July 19, 2022

JF2877: Producing Massive Results in an Unpredictable Economic Climate ft. Jason Yarusi

Third-time Best Ever Show guest Jason Yarusi is the founder and managing partner of Yarusi Holdings, LLC, a multifamily investment firm based in Murfreesboro, TN. In this episode, Jason discusses how the current economic climate is changing the way he looks at deals, why he is going for “sleep-better-at-night” debt right now, and why he’s zeroed in on the Nashville market.


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Slocomb Reed: Best Ever listeners, welcome to the Best Real Estate Investing Advice Ever show. I'm Slocomb Reed, and I'm here with Jason Yarusi. Jason is joining us from Murphysboro, Tennessee. He's the founder and managing partner of Yarusi Holdings, currently a GP of over 1,300 units across 15 properties and a third-time Best Ever podcast guest. His other episodes were 1538 and 1788. Jason, can you start us off with what you've been doing since the last 1000 episodes aired and what you're currently focused on?

Jason Yarusi: Yeah, sure. Thanks so much for having me in the show. And I'll note, I actually got to host a show with Theo back in the day as well, which was pretty fun as well. So excited to be back.

Slocomb Reed: Nice.

Jason Yarusi: Yeah, the bio, we actually would probably need to update it a little bit. We are coming up about 17, 18 hundred units right now, some acquired, some will be closing soon, and another about 100 million of development in the works across three properties. We moved down to Tennessee about two years ago, grew up in New Jersey, lived in New York City, [unintelligible 00:03:25.10] with the family. It's been great. Most of the properties we invest in are down here in these core markets: Atlanta, Nashville, and Louisville. We are owner-operators here. We do syndicate out on our projects, the majority of them; we're just looking for underperforming assets, whether it's on the building or the management side. Typical, if you find one, you find the other. And we've been pretty active in the last three to six months.

Slocomb Reed: Very active in the last three to six months. You know, Jason, our audience has grown a lot the last three years since you were last on the podcast, so we can't assume that everyone knows your story, but I want to be able to dive into what you're currently working on. When you say you've been really active the last three to six months, what does that mean?

Jason Yarusi: Started back in multifamily in 2016, first acquisition was in 2017. Prior to that, we were in the single-family space for about three to four years. And prior to that, we actually owned and operated some bars and some restaurants in New York City; at one time I opened a brewery that I sold in New York City. So we made the transition as we, my wife, Pili, who's my partner here at Yarusi Holdings and myself, wanted to just get back to something that we could do to create time and create the things we wanted. So our children - of course, we have three of them now. At the time that we started on this journey, my wife, Pili, was pregnant with our first. He's now seven, coming on eight. And we were so busy within a construction business we were running, coming out of the bar world where we had to just be active to get back.

So just like many service worlds, if you're not doing, you're not getting paid. So that had [unintelligible 00:05:05.10] We knew working late nights was not going to be the way to really grow the family we wanted, so we wanted to find what else was out there. Single family is great, but we found very quickly that we were adding on another job, we were adding on another thing that just kept busy activity. So we were doing all this [unintelligible 00:05:19.01] here. We are doing flipping, wholesaling, Airbnbs. But what it did allow us to do is to find better questions to ask, and we came upon investing out of state in small rentals - two, three, and four units. Really loved the space, but just really felt capped, felt capped on what was the potential to be able to grow to get to the level we wanted to, to be able to get back again our time.

I was introduced to large apartment investing back 2016, really dove in, sold off those smaller properties, learned as much as we could, surrounded ourselves with other great people and dove in, went from those three to four units up to a 94-unit for that first acquisition there. And then over the course of the last five, six years now, we've really doubled down in the space; the last three to six months, which has really accelerated our pace, is just the ability to bring on great team members.

So we've been growing our team, expanding our team, and have just found dynamic people, because just our path forward to just make places better places to live, which always trends back to, of course, make it a better place for the tenants, which makes the property perform better, because those tenants, instead of just using it as a place to pass through, treat it like their home, because now they know there's a group looking to improve it and take care of it, which turns down to the bottom line, which ultimately produces better return for our investors. And we've found that our process was being capped by Pili and myself, because as much as you want to think it, you trying to do more, sometimes produces less results. So we've been able to bring on great team members, it has really helped us grow our plan, grow our process and just help more people.

Slocomb Reed: That's awesome. So 17, 18 hundred units; it sounds like you've been very active in a time that brings some hesitation to multifamily syndication, with increasing interest rates and the possibility of expanding cap rates. While still being active in acquisitions, Jason, how are you changing (if you are changing) the way that you're looking at the deals you want to do right now, given the current economic and commercial real estate market that we're seeing?

Jason Yarusi: So of those units we've acquired, we've actually gone full sight on eight of them now, with the ninth one coming up. So we've had a lot that we've transitioned out of that was, I'll call it premature, but early in our hold period; we took advantage of just how far we were able to get ahead of the business plan, and then coupled that with what was some of the economics happening in the market. We took advantage of it. That, noting into where we're going today, we've also moved where, traditionally, a lot of those buildings were more C oriented or C-class oriented. Good markets, however, we're more exposed to the element of inflation really hitting someone's pocket a lot more in that space where they're living at a much more week-to-week basis. We've transitioned into areas that weren't a step-up in tenant base. We've really dialed in.

Part of the reason that we're here is, one, we love it here in Tennessee. However, we really love the Nashville MSA. We've stayed really market-focused. We're really highly positioned and focused on a Nashville MSA. We're not going to Memphis, we're not going to Chattanooga, we're not going to Clarksville. We're really honing down and dialing in here and finding our space in places that we feel have good runway, have good insulation to sustain very well based on the dynamics of the market, the job growth, the job diversity, the amount of people coming into the market here and just the lack of supply across the nation. We were at a point here-- on average, we were about 0.8 months of housing available. Nashville was trending about 0.7 months at the time. Murphysboro, where I do live today, very insulated multifamily market. The RM zoning, which enables the density for the area here, has actually gotten downsized because of the sewer allocation. It's been on the top list for Tennessee of fastest growing cities here, and they can't keep pace.

Our properties that we have here currently - we're at 100%, even though we keep pushing our rents up, and we're about a year, a year and a half ahead on our proforma rents based on what's happened here. However, each time we step that up, we're finding that occupancy stayed close to or near 100%. We're talking 2% vacancy. It's basically a zero on the vacancy there.

So we've found that this market part was having very strong teams surrounding us, puts us in a good place to go out there and look. We've also looked for debt that didn't put us in great exposure, where we'll say two years or three years out from now we're going to be pushed to make a decision on trying to transfer out the property as well. So we are really looking for good debt partners right now that we can pair that on properties that we want to be in for seven, eight, nine years, because we want to stay in the market, where it's not something where a lot of the earlier ones have been earlier exits based on what's happened in the market, where it's almost-- like, we'll call it a longer-term flip, the building, because of just how the transition period went from a five to seven-year-old into a one, two, three year old.

Slocomb Reed: You've said a lot in the last couple of minutes there, Jason. There are a couple of things that stood out to me though as seemingly contradicting to what most people I interview are thinking or doing. I'll start with the second one that you mentioned. You're focusing on long-term debt. This is Joe Fairless's Best Ever podcast. In his Best Ever book, he said that one of the core principles of apartments indication is secure long-term fixed rate debt. That being said, given the debt market that we're seeing right now, the gap between long-term debt and bridge debt is widening, and some people think that makes bridge debt look juicier, because they believe they're going to be in a position to turn their property around in three years. They expect that what's happening with interest rates right now won't last that long, that interest rates will lower three years from now... So they'd rather go ahead and fix that interest rate two percentage points lower for the next three years than stick with the long-term debt they've always gone for, now that it's so much more expensive. What are your thoughts on that?

Jason Yarusi: Great points. I'll note a couple things in there. So traditionally, over time, going for a floating rate over a 5 and 10-year horizon has outperformed staying in fixed rate. And just because a lot of times-- it's like the fear of the chess move actually produces more than the actual move itself, where the Fed is saying that they're going to increase rates. It's almost priced in right now into the current rates. Now, the point of that is you can go longer-term debt with more potential backend opportunities.

So there are banks out there right now that are lending under balance sheet [unintelligible 00:12:02.06] right? So we have one right now where we're getting five-year fixed, not far off where we're seeing the floating rate where we don't have a prepayment penalty to source out of it, right? So it puts us in a position to have five-year money, five-year term; although the amortization is going to come down to 25, it still works very well for the deal, and it doesn't lock us in where we have a potential big exit penalty if we want to get out of that deal early.

On the other side of it, we've found that interest caps have been so expensive based where they priced into that you have to say, "Okay, I'm going to have to figure out something two years from now with the interest cap [unintelligible 00:12:34.14] does go the opposite way, but is the cost of going into that interest cap - does it make for just paying a little bit more for the fixed rate right now? So we're looking at both of those sides, and we've found earlier when we were doing some bridge products, it's worked well for those. However, we've transitioned into more sleep-better-at-night money for some of these properties here, that will trend better to this investment that we're going forward into, but it still gives us the option going out.

Now, the point about this being short-lived - yeah, I agree. We've even seen Freddie Mac, their small balance [unintelligible 00:13:09.29] there because a lot of this scarcity we've seen everybody overreacts, and then calms, and then takes a step back. But Fannie and Freddie themself, they have to put money out there. And right now they're probably so far behind this year on how much money they need to put to work, that you're going to find other things happening out there that's going to make these deals better, depending on what they are.

So we haven't gone agency in quite some time now. We did the majority of our earlier deals in agency. We haven't been there for a while. We've gone bridge, bank, credit union, all different parts of the narrative here, but we are looking back at agency now based on where we think that might go, compared to some of the other debt options out there.

Slocomb Reed: Sticking on this point, Jason, you'd said that you're going for sleep-better-at-night debt right now. Is that because that is what the property and the deal necessitate, or is that really more about what your investors are looking for, given that the economy is more tumultuous right now than it has been the last several years?

Jason Yarusi: It's not so much the deal that we're forced to go to the bridge. We've been trying to stay away from deals that are very skinny, even from core principles throughout. So one deal, for instance, we're buying here in Nashville, price per pound is expensive, but it's a product that we could see ourselves holding for a decade, right? It's a great area, very desirable area for selling houses and across the street, 800,000 up to 1.2 million. So it is a primary for us to be in. However, we're saying, okay, the bridge option with where potentially [inaudible 00:14:40] will go and how expensive the caps are, it's going to crush cash flow potentially where we go out there. Where if I can predictably set an income stream, at least for the future, the sleep-better-at-night money is that I'm not going to be more exposed to the ups and downs that could exist out there that's going to limit our cash flow out of the gate, because we do have a sizeable proven gap by our comps there, but it takes a minute for us to get there in terms of our rent bumps.

Break: [00:15:07] to [00:16:53]

Slocomb Reed: You are an operating principal in the majority of your deals, your acquisitions, your operations. You're also investor relations. So are you seeing, in your investor relations, that the appetite of your investors is changing right now? Couple of things to consider, given what's going on, a bit more frame of reference for our audience - there's a lot of money on the sidelines, because a lot of people who invest in apartment syndications have seen major windfalls, higher equity multiples in shorter hold periods for the last several years than were expected. So they're sitting on cash, and the market is starting to show some cracks in the foundation. What are you seeing from your investors with regards to their appetite right now?

Jason Yarusi: You trend on two sides, right? Typically, if it's real heavy on deals, it means the market is tightened up on the money supply. And if we're real heavy on the money like we saw for the last couple years there, deals are really hard to come by or more competitive. So on that front, we're trending to that element there. However, noting where the stock market is, a lot of people pull out from intangible assets, right? So we're pushing away from crypto, pushing away from stocks, just on unpredictability and just how much they've been hammered in the market, and they want to be in assets here that focus well with the inflationary narrative here. Because if you think about this point, real estate is a good hedge, they say, for inflation. Well, there's certain asset classes that really trend better and multifamily really does well. If you look at it as we go out here and the more inflation we have, typically, it makes buildings, of course, cost more to build, materials cost more, labor costs more, and then when you go into really supply-constrained areas. Like we have here, it's slower for these to come up to meet that demand.

On the same side, we're more predictable because of short-term leases, your leases here that we can adapt to all these market changes more readily, whether it's up or down, right? Hopefully, not down, but whether it's up; and down and we're tracking on two points - how the area, the property itself is adapting to wage inflation. Because we've seen such a rise up in price inflation now, but the wage inflation is really what we want to pay attention to because that's showing how much the tenant base can sustain because we have to be reasonable to say that, "Here we are raising rents. Sure, we can prove it out for comps, but what's it going to do to our property? Will our tenant base be able to renew at some point and stay there, or are we going to basically outprice the market?"

So noting that we've had a core group of investors that have done well with us, that we continue to talk to and keep them abreast and be very good with our response to them, there are going to be some that want to be safe in terms of putting their money in real estate, and there'll be others that will choose that they want to wait it out, and we want it to be the best decision for investors. So we're finding either way and it's going to be more to their investment parts. We find that in most lights, the ability to benefit from cash flow, appreciation, depreciation, debt paid down, tax advantages - all of those that come with a multifamily housing far outweigh sitting on a sideline where your money is in a bank account and losing 10%, just basically sitting there for the last year. So you look at that, you say, "Okay, if I can get something that's cash flowing, can give me a lot of offsets, tax advantages, it makes good sense if I believe in the area, if I believe in the operator and the team that's putting forward the investment."

Slocomb Reed: Are you seeing a lot of your investors choosing to take their chips off the table right now and sit on the sidelines?

Jason Yarusi: No, actually not. I'm not seeing a big part of investors trend back. There is that group, and I completely understand. But the same thing too when you look back even just on early COVID, one of the things we did is we actually had purchased property almost a month before, not knowing; that property, lo and behold, performed amazing because of everything that happened. However, a month in, we actually got under contract a property here locally, and we couldn't invest conscious efforts, say to our investors that this was the right time. So we actually walked away from that deal, just noting of everything, all the uncertainty at that time. Knowing what we know now, we missed out on a tremendous opportunity because of all the pieces.

So hindsight's always 20/20, but we want people to be up for their best decision, whether now is the right time to invest or not. We have a good group of investors that continue to move. We actually have another one property that's selling in about two weeks. We have another property that looks to be going under contract to sell, right? So there's still an appetite on the buyer side out there as well. But we have not seen a massive, we'll say pullback from our investor base; but there's always some, and that could be some are marketing and some are just anything else, right? They've started their own business. They've done something else out there that's productively using their money.

Slocomb Reed: Jason, you said earlier on in this episode that you've decided to hone in specifically on Nashville. I was asking you how you are adapting your strategy and your underwriting to the current market conditions when you said so. You mentioned markets on the periphery of Nashville that you're not even considering right now, focusing on Nashville. I think the vast majority of our listeners recognize how much growth there's been in the Nashville MSA, so that's not going to come as a surprise. However, deals are fewer and farther and further between, and you're deciding to zero in on one market at a time, when most investors are looking into multiple markets in order to get deal flow. Why just Nashville?

Jason Yarusi: Nashville - remember we have the outer court too, right? So Nashville's Davidson County. We have Williamson County, where we are at, Rutherford County. We have Wilson County. So that incorporates a lot of the area here that makes up the MSA for which areas we believe in. So even below us is right here in Coffee County. Noting the difficulty in just how much demand exists out there and how little supply, that's what we've looked into development. We come from a long history of construction. We've found two properties that are very well situated here; one entitled, the other one we were able to walk into right as entitlement happened. We actually just recently found another one here where it was a house that was zoned accordingly for four apartments here. So knowing that we can walk in there and help meet the gap of the need of housing, that gives us more opportunities.

Now, of course, we would like to buy existing products. It has less downside risk, less other points of need, but we also are, again, looking for the delta between just the cost to buy versus the cost to build, and we continue to see that gap. Even with inflation, the gap continues to shorten on some of these areas about how much it costs to buy something compared to how much it costs to build. So if we can control that piece of the puzzle here, and even be more open on our exit. We've had offers come in, just basically buying the dirt from us where it's at, or even for them to buy the dirt and still have us do some of the infrastructure. So there's multiple exit strategies.

So [unintelligible 00:24:02.04] say stay stuck or not just a one spot. You can see that although we're in one area, we're very adaptable to the multifamily space, to make sure we're [unintelligible 00:24:13.02] accordingly. Because you go to multiple markets here - it can be great, but I also see the risk of not being prepared to how that market is changing... Because a lot of things can happen very quickly. In Louisville, funny enough within two years we've done so well because the market took unpredictable changes in good ways. So that's worked to our favor here, but you can't predict if that could happen in the wrong way, too. And the more dialed in you could be to your area, the more opportunities you can have to win those markets.

Slocomb Reed: Jason, I know you've been on this podcast a couple times before, but it has been a little while. Are you ready for the Best Ever Lightning Round?

Jason Yarusi: I can, yup. And you've done a great job, so Joe's got challenges coming up on him, so...

Slocomb Reed: Well, I appreciate it. We'll see if he ever comes back and interviews anyone. What is the best ever book you've recently read, Jason?

Jason Yarusi: I actually just finished out Gary V's Twelve and a Half. Fun book just talking about accountability, taking control of your emotion, just understanding, have the best path forward so you can be your best self, but also be in the best position to help others.

Slocomb Reed: You said that was Twelve and a Half?

Jason Yarusi: It's Gary Vaynerchuk, but I'm pretty sure it's Twelve and a Half is the name of the book.

Slocomb Reed: Gotcha. What's your best ever way to give back?

Jason Yarusi: We've done a lot in some charity organizations that we really have. One's called Imagine, that we like to work with. We also have this seven-figure multifamily mastermind, where we have a bunch of people that are looking to do the same thing we have, that we've helped others now go out there and just change the direction of where they want to be. So between the two, it takes a lot of energy and we love to go out there and just show our kids just other ways that we can all win together in this world, and then hopefully, they could pass that on as well.

Slocomb Reed: Since the last time you were on the show, Jason, what is the biggest mistake you've made, and the best ever lesson you've learned resulting from it?

Jason Yarusi: Hmm. So I talked on hiring earlier, and that's a big part here, is that we all want to assume that we can do everything the best ourselves. Rarely ever true. But let's just say even if you can - if there's one of you and you have to do 10 things, you're probably going to get two done at 100%. The rest are going to be done at 10%. So although, maybe in a magical world you could do everything better, which probably you can't; ultimately, while those eight things got done at 10% of what they need to be done. So we've really honed down on finding great people. We want to continue to scale. I have a great team surrounding us now. I'm so excited on the path forward. Just so excited on how they come engaged every day to do better. So the biggest mistake is just waiting too long for things to really bring people on that we can all help each other do great together.

Slocomb Reed: Jason, what is your best ever advice?

Jason Yarusi: Get started. Everything I've done in my life. I used to, younger, always trying to figure everything else out. And then you start and realize the first thing that happens is you realize you don't know any of the questions or answers, basically because you just started and got smacked in the face. So get started. Multifamily space, if this is where you want to be, you can listen to this podcast here, you get a ton of true value, but you have to get out there. Go to meetings, talk to people. Go out there and find other people that are doing it. Ask if you can have time to speak with them. Go out there and find positions that you can involve yourself or engage or add value to others.

The get started component - no one ever looks back 50 years from now and said, "You know, I wish I did less." Everybody always says, "I wish I did something earlier. I wish I took action. I wish I tried." The ability to fail is something that scares us all, but failure is a natural way for us to learn what not to do again and learn from our mistakes. So go forward, try. You will find that the downside risk of what you try is so minimal from the upside potential, because we always assume the worst-case scenario is going to happen, the worst possible thing is going to happen. But if you're going to give merit for the worst possible thing going to be able to happen, you have to get credit that the best possible thing can also happen.

Slocomb Reed: Awesome. Jason, where can people get in touch with you?

Jason Yarusi: Sure. You can go over to yarusiholdings.com, everything over there from talking about the mastermind to our podcast, to our offerings, to what we've been working on, to a little bit more about Pili and I, so everything there at yarusiholdings.com. And thank you so much for having me back in the show.

Slocomb Reed: Absolutely. Jason, thank you for coming back. And that link is going to be in the show notes. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to the show, give us a five-star review and share this with a friend you know we can add value to through this episode. Thank you and have a best ever day.

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