Air Date: 8/5/2020
Today’s guest Nikolaï Ray is the founder and CEO of MREX. He’s regarded as one of North America’s leading experts in apartment investing with over CA$1 billion in analysis and transactions. A leading expert in multifamily financial engineering, he’s often called to stand in as teacher, adviser, and speaker. He is also a real-estate technology pioneer with his current work on multifamily real-estate property tokenization with block chain.
Topics Included in this episode:
- An educated approach to multi family investing.
- Failing hard and getting up harder
- The struggle with real estate education
- Nikolai’s upbringing > Decentralization of real estate investing
- Multifamily Financial engineering, using math to invest
- How the market has changed, understanding syndication
- Understanding how to use levers and outcomes
- Understanding IRR manipulation
- The variables that affect cap rate
- Net Present Value explained
- How investing in knowledge yields a higher return
- Using blockchain to invest in real estate
- Democratization of Real Estate
- Nikolai’s keys to success
The value of a multifamily property is essentially if we boil it down and dumb it down. It’s based off two things, right? It’s based off net operating income. So, rents minus expenses. What’s left is net operating income divided by the cap rate, right? So, what’s the percentage cap rate that people are paying for in the market? That’s essentially what a property is based on. What the value is based off.
Welcome to Ritter on Real Estate, the show about how to passively invest like a pro. On each episode, I interview real estate experts to give their top investing advice, strategies and tools, they break down insights into practical steps to avoid the pitfalls and make better investments. I want to help you passively invest like a pro. This is Ritter On Real Estate. I’m your host, Kent Ritter.
Hello fellow investors. Welcome to another episode of return on real estate where we teach you how to passively invest like a pro.
Today, my guest is Nikolai Ray, and Nikolai is the founder and CEO of MREX. He’s regarded as one of North America’s leading experts in apartment investing, with over a billion in Canadian in analysis and transactions. He’s a leading expert in multifamily financial engineering, and he’s often called upon to stand in as a teacher, advisor and speaker. He’s also a real estate technology pioneer with his current work on multifamily real estate property tokenization with blockchain. Man, Nikolai, so happy to have you today. I think it’s time to unpacked Yeah,
That sounds like a mouthful, doesn’t it? It’s like, that’s all like kind of old stuff. I think 1 billion was probably like five years ago.
KR 1:55 Oh, man, you got to update your bio.
NR I know. Right. Now, yeah. I mean;
KR 1:58 I think there’s a wealth of things that we can unpack today. So, I’m really excited to talk. I mean, I think just talking about, I think, letting you know explaining to our audience some of the ways that you in a very advanced way, look at deals and how you analyze deals and giving some insights into where you know, where things get tricky, tricky, where things can go wrong, where maybe some of the benchmarks and some of the common things that we’re used to maybe aren’t the way we should really be looking at things. So, I think I’m really excited to dive in. But before we do that, let’s start at the top. tell the audience you know, where you came from, and how you got to where you are today?
Well, it’s, uh, I’ll try to make it pretty short, because it’s actually quite a long story. But I was born in Quebec City and in Canada, obviously, in the French speaking part of Canada, but I left with my parents when I was just about a year old and ended up growing up in Los Angeles in California. So, I spent my childhood in LA as a Valley Boy, you know, I learned some Chicano, so I speak English, French, and Chicano. And essentially, came back to Canada in my teens, became a professional hockey player. And then also completed my education in exercise science and preventive medicine. And went to the Olympics three times as a human performance specialist. And throughout that I have a very strong mathematical background, being in biomechanics in preventive medicine. And I always had this knack for, obviously for math and for numbers and always loved real estate and thought that real estate was a great way number one for me to really express my mathematical prowess.
But at the same time, you know, create a bigger, a bigger dent on the university and a bigger impact on society than what I was just doing in the sports field.
So, in my mid to late 20s, I decided to actually completely leave my career of high performance and preventive medicine even though is at the top of my game at that moment, literally as you know, as a one of the coaches for the human for the Canadian Olympic teams, and went into real estate started a real estate investment firm. So essentially was a boutique investment banking firm specializing in real estate. And within a couple years, we’ve scaled that to $100 billion in transactions a year, ended up selling that business, went on to do some consulting work for family offices as their real estate arm consulting work with syndicators, private equity firms, real estate investment trusts and all that stuff. And ended up I guess, four or five years ago now founding MDX and MDX college, m Rex being a technology company where we’re essentially building the equivalent of the Bloomberg terminal, but for everyday real estate, real estate investors, so retail investors, Mom and Pop investors, passive investors, obviously syndicators, and we’ve also built a college where what we do is essentially, we bring very specific knowledge and frameworks to retail investors. So, the idea is to kind of Give you a Harvard level education specifically in multifamily investing even though you are not in the ivy League’s or maybe you’re now a professional investor, or maybe you’re a doctor, and you just want to learn a bit more about investing.
So, I felt like there was a big gap to fill between the whole industry having conferences and seminars and you know, what we what a lot of people will call gurus or mentors or coaches, right. And then the whole kind of college and university, which is much more built to So, build, for example, investment bankers and lawyers and stuff like that. But I felt like there was something missing in that gap there for just everyday retail investors who want to learn how to become a better real estate investor. So that’s essentially what I’ve been doing for the last five years. Obviously, my specialty is really in multifamily real estate, financial engineering. And, you know, I’ve worked on pretty much every single side of the game from, you know, active investing to helping passive investors, ground up development to, you know, complete redevelopment and optimization of actual existing multifamily properties. And yeah, that’s, that’s the gist of it in I hope, couple minutes,
just just that just. Yeah, that’s, that’s, that’s an incredible story. And I didn’t even realize all that about your background and the whole history of the Olympics and things. So, thanks for sharing that. And, you know, and something that you said, I mean, it really strikes a chord with me this idea of this last lack of really an education source for people that want to be real estate investors, right. Like, in my personal experience, I was a finance and econ major in college. I even took a real estate finance class in college.
That’s a great, that’s a great bass to have.
Yeah, but so, it didn’t really teach me any, like nothing I learned in that class. What I say, am I really applying today, everything has been self-taught. Right? Right. And so like, there really isn’t that avenue in a university to learn how to really successfully invest in real estate. Even my real estate finance class was like, if you were like working for a large corporation that invested in real, it’s
It’s very, very, it’s aimed towards building investment bankers. And yeah, you’re Yeah, you’re building people that you’re appraisers, you know, not not not building folks that want to go work in a large organization. And by the way, it doesn’t give you that mindset of an investor. And that’s kind of it doesn’t, that’s all fine and dandy, right. I mean, you know, universities and colleges have their own specific vocation. And I think it’s important, I think a college education can really help. But, you know, I think we have to keep in mind that, obviously, people who are teaching it at these institutions aren’t yours for the most part, not active investors or active investment professionals. Right. That’s
right. That’s right. Well, I like I mean, I think it I hope that I mean, I often talk on this show that even though it’s a passive investment, like you’ve got to be active in it, you’ve got to educate yourself. And I think that it sounds like you’re providing an opportunity for people to do that, which I hope makes more accessible for folks hopefully removes some of that fear factor of jumping into real estate with a better understanding and hopefully, allows more people to get involved in real estate investing, and all the benefits it can have in your life, right and everything, everything is done for me. So, I’m always a proponent of trying to get as many people to invest in real estate as you can be life changing. Democratization of real estate is a very important factor. Because,
I mean, I grew up poor, I grew up poor in the ghetto, and you know, in a ghetto in Los Angeles, and my parents were artists, you know, bohemian artists, my dad was a jazz musician, touring blues jazz musician, which essentially means he was dirt poor, and my mom was a theatre actress. So essentially, was a waitress, right? Like every actress in LA. So, I and So, you know, all the research that exists in the world on, on, you know, climbing the social ladder, and social mobility and equal access to opportunity.
You know, two things always come out. And that’s education, obviously, access to education. And the other thing is, is actually real estate. And there have been some really interesting studies done especially on like the favelas in Brazil, which are just the word for ghetto.
Right, right. And the moment that they started allowing the people who have been living there, it’s actually become owners of where they live in because favelas were always government owned. You started seeing people for the first time actually climb out of these, essentially shanty towns, be able to, you know, pretty much change their, there that go up the social ladder. So I think the democratization of real estate, that’s what the mission of Mr. X is through technology, education, is to do that to be able to say, Hey, you know, real estate’s always been a very, you know, kind of closed off, big boys club, you know, even for like, even for, say, an accredited investor who say as a as a surgeon, even for that person accessing for example, multifamily real estate investment market and the great returns that it offers in relation to the very little risk that that pertains in that market. Right? a hard thing to do, right?
It’s Yeah, not that easy-to-get access to good deals and too good to good deal flow and to actually invest in that market. So
You’ve got to really know somebody, right? Or you’ve got to, you’ve got to really do your homework to find people and, and if it’s somebody, you’re just finding randomly, you’ve got to do your work to build trust,
NR 10:25 and then you have to understand the market, you know, in the multifamily market is very, and when I talk about multifamily, obviously, that’s my, my prime business, but obviously, we could talk about commercial and mixed use and whatever. But essentially, when we talk about the overall umbrella of commercial real estate, it’s a very different type of investment class where, you know, it, in part resembles the fixed income class of bonds and obligations.
The same token, it also has resemblances to, to the stock market, and actually to just business owning, because essentially, that’s right. I mean, buildings a business, right? It’s just right.
Simply, you’re getting your share of the profits in the business as an owner, right. So, it really what you’re saying, which I totally believe it’s about, it can be the best of both worlds, right? You have to have the best aspects about the worst of both worlds, if you know what you’re doing. If you Yes, yes, exactly. So, no, I love that nickel, I think that’s a really good, really good kind of lay of the land, I think, explanation very fascinating about just the research around real estate being that, you know, one of the common denominators to help people, you know, climb to that next social class, socio economic level. Yeah. Something else that you said that I thought was really interesting. Interesting. I want to dig into a little bit more, is this idea of multifamily financial engineering? I mean, that sounds like, it sounds like underwriting like on steroids, right. So, tell us a little more about that. What do you mean by that?
Well, what I mean by multifamily financial engineering is, is essentially, I mean, financial engineering obviously, is a look like this very kind of big thing. A lot of people get very fearful when they hear about it. But essentially, underwriting is just one part of real estate, financial engineering, right. So financial engineering is essentially playing around with numbers, play around with projections, playing around with all these different tools, mathematical tools, you know, financial economics, to be able to, to, to mitigate risk to try and generate alpha. so, look we’re talking about, like, Jensen’s alpha trying to generate actual better returns by taking about the same amount of risk. So financial engineering allows you to play with so, with different types of capital stacks, different levels of capital stacks, you know, using different types of debts and levers and all these things, and really use a mathematical and analytical base to invest in real estate. And I think, number one, financial engineering is so, probably the most important tool an active investor can use today, just because, I mean, let’s face it, the market today is so, much tighter than it had been in the past because it’s gotten much more sophisticated right investors today, syndicators. I mean, prior to 2012, the JOBS Act syndicating was not a word, like no one really, right? talked about syndicating Now, every one of their mothers is a syndicator. Everyone is
Right. That’s right.
Watch it. I mean, everyone, I mean, if you go on Facebook, it seems like everyone has 8000 units now. Right?
KR 13:25 Everybody has 1% of 1000.
NR 13:27 Right, exactly. Or point 1%, which is fine. I mean, whatever, whatever rocks, everyone’s boats. But I mean, the fact of the matter is, that now everyone’s in the game, interest rates have really bottomed out. cap rates have compressed, and we’re just in a different type of economy than more than what we had ever been in. And multifamily real estate and commercial real estate, but especially multifamily has gone from a mom-and-pop investment class to a sophisticated investment class.
So, if you’re working in a sophisticated investment class, you have to have the proper tools to know what you’re doing and to make the proper investment is because the market is much more competitive now. I mean, if you’re a mom-and-pop investor, let’s say I started out investing tomorrow morning, I want to buy my first 24-unit property, I have to compete again, against some pretty, pretty heavy So, duty. Opposition. Right, right. So, 24-unit I think you need that and then as a passive investor, I think you need to understand financial engineering to understand what’s being presented to you as a passive investor, right? Because now we have all these syndications. Obviously, syndications are not really. I mean, it’s not like a public company like nothing’s audited. And no one’s really combing through all these operating memorandums and stuff like that.
So as a passive investor, yes, you’re passive operational wise, meaning that you’re not managing the property and the acquisitions, you’re just putting your deal into essentially a funder or a syndication, but you have to understand what is being done in these projects. And the modeling to understand, you know what you’re really investing in, you know, because, for example, I mean, I see this all the time, you see these syndicators, like, oh, we’re generating 18% IRR, 22% IRR. Okay, you know, internal rate of return is like the easiest metric to doctor, it’s so easy like I can toggle one or two things and completely change the IR of a project. Yeah. But essentially, it means nothing like, it doesn’t really mean anything in the project.
So, if you don’t understand what are the inputs that are underlying that output, and how they’re asking them as a passive investor, I mean, a very simple way to understand that is, you know, the first thing that you can do as a passive investor is go and look in the modeling of the of the syndicator, the GP or, or I mean, we can even get a higher level of a RI and go and look at, okay, what Obviously, is the IRR based off? Is it based off an exit? So, a disposition of the assets selling the assets and five or 10 years, which is pretty common practice in modeling; Or is it based off a refinance. So, if it’s a value, add the deal, maybe they’re right, refinance and pull you out? Which is, I mean, it’s a liquidity event like So, a disposition, like a sale? So that’s the number one thing and then you want to look at it, what’s that terminal value? What’s it based off? Right? So, for example, if it’s based off a projection that cap rates are going to be 3%. And, and the internal rate of return on the project is 18%, I’d be very wary as a passive investor to invest in that deal, I’d be asking some very serious questions of how that partner is arriving at that right output.
One of the things that struck me as I really started, so I want I love what you’re saying. So, you know, I was a consultant in my previous life, and I always thought about things as you’ve got to understand at a basic level, like what are what are the different levers that exist? And so, what So, are the outcomes that happen when you pull these levers, you know, when you move it up or down? What then what happens? Right, what’s the outcome that occurs, right, and so that’s what you’re talking about right now.
And you know, PhD in finance to do this, I mean, it’s, it’s the first time they do someone, here’s what we’re talking about, it might seem kind of, you know, over the top and very heavy, but it’s, uh, you know, we can boil it down to the very simple way.
And what I was gonna say is this, the thing that really struck me about IRR is when I realized this and really started to understand these things was, you know, one of the one of the easiest ways to going to juice your IRR is actually pay more for the property, which lowers your ingoing cap rate, which will, in turn, lower the cap rate on your exit, which will improve your IRR throughout the project. Well, you want to raise your IRR. In some cases, you could just pay a little more for the property. So just showing one kind of extreme example of how it can be manipulated.
Absolutely. That’s funny, because I actually hosted a webinar last week on the four critical mistakes of what investors do with regards to determining exit cap rates or reversion cap rates.
KR Yes;i that’s one of them is basing your cap rate off your acquisition cap rate, because what a lot of people do is they’ll take their acquisition cap rate and say, well, I’ll just expand that cap rate. So, I’ll add on to it, say, you know, five basis points a year. So, let’s say if you purchased at a five-cap rate, that means in five years, your exit cap rate would be five point 25%. Right. But the problem with that is like you just said like that’s five-cap so biased to the price that you paid for the property, right? It’s number one. And number two, if it’s a value-added deal, the cap rate upon acquisition means absolutely nothing, it means nothing, right? Because a cap rate is a metric based on stable cash flows in time, right? What a value-add deal is not and does, right.
KR 19:00 Right? Exactly. And a cap rate is really a market level metric, right, your cap rate is driven by the market, which is what can be completely disconnected from what you decide to actually pay for the property. And the cap rate that you actually pay can be a five and a half cap market. You’re overpaying for the property; you’re paying a five cap for the property. And therefore, that that impacts everything you’re saying it impacts if you’re expanding what your reversion cap rate ends up being right, and you’re just you’re just over projecting, you know, in everything because you’ve overpaid from the outset. So yeah, I appreciate that.
NR 19:41 There’s another interesting point in that and this pertains not just to cap rates, but to pretty much everything in real estate investment with regards to like metrics and, and data and all that stuff. stats. I think like if, if anyone’s anyone who’s watching this right now, this is just like the key takeaway of this 30-minute discussion. Just remember this. This is an old fable. I don’t know where it comes from if it’s an Aesop’s fable or whatnot, but it’s the story of the six-foot man who drowned in the lake that was five-foot nine average deep. Right? So, you have to be careful when you talk about averages. Right?
You could have a body of water that and average, that it’s five foot deep, but that doesn’t mean that it’s five feet everywhere. Right? Right. Yes. It’s what man could still drought in that in that body of water. Exactly. The average depth is five feet.
Yeah. 15 feet over here. And it’s right over here. And it’s Yeah, right. Exactly. One foot over there.
and yeah, that is really important to understand statistics and data and metrics, because, for example, everyone talks about a cap rate, what’s the cap rate? And in Dallas, what’s the cap rate? And I think you’re from Indiana, right? Yeah. Indianapolis, Indianapolis. So, what’s the cap rate in Indianapolis? It’s 5%. Yeah, but that’s the average, like the cap rates in Minneapolis are probably like between four point 30 and five point 60. And then there’s a whole bunch of different factors affecting where that property should be in that range.
That’s right. That’s right. That can be something that’s extremely dangerous as well.
KR 21:15 That’s right. No, I mean, I love it. I mean, we could nerd out on all these metrics. Because we’re kindred spirits here. But let’s um, let’s hit some highlights for folks. I think we could go really deep, right. But what really are some? What are those keys? If you think about those levers that make or break a deal or an analysis? What are some of those keys? We talked about cap, right? Like, what are some of those other ones that people really need to pay attention to? And maybe often get wrong?
Guest Nikolai 21:40 Yep. Well, I hope these are those keys waking up a lot of passive investors to understand that, even though they’re passive, they can be passive in their education, like, that’s right. In fact, being a passive investor, you should probably even be more educated, or try to be more educated than the people who are the active investors. Because, I mean, what’s the best way to get screwed by someone that’s being dumber than those keys guy trying to screw you, right? But the levers where you can really play around with things, obviously, I mean, underwriting, which is a part of financial engineering, is obviously the amount of debt that you’re using. And then the overall weighted average cost of those that capital of that debt is something that can completely change the model number one, so right, because internal rate of return and NPV and that’s another thing, internal rate of return should always be accompanied by NPV net present value, they go together their brother and sister. So, if you’re just talking about IRR in and alone itself, you’re kind of missing the part of like, that’s kind of like just the tip of the iceberg. So, I think, to keep in mind, NPV, something very interesting, very important, because obviously, the less amount of money I put into a deal, the easier it is to drive up my internal rate of return. Right, right. Yeah.
KR 22:55 So explain real quick what NPV is for fun,
NR 22:58 NPV is net present value. So, let’s say, let’s say I, I’m putting in $100,000 into a deal. And I’m expecting a 12% return, well, if my NPV is at zero, that means I’m getting my 12% return, right? And my internal rate of return would essentially be 12%. Because internal rate of return is essentially a metric that just says this is the return needed to make sure that your NPV is at zero, right. So, if I have an NPV of that, which is positive, which is say, let’s say it’s So, $200,000. Well, that means I’m getting the return that I’m asking for plus $200,000 on top of that. So that’s an important thing to consider. And in all these metrics, NPV and total rate of return, return on equity, which is another one that’s really or equity, multiple, popular one in the syndication world. Yep. which is essentially if I’m, you know, if I’m getting, if I’m putting $100,000.20 $1,000 comes back in five years, well, you know, that’s an equity multiple of two, right? I’ve doubled my Yep. But that’s all dependent on essentially, what is the exit value? So essentially, what’s the cap rate or the refinancing value, what I call economic value, the value that the value based on which the maximum loan amount will be considered? Yeah. And then obviously, you know, what’s the rent growth per year?
That’s a really important one that affects all these, these outputs, all these metrics that we talked about, what’s the expense growth, expense growth? And what are interest rates doing?
Like, those are all very important things. And then finally, obviously, supply and demand in the actual transactional market, which will affect, you know, cap rates and values and stuff like that?
KR 24:50 Yeah, no, I think I mean, that’s a good overview. It’s the, you know, you start with buying it Right. Right. So, purchasing at the right price and then it becomes about the expectation. So how, you know, how well you understand the market? How much are you expecting to get from your renovation from that bump? Right? How much are you expecting rent to grow organically? Right? How much are you expecting expenses to grow organically? One thing I often see people just think undervalue from an expense standpoint are is insurance and taxes. I think those are kind of when I look at deals consistently, in my mind, they’re just under estimating how much those are going to grow.
Right. Whoa, look at the last couple years how much insurance premiums have inflated. It’s unbelievable. It’s an incredible amount. Yeah. And you know, yeah, people have to understand that this is also good for purchasing, you know, preventing yourself from getting into the wrong deals.
Also, good understanding that, oh, I might get into that deal. That’s actually probably a better deal than what the syndicators indicated, because let’s take an example. I mean, the value of a multifamily property is essentially, if we boil it down and do it down, it’s based off two things, right? It’s based off net operating income, so rents minus expenses. What’s left is net operating income, divided by the cap rate, right?
So, what’s that percentage cap rate that people are paying for in the market?
That’s essentially what So, a property is based on what the value is based off. So, anything that affects NOI in the future, and anything that affects cap rates in the future, will determine realistically how, what So, the model looks like? So yeah, let’s say if I’m a syndicator, and I’m sitting on a property in Memphis, and I project, you know, 8%, rent growth year over a year? Well, if you’re a passive investor, I you know, like, that’s the first thing that you should be looking at what’s So, the projected rent growth year, over year, and then look at how is ATAWHY growing year over year over projected inflation, those are two simple things, you can look at it in that NOI growth, obviously, you’d look at expenses, you know, is, is the is the model projecting growth and insurance costs in taxes and things like that, and, and that, but then on the other on the other side of things, like, for example, I live an hour south of Montreal, and then I spent a lot of time in Miami as well. But Montreal has been a market that has just gone, it’s been on fire in the last like 510 years, kind of like Phoenix and Arizona, you’re a similar type of market. And Phoenix might be another good example, like Montreal is, if five years ago as a passive investor, you were presented as a syndication deal to get into as an LP. And the deal was really good on paper. And you look at the projections and the rent growth projections were say, or the NOI projections were 3%, you know, essentially 1% over inflation, one and a half percent over inflation.
you know, rent growth in Phoenix over the last five years, it’s probably been like eight or 9%. year on year. Right, right. Yeah, well, that deal actually ended up even way better, right, than the deal that was presented. And that’s where financial engineering, understanding financial engineering is very important, because I bet you there’s a whole bunch of people that didn’t buy properties, saying the properties were too expensive in 2015. Only projecting 2% rent growth year over year, even though they were in a market that was going to grow nine to 10%. year over year, right. Yeah, that’s a very dangerous thing. Because on the flip side of that, you see it people, you know, project, crazy rent gross or, or crazy cap rate compressions, in just the wrong markets, like in a Cleveland, you know, where I see people, you know, say, oh, yeah, cap rates are gonna drop down to like, 5%. On average, I’m like, you know, that’s Yeah, I don’t see the economic variables indicating that that’s going to happen anytime soon.
Yeah, so it sounds I mean, it sounds like what you’re advocating is really a more a more educated approach to actually understand the markets. And, based on what’s happened in the markets and history and what we expect to project a future versus using a lot of benchmarks, I think we’re all accustomed to being short.
Um, yeah, reservoirs are very, very dangerous things. And I think like the best investment, whether you’re on the GP side as an active investor, or if you’re on the LP side, as a passive investor, the best investment you can make in real estate investing is investing in your knowledge base. Like that’s, it’s, you know, the return on investment that is, is, is, you know, 1000s of times better than any return that you can make in the market itself.
Yeah, no, I think that that’s a great point. That’s a great point. And, and I think that’s a good I mean, that was a really good lesson. I think that gives people some golden nuggets there about things to look for and stuff to watch out for. One thing I would add is, you know, where I see people, I think you are talking about boiling that down to a kind of NOI divided by cap rate based on that, that tells you how much the property should be worth. I think where people need to temper that is, what’s the reality of what things have actually sold for in that market historically? Because what you’ll see is okay, if, you know, the spreadsheet may tell you that the property should be worth 150,000 per unit based on where you can go with rents and things. But, if nothing in that market has ever sold above 90,000 or 100,000, then there are some limitations. Absolutely. Well, in that, and that’s where like, that’s where when we’re underwriting, that’s kind of our final look, we’re saying, okay, well, it says all this based on our projections, but as we compare to reality, we actually need to cut that exit price by maybe 20,000. Just to temper expectations, and that’s like our final check,
and also include all the disposition costs that come with selling a property. Yeah. And then also, if you’re doing a refi, rather than an actual sale of the property as your liquidity moment. The other thing you have to really consider, a lot of people don’t understand this is finance, financial, financial institutions like banks and credit unions, and Fannie Mae’s and Freddie Mac’s and all these, they don’t necessarily finance based on market value of the property. You know, there are some very important ratios, you know, debt service coverage ratio, loan to value ratio. And this essentially creates something that I called economic value, Evie. And essentially, financial institutions will, in the majority of times, finance a property based on the smaller amount between actual market value and economic value. And, you know, in layman’s terms, people will often say, well, you know, I got, oh, I only got, let’s say the property is worth a million bucks. The bank is willing to finance, you know, 75%. LTV. So essentially, normally, you’d be able to get $750,000 in loan dollars, right? Yeah. But the banks finally capped it at 700,000. But that’s because the debt service ratio was too weak. Because essentially, banks have well actuarial teams’ actuaries, essentially creating these risk management models. And that creates something called economic value. So, in this case, what the bank is essentially saying is, yeah, market value is a million. And you know, that’s, that’s, I’m sure market value, and appraisal value is probably a million, but we’re as So, a bank, our job is to take zero risk, or as close to zero risk as possible,
right? So, we’re underwriting this at a $900,000 economic value property, therefore will lend you up to 75%. loan to value based on the smaller number between the two, they’ll never tell you this number. Right. But I found the equation that can help you know what that number is? So that’s Yeah, that’s something that’s very important to understand as well.
Yeah, absolutely. And it’s about the I mean, at that point, it becomes about the ability, the probability that you can cover your debt payment, right. And that’s what that debt service coverage ratio is, is how much cushion Do you have between your income and what you have to pay monthly on your deck and
Never underestimate leverage in real estate investing? Because it’s, it’s, you know, it’s So, and it’s a 60 to 80% leveraged market, right? We’re using a lot of debt. We’re using a lot of leverage. So, if you don’t consider that you kind of, you know, forget a huge piece of the pie.
Yeah, absolutely. Well, this has been enlightening. I appreciate the conversation. Before I let you go. I want to talk a little bit about something else you’re working on, though, because I think this will be fascinating is this idea of real estate property tokenization and using blockchain in real estate, so tell us what you’re working on there?
Well, it’s still in its very nascent stages, blockchain technology. The whole thing is very nascent. Obviously, a lot of people know about cryptocurrency and Bitcoin and all this stuff, which is, yeah, it’s, that’s all based off of blockchain technology. But that’s not what blockchain technology is. The easiest way to understand it is like no one talks about clouds anymore. Remember, like 10,15,20 years ago, everyone talked about cloud computing. No one uses that word anymore, even though we’re all in the cloud using Dropbox and drive and stuff like that. So blockchain is just kind of the evolution of the transfer of value through the internet.
It’s ledger technology. But the idea here is to be able to essentially, you know, in the goal of democratizing the access to real estate investing, what I want to be able to do is create a NASDAQ of real estate investors. So, to be able to say, rather than just have to kind of find an indicator here and there, or go on these crowdfunding platforms. I’d like to create a market where we have all these syndicators and companies and you know, and firms and you can actually Just go and buy shares in either a property and either a fund or a group of properties. And then you have liquidity as well, because, for example, crowdfunding is kind of the first step towards that.
But with crowdfunding, the problem is that you have no liquidity. So, you’re not really, you’re not really, I mean, because the two major obstacles to real estate investing the many obstacles, but the two major ones, or the weaknesses of real estate investing, especially multifamily, and commercial is number one access in the market, you need a lot of money, right? Right, to buy a 24-unit property, you need maybe half a million dollars in equity, right? Not everyone has that. To buy a small six-unit property in most, you know, metro areas, you’re going to need at least 100,000, $250,000 in down payment, which is a lot of a lot of money to put aside and a lot of, you know, to just put your eggs in the same basket essentially, right? Because yeah, no diversification whatsoever. So, access to the markets is very expensive. And then on the second part of that is, once you put that 100,000 to your six-unit property, or 500,000, to a 24-unit property, or maybe you’ve invested into a syndication, that that money is frozen, like if you have a rainy day or for some reason, or you need to get out of that that’s So, stuck in there, you can’t get out of that, or any of your gains won’t be realized for you know, five to six to seven to 10 years. Right, right. So that’s kind of where I want to go with that.
We’re really taking our time to build a solid foundation, foundation and technology, a lot of people have already come out with various projects and real estate, tokenization and blockchain because a lot of people kind of adhere to the first mover advantage, which I just don’t believe in. And I think we’re probably still a good 10 years out, maybe even 15. Before, blockchain was mature enough. And, people are our everyday average people, and are happy using that technology.
But that the idea is essentially to be able to say, well, if you can invest in a tech company and buy shares and have liquidity, well, why wouldn’t you do that with, you know, a ground up construction of 100-unit property and Indianapolis or, you know, a portfolio of 10 properties in Miami.
Right, right. Yeah. So, the idea of this, again, like you said, democratization of real estate, you’re creating, you want to create a secondary market, right, where you can actually trade these deals like you would trade stocks, right. And also, in doing that provide liquidity, you know, the ability to sell your shares to someone else, right at your preferred time. Now, it’s extremely interesting. I think that’s a huge idea. I think there’s a lot there. And I think that will make real estate more accessible for So, people, which will ultimately, absolutely improve the financial lives of a lot of folks. So, more power to you, man. That’s awesome. Thanks. So. Yeah, well, before I let you go, we want to move on our keys to success. I’ve got a few questions. I want to ask you, Nikolai. What is the one question that every investor should ask their deal sponsor?
Would you How would you put your money into this deal?
Yeah, would you? Or maybe, like, are you right?
Yeah. Well, in both cases, I think, yeah, I think (question one, A and one, B). And, you know, I can understand a lot of people maybe don’t have the equity to put money in every single deal they do. But you know, that’s the first thing that I’d ask. And, you know, I’m an investor myself, I was a passive investor.
For So, most of my adult life, up until about a year and a half ago, and then a year and a half ago, I got this. I woke up one morning and decided to buy a couple properties. And I’ve actually purchased 30 apartment buildings in a year and a half with two of my buddies with just our own money. And I’ve slowly now started to accept a couple friends and family as So, as, as LPs, and some of our deals or in our jayvees. And every time I’m, you know, I’m, I tell them like, hey, you know, if I’d be willing to put the same amount into the deal as well, I’m not gonna put it into this deal. Because I put it into that one or whatever, right? There are different reasons why, but I would be willing to do it. And you know, I’m willing to, you know, to swear on my own kids, I’d be willing to do that. I think that’s a very important question to ask. And you’re able to see like, how, what is the level of conviction of that deal sponsor then by asking that question? Yeah, very good.
KR 39:23 What are you most proud of in your career?
I went back to when I was 25. So, I started my career. I retired from professional hockey 22 and started. I didn’t realize I started a company but I did start a company. I actually started two companies. So I started a I started a private health company where we had these clinics that were a mix of preventive medicine clinics and high performance gym so mix them to one and I also started a real estate HITHE agency where we wrapped hockey players, my first company, within three and a half years grew, like we had almost 100 employees, we were in three countries opening up in Paris and Sao Paulo in Brazil, and I just lost control the company because I didn’t really know what I was doing, I was 25, I’d never set out to be an entrepreneur, you know, made a bad deal with an older partner who was supposed to be a mentor in the business world for me and end up kind of letting me out to dry and essentially went from, you know, having nothing to 22 to 25 to being essentially a millionaire on paper, and then at 26 being homeless. And then, you know, just within probably about four to six months, got right back up and K and came back stronger. And, and ever since that the last, you know, 10 to 20 point 10 to 12 years of my life have just, you know, been, you know, 10x of success I had prior to that, so be able to fall as hard and get up even harder, for me is the thing I’m the proudest of, and I think it you know, it shows resiliency, it shows passion and shows that you can make mistakes and learn from your mistakes. But you’re also responsible, not a victim. I think that’s the key to success in anything that we do in life.
Absolutely, that’s, That’s a great message. What books should everybody read?
I have a I have a couple of years, I have probably a couple probably 1000 In my house, so many great books. But I think, you know, I’ve got a lot of people here talking about real estate books and you know there’s some great real estate books and, you know, but I think they’re there. I think personal development and what you do with your mind, your spirituality is very important. I think any of the Wayne Dyer books, who’s passed away now. One very important books one that really touched me was called Inspiration, as well as way back when the seven, seven spiritual laws I think of Deepak Chopra, really big book. And, you know, there’s all a bunch of other books, obviously, newer books like Tribe of mentors by Tim Ferriss, I could probably give you a list of 100 books, I wouldn’t be able to put my finger on one.
They’re just given us some good ones to start.
Good place there’s just so many, so many great books one that really really is great is the Untethered Soul. Yeah, that’s an amazing book.
Awesome, well we got some good places to start. We’ll come back to you once we get through that. Awesome. And then lastly, what is your number one key to success?
Number one key to success, I think, is having faith. I think faith is extremely important, believing yourself, believing in what you’re doing. And essentially believing in something greater than yourself, kind of, you know, in the background of that whether you’re what you know whether your faith is, if you know is whether you’re Catholic or Protestant or whatever your faith is, I think faith is extremely important to have. And I think it’s a key because that’s what allows you to kind of, you know, not, not become a victim. And, you know, have belief in vision, and I think without belief in vision, you can achieve anything.
Yeah, fantastic advice Nikolai. Again, thanks for coming on this show, talks about a lot of different things today a couple takeaways I think folks need to probably go back and relist into like the first half of the show, especially when we’re getting nitty gritty into some of those things need to be understanding looking out for as, as you’re evaluating deals and underwriting deals and talking to sponsors right some golden nuggets there. And Nick if folks want to get a hold of you. How can I learn more about what you’re doing
NR 43:45 I’m pretty active on Facebook so you can find me on Facebook Nickoli ray there are, there are many of us. This is I’m sure there aren’t too many Kent Ritter,
KR 43:50 So I was able to claim kentritter.com. Not a whole lot of competition.
NR 43:52 bigger, I read the one on Facebook, very active on LinkedIn, a lot less active on Instagram, I’m not into the old kind of showing off kind of, kind of world by the time I am there. And, as well. The MREX college you can find us on, on Facebook on LinkedIn, as well as on YouTube or decide to put on more and more stuff in English because obviously we’ve been very, very active over the last five years and French with a huge following. And we’re just going to try and bring that even more to us and to the English part of Canada as well.
That’s awesome. Well yeah, we’ll make sure all that’s listed below so folks go down and click and get a hold of you, again, Nikolai Ray, thanks for being here today and adding so much value,
and hope to talk soon. Thanks. Well, I can’t. It was a lot of fun and you did a great job so I appreciate anytime you want me back, we can always go deeper into any type of subject that you work so.
KR that sounds great man I’ll take you up on it.
Thanks for listening to another great episode of Ritter On Real Estate. Hit the subscribe button to make sure you don’t miss out on the content that will make you a better investor. Also visit kentritter.com for articles, videos and tools curated just for passive investors from next time. This is Kent Ritter with Ritter on Real Estate and go out and invest like a pro.