May 12, 2022
In this episode of the How to Scale Commercial Real Estate Podcast, we welcome Anthony Scandariato back to the show. He shares what he’s observing about the current housing market, the benefits of setting up a TIC and 1031, and how capital raising has become more efficient in recent years. All this and more!
Anthony Scandariato is a real estate entrepreneur & multifamily investor with a focus on in-place cash flow and forced value-add appreciation. He’s the co-founder of Red Knight Properties, a privately held boutique multi-family and mixed-use real estate investment & property management company with a track record of building and managing portfolios that deliver dependable cash flow and equity upside.
Anthony is also the host of the popular podcast “Discovering Multifamily”, and teaches others how to become financially free through multifamily investing via tons of free content/events on RedKnightProperties.com and through his Facebook/Meetup Group Community - "Discovering Multifamily Investor Association."
[00:01 - 06:09] Welcoming Anthony Back
- Catching up with Anthony and what he’s been up to with Red Knight Properties
- Listen to Anthony’s first time on the show!
- Why he’s selling early
- Restrategizing and tapping into properties in the Southeast
[06:09 - 14:24] The Real Estate Landscape
- Anthony’s thoughts on the inflation to rent price ratio and its unsustainability
- The wage inflation’s disparity with CPI inflation will cause greater supply and demand issues
- How Anthony is handling this next exit
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- Setting a 1031 and TIC initially
How capital raising has changed in the last 4 years
[14:25 - 17:31] Closing Segment
- Advise Anthony has for those getting started in real estate
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- Figure out whether you want to be a passive or active investor
- How to connect with Anthony
Tweetable Quotes
“It becomes complicated if you don't have a Tenancy in Common structure set up from the beginning because you could have one investor that just wants out, and just wants their money back,” - Anthony Scandariato
“So with the 1031 and the TIC, if we set it up from the beginning, they would actually all just move forward because it's not set up initially. If everybody was on board except one or two people, it blows up the TIC.” - Anthony Scandariato
“Figure out if you really want to be active, or passive, figure out what you want.” - Anthony Scandariato
Resources Mentioned:
- How to Scale Commercial Real Estate Podcast: Investing in Workforce Housing with Anthony Scandariato
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Connect with Anthony Scandariato
Website: https://redknightproperties.com
LinkedIn: https://www.linkedin.com/in/anthonymscandariato
LinkedIn: https://www.linkedin.com/company/red-knight-properties/
IG: https://www.instagram.com/redknightproperties/
Twitter: https://twitter.com/redknightprop
Facebook: https://www.facebook.com/redknightproperties
Youtube: https://www.youtube.com/channel/UChvn3ruK6_OAY0RG5Y8LgIQ
Podcast: https://podcasts.apple.com/us/podcast/discovering-multifamily/id1506820688
Connect with me:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Like, subscribe, and leave us a review on Apple Podcasts, Spotify, Google Podcasts, or whatever platform you listen on. Thank you for tuning in!
Email me → sam@brickeninvestmentgroup.com
Want to read the full show notes of the episode? Check it out below:
HTSCRE #529
[00:00:00] Anthony Scandariato: Just figure out what your goals are, figure out what you want. You really want to be managing maintenance, technicians, leasing agents. It's really an operating company. So you really want to take on that or do you just want to partner with someone who's experienced like Sam or whoever the sponsor is and have your money work for you?
[00:00:16] Do whatever you're doing as a hobby or passion or whatever, just really figure out what you want to do.
[00:00:21] Intro: Welcome to the How to Scale Commercial Real Estate show to Scale Commercial Real Estate. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big.
[00:00:32] Sam Wilson: Anthony Scandariato auto is the co-founder of Red Knight Properties.
[00:00:36] Red Knight currently has over a hundred million dollars in assets under management, 750 units in four different states on the east coast. Anthony, welcome to the show.
[00:00:45] Anthony Scandariato: Great to be back on Sam. Really appreciate you having me on again. Pleasure's mine.
[00:00:48] Sam Wilson: You came on episode number 72. So the show was just getting kicked off there.
[00:00:53] I think you want to go back and listen to Anthony's story. We won't spend a lot of time on today's show, here. Previous the story that he shared with us on episode 72, that was on February 9th, 2021. By the time this goes live, this will probably somewhere close to June of 2022. So that's almost 16 months later in case somebody though they didn't get the chance to listen to it.
[00:01:13] Can you give us a 92nd synopsis where you started, where you are now?
[00:01:18] Anthony Scandariato: Yeah. As Sam said, one of the co-founders of Red Knight Properties were a privately held boutique mixed use and multifamily investment management company for real estate, as well as a property management team. As Sam said, we have about a hundred million dollars under management.
[00:01:32] I think when I came on Sam show, we were more like 60 million. So basically doubled from that your time period. We did quite a bit of deals in 2020. And over 750 units, I think we only had maybe 400 units give or take in three different states. Now we're in four different states. So pretty exciting.
[00:01:49] I think we were just closing in our first Southeast state of this great state of Florida. We're actually starting to sell some assets now given the state. Where the market is and how quickly, especially the state of Florida has really grown from so many different standpoints. So we're starting to sell some of our assets that we weren't even considering selling for another three to four years from now.
[00:02:13] We're actually selling early. So happy to talk about why we're starting to sell early. Yeah, deviating from our business plan a little bit.
[00:02:21] Sam Wilson: Love to hear that the floor is yours. Why are you selling early?
[00:02:25] Anthony Scandariato: Sure. So I started my company 2018. We can go back to the other episode and listen, but since basically 2018 acquired almost a thousand units at this point.
[00:02:36] And once we're value added investors, we come in and find operational inefficiencies. From a management standpoint and mostly from a management standpoint and we're buying assets from motivated sellers long-term owners, when we're investing in CapEx that hasn't been put to a life and 10 to 15 years, and we're really bumping the rents up and for us to get 25% rent bump within the year with.
[00:03:01] We're not just investing the dollars necessary in order to get that bump. We're not just going in and raising the rents like a lot of other operators. We just think at this point in the cycle and this is releasing in like mid Q2 in 2022, when interest rates are on the rise inflation is still going to be carried out in my opinion for the next couple of years, probably not going to be as elevated as it was 2021, but it's still going to be a problem.
[00:03:25] Moving forward. Long-term depends what the fed decides to do probably by the time this is released, we'll probably raising another half a point. But with all those macroeconomic situations rates, aren't going to go down inflation is going to stay pretty high in which means rents are still going to go up.
[00:03:42] We just think the value, it's almost like we front-loaded a lot of the appreciation over the past couple of years. And I feel like we're not going to just see that huge increase in spike and value that we saw. Once the fed basically did their QE and rates were at near zero for a couple of years, it's just, the values are going to start to slow down.
[00:04:03] I'm not saying they're going to crash. They're going to slow down. And obviously in the commercial real estate and all it's all driven on NOI, right? So as quickly as you can get rents up for us and we see the value, there's a property in Florida we're selling for double what we pay for it a year ago.
[00:04:19] And our projections weren't even assuming that five years. So we're looking at the returns and we're like if we can provide people basically double their money in a year, and then we could do some tax deferred strategies, reinvest the capital. If they decide to come back, reinvest the capital into another opportunity, that's maybe not in as hot of a market as far as, because there's a lot of capital.
[00:04:42] We were talking about this on our show, which I'm planning to release as well. Sam was on my show, Discovering Multifamily and we were just talking about some of the pivots he's been making to his business. We're doing very similarly, but we're sticking with our asset class, multi-family we're going into other markets.
[00:04:57] Now we're looking at Midwest markets that haven't really been tapped as much as the Southeast has been lately, even where I'm based in the Northeast. It's always been a little saturated. So we're pivoting. Where all the money's flowing. We want to come in early and then you kinda gotta know when it's right to get out.
[00:05:14] And as of right now, we could refinance. Everybody can get the money back. We can roll that into another property. Great birth strategy for commercial real estate. And I think we touched on that in the previous session. You just got to do your numbers and see what makes sense and really just analyze all the risks in the economy and an informed and educated decision might not be the best decision, but at least you want to just have an opinion and you want to be able to come up with some logic behind, okay, why are we selling early?
[00:05:41] Why are we selling four years early? The reason is X, Y, Z so it's very interesting and you're seeing it in the market as well. I'm sure. We'll see what happens. A lot of other operators I've talked to are experiencing the same type of feelings, starting to sell assets early. And they're doing well on them.
[00:05:58] Sam Wilson: There's never a bad time to execute the entirety of the business plan in a shorter timeframe. It's oh, great. Lucky us. We said five years and now we're going to do it in one. That's okay. That's quite okay. I'm really curious when you think about the inflation to rent price ratio, right?
[00:06:16] Like we've seen inflation the published seven ish percent and then we've seen rents again it's a very localized number, but let's just use. Arbitrary insights, 15% on a national average. I don't know what it is on a national average, but it's greater than what inflation has been at some point.
[00:06:32] Do you feel like that is going to swap like positions there where the rents are not keeping up with where inflation is going? Just because people don't have the income to support it at some point.
[00:06:44] Anthony Scandariato: Do you think that okay, you're right. It depends upon wage growth. At the end of the day, you really should be looking at CPI that likes to quote PCE.
[00:06:52] So PCE. They don't have. Really rent, like the real red figures in that number. So I think inflation is higher than what they're representing, to be honest with you. And I know a lot of other people do as well. At some point, yes, it's good. We like to look in markets where rent is maybe 25% to 33% on the high end of their wages of their income.
[00:07:15] So if the wage inflation is not keeping up with rent or just regular CPI inflation, Yeah, it's going to be a problem. There's still a supply and demand issue. Over the past couple of years, I think the level of new homes and also new apartments are down 50%. It's only going to get worse because now with rates rising, there's gonna be a lot of builders that go belly up, unfortunately is going to be a lot of customers.
[00:07:39] I think on the single family side, pulling out of deals on the apartment side, it's getting harder to build because costs are just higher. So they're going to have to pass that onto the consumer. I specialize in the class C space. So we're trying to buy deals below replacement costs in the first place.
[00:07:55] So yeah, it's going to be a problem. I, again, like I said, I keep going back to, I think we front-loaded a lot of the appreciation. We're not going to see 20% year over year. It's just, it's stupid. And I get opportunities from other sponsors who will still believe that's going to happen.
[00:08:10] Who knows if you're buying in the state of Florida, maybe it's going to happen. I don't want to see a projection where, you know, on a class C property where you're projecting $2,000 a month for a one bedroom apartment. Even if you renovate it, it's just something about that in a suburban area. It just doesn't seem right to me.
[00:08:25] Like you said, Sam, you got to look. The employment drivers and it's all local employment drivers in the area. Where are the jobs? What type of wages are they paying? Is that industry experiencing wages, coalitions across the board? In my opinion unemployment's near time, all time low.
[00:08:42] I actually think the unemployment rates probably in the short term, going to go down. Even further, but then probably by the end of the year and go back up a couple of points. We'll see. So it's a very interesting conundrum. The good thing about the commercial real estate world is if the rents still keep going up, let's say three to 4% a year.
[00:08:58] Your NOI keeps going up. If interest rates rise, theoretically, it's not always one for one, but. Rise a little bit, maybe 10 basis points for every hundred basis points and interest rate move, which is weird. Cause it's not one-to-one correlation. And again, it's still a lot of money out there that we're just on the sidelines for two years, chasing multifamily, industrial self storage, those three hot asset classes concentrated in different areas.
[00:09:24] Now, like I said, in the south and my opinion, it's just still a lot of cheap money out there. A lot of balance sheet lenders, a lot of bridge debt. I'm a little nervous for some of the sponsors who took on very high leverage bridge debt, and they think they're going to get out of it in two years and they're may be slow in their business plan.
[00:09:39] And when they go to refi, they got to do a capital call because the value is not there. So I'm a little concerned with that. But for sponsors that have been experienced around there, that's good opportunity for them to start picking up some of those quote unquote distressed properties. But I still don't think we're going to see that for a couple of years, right?
[00:09:56] Sam Wilson: No, couldn't agree more. Talk to us about your deal that you are exiting. Your role in that, or at least some of the proceeds of that into another deal. Are you doing one large, 1031 with your investors? And they're just going into the next deal or what's the process like on that?
[00:10:12] Anthony Scandariato: Yes, the sale hasn't been completed well, by the time this is released, it'll probably be completed. As a sponsor and just some pieces of advice, it's very difficult to do a 1031 in a syndication. Very difficult in my experience, if you don't have a TIC set up from the beginning, it's going to be very challenging for you to moving forward.
[00:10:29] So what we're doing is. As if we sold the building and we were buying nothing else, however, we are fortunate to find another opportunity. And we do cost segregation studies and the ability to pick up bonus appreciation. This is 2022, I think is the last year for a hundred percent bonus depreciation.
[00:10:47] So whatever capital gain my investors, including myself, cause I invest as well. I have to pay hopefully if they choose to reinvest most of it or all of it can be offset by another reinvestment. So it's not a 10 31 exchange, but there still is some tax benefits and deferrals, cause you still have to pay it at some point.
[00:11:05] So that's what we're currently working on. But yeah, it's tough to do a 1031, if you don't have it set up for the beginning of the TIC,
[00:11:12] Sam Wilson: when you say set up from the beginning, can you explain that? You mean set up in the initial investment as a, so you're saying you're going to a Tenancy, which to those you're listing a Tenancy in Common deal, you're going to Tenancy in Common.
[00:11:25] Then you go to your 1031 intermediary, you roll the money into the intermediary, and then you go to the next deal as a Tenancy in Common. Is that what. Correct.
[00:11:32] Anthony Scandariato: And it becomes complicated if you don't have Tenancy in Common structure set up from the beginning, because you could have one investor that just wants out.
[00:11:39] Just wants their money back. And it happens. We've done deals where we've refinanced. We give everybody a money back and maybe one or two people, oh, I need the money because I'm buying a house or I'm doing this I'm going on vacation. So with the 1031 and the TIC, if we set it up from the beginning, they would actually all just move forward because it's not set up initially.
[00:11:58] They and everybody was on board except one or two people. It blows up the TIC
[00:12:03] Sam Wilson: there's a way around that. Cause I was just involved in a deal and I was that investor yeah, I didn't want to roll over one cause I wasn't in love with the next opportunity. And then secondly, because I had invested with my IRA funds, so it didn't really matter to me if we were 10 and they didn't set it up as a 1031 in the beginning.
[00:12:18] So I'm like, one, I don't like your deal. The second deal. And two, like I gain nothing by this is a self-directed IRA. So I gained nothing by 1031-ing this. So I want out, right? So I was that pain in the neck investor, sorry, Anthony. But there was a way around it and I don't know what they did in the deal.
[00:12:35] They found a way, but it was paperwork heavy to your point. It was paperwork heavy and there was new LLCs created
[00:12:42] Anthony Scandariato: and neither of us are tax advisors or experts. So we're not the right people.
[00:12:46] Sam Wilson: Right. No, don't take anything. I say here's tax or legal advice. That's for sure. But just to note that there is a way around it, it's just messy.
[00:12:53] So to your point, let's avoid all the mess. We can get 2018 to now, what have you seen change on the capital raising side of things? And are you guys doing anything differently than you were four years ago? Yeah,
[00:13:06] Anthony Scandariato: I think it's streamlined more, becoming easier to raise capital. And as we were talking, there's a lot of money still out there in the system.
[00:13:13] And also a lot of we cater to individual investors. So we're usually talking to mostly high net worth individuals that putting in 50,000 or a hundred thousand into a deal and looking for income and also equity upside at the sale or the. It's really grown upon itself. I think once you've been around and I've been in the industry since 2014, so it's not 2018, I worked for somebody else.
[00:13:40] But once you develop a reputation and you start producing case studies, you start selling, you start refining. The case may be, you'll be able to show those returns into find more investors and more partners. It becomes easier in that sense. And your network starts to grow. Obviously we both have podcasts, so both of our networks have grown from that.
[00:13:59] I think you just have to have a system in place. We have investor portal, we have software that kind of manages relationships, CRM, and it grown upon itself. Most of our new investors come from existing investor referrals. There's always the one-off the founders on LinkedIn or our podcast. But it's probably similar to you.
[00:14:18] 70% of referrals. Yeah.
[00:14:19] Sam Wilson: Awesome. And that's so true. You'll get one-offs. But a lot of it, it's a very referral based system. If someone were getting in the business today and they're launching out and they want to invest in multifamily, what is one piece of advice you would give?
[00:14:34] Anthony Scandariato: Just figure out if you really want to be active, or if you want to be passive, figure out what you want.
[00:14:39] Cause they're both very different. I started out active. I'm obviously still active my ultimate goal. And we were talking about this on your show. Staff is I'm still young. So are you is to become fully limited partner and fully passive at some point. Just figure out what your goals are, figure out what you want.
[00:14:54] You really want to be managing maintenance, technicians, leasing agents. It's really an operating company. So you really want to take on that or do you just want to partner with someone who's experienced like Sam or whoever the sponsor is and have your money work for you? To whatever you're doing as a hobby or passion or whatever, just really figure out what you want to do.
[00:15:14] Cause I have people who have come to me that want to be active, and then I start telling them how much work it is and be like, you know what, let me just put my money in a deal and then let's see how you do it. And then if I think it's a lot of work, then I'm not going to do it moving forward.
[00:15:26] So that's happened. It can count on one. Definitely multiple times happened,
[00:15:31] Sam Wilson: right? Yeah. That's so true. Absolutely so true. And that's a great point because a lot of people want to get involved in real estate. Then they get overwhelmed with the mechanics of it. Oh my gosh, there's so many terms. How do I do this?
[00:15:42] How do I do that? And then it becomes confused. Mind says no. And they shut down the easiest way and the best way, at least for me, the same as you, I think is that become a passive investor. That's how I cut my teeth in this. It came in as a passive investor and I learned through. While investing. And it was like, oh, okay, now I understand it.
[00:15:59] So that's an absolutely fantastic point, Anthony, thank you for coming on the show today. Pleasure to have you back. I've enjoyed our conversation. Learned certainly a lot more about what you guys are doing while you guys are exiting deals where you see the market going. And then also, you know how you guys are protecting yourselves.
[00:16:14] Certainly enjoyed that. Thanks for sharing your wisdom with us. If our listeners want to get in touch with you or learn more about you, what is the best way to do.
[00:16:21] Anthony Scandariato: Sure we have a website and my company is redknightproperties.com. Just go there. We have a free e-book titled Leave Your Nine to Five Through Investing in Real Estate.
[00:16:28] That will actually pop up. Just putting your name, your email. I can send that to you for free. All my contact information will be on there. Facebook, Instagram, Twitter, LinkedIn, either my name, Anthony Scandariato or a company Red Knight Properties where you know, we're on everything. Absolutely.
[00:16:42] Sam Wilson: Anthony, thank you again for your time.
[00:16:44] All right, Sam. Thank you.
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.