Jun 5, 2023
Today’s Guest is Charles Bulthuis
Charles Bulthuis is a CRE Broker and the President & Founder of Reformation Asset Management. A Veteran, Certified Residential Specialist, Accredited Buyers Representative, and Honorary CCIM, Charles has spent the 30 years refining his innovative insights.
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Changing Demographics [00:00:00]
Condo Conversion Challenges [00:02:13]
Workforce Housing [00:06:34]
National Trend of Condo Conversions [00:09:05]
Viability of Retail and Office Asset Classes [00:11:45]
Aggressive Use of Buy Down Strategy [00:14:18]
Condo Conversions [00:16:43]
Scaling a Business [00:18:05]
90-Day Trial Period for New Hires [00:19:04]
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Connect with Charles:
Linkedin: https://www.linkedin.com/in/charles-bulthuis/
Web: www.reformationasset.com
Blog:
https://reformationasset.com/our-blog/
Connect with Sam:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Facebook: https://www.facebook.com/HowtoscaleCRE/
LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/
Email me → sam@brickeninvestmentgroup.com
SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson
Apple Podcasts: https://podcasts.apple.com/us/podcast/how-to-scale-commercial-real-estate/id1539979234
Spotify: https://open.spotify.com/show/4m0NWYzSvznEIjRBFtCgEL?si=e10d8e039b99475f
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Want to read the full show notes of the episode? Check it out below:
Charles Bulthuis (00:00:00) - This is a national trend. Okay. Um, and, and there's other supporting factors. Uh, not only, um, household coordination, trends, household formation occurring later in life. Um, but the fastest growing population for divorce is people in the eight of 60 and above.
Sam Wilson (00:00:15) - Are you kidding me?
Charles Bulthuis (00:00:16) - Not kidding you. So those people that have been in, in, you know, 20, 30, 40 year marriages are now becoming divorcees, and they're looking for a simpler lifestyle. They want a condominium, a one bedroom. They don't want a giant house. They have to go out and mow the lawn on Sundays.
Intro (00:00:31) - Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big.
Sam Wilson (00:00:44) - Charles Bold Heights is a c r e broker and the president and founder of Reformation Asset Management. Charles, welcome to the show.
Charles Bulthuis (00:00:51) - Hi. Thank you very much.
Sam Wilson (00:00:52) - Absolutely, Charles. Glad to have you here on the show today. There are three questions I ask every guest who comes on the show in 90 seconds or less. Can you tell me where did you start? Where are you now, and how did you get there?
Charles Bulthuis (00:01:02) - I started out as a residential broker in 1992 in San Diego, California. I am currently the, uh, president owner of a company that's a brokerage, a property management, uh, construction company, maintenance and lawn care. So we have five divisions and 65 employees. And I got here, um, basically I, I have, I have a philosophy on how to get rich quick, even if it takes you 20 years.
Sam Wilson (00:01:29) - I like that. I like that a lot. You're a busy man. You got a lot of things going on. Uh, the lawn care one is, is that's, uh, I, I wanna dig into that maybe before the show's over and just wonder how that bolt on business came, came to. But regardless, let's talk about some things really that are going on here in the marketplace today. You are, uh, I think the brokerage firm. Is that, is that probably the largest part of what you guys are working on right now? Is that a fair assessment? Uh,
Charles Bulthuis (00:01:55) - No, actually the revenue that comes in for construction will be the largest source of the revenue.
Sam Wilson (00:02:00) - Interesting. Okay. Very, very cool. Well, let's talk about that then, because I mean, you're in a market, you're aware, you're in Durham, North Carolina. Mm-hmm. . Yeah. Cool. What are you guys building right now? Like what's the, what's the big demand for you guys right now?
Charles Bulthuis (00:02:13) - Uh, so what we're involved in right now is the condo conversion. So we're taking apartments that have been, um, undervalued. So what would you call a value add property? Yeah. But rather than turning it into a value add apartment, we're turning them into value add condominiums, and then offering them as a resale product to owner occupants. So we helped one client acquire 108 units, um, in Durham, and another, uh, group of investors acquired 96 units in Chapel Hill. And, uh, those 204 units combined are what we're working on right now, and it's just under 20 million in renovations.
Sam Wilson (00:02:52) - What are some challenges? I mean, that, that it has to be the right, I would imagine, the right property in the right place with the right size of units, the right number of beds and baths. I mean, what are some challenges that you run into in locating a property like a condo conversion, e or even saying, Hey, this is possible as a condo conversion? Right.
Charles Bulthuis (00:03:11) - So the first step is actually not looking for what the market needs. The first step is identifying what the market needs. So once you've identified what the market needs, then you find a product that you can turn into what the market wants, right? So I didn't have to go out and find the two bedroom, two bath, 1000 square foot. I found the two bedroom, one and a half bath, 1000 square foot and converted it into a two two. Hmm.
Sam Wilson (00:03:33) - I see, I see. Yeah, that's really, really cool. I love, I love the, the, the, the spin on what value add is why is an end buyer, what is appealing to them about a, was apartment complex now? Is a condo, like what's, what's the, what's the value there for the end, I guess The end? Yeah, the end buyer.
Charles Bulthuis (00:03:54) - So we, we we're doing this both ways. In one instance, we are buying condominiums, um, that, and, and that, that we're buying apartments and converting them into condominiums. Yeah. And so for that individual investor, I helped him acquire six buildings that made up the community that is the 108 units. And then as we divest him of each building, they'll be their own separate 10 31 tax to put exchange. So he may pay taxes on one building, he may exchange another building. And so for him, it was the, the net proceeds potential where he was basically spending 20 million for purchase and rehab, and then selling the product as condos for 30 million. So it's a 10 million game for him. And that's quite an incentive, uh, for the other parties where they're buying condos and they're actually converting them into rentals. This is near the University of North Carolina, which has a very strong, uh, or, uh, student population. And the rents for those types of properties are rather high. They rent by the bedroom. So we could take a property that, in that neighborhood was completely undervalued, renting at $900 a month and dilapidated 50 year old complex revamp the entire complex, raise the rents to the market value of 1900. And the value add to my owners is, is dramatic, but then they have the ability to turn that whole product over as one, uh, rental property to an institutional investor that's looking for a 30 million buy that is student housing.
Sam Wilson (00:05:21) - No, that's really, really cool. I wanna circle back to the, uh, let's, let's call it the, the, the person that buys the condo conversion. The was apartment now is a condo who's living there. Why do people want that product in the market?
Charles Bulthuis (00:05:35) - Um, first of all, we, we have a market that completely misunderstood the buying needs of the, the product of, of, of the buyers. Today, for 30 plus years, the market was now producing one bedroom apartments. Think about that. You never saw one bedroom apartments being built, or at least, you know, not, not as the majority. Very few were right? But that is the source of workforce housing, really. So if you have a city that's growing rapidly and you're not providing workforce housing that is affordable, you're gonna run into a situation where your employers are gonna have to pay their employees dramatically more money to import them from outlying areas, uh, to avoid that $20 sandwich and copy, you know, it says you have to have workforce housing. And as a result, I was picking these one bedroom apartments as something that we could convert from apartments into condos. And now the price to rent in this location is 1650 a month, but you can buy the same condo and own for 1650 P I t I h o a.
Sam Wilson (00:06:34) - Right? Right. So why not? Why not? If you're gonna, if you're gonna end up paying the same amount of money on a monthly basis own don't rent. I mean that Exactly. That just seems to make a lot of sense. I'm really intrigued by the, or interested in the idea that the one bedroom that that kind of flies in the face of what I would've clearly wrongly assumed that one bedroom for what are, what people are wanting
Charles Bulthuis (00:06:59) - Household formation right now in the triangle, which Research Triangle Park is the area for Raleigh Durham, chapel Hill, and several other outlined communities. But those three big ones, the average household size right now is 1.8 people per household, huh?
Sam Wilson (00:07:15) - Right, right. That's really, that's a lot smaller than I would assume. Would've assumed.
Charles Bulthuis (00:07:20) - Yes. Demographics have shifted dramatically.
Sam Wilson (00:07:23) - Yeah, absolutely. How does that, how does this work inside of the housing shortage? I know that's something that is kind of near and dear to your heart, that you guys are trying to figure out a way to solve what, what of it you can. So how, how does this play into that kind of, uh, housing shortage?
Charles Bulthuis (00:07:41) - So it, it plays in the, the city is actually following suit with the product that I'm recommending. Hmm. Um, I, I sat on the, uh, mayor's, uh, affordable, uh, housing round table for the last three mayors that we've had in Durham. And, uh, one of the things that we discussed was workforce housing and household formation relative to the population growth in our area. And of the 2,500 or so affordable housing units, the city is planned to build, 2200 of them are one bedroom homes.
Sam Wilson (00:08:10) - Wow.
Charles Bulthuis (00:08:11) - Wow. It's that severe how important that workforce housing is. Now, when we're talking about a downtown region, this is where your restaurants, your bars, all of your nightlife activity, your offices, these places need people that come in and work those types of service industry jobs. Um, but at the same time, if we build three bedrooms and four bedrooms, we're we're that, that's more of a family oriented housing structure. And, and then you have to build new schools if you have to have school buses, and you have to build the infrastructure for children. So this is more for a dense population or for the intention of a higher increasing dense population.
Sam Wilson (00:08:49) - No, I like that. I like that a lot. That make, that makes a lot of sense. That's, that's a really, yeah. That, that's just a, uh, an an insight I'd not, not really had before is on. And I, and that's then this maybe, do you think this is particular to where you are or do you kind of see this as a national,
Charles Bulthuis (00:09:05) - This is a national trend. Okay. Um, and, and there's other supporting factors. Uh, not only, um, household coordination trends, household probation occurring later in life, um, but the fastest growing population for divorce is people in the eight of 60 and above.
Sam Wilson (00:09:21) - Are you kidding me?
Charles Bulthuis (00:09:22) - Not kidding you. So those people that have been in, in, you know, 20, 30, 40 year marriages are now becoming divorcees and they're looking for a simpler lifestyle. They want a condominium, a one bedroom, they don't want a giant house. They have to go out and mow the lawn on Sundays.
Sam Wilson (00:09:37) - Man, you're, you, uh, I, I'm not, I not not in that, uh, in that 60 and above divorced category, but I'll tell you, e e even I would say on, on the millennial side, like even, even they want kind of that smaller product type, I mean, gosh. Yeah. Less
Charles Bulthuis (00:09:51) - Commitment.
Sam Wilson (00:09:52) - Yeah. Man. Like, I'll even say it like, yeah, I own a house right now and I've, you know, it's great for the kids playing in the backyard and all that, but we could probably get those same amenities maybe with less work home ownership is, uh, well, it's a lot like work. I mean, you got a lot of stuff to keep up. So yeah, there,
Charles Bulthuis (00:10:08) - There's a trade out there that's for sure. When you're buying a house, you have to envision that there will be constant will be yours, but there also ties in with the fact that eventually the property will be yours. Right,
Sam Wilson (00:10:17) - Right. Undoubtedly, or at least
Charles Bulthuis (00:10:18) - The equity.
Sam Wilson (00:10:19) - Right. It goes both ways. But, but yeah, if you, you could sell me very quickly on the idea of not spending Saturday, which I don't spend Saturday mow the yard anyway, but if you still end up maintaining stuff one way or another, but I digress. This is not why we came here on the show to talk about what my preferences are. I do want to talk about what market perceptions are in some kind of, um, asset classes that people traditionally, not traditionally, but even right now are saying, you know, these things are dead. Those two being retail and office. Gimme your insights on those two particular asset classes in particular.
Charles Bulthuis (00:10:53) - So the pandemic, um, had a, had a major impact on the work from home and, and, and the, the work from office discussion. And if you, if you were to watch the news and you only paid attention to the largest markets in the country, Chicago, New York, LA, Miami, um, you're, you're gonna, uh, Houston, you're gonna get the perception that, um, commercial real estate is a, is a, it is a spiral, right? But here, locally, the commercial real estate market for retail and for office is, is very brisk. Um, I've missed out on three properties that I personally wanted to buy in the last six months because I just didn't get my offer accepted. I wasn't high enough, et cetera. Um, and understand, please, if you're not familiar with c R e, that most loans for commercial vehicle estate are gonna be tied to a 20 year amortization schedule, and that's not tied to the 10 year bond.
Charles Bulthuis (00:11:45) - So the rates for the commercial property, they're in the fives right now. They're not in the sixes. And, and, and they were down in the fours just, you know, a few months ago. So that market still has viability. And yes, there's a lot of loans that are gonna have to be refinanced in the near future, but we don't have a liquidity issue in the banking system. We have a few banks that, you know, misunderstood the value of investing in treasuries versus having some money on hand to give your depositors if they ask for it back.
Sam Wilson (00:12:13) - Right? Yeah, you said it, you said it. So for where you guys are right now, what you're, what you're telling me is that retail and office aren't just not dead, but they're doing very well in certain markets
Charles Bulthuis (00:12:24) - Very well. And even in the major markets where they're not doing that well as a percentage of the overall portfolio, they're less than 5%. Right. You know, if you took all the commercial real estate in New York, Los Angeles, Chicago, Houston, Miami, you grouped it all up, it would still be less than 5% of the nation's commercial real estate. It's just not gonna tip the scale.
Sam Wilson (00:12:45) - Right. Undoubtedly it even so, I mean, gosh, I had someone on the show here recently that their, their whole strategy right now, and they're, they're in, in New York, is buying office space, which is not doing very well in New York City, and they're imagine that
Charles Bulthuis (00:13:00) - Buy low, sell high,
Sam Wilson (00:13:01) - Uh, right, right. He was, he was telling me that, you know, two years ago, or not two years ago, three years ago, I've been pre pandemic, gosh, three and a half years ago then, you know, they were trading eight, 900 bucks a square foot. He's like, dude, we're picking stuff up right now. Three, 400 bucks a square farm.
Charles Bulthuis (00:13:14) - Yeah, yeah. He
Sam Wilson (00:13:15) - Goes, it's, yeah, it's, now is the time to buy. Like this is New.
Charles Bulthuis (00:13:18) - York's not gonna disappear.
Sam Wilson (00:13:20) - It's not. It's not. And,
Charles Bulthuis (00:13:21) - And as a reality, all it's going to happen is you're gonna have a lot of these companies reenvisioning how to monetize their office space to lower the workforce back.
Sam Wilson (00:13:28) - Right, right. That's exactly right. That's exactly right. That's really, really cool. Are there strategies or things that people, or any of your clients really you see them doing right now that would just be good food for thought if somebody's looking at these asset classes?
Charles Bulthuis (00:13:42) - Yeah. Don't, don't let yourself get, uh, rolled over by the noise. That is the, the, the, the, the pundits the know-it-alls. You know, one of the best things you can do is go against the crowd. Right,
Sam Wilson (00:13:55) - Right. I like that a lot. I like that a lot. Yeah, absolutely. If you're, if your main source of information is from the pundits, we're probably not friends cuz it, uh, , it's just a lot of noise. So that's, uh, that's really, really great there. Let's talk about the, uh, interplay between interest rates, the residential market. I know that affects, uh, a lot of things. What do you see on that front?
Charles Bulthuis (00:14:18) - So what, um, what this, uh, market has quickly returned to was strategies from the early nineties. And I started in 1992 and we had an accelerating interest rate market from that period as well that led us from a, uh, recession into, in San Diego into a horrible recession in San Diego. Uh, we, we had, um, Boeing, which was one of the largest employers in San Diego, leave and go to Washington State. Right. Caused a massive drop in valuations. And then boom, we hit the 92 recession, and now we've got interest rates going up toward the eights as well. Um, and, and one of the best tools that we had in our basket back then, or our toolbox was the buy down. And so we are aggressively using the buy down to position buyers into our product with rates that are artificially reduced for the next couple of years because we believe that in the next couple of years they'll be able to refinance into lower rates.
Sam Wilson (00:15:14) - Can you, can you explain that strategy? Uh, I guess more, uh, more in depth? Sure.
Charles Bulthuis (00:15:20) - Um, what about that is, is if interest rates sit there at six and a half and I spend points, I can go through my lender and buy the interest rate down to a four and a half percent interest rate. And so the buyer still has to qualify at the rate of six and a half mm-hmm. , but for their payment purposes, they'll be pa making payments the first year at four and a half percent interest the second year at five and a half. And then that third year it'll normalize at whatever the rate was at the time that they took the loan at today's six and a half. Right. But if at any time during that period the rates were to drop, they can refinance their loan into a lower standard interest rate and even use the money that's still available in the two one buy down for future rate reduction for the cost of the refinance. And because of the inversion of the yield curve right now, it, it is the long-term money that is priced low and the short-term money that's priced high, which is indicative of rates coming down in the next 24 months.
Sam Wilson (00:16:19) - Interesting. So I, in, in effect, it's, it's, it's not just buying an option for refinance it, it's sort of like that, but you also get the short-term benefit of maybe potentially paying less in interest on the front end is that, oh,
Charles Bulthuis (00:16:32) - You're absolutely paying less on the front end and the best part is the seller is paying for that option on your behalf.
Sam Wilson (00:16:38) - Ah. So that's something you negotiate into the deal.
Charles Bulthuis (00:16:41) - Right.
Sam Wilson (00:16:43) - Very cool. I love that. That's an, that's certainly an advanced strategy. Um, thank you for taking the time to really share, share with us your thoughts on that front. So, so far we have talked about the perceptions inside of retail and office. We have talked about the, uh, interest rates and the residential market. We've talked about condo conversions, we've covered a lot of territory here. The one thing I really haven't, uh, gotten into with you, you talked about maintenance in a lawn care business. I mean, when did you tack that side of your business on and why?
Charles Bulthuis (00:17:13) - So I created the property management company because no property managers wanted to deal with what I was doing. Let me buy you the property, let me push everybody out of the property, remodel the property, then re-rent the property. And then in two years, 10 30 wanted into another property. Right? No. So I had to create a property management company. Well, now I have a property management company. I have to manage the properties, I need maintenance, I need lawn care. Well, as I realized that I kept falling to the, you know, I wasn't the top person on everybody's list. Yeah. Well, I wanna be the top person on the list. So I had to create the company so that the company takes care of me because I'm an insulting client.
Sam Wilson (00:17:48) - , there you go. I love it. I love it. What's it been like, let me ask you this question. Scaling all of these different businesses, how do, how do you, meaning what's, what's been like maybe one thing you've done that has really helped you scale each of these in their own unique way?
Charles Bulthuis (00:18:05) - Hiring people that can head each of these companies that are creating, or each of these divisions within my company? Um, I am, in my opinion, you know, and others a very good real estate broker. Okay. Um, but I am not a general contractor and I haven't cut along since I was in my a teenager. So I need to hire people that could run these other businesses or head up these other divisions without my constant interaction. Hmm. And, and, and that's the key to building any business, is hiring the right employees, getting the right staff behind you, building a team.
Sam Wilson (00:18:40) - Yeah. And that's the hardest part. I mean, I think so many times, especially, you know, the thrust of this show is how to scale commercial real estate. And when you're in that scaling period, especially in the early days, the mistakes of a miss or a bad hire, uh, can be expensive, but also just they, they can be time consuming. Are there any, any, any strategies you employ on that front now? Making sure you're bringing the right team members on the first time?
Charles Bulthuis (00:19:04) - 90 days. I need to know within the first 90 days if these people are gonna be able to take that ball and run with it on their own. Or if they still need, need me to sit, sit on their shoulder. Um, in North Carolina, you can fire anybody for any reason or no reason within the first 90 days. Got it. So if I know in 90 days that I think that they're, they're just not getting it. I, I wanna start over.
Sam Wilson (00:19:27) - Okay. Okay. And that's hard, man. That's hard. I mean, it's, I'm sure that's, that's a, a, a muscle that you've had to exercise over time. I know for me, uh, I I I'm getting better at it, but it's also one of those things that, gosh, I hate letting people go. It's just, it's always, it's always hard.
Charles Bulthuis (00:19:45) - My management experience was garnered in the US Army, so I'm a little bit better at that.
Sam Wilson (00:19:49) - good. I like it. I like it. I, I need to, I need to tear a page outta your book and, uh, and read it probably more often. So this has been fantastic. Charles, I have enjoyed today's show. You've given us a wealth of information, things here to think about. If our listeners wanna get in touch with you or learn more about you, what is the best way to do that?
Charles Bulthuis (00:20:08) - Uh, please go through my website, reformation Asset Management. Um, or if you would like, I mean, call me directly. I, I'm very accessible. My number is 9 1 9 4 5 2 4 8 3 3.
Sam Wilson (00:20:20) - Fantastic. And we'll make sure we put that there also in the show notes. Charles, thank you for taking the time to come on the show today. I certainly appreciate it. Thank
Charles Bulthuis (00:20:27) - You very much. It was a great show.
Sam Wilson (00:20:29) - Hey, thanks for listening to the How to Scale Commercial Real Estate podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcast, Spotify, Google Podcast, whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories. So appreciate you listening. Thanks so much and hope to catch you on the next episode.