JF2113: Locking In Deals With Jesse Fragale
Jesse is a real estate agent and broker working in the commercial space. He is also an investor with experience in student rentals, single-family rentals, and apartments. Jesse also gives some ideas on how being a real estate agent can help you find good deals and shares with you a specific line he uses to lock in good deals.
Jesse Fragale Real Estate Background:
- A commercial real estate broker and investor
- 10 years of real estate investing experience
- Located in Toronto, Canada
- Say hi to him at: https://www.avisonyoung.com/
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Best Ever Tweet:
“Noone is looking to sell but when you have an offer in front of them, maybe they are looking to sell.” – Jesse Fragale
Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, today’s host, and today we are speaking with Jesse Fragale. Jesse, how are you doing today?
Jesse Fragale: I’m doing great. How are you?
Theo Hicks: I am doing great, and thanks for joining us. A little bit about Jesse – he is a commercial real estate broker and investor, has ten years of real estate investing experience, is located in Toronto, Canada, and you can say hi to him at AvisonYoung.com. Jesse, do you mind telling us a little bit more about your background and what you’re focused on today?
Jesse Fragale: Sure. My background in real estate is twofold. Like you mentioned, I’m a real estate agent or broker. I work in the commercial real estate space, predominantly in office, but we’ll do industrial, as well as retail. As an investor, I have been investing for about approximately ten years. I got my start in student rental properties, so started out like everybody else, with one, and then slowly built a little bit of a portfolio on the student rental market. From there, I kind of grew towards over the last ten years continuing in student rentals, purchased a few single-family investments, condo investments, some assignments or wholesaling (depending on which nomenclature you use), and then moving into apartments today, and that’s what I do.
My partner and I – we’re always looking for multifamily apartments (the more units, the better) and we’re buy and hold investors. So that’s kind of the snapshot.
Theo Hicks: Do you still have a lot of those single-family rentals?
Jesse Fragale: No, not really. We have kind of transitioned. We’ve purchased some more condos. In my market it’s very tight – the Toronto market – it’s probably most similar to San Francisco, Boston, New York… The yield is very tight, and one thing we’ve had is a very big constraint on supply. Condos have kind of made up for the lack of purpose-built apartment buildings. There’s a few reasons for that, but fairly briefly, it’s the fact that we have in recent memory pretty tight rent control programs. One of the ways to avoid some of that rent control has been newer product.
The condo market has basically been there as kind of a shadow market for rentals, which is a little unfortunate, and hopefully in the future we already have started to build more purpose-built… Long story short – that’s why we’ve purchased quite a few condo rental investments. Those would be most similar to single-family homes in other markets.
Theo Hicks: So for the rent control, if you buy a newer condo then there are no rent controls?
Jesse Fragale: So the way it worked until fairly recently – 2017 was the change – was that provided that you had new construction, you weren’t subject to rent control. There was a policy – basically, buildings built after 1991 were not subject to rent control; buildings built before 1991 were subject to rent control, which basically meant that you had a certain guideline that the province in Canada (or the state in the U.S.) would allow you to raise it… And it would be indexed with inflation, which as you can tell, is very low. So what would happen is you’d wait for a tenant to move out, and then you could mark-to-market the rents. Then you could take the rent and bring it up to market value.
So what happened was we were in a little bit of area with our government a few years ago that they wanted to get rid of this policy that said new construction would not be subject to rent control. That was reversed in 2017. So what we have seen is actually a 40% increase in permitting applications for purpose-built. So that’s a good sign for Toronto, that we’re going to hopefully in the future continue to be building more purpose-built. The majority of the stock of rental properties in the Greater Toronto Area – and I’m pretty sure the province – were built prior to 1970. So we have just this old stock. The idea that you go to an American market and you see these AAA buildings, these beautiful apartment buildings is kind of foreign to us, because the majority of apartment buildings are old stock. So hopefully we’re moving in the direction of being able to supply more apartment buildings.
Theo Hicks: So will that same concept apply to those newer apartment buildings? So if someone builds a new apartment building, it will not be subject to rent control?
Jesse Fragale: Yeah, and that’s why we’re starting to see a lot more builders – I’m not sure if RioCan or some other major builders that are basically focusing on building apartment buildings now that the rent control — they’re not subject to those kind of constraints. I think this year we’re allowed to raise on existing tenants 1.4%. At that point, why bother the tenant with the rental increase?
Theo Hicks: Okay, perfect. So how many condos do you currently have as buy-and holds?
Jesse Fragale: Buy and holds I believe it is seven condos right now… And the apartment building – we have one apartment building about an hour West of Toronto, and that’s an 11-unit apartment building, which we’re trying to put another unit on. To give you some context, for the apartment buildings down here, the average price for an apartment building per unit in Toronto is about 275k to 300k/unit.
Theo Hicks: Do you mind walking us through that 11-unit deal? How you found it, and then what you bought it for, and then what the business plan was. I know you already mentioned you’re trying to add another unit to it, but anything else about it, from a business plan perspective?
Jesse Fragale: Yeah, no problem. That particular apartment building we were generally looking in the area; if you think Brooklyn to Manhattan, that’s this place called Hamilton, just West of Toronto. So what we did like about it was the prices weren’t as crazy as the downtown Toronto market. It was a little bit in the periphery. I think initially it was actually a marketed property; I don’t think it was off-market. I think the gentleman that was marketing it – we were looking at a different property of his… So he said that there was this 11-unit he thought might be interesting to us. We went, we checked out the unit, and it was. It was under-rented, so quite a few of the rents were under-market, which we noticed. That was one checkmark for us, and it checked off one of the boxes.
One of the other things was that there was a motivated seller. Unfortunately, it was an older gentleman, and we didn’t know at the time, but I don’t believe his health was particularly good… So I think just managing and owning an apartment building was just too much for him at the time. So for better or for worse, that was a positive for the deal, obviously, because he was motivated… And basically, we looked at the apartment building and we saw that there was quite a bit of potential lift in the actual rent. We looked at it as a buy and hold strategy, but we kind of balanced the fact that it was still getting decent income. So we basically came from the perspective that we were gonna be able to get pretty good financing on it, which we did… So we went out to our mortgage broker, gave him the rent roll, the area, all the expenses, and we were able to strike a good deal from the lending perspective.
Then come offer time, we put together what we thought was a great offer, with a little bit of back and forth, and we were able to secure the property. That was the pre-deal mechanics, and we were happy with the purchase. Looking back now, we wish we bought ten of them, because the market has continued to increase… But in terms of what we wanted to do initially – we did the roof, we did just some minor work, housekeeping things to get it up to where it should be; a lot of the fire code, all the electrical…
And then in terms of other value-adds, like I said, we are looking at adding another unit, but as of right now, we’re just trying to continue to raise the rents where we can, and go from there.
Theo Hicks: Perfect. So let’s talk about the condo deal next… It’s obviously a little bit different than the apartment, so maybe walk us through one of your more recent condo deals, and the same thing – how did you find it, what did you buy it for, and what was the business plan?
Jesse Fragale: Actually, the place I’m in right now, I can give you kind of an example. This was supposed to be a rental, which I ended up moving into just because of life circumstances… But we’ll take you back to — I believe it was 2016 that I purchased this deal. They’ve just finished building this about 4-5 months ago. It’s actually currently in construction right now… And it was 411k, pre-construction condo. For pre-construction, in my market, you typically ask to put 20% down over a certain period of time, so $400,000, 5% installments, getting up to $80,000 as a down payment.
In this particular market, these condos – just to give you an idea of how crazy our market has gotten – 2015, $411,000. Probably today I could probably get about $3,000/month, so just shy of $40,000/year on this condo. So $40,00/year, $411,000 purchase, 10 on a gross rent multiplier. If you work out the cap rate on that, I don’t know what that really would come to. Say you use like a 50% rule on $40,000, so you’re down at $20,000… You’re in a pretty decent cap rate environment.
Now, this particular condo, today you probably would not be able to buy this for less than $850,000. So just to give you kind of an idea of how the numbers just have completely stopped making sense from a cashflow perspective, and that’s why I mention that our market is much more similar to a San Francisco market than it is to, say, Memphis. That would kind of run you through some of the math of the condos. I genuinely don’t know how anybody is buying them today, unless they are just putting a massive down payment, or they’re just not concerned with cashflow.
Theo Hicks: I was gonna ask you – I’m assuming you’re not buying these types of condo deals anymore…
Jesse Fragale: Not in this market, that’s for sure. To give you just an example of a condo market deal, if it’s an hour-and-a-half away from Toronto – say it’s a student rental property, because they’re starting to build a lot more in condo form – then it’s a little different. You’re able to buy these condos at like 200k, 250k, while still not having a ridiculous low income… Even then, the reality is our market is just very tight, and cap rates – just to give you an idea of cap rates on AAA office towers in the downtown area, they’re trading at 2.9%-3.1% cap rates. It’s very tight.
Theo Hicks: So you’re transitioning now to moving into apartments. You’ve got that 11-unit… What’s the next step? Do you have anything in the works right now, apartment-wise? What types of things are you doing to generate apartment leads, things like that?
Jesse Fragale: For us, basically we have a list of apartments… Like I said, Toronto, for rent – $300,000/unit. It’s very tough to just go out and buy 50 units. It’s just millions of dollars. So for us, we’re looking at anywhere from 15 to 30-unit apartment buildings. The way we’re reaching out is either direct mailers to apartment owners, or just as agents, we have the luxury of being able to look up CoStar, or Altus, different online programs that other people don’t necessarily have access to, because these subscriptions are so expensive… And we’ll call owners directly, basically ready to put an offer in.
Right now we’re looking at a ten-unit apartment building, but an hour from where I am, and we’re just kind of going through the process. This was a direct outreach to an owner. I wasn’t looking to sell. We knew where his apartment was, we called him, and we said “Hey–” We always come from the perspective that we would list it, which we would if it’s big enough as agents… And then we say “Listen, if we could bring you an offer tomorrow, at this amount, would it interest you?” And that’s how we basically did it with this guy. We gave an opinion of value, and he said “If you can bring me an offer in that range, I’ll take it seriously.” That’s kind of how we’ve been approaching it, and I guess we’ll see what happens… Given the current environment, with life on lockdown, at least in our world, it just gives you a little bit more time to reach out to these owners.
Theo Hicks: That’s a good strategy for those who are looking to get started and buy a deal in a competitive market – get your license and you’ve got access to all those subscriptions… Call them up, ask if you can list it for them, and then, as you just mentioned, say “If I can bring an offer tomorrow, would you be interested?” I like that strategy.
Jesse Fragale: Yeah. I always tell young guys in our office – you can’t leave the conversation by just asking “Are you looking to sell?” and they say no. It’s like, nobody’s looking to sell. But when you’ve got an offer in front of you, maybe you’re looking to sell.
Theo Hicks: Exactly. Alright, so the last question before the money question – how are you funding your projects? Maybe give us an example of a project in the past. Is it the same thing – is it your own money, is it other people’s money, strictly banks…?
Jesse Fragale: Right now I’ve been fortunate to continue to use our own capital – and when I say “our own”, my partner Jonathan – him and I have been investing in the last few years. We haven’t hit a wall yet, and I understand that for most people it’s not a matter of the idea that you’re just gonna keep using your own capital. You will hit a point where if you’re gonna continue to invest, you need to look at outside funds.
So for the apartment building, for instance, my partner John and I – we’re fortunate to make a pretty good income as agents, in commercial real estate, especially with the run we’ve been on for the last few years… So we have taken that money and invested it into investments. I think we both put in about 150k of our own capital. The rest went through a mortgage, and then I think we did a line of credit for $100,000… That was kind of the structure of that deal.
The condos – again, we’ve been using our own capital… But like I said, we were just talking before the show – Matt Faircloth has a great book on raising capital, and the reality is you will hit a certain point where you will have to use other people’s capital, and you need to make sure that you know how to actually raise capital, and you are right now making a track record for yourself… But yeah, we’re not at that point yet. As long as we can continue to fund these with our own capital, we’ll do so… But like I said, there will come a time where we start needing to use outside resources.
Theo Hicks: One more question – what percentage of your time is spent on investing-related duties, and what percent of time is spent on your full-time job as a broker?
Jesse Fragale: My 9-to-5 (air quotes) is as a broker. So that part, the Monday to Friday, coming into the office at 7-8 o’clock, leaving at 6-7 o’clock – that is my life as an agent. So I would say maybe 60/40 type of thing… As you know, as an investor you can call it passive, but you never really turn off that part, because that is always happening. But in terms of actually looking for new acquisitions, managing current ones – yeah, I’d probably be a 60/40… Because everything we had is managed by a third-party property management company. So we’re not actively managing anything except the managers.
Theo Hicks: Okay. Alright, Jesse, what is your best real estate investing advice ever?
Jesse Fragale: My best real estate investing advice I would say by far is figure out what your strengths and weaknesses are in life in general. And it sounds kind of vague, but what I mean by that is there are certain areas, whether it’s attention to detail, whether it’s big-picture thinking, whether it’s doing the spreadsheets – there’s gonna be areas that you excel at, and there’s gonna be ones that are just not your forte… And the worst thing is going 5, 6, 7, 10 years and trying to do something that you should be outsourcing to somebody else. Once you do outsource that to somebody else, you start really seeing how your business grows.
For instance myself, as much as I love the deal-level of the different investments we do, when it starts getting really into the minutiae, I’m not a detail-oriented person in that way. And I know that there are people that I work with that really excel at that… So identifying that person and delegating those tasks to that person – it’s just gonna save you so much time and headache in your investments… And I think, like I said, in life in general. Any task you do or anything that you kind of embark on that you’re trying to achieve, I think just understanding where you are in terms of your strengths.
Theo Hicks: Alright. Are you ready for the Best Ever Lightning Round?
Jesse Fragale: I think so.
Theo Hicks: Alrighty. First, a quick word from our sponsor.
Theo Hicks: Okay, what is the best ever book you’ve recently read?
Jesse Fragale: Oh, recently? That’s a good one. You know what – I’ve read it recently; it’s kind of an older book… Not an older-old, but it’s basically The Morning Miracle.
Theo Hicks: By Hal Elrod?
Jesse Fragale: Yeah, Hal Elrod. That was a great book. It reminded me of just kind of like getting everything in order… But there is a really good book by Kelly McGonigal that I read recently called “The Willpower Instinct.” That’s a fantastic book. It’s not necessarily real estate-related, but I think it would benefit anybody that has goals they’re trying to achieve in their life.
Theo Hicks: If your business were to collapse today – and I guess in this case businesses – what would you do next?
Jesse Fragale: My real estate business – if everything collapsed again today, I’d probably take the knowledge that I have been fortunate enough to receive over the last ten years and probably apply it back to the beginning of how I got into real estate. That started at a bookstore; research what you’re interested in.
The biggest thing I find people don’t do, that you hear people give as advice, is get a mentor. It will fast-track everything. There is no substitute. Find somebody that you see what they’re doing, that you wanna do; find those people, because they will just save you years in your path towards that, if that’s your goal.
Theo Hicks: So besides the condo you’re in now, which was definitely an amazing deal, what was your best ever deal? It could be a condo, or it could even be one of your deals as a broker…
Jesse Fragale: The best ever deal would probably be first or second student rental property I bought, only because you learn so much on your first couple deals, and you don’t realize at the time that you’re going through a school of hard knocks with investing. So that would be one of the first properties I bought, $250,000. I think it was 2009, and I had five university girls living in there from one of the universities not too far from me. Basically, through that particular property… The reason I say it’s the best ever deal – it wasn’t the biggest return on investment, but when all was said and done, I think I sold that at $470,000 a few years after that. I think 5-6 years after that. But the reason it was great for me was I learned how to take an under-market property, bring the rents to market… I learned how to deal with tenants for the first time, and I’d never done that before.
I learned how to deal with contractors, ranging from going in the back and having the city make us remove 5-6 gigantic trees. I had no idea that the city could do that at the time, and how many thousands of dollars it takes to remove trees. It was a house that was build in the early20th century, so it was dealing with knob-and-tube electrical… Just everything you can imagine that a 20-year-old guy had no clue of at the time. It kind of shaped me up and made me think a lot more diligently and a little bit more thoughtfully about future investments… So call that one the best deal ever.
Theo Hicks: Yeah, I can definitely relate with that. The best ever listeners have heard this story a bunch of times, but I forgot to turn the utilities on and transition it to my name on my first property… So the first day I walked in there, there was a waterfall in the basement because the pipes burst. I totally understand; that was probably my best ever deal as well.
Alright, what is the best ever way you like to give back?
Jesse Fragale: The best ever way I like to give back… First of all, in downtown Toronto (and I’m sure in a lot of major cities) I’m trying to give knowledge to other people that are trying to get into our industry as well, and that’s why for me – I started as a contributor for the Bigger Pockets Podcast and YouTube videos – anytime I can give information that will help people… And I can’t remember who was saying this to me recently, but they basically said if you have an expertise in something, or if you even generally have more knowledge than the average person in something, he said that you have a duty to share that with people. I thought that was an interesting word. It wasn’t just like “Hey, take a YouTube channel and start saying stuff, or telling people”, but just an obligation to give that knowledge to other people.
Aside from that, trying to help out where I can with causes in Toronto… Avison Young is a big believer in a lot of the major causes in the downtown area, whether it’s heart and strike, melanoma – we do what we can from that point of view as well. But yeah, just also carving out a little bit of time in your day, whether it’s ten seconds or ten minutes, to just think a little bit about gratitude and what you’re grateful for, and a little bit about the advantages I have, that other people don’t.
Theo Hicks: And then lastly, what is the best ever place to reach you?
Jesse Fragale: Best ever place to reach me is probably go on Instagram or YouTube. On Instagram it’d be @jfragalz, and Jesse Fragale on YouTube. If you google that, I’m sure Google will explain how to spell it probably.
Theo Hicks: Do you guys always say zed for z?
Jesse Fragale: I go back and forth, but when you get some super-Canadian people, they’re just like “It’s not zee, it’s zed”, I’m like “Alright.|
Theo Hicks: I guess it does sound like C, and it can get mixed up.
Jesse Fragale: Yeah. It depends how close you are to — Toronto is like Chicago; you’re in a major market… Whereas if you go to Newfoundland or you go into some periphery markets, you start hearing a little different twang in somebody’s voice.
Theo Hicks: Good stuff, Jesse. Well, thanks again for joining us today to talk about your experience and your transition into apartments. Just to summarize what we’ve talked about – we’ve talked about how you’ve got ten years, started off with those student rental properties, purchased some SFRs and condos, dabbled in wholesaling and then moving into apartments. We talked about rent control and how new construction is not subject to rent control, so you’re seeing a pretty big uptick in purpose-built permitting applications.
You said you’ve got seven condos right now, and you’ve got the 11 units. We’ve talked about where you’re at – multifamily is pretty expensive, so you’re not looking at 50 units; you’re focusing more on the 15 to 30-unit buildings.
We talked about specifically your 11-unit building that was a little bit further out from downtown. It was initially on-market, you ended up getting it from a motivated seller who was in bad health, the buy and hold strategy. It was a few minor things – roof, fire code electrical, you were looking to add another unit.
We talked about your condo that you’re living in now, which you bought in 2016 for 411k, and now it’s worth $850,000, which is why you’re not focusing on condos as much anymore, because you really can’t get cashflow at that price point. You talked about how, again, your plan now is to focus on those 15 to 30-unit apartment buildings, and the strategy I really liked was you’re a broker-agent, you’ve got access to some of the better, CoStar-type online applications and programs, so you’re calling owners directly, and as you mentioned, you don’t wanna just say “Hey, do you wanna sell us your deal?” and they say “No” and you hang up. You tell them, “Hey, if we have an offer, would you be willing to sell your deal? Would you be interested?” And you also look at it from the perspective as an agent, saying that “I can list this property for you”, and then transitioning into submitting an offer.
You’ve talked about how personally you and your partner are funding your deals right now, but you eventually want to transition into raising capital, or will have to eventually transition into raising capital, and that your experience will make the process a lot easier, since you had that track record.
Then we talked about your best ever advice, which is to figure out what you’re good at and what you’re bad at, in real estate, but also just in life in general… So if you notice you’re not very detail-oriented, then make sure you’re outsourcing those types of things to other people, and then vice-versa.
Unfortunately, we didn’t get into any of the brokerage stuff. I’m sure you’ve got a lot of solid advice on that, so maybe we can get you back for a Skillset Sunday to talk about how to be a best ever commercial broker in a crazy market like Toronto… [laughs] But until then, thanks for joining us. Best Ever listeners, thanks for listening. As always, have a best ever day, and we will talk to you tomorrow.
Jesse Fragale: Awesome. Thanks.
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