Steven is a returning guest who has built an incredible development business. One of his strategies is to build four unit buildings, rather than single family homes or large apartment buildings. He has been doing that for years and has a very large portfolio because of it. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Steven Bond Real Estate Background:
- Co-founder of Fourplex Investment Group (FIG)
- FIG has sold over $400M in 6 years in and they have a turn-key multifamily investment vehicle for investors nationally and internationally
- Hosting The Intermountain Real Estate Investment Summit in February 2019
- Listen to his previous episode: JF485: BYU Dropout Began During the RECESSION and WON!
- Based in Provo, UT
- Say hi to him at http://www.fig.us/
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Theo Hicks: Hi, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m your host for today, Theo Hicks, as Joe is traveling to Texas to look at a few apartment deals.
Today is Sunday, so you know what that means – it’s Skillset Sunday, so we will be talking about a specific skill that you can apply to your real estate business. Today I am speaking with Steven Bond. How are you doing today, sir?
Steven Bond: I’m doing great. Thanks for having me on the show today.
Theo Hicks: Absolutely, I’m looking forward to our conversation. A little bit more about Steven’s background before we get into his skill – he’s the co-founder of Fourplex Investment Grup, otherwise known as FIG. FIG has sold over four million dollars in assets in six years, and it is a turnkey multifamily investment vehicle for investors nationally and internationally. He will be hosting the Intermountain Real Estate Investment Summit in February 2019. You can listen to his previous episode all the way back in episode #485, entitled “BYU dropout began during the recession and won.”
Steven is based in Provo, Utah, and you can say hi to him at fig.us. Steven, before we get into your skill, can you tell us a little bit more about what you’ve been focused on since your last interview?
Steven Bond: Yeah, absolutely. It’s interesting. Last time your group reached out to me to be on the podcast I think somehow you found me on Bigger Pockets, through some forum post I made or something, but at the time I had just bought our building to expand our offices. A fresh real estate broker who bought a RE/MAX franchise, and there was construction going on all around me.
As we were on that phone call, I was running from space to space, trying to avoid the hammer sounds that were in the background. We were renovating an old building built in the 1900’s of 26,000 square feet for all of our offices. Now we’ve been going for three years, the building is thankfully done, and we’ve been growing the business since then.
We started a property management company, we expanded to two new states officially – we’re in Texas and Idaho now, in addition to our developments in Utah. We have some sites that we have LOIs on, and now the Colorado market, and in Arizona as well.
Theo Hicks: Great. So the skill we’re going to talk about today is how to set up a development business, because Steven is a developer. More specifically, we are going to talk about how to set up a development business for fourplexes. I know that you do more than fourplexes, but since it’s in your name, I think that should be the focus of the conversation.
I’ve actually never heard of a developer who does fourplexes. Most developers I’ve heard of are either doing single-family homes, and obviously individual homes or communities, or these larger apartments… So that’s my first time hearing about fourplexes, so maybe to start it off you could tell us about what’s different about developing fourplexes compared to, let’s say, larger multifamily apartment complexes?
Steven Bond: There’s typically this evolution of real estate. Someone that says “I want to be a real estate investor” goes to some type of REIA, or gets on Bigger Pockets, for example, or The Joe Fairless Show, and quite often, this person who’s super-motivated and excited doesn’t have a whole lot of cash. Now, where do they start? They start in wholesaling, or using other people’s money. Then they get a couple rental properties and they realize, “Man, I need to get more doors per loan”, so then they get a duplex, triplex or fourplex and they house-hack. Great strategy. Then they start to get a couple of those and then they get into larger multifamily to get into the commercial stuff.
We wanted to carve out this real specific space… About six years ago my partner and I – he was a builder, I was his real estate agent – said “Where is the market not paying attention to?” and it’s the fourplexes. A very hot product, because now you can get 40 doors with Fannie Mae financing, because you can get up to ten loans; fairly decent LTVs, 30-year amortizations… A great product, and a good hold strategy, but they hadn’t been built since pretty much like the 1970’s and 1980’s on large scale. Back then, almost every major metro area has that area of town that has these fourplexes, and they usually don’t have the best reputation, but the owners love them as an asset.
So my idea was “Why don’t we build new?” and as we came out and went to the cities, they said “No, there’s a reason – we don’t want those in our town anymore.” So my partner being a genius, actually – he’s the one that came up with the concept of “Well, we can do this differently. Let’s go to density zoning in open land through these cities, and we’ll get a PUD plat that will be typically for multifamily and apartment complexes, or townhome communities or condo communities, but all we’ll do is define each set of four parcels that would be townhomes or condos, and give it one tax ID, and pre-sell it to an investor as a fourplex. We build it out, we have the management company and we then stabilize it for that client at completion.”
Theo Hicks: That’s interesting. I actually own three fourplexes in an area called Pleasant Ridge in Cincinnati. There are a ton of fourplexes in that area, and for similar reasons I really like it. I had bought a duplex before, and it was a good investment, but a fourplex is great because it’s still a residential loan, but you’re getting four doors. So thinking about the ten loans, that’s 40 doors, as you mentioned, before having to do any other sort of creative financing.
Steven Bond: Exactly.
Theo Hicks: So basically what you do is you go find a piece of land, and once you have that land is when you start the process of finding a client who wants a turnkey fourplex? Is that correct?
Steven Bond: Yeah. We have a large database of followers. Basically, we have a community of usually on average 200 units, and our typical buyer – again, they don’t wanna be a landlord… Also, in some of these fourplex communities built in the ’70s and ’80s there’s no way to control what your neighboring investor does with their asset. So all of a sudden when their roof needs to be replaced and they don’t reinvest into capital expenditures and make it nice, it draws down the value of your asset (because you’re right next door) and the quality of renters etc. when there’s too many bikes out, or the landscaping is not maintained. We didn’t wanna have those issues in our communities, so our investors really liked the fact that they’re buying a fourplex next to another fourplex that’s managed collectively by an HOA, so that my asset is now preserved and valued.
There’s always a reserve to take care of all maintenance needs, for the benefit of all us collective fourplex owners in the community now. The landscaping is done, the pets are managed, there’s not bikes out on the front porches that are not managed through a community management. So it’s that person who says “Man, I’d love to own an apartment complex, but I can’t quite afford to do that myself, so I’m getting a piece, but I’m getting it fee-simple, not in a TIC or in a limited partnership. I won my fourplex in this whole community, so if I wanna liquidate and take the upside equity, I can do that without any restrictions; I sell my fourplex and can go trade it into something else.”
So that’s this little in-between space of the fourplex world that no one else, to our knowledge, is doing anywhere.
Theo Hicks: How many fourplexes are in one of these communities?
Steven Bond: On average we do 200 units per community; some are up to 355, some as small as only 40 units. So we’ll have anywhere from 10 to 70 fourplexes in one project.
Theo Hicks: Okay, so you’ll identify a piece of land, and then based on that size, you’ll determine how many fourplexes you can put on that piece of land?
Steven Bond: Yes, exactly. During the entitlement process, where we’re working with the city for our rezoning and getting our platting approved, we put our proformas together and all of our market data on what the rents will be, and what the absorption should be, and the expenses for managing this community; we put our proforma together, release it to our database, and start taking reservations.
Once the plat records, then those reservations turn into full-on contracts that are held with deposits, and then that investor gets their construction loan. At the end of completion of construction, our management company takes over and stabilizes that asset for them.
Theo Hicks: How do you determine what the rents will be in those communities, since you’re starting from scratch?
Steven Bond: Basically, comparable analysis. Depending on what market it’s in, and how quality the data is – if it’s shaky data, then it’s literally just boots on the ground, we’re going around to all the surrounding communities and find out exactly what it rents for, we go into places like Zillow to see what other owners are marketing their rents to be in that area. We’re finding some of the commercial brokerage houses to get vacancy rates in the area and stabilization times, finding what jobs are coming into the area… So before we ever pick a market to go into, we know what the vacancy rate is, we know where it’s trending, we know how many communities are being built – as far as we can control, and this is always in a closed caption of time; so a new project could be approved, but we know what’s coming. So we’ve done all that market research to make sure that our investor is getting a good asset at completion.
Theo Hicks: And what types of returns is an investor seeing for these turnkey, new development fourplexes?
Steven Bond: For any market we go into, our goal is always to be at least 1% cap rate higher than resale market is giving them, and usually we’re 1% to 2% cap rate higher than the trading market… And we have to be, because quite honestly, if you or I were looking at something today to buy, another fourplex, if that was what we were looking for, why would we wait for construction for the same exact cap rate I could get today, and it’s ready to trade right now? So there has to be an equity play on cap rate.
Specifically, in our markets, we’ve been anywhere from a 6% cap to about an 8% cap, depending on the market and when it was delivered to our investors.
Theo Hicks: How do you find the land to build these fourplexes on?
Steven Bond: Within the FIG ownership there’s a land partner who’s specialized in work for builders throughout Utah, historically, and he’s [unintelligible [00:11:55].14] and entire developments, and has relationships with landowners for these big tracks of land, and he’s our land broker, essentially.
Now, we call him a land broker, but really he’s working with other brokers as well. People will bring us land opportunities… But he’s the bird dog, he’s always out, looking in these different states for different land opportunities that will be a potential to rezone, or that have already have rezoning, to take through as another FIG development.
Once he’s established a top three in a new market, then our marketing team and our property management team comes in to say “Yeah, this is good, and here’s why – because this job is coming into the area” or “The absorption of these types of inventory that we’re looking to build here – we’ll do really well.” Or the exact opposite – he brings us a land opportunity and we say “Actually, this company is not doing so well, and it has 13% of the jobs in the area, so we don’t believe that this is going to be good for our investors, so take that one off the list.”
So from the land guy it goes over to marketing and management to ensure that the asset will be what we want it to be for our investors when we actually pull through and have it completed.
Theo Hicks: Whether using this person as an example or anyone else on your team, what tips do you have for finding the right team member for whatever job it is you want them to do?
Steven Bond: You’re saying for literally any position? Is this a question solely on “How do you hire the right person for any job”, or is this specifically for land?
Theo Hicks: You can take it either way. I would just say in general, but you can use this person as an example, how you found them, how you qualified them and things like that.
Steven Bond: Yeah. One thing that’s really important to our culture is that the mindsets of all those we work with have to be a mindset of abundance. If they’re someone that has a scarcity mindset, that’s constantly trying to pull all the cards on the table to their side, they don’t really fit with our group. Our entire business model is built around giving equity to our investors that trust in us, and finding ways to cut costs, so that they can get the best yield on their investment dollar. So if we have an employee that doesn’t think that way as well, again, it’s not a good fit.
I would say that translates to anything that an investor is doing in our space – if you’re doing a deal with a seller and you’re always so one-sided that you’re looking to take one over on someone, it’s just really hard to get ahead in our world, because it’s a relationship business, and people end up just not trusting you, and you end up not making the loyal followers that you’re really looking to do, and building a growing real estate business.
Joe Fairless and your group is definitely like that. You wrote this phenomenal book which I’m pouring through right now on your apartment syndication, and it’s that mindset of abundance that says “Hey, I’m not gonna be hurt by trying to lift all the people around me.” That’s really worked for us as well.
Theo Hicks: Yeah… And those people are just annoying, too. I have a couple friends who are like that. [laughs]
Steven Bond: Yeah.
Theo Hicks: Let’s talk about this database of buyers, because if you’re on average doing 200 units per community, I’m assuming that you want those to sell pretty quickly, so that’s gonna be 50 different investors, or at least 50 different properties you need to sell, so… How did you build up that database of buyers? And another question would be what percentage of those people are consistently buying, and what percentage of them are newer, or just doing one-off deals and never doing one again?
Steven Bond: Just to hit the second question first, on average about 70%-80% of our projects are repeat clients, or referrals from a repeat client. Then the rest is new blood that’s coming in to invest with FIG. It’s become quite viral within our own group of investors.
How we found them to begin with is we just simply pre-marketed, we built a website (fig.us) and we marketed through LoopNet. We traditionally didn’t go through the MLS, and a lot of that just had to do with the kinds of calls that we would get – people that didn’t understand internal rates of return, or cap rates, or how valuable the assets were that they were looking at, so they thought that the only was value was in negotiating it so low where it just didn’t work… Whereas once we started working with more educated investors by going to platforms like LoopNet and our own websites and web channels, we found that the quality of investors just really was increased.
They understood what kind of assets we were delivering to them, and what was going on in the area, so it just became a more seamless process with that clientele. So as far as absorption of our inventory, right now we pre-sold our next batch of releases that we’ll have closings in spring through fall of 2019. We have about 800 doors of inventory that we’ve been selling in the last three months. We’re either 100% sold out in those developments – it’s three new developments in Idaho, Utah and Texas – or we’re at least 70%-80% sold out in those developments already, and we haven’t even [unintelligible [00:16:53].00] the dirt yet to start construction.
Theo Hicks: You mentioned that you find the land, and then you’ll sell that to one of your turnkey investors; then they’ll get a construction loan themselves and you’re just managing in the back-end. Do they get to decide all the different materials that are used, or is that something that you have a template of what you guys do for all of your fourplexes.
Steven Bond: We actually decide it, and a lot of that has to do with — real estate can be very emotional, and we try and take the majority of that out and become quite pragmatic through market research that “This is what will yield the best return on dollars, and also create the best experience for tenants.” Because those go hand in hand. This isn’t about just creating the cheapest product, it’s about creating the most valuable product.
So we pick out the products and materials, and the selections – we do have five upgrade options for a client that says “I wanna differentiate with my countertop, or with my appliance package, or with my lighting package”, but they’re predetermined options. It’s really like A, B or C; you choose, and that’s what you’re gonna end up getting. And it’s all put into the first price, and taken care of from that point forward.
Theo Hicks: The last question I have is — correct me if I’m wrong, but you didn’t start off with these massive projects… What are a few tips you have that you believe enabled you to scale to having the average community size being 200 units?
Steven Bond: It really was on accident. Again, we came up with this concept and it was, at the time, “How do we put food on the table, in 2011-2012, in the real estate space?” This was not “How do we build this incredibly large company where we have followers from all over the world that wanna invest with us?” That was not the questions we were asking; we were not doing any big, radical move. It was “What’s important today?”
We found some ground that was FDIC-owned at the time, and came up with the concept, and it was only a 40-unit project. Then the entire project was financed with hard money, because banks would not touch us. So it was one baby step at a time.
To an investor listening to this podcast, the best way to start is to go out and literally look for just an infill piece, a two-acre parcel, and get some partners and collectively go together and create a limited partnership if you didn’t have a ton of capital, and do four fourplexes if you could. Just start that out in that way. There’s so much value and interest right now in the multifamily space, buyers that want stability; they got scared off from the speculation of the 2005-2008 run-up that was in single-family, of people that were buying homes only to flip them at completion with no intent to occupy… Whereas in multifamily you’re buying the stability of someone who needs a place to live, and there’s still quite a bit of housing scarcity going on throughout the economy and throughout the nation, and many of the major markets.
So if you can buy and invest in stability, which is these types of assets, you can start off with a one or two-acre parcel, get a couple multifamily units, partner up with a good builder, and do that small development to start off with.
Theo Hicks: That was gonna be my follow-up question, but you hit the nail on the head with the best way to start. I really appreciate you coming on today and talking about this very unique development strategy of developing fourplexes. Just to summarize what we’ve talked – you mentioned how you got into the industry by essentially asking yourself “Where is the market not paying attention?” and that happened to be that middle of the road fourplex avenue, as opposed to smaller, single-family homes, or these big apartment complexes.
The advantages are with ten loans you can get 40 doors, and there really haven’t been many fourplexes developed since the ’70s and ’80s, and that comes with a lot of other issues as well that your investment strategy is able to solve.
You mentioned that you’ve got a specific team member who essentially all he does is he goes out and looks for land to build these properties on. Then for other team members, you talked about how really the main requirement you have is that they must have this abundance mindset and not this scarcity mindset. We talked about how you built your buyer database – starting out, you just built a website and marketed through LoopNet, so pretty simple, just making sure you’re grinding daily, and then now you are able to get the majority of your business through repeat customers and referrals.
We mentioned how you determine the rents, through the rent comparable analysis, as well as the fact that you make sure that you are selling these at 1% cap rate higher than the trading market. Then we talked about how to get started, which is look for a two-acre parcel, get some partners together and start off by building fourplexes. When it comes to scaling a development business – or really any business – I really liked your advice (it’s very simple) which is “It’s just one step at a time.”
Is there anything else that relates to starting and maintaining and scaling a development business that you wanna talk about?
Steven Bond: Well, the main thing, if you’re looking to do this for yourself, we’ve covered it all. If you’re looking to do it for clients, the trust comes in the end result, and we’ve found that about mid-way through year three, that our clients wanted us to manage it, because we were aligned in their interest the whole time… And I was really reticent to start a management company; I didn’t wanna own a management company and deal with that… But we did, and we’ve done a really good job with it actually, and I feel pretty proud of our team that’s done that. And it has been the catalyst that has grown the company even faster, because now the client can trust that experience all the way from beginning to end, and there’s no stumbling hand-off, that all of a sudden there’s this new face who hasn’t been a part of the deal from the very beginning.
So if you’re looking to set it up and create a following, you really have to have the beginning all the way through to stabilization under your control, to a large degree – under the control of your culture, your Why, that that client is truly taken care of… Because the second there’s someone with a different interest, you’re probably gonna hurt the relationship in some way… So that’s one other takeaway that I would definitely encourage.
Theo Hicks: Thank you for that. Before we leave, you’ve got a conference coming up in February, so do you wanna just briefly talk about that conference, as well as where people can buy tickets?
Steven Bond: Yeah, you bet. So you go to figsummit.com. February 1st and 2nd. Honestly, a lot of these speakers are good friends of mine. They don’t normally go and speak at these conferences, but they’re industry leaders. One who owns over 100 million dollars of private equity company, and how he built that from ground zero up, owning businesses, hotels, apartment complexes… He’ll be speaking about how he’s built that up. Randy, who’s a president at Lifetime Paradigm, how to evaluate income property. A lawyer to talk about legal strategies. Founder of National Association of Real Estate Investment Advisors, speaking to agents, how to increase their business. Someone from John Burns Consulting, speaking about the multifamily market… The president of UVREIA… So we have all of these great industry leaders that will be coming and just simply sharing their knowledge – how they built their companies from the start to where it is today, and in all aspects, from syndication, apartments, student and family, fix and flips, it will all be covered. I’m really excited about it, looking forward to hosting the event here at Utah Valley Convention Center in downtown Provo. It’ll be February 1st and 2nd.
Theo Hicks: And that is figsummit.com, so make sure you check that out and get a ticket to that conference. Steven, again, I really appreciate you coming on the show today… Lots of great information about developing fourplexes. Have a best ever day, and we’ll talk to you soon.
Steven Bond: Thank you so much, I really appreciate it.