Edward Ring is the founder and CEO of New Standard Equities, a leading vertically-integrated real estate investment management firm that specializes in the acquisition and operations of multifamily properties located throughout the Western U.S.
In this episode, he tells us his thoughts on the difference between a value-add and repositioning business plan, how he cautiously approaches repositioning apartment buildings, and which apartment interior updates have led to the most success for his business.
Edward Ring | Real Estate Background
- Founder and CEO of New Standard Equities, which is a leading vertically-integrated real estate investment management firm that specializes in the acquisition and operations of multifamily properties located throughout the Western U.S.
- Portfolio:
- 2,000 units in 13 properties
- Based in: Los Angeles, CA
- Say hi to him at:
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and I'm here with Eddie Ring. Eddie is joining us from Los Angeles, California. He's the founder and CEO of New Standard Equities. They syndicate and JV West Coast value-add apartment deals. In their current portfolio they have around 2,000 units in 13 properties in Greater Seattle, Northern California, and Southern California. Eddie, can you tell us a little bit about your background and what you're currently focused on?
Eddie Ring: Yeah, absolutely. First, thanks a lot for having me on your show. I'm happy to be here. So I started this company back in 2010, and my sole mission in life is to do things that I've done before. So I don't like to take a lot of risk; I like to do things that have been successful, and that means I kind of go out and do the same thing all the time, buy the same types of properties, the same sort of demographics, execute a very, very similar business plan... And I do it in similar markets, markets that I know like the back of my hand. So what I'm doing today is kind of similar to what I've done for the last 10-12 years. We go out and we look for underperforming assets that could use dollars to fix problems, and where I can maintain a strong cash flow and occupancy with my current demographic. So that means I'll go in to, say, a Class B property and find a way to improve the rent vis-a-vis what I'm seeing in the market, and execute that plan and slowly turn units. I don't empty buildings, I just kind of do a natural turnover.
Slocomb Reed: Gotcha. Eddie, the first thing I keyed in on there was that you don't like to take risks, but you started an apartment company in 2010... Tell me about your timing there. Why 2010 For a guy who doesn't like to take risks?
Eddie Ring: Well, it's funny, because I don't like to take risks that I don't understand. Back in 2010 - obviously, we were coming out of the Great Recession - I had been working for another company, a very big brand name institutional type investor, and I understood and knew this business of value-add apartment operations and repositioning. And so even in 2010, because I was betting on myself and I was betting on what I already know that I know, I didn't think I was taking a very big risk. But it's all a matter of perspective. If I set about the task of building a spaceship company, I'd be way out and ahead of myself.
Slocomb Reed: Yeah, there's a big difference between having a background working for an institutional investor in this space and being a marine biologist and deciding "It's 2010. Real Estate doesn't feel risky. I'm just gonna do it." That sounds something more like I would have done back then. I came into this from youth ministry. Eddie, I often struggle with this when explaining what I do to the apartment investor community at large... I'm an owner-operator of apartments in Cincinnati, Ohio. Given your experience or track record, it's a fairly basic question, but I'd like to hear your answer... Do you think that there's a difference between a value-add business plan and a reposition business plan? When you use those terms, do they mean different things? And if so, what are they?
Eddie Ring: That's actually a great question, and I've thought about that in the past, and I'm glad you're asking it, because I do think there's a difference. I believe that you can have value-add apartment opportunity or apartment project where you're going in and maybe you understand that you can make a little nicer kitchen, and you can fix up the common areas, maybe you add a fitness center... But that's the extent of it. But you can also find an apartment project that's in, say, a B-class condition, and you might find that there are no other B+ or A- condition apartments in the sub-market, only super-high-end class a luxury. And so in those circumstances, I think that there is a repositioning play, a true repurpose auditioning play, it's a rebranding - it's taking your community that had previously been known to be X, and you're really creating a new space for it in Y.
We love to do bonafide repositioning deals, because it brings in all kinds of different skillsets that I have and my team has, on the creative side, on the marketing, the rebranding, and really finding that new niche. That said, that costs more money, and you better get a better return on your investment for that activity. But I do think that there is a distinction between value-add and repositioning.
Slocomb Reed: There are a couple places I want to take this, Eddie. The first thing I want to ask - you were just saying that you have a preference... You didn't say to move slowly through your business plan, but that you like to keep apartments occupied, renovate, move tenants in over time. I know some people who, when they talk about repositioning the way that you do, rebranding a space, changing the culture, if culture is the right word, shifting the community who is interested in living in that space, shifting your tenant base, that's a reposition. I know a lot of people who would say that if you're going to reposition a property, you need to do it as fast as possible, which may include, some people would say emptying the building of tenants, depending on what situation you've found the property in. But I know I have personally experienced difficulty in repositioning an apartment building when I'm letting a below-market tenant base stay in some of the building while trying to also rent it at or even sometimes slightly above market. How do you reconcile that with your repositions, that if you're choosing to move at a slower pace, and just get things done over time and maintain occupancy - does that not cause problems in attracting a new tenant base your properties when the below-market tenant base is still there?
Eddie Ring: Yes, it can. It just means you have to do it even more cautiously. One of the reasons I like to move slowly is just in case I'm wrong - generally, that hasn't happened, but I don't want to empty a building only to have to refill it back up with the same profile, or the same resident. To be wrong about an opportunity is made worse if you've already ruined what you had. So I kind of like to go slowly to make sure that what we've got is what we expected in the frontend. And again, every property is different. If you're taking over something that maybe had some crime problems, or something that really had a bad name in the news, you really need to unwind the project... And I would go and rename it immediately, and get a new logo, and really start that process. But other times it warrants a slow [unintelligible 00:07:53.21] approach... And you're right that there is a balancing act, because you're going to have a current profile, and a current tenant base that is far beneath the new tenant base, in terms of demography, and sort of willingness to pay the higher rent etc. You've got to really, really be careful with that. Your neighbors talk to each other, and that's probably one of the bigger problems. However, a lot of residents that I've found, they appreciate the newer apartment, the newer look, the newer feel, and they also understand that they're paying for that. So if I'm in a part of the economic cycle where all of a sudden they're feeling like they're overpaying, because the guy next door is paying $300 less in rent, and he/she can't discern the difference between their beautiful stainless steel fridge package and granite quartz countertops, versus their 1960s vintage refrigerators and whatnot, that's a distinction that we've got the wrong tenants in that newly-renovated product.
But ultimately, I do like to make sure on my repositioning deals that I was right. I did one project up in Greater Seattle, 1940s vintage. I usually don't go that old, but this was the 1940s vintage former military barracks, and it was known as Bremerton Garden. It had a horrible name, and the community - it's a smallish town, maybe 40,000 to 50,000 or something like that... It's heavily military concentrated, and people were paying very, very little money to live with beautiful views of Puget Sound. And I came in and I looked at the project and I immediately thought of a 1940s fishing village. I don't know why that came into my head, but I was like "You know what - this is almost like Mainstreet Disneyland or The Truman Show." I was like, "No, no, I can turn this into something really cool and fun to live in." Yes, the rent will go precipitously higher, but people will enjoy this. It'll be like living in this cool little town, as opposed to a rundown form of military barracks.
So with that, I wanted to get that process going right away, because it was in such bad condition that I rebranded immediately and started putting the architectural elements together as soon as I possibly could. And that took the better part of 12 months before I got the prior tenancy out and fully turned over. But it was a huge success. We bought that for 13 million and sold it for 35. So that was good execution.
Slocomb Reed: Nice. Bought for 13 million, but how much had to be put into it?
Eddie Ring: About two.
Slocomb Reed: About two. Yeah, so that is a good deal.
Eddie Ring: Yeah.
Slocomb Reed: Eddie, when it comes to value-add or reposition and how steep of a budget or how intensive a business plan is going to be required, I often hear investors talk about occupancy rates... I think the main reason that they do it is that banks are focused on that occupancy rate when they're looking at trailing financials... And so you know, you hear that above 80% occupancy is value-add, below 80% occupancy is a reposition. I can see there are properties that I've taken over where I had 50% physical occupancy or less, and even though I wasn't changing the culture of the community, I wasn't rebranding the building, it was still a pretty heavy lift, even though I was leaving the monument signs in place and just changing the phone number on them. What are your thoughts on that?
Eddie Ring: Well, it's a great question, because I generally don't do business in markets where assets fall that far. So rather than -- think about whether it's value-add or repositioning based on the occupancy, what we see on the West Coast is... Like, right now my entire portfolio, I think I'm 98% occupied across the board. Maybe there's one project that's exposed to about 92%, or something like that, so I've got some eviction. We're still dealing with the COVID eviction stuff here on the West Coast. It's not fun. But there's such a shortage of housing really in every single market that I play in, that we can find a project that's 95% full, but that needs a full repositioning. Or similarly, a project that's 85% that just needs some TLC, and it's a minor repositioning. I've done both.
But I think the key for us is investors like their cash flow, so we like to make sure we're distributing quarterly... And like I said, if we're wrong and we renovate a project or something like that, renovate a unit, if we can't get that rent, if it's sitting there for 2, 3, 4 weeks and I can't get that rent, I'm not going to put another one into the renovation program. I'm going to hold it off, I'll rent it out for the classic price, and just wait and see what happens with the market and see what we're missing. The key is to not spend the money if you're not going to get the added rent bump, but then absolutely spend the money if you aren't getting it, and do that as quickly as you can.
Slocomb Reed: Can you give us an example of a time when you tested the market to see whether or not your spend was going to be justified by rent increases, testing the market to see how your tenant base reacted to that?
Eddie Ring: Yes. In fact, a really interesting example in San Jose, California... We have a beautiful project that is sort of the value-add than a full repositioning, as I kind of talked about... But this is one where we have basically all two bedrooms, so either two bedroom/one bath, or two bedroom/two bath. And we executed our plan, and immediately we started getting a very healthy rent bump on the two-bedroom/two-bathroom units, and the two-bedroom/one-bathroom units just sat. So we immediately stopped renovating all of the two-bedroom/one-bathroom units and saved that cash. I mean, we were spending $12,000 or $15,000, or something like that on each unit. But the two-bedroom units were commanding a $250 premium after the renovation.
So that was one where we were able to actually see that, for whatever reason, the market really preferred the two-bedroom/two-bathroom units, and we were willing to pay more for a nicer version of that, whereas we couldn't get a single penny out of renovating the two by one units, which is fascinating. I never would have expected -- I thought maybe $50, or $75, or some number... But no, it was such an undesirable unit at the time that it didn't justify spending any money on it.
Slocomb Reed: I will give my own example, that will lead into my next question, Eddie. A lot of the apartment inventory in Cincinnati is built mid 1960s to early '80s. Brick construction, 4-families, 12-families, and then larger versions of very similar layouts, very similar apartments. So I have a property in a B area of Greater Cincinnati, outside of the city, where I have one of these 1968 builds, all one-bedrooms, living room, galley kitchen, the bathrooms right behind it, and the bedroom's in the back. And the galley kitchen has like a little dining area off of it. Well, one of the things that's become really common - this is something all of our listeners ought to already be familiar with - the open concept floorplan, and the idea that the kitchen is a part of the living space, and not necessarily a separate working space.
So one of the things I've seen within my own portfolio is how much of a change there is when you take out that wall that makes the kitchen the galley kitchen, and either do something like an island, or a peninsula, or just do an L-shaped kitchen on two walls, but open up the kitchen to the main living areas. According to all of the rent comps, apartments.com, Zillow, OurExperience, Rentometer, all of those things - these were supposed to be $800/month apartments; we decided to try this out with one of them, and got $900/month immediately. And the reason was, it wasn't just the nicer floors, the nicer appliances, it was the actual change to the floor plan, making the space feel larger, brighter, more sophisticated, that came from taking out that wall between the kitchen and the living area. So you had that kind of open concept/living/dining kitchen, and I've seen that work in other places. Being able to do that, and being able to garner above-market rent is proving to us that with this 12-unit apartment building we can reposition, and we can change the community and the culture of the property, because we can attract a tenant base who is willing to pay above-market rent based on what everything that's happening around us, because they're willing to pay more for a nicer space.
The question coming from this for you, Eddie, is interior-specific, what are the things that you're doing that are leading to the most success with repositioning your apartment buildings? I feel like exteriors is obvious. We can talk about monument signs, and resurfacing parking lots, changing the color scheme, making it pop, putting the dumpsters in the right place... I feel like a lot of that is obvious. Specific to the interiors and inside your apartments, what is it you're doing that leads to success in repositioning your property?
Eddie Ring: Yes, and I'm seeing the same thing in a lot of our buildings. We frequently rip out the old kitchens and turn them into generally speaking L-shaped kitchens, and they are 100% value-add and an opportunity to reposition. We have a project, it's a smaller one, roughly 80, maybe 78 units, or something like that; smaller for our portfolio... In Fremont, California, which is Silicon Valley [unintelligible 00:18:11.09] Google tech workers basically, where the single-family home is $1,400 [unintelligible 00:18:18.12] It's very, very expensive. San Francisco area is very, very pricey. The units unrenovated are going for about $2,000, and renovated with the nice L shaped kitchens are going for about $2,700 -$2,800. So you're saying it's working in Cincinnati... That works in Fremont, California.
Break: [00:18:40.18] to [00:19:43.00]
Slocomb Reed: Eddie, give us some more of the math there. How much are you spending for that rent bump, and what kind of return are you getting?
Eddie Ring: We're spending about $15,000 to $18,000 for that extra $800 bucks... It's a solid return on cost. The other thing that we ended up doing - and I think we're doing it at that property as well - is we are adding washer/dryers to the units.
Slocomb Reed: Oh yeah, absolutely.
Eddie Ring: Yeah, anywhere we can find that opportunity, we'll do that. However, it's funny, because I've seen situations where the rent pop that you get from a washer/dryer install is not as much as you wanted to - $75, or $50 even - and then you have to look at what the income that you're losing on your laundry room. So you lose that income, and you get [unintelligible 00:20:30.12] It's like okay, well, now you're doing it to improve your occupancy, maybe...
Slocomb Reed: I feel like there's some retention...
Eddie Ring: Yeah, there's some retention there... You're lowering your cap rate maybe on exit... Who knows. But for me, it's - you're kind of like holding your breath sometimes in some of these. But generally speaking, adding washer and dryers works very well. Doing L-shaped kitchens, really going all the way to a quartz countertop instead of using laminate - that also seems to be a very, very good, attractive feature for residents...
Slocomb Reed: You're getting a 50% return on investment on your kitchen remodels at the least...
Eddie Ring: Yeah, exactly.
Slocomb Reed: ...at the lowest return... So absolutely. Yeah, this is a little bit niche. I hope we don't lose our listeners here, but what do you feel about the two-in-one ventless washer/dryers that you can put under the counter in the kitchen?
Eddie Ring: They don't work that well. So they look good on the tour...
Slocomb Reed: But you overload them very quickly.
Eddie Ring: Very quickly, yeah.
Slocomb Reed: It almost feels like -- I'm speaking from experience; I'm asking for a friend named Slocomb here - that in my experience with them it's almost like, especially if you have a tenant who works out, they're gonna have to use that thing every day.
Eddie Ring: Yeah. And the problem is, because they don't work that well, your maintenance team is going to be called all the time; they're gonna be inundated with phone calls to the office and complaints. And it's not really your fault, it's the machine that's designed poorly, or [00:21:58.15] and now you're basically hurting your own business because of a different business, i.e. the washing machine company didn't develop a very good product. So now you're suffering some of the bad or the ill will, instead of having a really nice laundry room.
So that would be an instance where I would say maybe skip that, because it's hard to explain to an angry resident "Hey, man, I'm sorry, we just threw it in there so you can do your socks, but not your socks and your shoes and your sweats at the same time."
Slocomb Reed: Yeah, I get that. I will say, the one place where I am content - not happy, but content with those is in buildings where a laundry room is not an option, common area laundry is not an option. The tenant base in the neighborhood demands on-site or in-unit laundry, and I just don't have any other place where to put it. A studio apartment, a one-bedroom apartment, a lower-level apartment, I can't ventilate. I'm taking garbage disposals out of all these apartments anyways, and so if it's a ventless 110 volt, I can just run it off of the electrical right there, leave what's already there. It already has a switch, because the disposal had a switch... It's super-convenient. But I tell all my tenants upfront "Look, you just can't put that much stuff in this thing." If you work out and you have work clothes and workout clothes, you're literally going to be doing this every day. You just need to have that expectation going in. I'll tell you where the Laundromats are, they're inconvenient, which is part of the reason I did this, but this is the best option available given the circumstances."
So I'm not entirely opposed... I will say one more anecdote - they're terrible for short-term rentals, because you cannot get the sheets and towels washed and dried, in general, but nearly not nearly in enough time. You need something that works a lot faster when you're trying to wash while you clean.
Eddie Ring: Yeah.
Slocomb Reed: Well, this has been a great conversation, Eddie. I feel like I could ask you questions for the rest of the day, much less other hour. This is a short-form podcast though, so are you ready for the Best Ever lightning round?
Eddie Ring: Sure. Yeah.
Slocomb Reed: Awesome. Eddie, what is the best ever book you recently read?
Eddie Ring: The Obstacle Is The Way by Ryan Holiday. Pretty interesting. It's about the stoics; especially in today's world with our finance, debt markets all up [unintelligible 00:24:22.07] and the stock market going crazy, focus on what is accepted, deal with it and move on.
Slocomb Reed: I want to plug that book here as well, Eddie... We are recording in late August 2022, and there are some major events happening in American politics right now that I will leave unnamed, because I want to make the point generally anyways... But whenever I see my friends on Facebook who [unintelligible 00:24:50.17] and get in debates about these things that the government is doing, about things that are happening in the outside world, my phone first response is always "Chop wood, carry water." The things that I can control are the things that I can control. It's my responsibility to take care of my family, myself, my company, and I'm going to focus on me, I'm going to focus on what it is that I can do about my situation... And frankly, that's enough. That's gonna keep me busy if I really am doing what I can for myself. So a plug for stoicism, a plug for Ryan Holiday, and a plug for "The obstacle is the way." Absolutely.
Eddie Ring: Awesome.
Slocomb Reed: Eddie, what is your best ever way to get back?
Eddie Ring: Right now I'm on the Board of Trustees at an organization called The Children's Bureau. It's 110-year-old organization here in Greater Los Angeles that's focused on preventing child abuse. Prevention is obviously a very, very challenging aspect of their business, because how do you stop something before it happens? But it's with community outreach, it's with education, social work, a lot of hand-holding and intervention into the community. It's something I'm passionate about, and I really love working on fundraising and programmatic things that I can help with with the Children's Bureau. I'm also on the board of directors at a regional theater called Center Theatre Group. It's a nonprofit theater here in Los Angeles that I'm very passionate about, and the arts, and making sure the arts don't die with our streaming services and whatnot, and movies and television.
Slocomb Reed: Nice. Eddie, thus far in your commercial real estate investing career, what is the biggest mistake that you've made, and the best ever lesson you learned from it?
Eddie Ring: I did a deal a few years ago, it was one of the newer projects - '04 vintage, I think - that I've ever purchased. There was $1,000 upside in the rent, that I knew about, but I chose to not focus on the fact that somebody was building right next door to me, or a block away, a Class A product. And I thought, "Well, I won't compete with the Class A." And there was already a Class A building on the other side of my building. But what I thought, even though those rents were supporting my pro forma rent, in a small little downturn or during the lease up, they were able to special their rents in order to compete, and they beat me hands down, because they had more amenities, and they had a better product and etc, etc.
So the idea that you can purchase -- that was a tiny little 28-unit building, next to two 150-unit buildings. So I had 300 units of competition that I didn't really give a lot of credibility to, because we were so far below them... But when they give away two months free rent, all of a sudden [unintelligible 00:27:46.22] So I think that's the biggest mistake. I didn't actually lose any money on it, but we didn't make a heck of a lot either, and it was a headache.
Slocomb Reed: Tell us a little bit more about the lesson learned here. How did you grow out of this experience?
Eddie Ring: So the lesson learned was -- and I had an opportunity to potentially refinance the loan to stay in the project... But I really looked at the circumstances and I realized that what I should have realized before was the risks of owning this thing, I can't separate from my neighbors. I have to look at what they're doing and the trajectory they're heading, because they were Class A; they had to follow other class A buildings in the local market. So all of a sudden, with my class B Building I was really being forced to follow where the A's were, rather than be in my own little space.
So it taught me a lesson of, number one, don't be the small guy on the block, if the block is filled with aspirational rents that [unintelligible 00:28:49.22]
And number two, at the price point, I'm not sure if you have assets that are like this, but I was renovating a Class B+(ish) kind of deal to compete with more of the A's. When you get an A luxury type unit, you have a resident profile that demands that level of service. So what it taught me is that you can't separate the service quality of an A with the service quality of a B; the demographic of that renter profile, they demand this service, but you can't service in a 28-unit building like it can a 200-unit building. It's just not possible. So all of a sudden, I'm trying to get people to do 24-hour maintenance, or fix up a little unit to add a fitness center... You just can't do it.
Slocomb Reed: I lived in that 28-unit space, and what you're saying is giving me headaches already, just thinking about it.
Eddie Ring: Yeah, it's really really tough. And the other lesson is, I try to stay larger. I try not to go below 75 units, because I want a full-time person working there. It's very tough when you have to staff it with somebody and you only have 25 or 30 units, or something like that. These things don't run by themselves, as you know; they're very labor-intensive.
Slocomb Reed: They are, and I could ramble forever about how -- I self-manage, so how a lean and efficient business model is the only way that I can do it. The ability to do everything as remotely as possible... But as a management company, get on-site affordably to take care of what needs to be taken care of - yeah, absolutely. Eddie, what is your best ever advice?
Eddie Ring: My best ever advice is to a) make sure that you're ready to do this. If you haven't taken a step towards being an investor or being an operator, make sure that you're ready and you're armed with information. But that said, if you are ready, bet on yourself, because we're only on this planet for a little bit. And you may as well go all-in on the things that you can control, that it's your force of personality that's standing behind the product. I would say that for anybody in any business - as long as you're prepared, then believe in yourself and just do it.
Slocomb Reed: Eddie, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this conversation, primarily about repositioning apartment buildings on the West Coast, please do subscribe to our show, leave us a five-star review, and share this episode with a friend that you know that we can add value to through this conversation. Thank you, and have a best ever day.
Eddie Ring: Thank you.
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