lot in one of the projects is absolutely horrible; the trees are ruining the parking lot, so get rid of the trees, fix the parking lot, do the grounds… All of a sudden you have new curb appeal; paint the buildings, new windows if necessary, adding washers and dryers. The other property needed new roofs, again, paint the exteriors… A lot of just cosmetic stuff. But of course, on the interior of the unit, we’re going to be doing kitchens, the bathrooms, flooring, painting, lighting fixtures, whatever might be necessary. But truly making that a better place to live, so that the rent increases are not just based on an assumption that we’re always going to go up. Multifamily has obviously done very well over the past, but when you look at an untrended yield, that’s really what’s going to be a telling story, and I just want to be able to bank on the fact that we’re going in there fixing it and truly being able to demand a higher price because it just is a better product.

Break: [00:06:50][00:08:30]

Slocomb Reed: Give us an example of a time that you’ve done that.

Nick Simpson: I’ve been doing that from the beginning, whether it be from the very first house I bought, to properties we’re working on right now. The very first house I bought was $35,000, it was a foreclosure, and we put about $35,000 into it. It was a lot of sweat equity, but by the time it was done, we were able to sell it for $120,000 after I rented it for, I don’t know, five or six years. The lot next to it actually came with the property, and I was able to sell it that off for another 15 grand. But by literally making the property better, I learned early on that even if the markets going to go the wrong way, we’re going to be in an okay position. That’s no different for one house, for 90 units, for 250 or a thousand. You really just have a better product, and people are going to be interested in that better, less headache product.

Slocomb Reed: Give me some numbers on one of those deals, like one of the ones that you did there in Maryland or one of your Atlanta deals. What you bought it for, what the rents were at the time, how much you had to put into a property to get the rent growth that you got, and what that rent growth was.

Nick Simpson: So I think bringing it to more right now, in Atlanta, we’re putting roughly two and a half million dollars total asset value between the two properties, a little over 20 million. So we’re doing a decent amount of work to improve these properties. We’ve already seen rent growth; it’s more aggressive than we expected, but we’ve already seen rent growths of $200 to $250 more than what was the going in rental rates. We really think that’s just going to do quite well over the long term. If it does slow down a little bit and we go to more of a two, two and a half, 3% standard increase year by year, just by starting so strongly, we feel that we’re kind of ahead of where we would have already ended up.

Slocomb Reed: Where in your value-add multifamily deals, your B and C class stuff, where are your average rents right now?

Nick Simpson: Right now, for like a one-bedroom, you’re talking $950 to $1,200; two-bedroom, two-bathroom, probably $1,050 to probably in the neighborhood of $1,400, depending on how nice the unit is. And then the three-bedroom, two-bathrooms, I think we have a couple in the neighborhood of about $1,400 or $1,500 a month. They’re all in about that range.

Slocomb Reed: Gotcha. That’s now. We’ve seen crazy rent growth across the board the last two years. In your experience, what do you think rent growth is going to look like in the next couple of years? Should we expect the type of growth that we’ve had? You know, there are several underlying economic factors here, Nick, like when you look at what COVID did to the employment market. When you’re talking about affordable rents, you’re also talking about the sectors of the economy with the highest wage growth. Do you think that trend is going to continue, or are you expecting to go back to that 3% rent growth year over year?

Nick Simpson: I can’t say that it’s going to slow down anytime soon. Based on what I see, I don’t think it’ll slow down anytime soon. However, that is not what I’m underwriting to. I just don’t think it’s wise to pretend like anybody knows. I do think that rent will continue to go up just by the sheer fact that inflation is going to make things more expensive, and people are going to be paid more, and therefore able to buy more, and will afford a higher rent. It all flows through the economy. I think people don’t talk about value enough. I think when we look at the exchange of dollars, what we’re really talking about is an exchange of value to somebody, and somebody is getting paid based on the value that they are providing to that company, or the company believes that they’re worth, or the employee feels that they’re worth, and then they go and spend it on things that they find of value.

If we’re talking in terms of value, things haven’t really changed in terms of value. People still value things at a certain amount. But of course, you’ve got to pay more for them now, because the inflation has caused that to happen. I’m not sure if I explained that very well, but basically, what I’m saying is, I’m not underwriting to an increased crazy amount of rents down the road. I think that’s an unsafe way to get into a property. I am bullish on what rents will do over the next few years, and I do think that will be the narrative that we’re hoping to go back to our investors with, is “Hey, we’ve way outperformed. Are you ready to go for the next one?”

Slocomb Reed: Nice. What led you to get into ground-up construction?

Nick Simpson: I like to have something that makes me excited to come to work. So all the books, all the experts in our industry – if you look at the top titans of our industry, the Sam Zell’s of the world, all those guys would say that development is riskier. But they all admit that there is something about seeing a building come out of the ground that you’ve worked on, or you’ve dreamed up, or you know is going to change your community, that is fun. It can also provide a really risk-adjusted return if you do the project well. So we saw an opportunity in Salisbury, Maryland and there was no high-rise in downtown, or at least there was nothing above seven stories, so going into that 14-story high rise type construction really is going to offer something that’s new, and make a placemaking in the downtown historic area. We also were able to use the opportunity zones, which we have an opportunity zone fund for the project, which allows for investors to have the tax savings that were offered by the federal government for doing projects in areas with lower incomes. That was a good way for us to find yield in some of the markets that aren’t as hot as say DC or some of the ones that we’ve talked about already, like Raleigh, Charlotte, Durham, all the typical Texas markets. You understand what I’m saying.

Slocomb Reed: Yeah. It’s this building that’s in the downtown area?

Nick Simpson: That’s right.

Slocomb Reed: It’s twice as tall as anything else there?

Nick Simpson: Yeah.

Slocomb Reed: What’s the unit mix?

Nick Simpson: This is a full student housing, so you have four-bedroom four-bathroom, or two-bedroom two-bathroom mixes. The property is a purpose-built student housing, so it’s slightly different than multifamily. You do have a slightly different property manager, you’re going to have a slightly different amenity mix, because it’s going to be geared towards the students; you’re going to have furniture included, you’re going to have utilities included… Everything’s going to become that turnkey — it’s a little bit different than what you’re going to see in the multifamily space, but it’s not much of a stretch; it’s pretty similar. And we were able to see that the students were coming to the downtown Salisbury area. That’s where all the restaurants, the bars, the energy of the town is. They were coming there, but there was no student housing anywhere near it. And it was an opportunity to work with a local government that was very bullish on building new housing and really revitalizing Main Street as the malls begin to die, which – the malls killed Main Street, so it’s ironic how it’s coming back. But we just saw an opportunity to work with the local governments and to do a project that’s going to be quite substantial for the Salisbury area. We have a couple more that are coming.

Break: [00:15:34][00:18:31]

Slocomb Reed: That’s awesome. Nick, talk to me like an accredited investor who’s considering putting my money either in value-add multifamily, the bread-and-butter play that we all understand. I want to know, so far as my own risk and potential reward is concerned, how is ground-up development going to compare?

Nick Simpson: There are a couple of things that go into that. If you’re going to be doing ground up development in downtown Boston, you’re going to expect one type of return, versus a ground-up project in a tertiary market like Salisbury, Maryland. Now, to help increase the returns, that’s where the opportunity zone investments come in. If people haven’t really taken a deep dive into the opportunity zone investments, I really think it is something that an accredited investor who has capital gains should really look at. If you haven’t sold anything, [unintelligible [00:19:20].15] the opportunity zones won’t work. But if you have capital gains and you have sold off any type of properties or stocks that you want to shelter your taxes from, you’re going to be able to increase your returns on a property by two and a half to 3% on top of what is offered to you based on an IRR basis.

The other side of it is with this very cap rate compressed market, you can see higher cap rates in the surrounding markets, smaller markets. And if you’re really working with the people in those markets who are the main contacts and the ones that really are the movers and shakers in that market… I know plenty of people who work in these types of small markets who are absolutely killing it. I would look to work with those type of people, and it really just has to be a fit for your capital. If you’re looking for that tax savings, long-term hold, and you would maybe look at a deal where you have an opportunity zone investment involved with it, which of course, I haven’t explained, but to use the opportunity zone, it’s best if you have a development project, so that’s kind of a natural matching. But if you have just capital you want to deploy, you want to do a shorter timeline, you want something that’s already got cash flow, you’re really just kind of looking for a standard play, then you could look for probably a lower return, which is certainly going to be a lower return than a development deal, and you can look to do a value-add project. But of course, risk/reward, it’s the nature of the market.

Slocomb Reed: What is your Best Ever advice?

Nick Simpson: I think people listening to this podcast should be honest with themselves on where they’re at if they’re looking to be a syndicator or if they’re looking to be an investor, and they should just be okay with where they are at that moment. I think a lot of people get caught up in the hype of trying to go from zero to being Joe Fairless overnight. It doesn’t happen that way, and it’s okay to take one step at a time and just continue the education along the way. I just have people who reach out to me, and what I think they’re looking for is that quick fix to get into the real estate market. But you really need to surround yourself with quality people and just take a step every day to get better over time. With good decisions, you’ll get to where you want to go.

Slocomb Reed: Well, Nick, are you ready for our lightning round?

Nick Simpson: I’m ready.

Slocomb Reed: What is your Best Ever way to give back?

Nick Simpson: I recommend you pick a charity. My thing for this year is a lot of networking that is unasked. I like to connect people, literally just send off an email at the beginning of the day, “Hey, I thought you two would be good together,” and just let them take it from there.” Just let them build their networks, I think it’s just a great way to kind of give it back. Because sometimes, I spent a lot of time just spinning my wheels, looking for the right person to talk to. I’m blown away with how many people are sending me back people to talk with.

Slocomb Reed: What is the Best Ever book you recently read?

Nick Simpson: Sam Zell’s Am I Being Too Subtle?

Slocomb Reed: That is a good one. What is the most money you’ve lost on a deal?

Nick Simpson: $150,000. I built a house — I was building houses at one point back in my career, and we didn’t have the ground surveyed correctly, and we didn’t have somebody watching the mason, who ended up taking two blocks out of the foundation, the house was built too low, and long story short, we basically built a house with a backyard that became a pond, so we had to pick the house up after selling to somebody, and had to move them out, and moved them back in after the house was picked up, and we moved a whole bunch of dirt in there… So I don’t recommend that one.

Slocomb Reed: What’s the most money you’ve made on a deal?

Nick Simpson: I don’t know. Probably over a million at this point. But it’s not something I’ve tracked.

Slocomb Reed: Yeah. When Joe asked me that when I was a guest, I wasn’t sure how to answer that one either. That’s great. Nick, where can people get in touch with you?

Nick Simpson: You can go to our website, mentiscapitalpartners.com. You can email me directly at nick@mentiscp.com. I’m pretty attentive and look forward to talking to you.

Slocomb Reed: Awesome. Well, thank you, Nick. Best Ever listeners, thank you for tuning in. If you enjoyed this episode, please be sure to leave us a five-star review and share this episode with someone you think could benefit from the best real estate investing advice ever. Don’t forget to follow and subscribe to our podcast so you don’t miss anything. Thank you and have a Best Ever day.

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