In today’s episode, we are joined by Ryan Webster. Ryan is an NHBA award-winning home builder, experienced real estate professional, and entrepreneur. Ryan is the Managing Partner and the founder of Equity Yield LLC. He has over a decade of experience owning and operating a Midwest-based construction, and development company, with a wide range of project experience managing new construction, and value add multifamily projects.
Highlights:
[00:00 - 05:34] Opening Segment
- Ryan Webster is the founder and managing partner of the equity yield group and he recently transitioned from the construction development side to the buy and hold the side
- When he transitioned, his motivation was to spend more time with his family and build a different business that was inherently more scalable
- He thinks interest rate hikes will increase consumer demand for multifamily housing because they will affect both commercial and retail consumers.
[05:35 - 11:04] Rents Still Affordable in Today's Market
- Rents are still affordable, but they will only continue to grow so long as they remain affordable.
- To calculate affordability, the company uses median incomes for the area and 30% of income as the rent figure.
- Fundamental investors look at supply and demand in the market and also focus on the quality of the property and its location.
- They like to invest in newer properties that have great amenities and are located in nicer neighborhoods with high incomes.
[11:05 - 16:21] Capital Raises $50 Million in New Funding
- How the company paid $85,000 for an interest rate cap 12 months ago, and now it is worth $700,000
- The company is not underwriting refinances and is bidding on a lot of deals
- How the company wants to form a company that not only provides great investments for investors but a great investor experience
[16:22 - 17:15] Closing Segment
- Reach out to Ryan
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- Links Below
- Final Words
Tweetable Quotes
” We're not focusing so much on being competitive. Our focus from the get-go is really looking for quality investments that generate great-risk-adjusted-returns in providing our investors, with a great investor experience.”- Ryan Webster
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Connect with Ryan Webster by visiting their website equityyieldgroup.com
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Want to read the full show notes of the episode? Check it out below:
[00:00:00] Ryan Webster: we've got a lot of investors. And I think for them, it comes down to, am I participating in the market or am I not at this point? And we have a lot of investors looking at okay.
[00:00:09] Ryan Webster: What else do I do with my money? The stock market's very volatile as of late bond yields.
[00:00:15] Ryan Webster: Uh
[00:00:15] Ryan Webster: aren't that great. So if I am a participating investor in the market, where do I wanna be? And a lot of them still want to be in real estate. It is, a low-risk investment historically has been a great, instrument for the preservation of capital. Ryan Webster is the founder and Managing partner of the Equity Yield Group. Ryan. Welcome to the show. Hi, thanks for having me. Hey man, pleasures mine, three questions. I ask every guest who comes on the show in 90 seconds or less. Where did you start? Where are you now? And how did you get there?
[00:00:54] Ryan Webster: Yeah. Absolutely.
[00:00:55] Ryan Webster: I've been in real estate, most of my career started in the construction development side and recently transitioned into the buy and hold side. And that kind of transition took place, motivation of kind of shifting to be able to spend more time with my family and, build a different business that was inherently more scalable.
[00:01:12] Sam Wilson: When you say you recently transitioned, what is recent
[00:01:15] Ryan Webster: for you? Within the last two years.
[00:01:16] Sam Wilson: Okay. All right. Fantastic. So you guys, so, but you were in, remind me again, you were in real estate before that.
[00:01:24] Ryan Webster: Yeah, so I owned a construction development company prior to starting this company. So within real estate, but on the other side of it in the, build and sell model, as opposed to buy and hold.
[00:01:33] Ryan Webster: Got
[00:01:34] Sam Wilson: it. So do you do any more development or is everything you guys buy right now? Existing?
[00:01:38] Ryan Webster: Yep. Existing stabilized assets is what we do now.
[00:01:41] Sam Wilson: That's really interesting. What were you building?
[00:01:43] Ryan Webster: We did a lot of, single family homes national home builder association.
[00:01:46] Ryan Webster: Award-winning home builder. Did some small multi small commercial strip malls back when that was the hot thing. Standalone restaurants.
[00:01:54] Sam Wilson: Got it. Okay. That's that's really interesting. One of the things that we hear a lot on this show, especially as it pertains to multifamily. Is that the cost to build is lower than what people are getting now for used product that they have to value ahead.
[00:02:08] Sam Wilson: How do you find opportunity right now in the multi-family space? I guess, especially coming from the, background as a builder, Like, how do why are you guys buying existing stock?
[00:02:19] Ryan Webster: Yeah. Absolutely. There's a couple different reasons. part of it's geographically motivated.
[00:02:23] Ryan Webster: I live here the Midwest and in a market that has very affordable housing, so there's no real retail demand for multifamily. And as a asset class, I, I liked. The idea of multi-family. I think in, in major markets, there's always going to be demand for multi-housing. It's a very stable asset class as far as real estate goes.
[00:02:41] Ryan Webster: So to be able to invest in that asset class I had to be outside of. My market. And it's a little more different to, to build outside of your market. And there's a risk reward profile from, the building and development side returns are a lot higher because there's lot more execution risk of getting a thing up out of the ground, getting it stabilized.
[00:02:58] Ryan Webster: And the other, Obstacle on the development side is it's constant capital gains. Depending on what year you building and what year you sell in you don't have the deductions to offset the capital gains where it's stabilized assets through, cost, egg studies and accelerated D appreciation.
[00:03:12] Ryan Webster: You're not hit with a tax bill all the time,
[00:03:14] Sam Wilson: right? Yeah. That's the largest expense. I think most of us incur. Is that tax bill. So if we can eliminate that's certainly a helpful place to be. One of the things you and I talked about before we kicked off this episode was that you think that interest rate hikes will increase consumer demand for multifamily.
[00:03:31] Sam Wilson: Can you break down your thought process behind
[00:03:33] Ryan Webster: this? Yeah. Absolutely. So. Interest rates not only affect us as investors on the commercial side, but they also affect the retail consumer your what would be first time home buyers. So I think what we're going to see is a lot of first time home buyers are going to be further priced out of the market and they will stay renters longer which will put a little more demand side pressure on multi-housing.
[00:03:56] Ryan Webster: And if you're looking at, at least major markers across the Southeast who have seen this very high inbound net migration A lot of these people move planning to, buy a home later since there's such low inventory. But I think there's a percentage of these people. That'll now be priced out of that market.
[00:04:11] Sam Wilson: How do you think that compares, especially in the Southeast where we've just seen astronomical rent growth. I mean at some point, are they also getting priced out of the renter's market as well? I mean, at this point, I don't know what an average let's use Greenville, South Carolina. I don't know what the average two bedroom rent would go for, but at the north of 13, 1400 bucks, I mean maybe even 15 or 1600 bucks.
[00:04:36] Sam Wilson: So at what point in time does it, I mean, is there a tipping point there where at some point you go wait, well, now we could afford a house cuz rents at the multi-family properties are just so high. I mean, What's your crystal ball,
[00:04:46] Ryan Webster: tell you, I mean, generally speaking in denser markets, it is cheaper to rent than it is to buy.
[00:04:52] Ryan Webster: But when we're talking about this topic of, the astronomical rent growth, and we're invested in around Tampa where it saw last year in excess of. 32% rent growth. Wow. Which is just insane compared to, historically what we're used to seeing. Right. So we've had, a number of conversations around, okay, well, where does this end?
[00:05:09] Ryan Webster: What's fueling it. And obviously can't go on forever. But for us, it comes down to, three factors. You have the supply and demand the demand pressure driven by, population growth, which is usually driven by jobs for the most part. Parts of Florida's also driven.
[00:05:23] Ryan Webster: Retirement migration. And then you have supply constraint. Are there barriers to entry of new supplies or availability of land or zoning laws? Convoluted? Is it expensive to build? And the other piece is the affordability component. This comes down to jobs and wages and the diversity of the job market in that area.
[00:05:40] Ryan Webster: And rents will only continue to grow so long as they're affordable. And they, we define affordable as kind of roughly 30%. Of the income is what the annual rent should be. And that's how we qualify, income for all our properties, both on new leases and renewals.
[00:05:57] Sam Wilson: What figure do you guys use when you say 30% of income?
[00:06:01] Sam Wilson: I mean, you have to have an adjusted. Kind of median income for the area. Is that what you're working off of? When you say, Hey, rents are still affordable or what's, what can you give us some insight into how you calculate
[00:06:12] Ryan Webster: that? It depends on where we are in the process at a first glance. We are looking at, median incomes for the census track of that area versus kind of median incomes, our medium rents of the property.
[00:06:22] Ryan Webster: As we get closer to bidding on our property, we'll actually look. Incomes of the tenant base at the property. We'll look at where those tenants are employed. How far is from the property, what the median income of those companies that those tenants work for. And then back into what are rents of the property what are rents of the property post value add or post stabilization?
[00:06:43] Ryan Webster: so we get more granular as the process goes on.
[00:06:46] Sam Wilson: Right, right. What's a high level. You said, I think maybe you did maybe answered this already, but the high level pass is just using the median income for that census tract is your just kind of initial soft
[00:06:56] Ryan Webster: pass at it. Yep. And that's the kind of, okay. Are we gonna dig in or are we not gonna dig in?
[00:07:00] Ryan Webster: And if the census track doesn't really cover the rents at an income ratio that we like, then, we kick it out and onto the next deal.
[00:07:08] Sam Wilson: Right? Right. Tell me about fundamentals. You guys are. Fundamental investors, according to you, what does a fundamental investor, what does that mean to you and how do you guys stick to your
[00:07:20] Ryan Webster: fundamentals?
[00:07:21] Ryan Webster: Yeah. we start. pretty wide and work our way in. So we start with the supply and demand of a market and then dig into really the supply side of the submarket or an area within the submarket. And to make sure that we're investing in a place where you have supply and demand working in your favor, that's gonna support rent growth or rent premium, post value add.
[00:07:43] Ryan Webster: And then we do a very detailed comp analysis, especially if we're. Value add of, okay, we're gonna reposition this property. What are, the qualitative pieces of our competitors nearby, what are tenants looking for in a place they live, other than just geography? What amenities they're looking for?
[00:08:01] Ryan Webster: Architecturally, what do the properties look like that are proving the premiums that we want approved and then we look at our position in the Comp. set versus where we wanna be in the comp. And we like to represent an affordable option to the tier that we're at. So we really like this, what we call a minus space. So we're in newer properties, preferably nineties to mid two thousands built for a couple reasons with my background in construction I've done a number of renovation projects and in this environment, it's very hard to accurate.
[00:08:30] Ryan Webster: Project how a big construction project is going to go. It's harder to get materials. Labor costs are going up, getting contracts to show up is difficult. And there's always some part of the scope of work that's a surprise. You can't see inside the walls, you can't see behind cabinets. There's gonna be something in the budget.
[00:08:46] Ryan Webster: That's gotta get pulled outta contingency. So the newer properties are generally well amenitized. The exteriors look good so we can come in and really focus on cosmetic interior updates. That are easy to do. It's a smaller scope and be able to prove out the same premium throwing less dollars at it.
[00:09:02] Ryan Webster: But the other more important piece is they're located in newer neighborhoods that come with an easier to work with tenant demographic. They're typically higher incomes, nicer communities places where people want to live and work.
[00:09:14] Sam Wilson: That makes a lot of sense. Yeah. And I love kind of the insight you gave there on the rehab risk and constraints that, a lot of people are running into.
[00:09:23] Sam Wilson: Certainly. Certainly right now it is a shifting environment we're in, I mean, I'm hearing from various parts of the country. This is a daily podcast. We get talk to a lot of people and we're even here in, on, on some fronts that there's kind of a soften. Of prices in the, in, in some particular markets.
[00:09:39] Sam Wilson: And there's a softening where there people are having, brokers now reach out to them with, Hey, I've got a multifamily asset for sale, would you like to put an offer in on it? Are you guys seeing that where you are and let's start with that question. I probably have several on this
[00:09:50] Ryan Webster: for.
[00:09:51] Ryan Webster: Yeah, no, absolutely. And I think it's gonna be market by market asset by asset, but we've seen such aggressive cap rate compression over the last 24 months, that, that can't sustainably continue. And you look at rising interest rates, lowering your current cash on cash yield and lowering your leverage.
[00:10:09] Ryan Webster: And as far as value, add projects go, you gotta look at if. Banking on a refinance. How do you size that refinance in the future? When interest rates are going up? Because we spent an environment in the last 24 months, everything was LTV constrained and asset prices continue to go up and you could just peg, 75% LTV debt.
[00:10:26] Ryan Webster: But that's because. Debt was so cheap. Right. Now we're, DSCR constrained you, you don't have the income to cover the debt service anymore. So if you're trying to back into a refinance you may be looking at 50% leverage to your future value, which doesn't pencil in a lot of deals. Right?
[00:10:42] Sam Wilson: So do you guys even underwrite a
[00:10:43] Ryan Webster: refinance?
[00:10:44] Ryan Webster: Currently we don't and we're not even doing variable rate debt anymore. We did, while debt was cheap, we bought very aggressive interest rate caps, cuz those were also cheap at the time. and are very much in the money. We just refinanced one of our properties to get into fixed rate debt sold the remaining term on our interest rate cap for about $700,000.
[00:11:04] Ryan Webster: Which we paid 85,000 for when we purchased it 12 months ago.
[00:11:08] Sam Wilson: I don't even understand what you just said to me. How do you sell an interest rate cap?
[00:11:12] Ryan Webster: So yeah interest rate caps are they're derivative the bank, offers them as a derivative product and they agree to. Cover your debt surface coverage above a threshold that you set.
[00:11:21] Ryan Webster: And we bought 50 basis points caps on all our variable rate debt and sofa is now well above 50 basis points. So the value of those caps is a lot higher now.
[00:11:31] Sam Wilson: Right. And so who do you sell those to?
[00:11:33] Ryan Webster: Back to the same people we bought 'em from generally you can go to Chatham financial, who brokers a lot of these deals.
[00:11:39] Ryan Webster: And we purchased that through them and went back to them when we refinanced it. Hey, we're going to fix rate debt. We don't need the cap anymore. Can you sell this back to the market?
[00:11:46] Sam Wilson: Wow. And so then the market said, Hey, your $85,000 interest rate cap is now worth $700,000 and you got to resell it.
[00:11:54] Sam Wilson: Yep. That is fantastic. I'm sure your limited partners really enjoyed that. Tell me about that on the capital raise front. That's one of the things that a lot of people, getting started struggle with, or, have. just varying methods for how they are raising capital. What are you guys seeing on the capital raise side of things?
[00:12:12] Sam Wilson: What are what's what's the investor sentiment that you feel like you're getting from from your investor
[00:12:16] Ryan Webster: base? Yeah, we've got a lot of investors. And I think for them, it comes down to, am I participating in the market or am I not at this point? And we have a lot of investors looking at okay.
[00:12:26] Ryan Webster: What else do I do with my money? The stock market's very volatile as of late bond yields. Aren't that great. So if I am a participating investor in the market, where do I wanna be? And a lot of them still want to be in real estate. It is, a low risk investment historically has been a great, instrument for preservation of capital.
[00:12:46] Ryan Webster: Right.
[00:12:47] Ryan Webster: Yeah. Yeah, absolutely. Absolutely. I love that. Very cool. So some of the things I hear that you guys are doing, you are not underwriting refinances. Obviously you were wise in buying your interest rate caps. When you guys closed on your deals what else are you guys doing right now to stay competitive in the market and continue to acquire assets?
[00:13:06] Ryan Webster: Yeah. we're not focusing so much on being competitive. Again our focus from the GetGo has been, really looking for quality investments that generate great risk adjusted returns in providing our investors, a great investor experience. So we're actively bidding. On a lot of deals a lot more than we had historically cuz there's a lot more deals on the market, a lot less of a pencil.
[00:13:26] Ryan Webster: Right. But lately it's been more of an exercise of bidding and staying in touch with the brokers and keeping our finger on the pulse of the market. As you see, asset revaluations in, in some of these markets and as the debt market continues to shift. But we're offering at, the price that makes sense for our business plan.
[00:13:43] Ryan Webster: And we've historically. Lost a lot more deals than we've won and, expect to continue that trend into the future.
[00:13:49] Sam Wilson: right, right. I love it. I love the candor there. Tell me about the investor experience. I know we talked about this early on, was that when you guys formed your company, the investor experience was part of, kind of your.
[00:14:01] Sam Wilson: Framework for how you wanted to run it. What does that mean? Yeah.
[00:14:05] Ryan Webster: Absolutely. Our investors, they're limited partners and they should be treated as partners. And, as, passive investors, ourselves, myself, my partner, we've had, experiences where there's, big lacks of communication between, the general partners and sponsors and the limited partner investors.
[00:14:21] Ryan Webster: So when we formed the company, we. We wanna form a company that not only provides great investments for investors, but a great investor experience. So we're very consistent about sending out investor communications the 15th of every month. Distributions are always on time.
[00:14:35] Ryan Webster: Our communications are detailed that we have a full. Financial reporting package every month as well as, tracking key performance metrics of, projections versus performance, and then just being available and responsive to investor questions. If they have a question they're able to utilize, we're getting an answer back to 'em, later that day and hopefully within the hour.
[00:14:54] Ryan Webster: Right? Yeah.
[00:14:55] Sam Wilson: And that's, amazing to me as well. I'm with you in that I am alluded partner. On a lot of different deals with a lot of different S around the country. And I think that's one of the things, as people grow and scale their companies, I think it's a great place to start. Maybe if you're not in, in commercial real estate right now, but you're looking to get, it's a great, if you have the capital go be a limited partner, I think you'll learn so much, much, like you're saying there, Ryan, where you get to experience other sponsors communication styles, get to see what they do.
[00:15:22] Sam Wilson: You get a front row seat to the opportunities. But also at the same time, kind of learn how you wanna do it as well. And I love how you guys have implemented that there in your business and said, look, we don't love this experience. We're gonna make it the way we want it and make the investor experience amazing.
[00:15:37] Sam Wilson: So, yeah, that's that's very, very cool. Are there any other thoughts you have around the economy around how you guys are structuring deals around how you guys are really where you see the multifamily business going here before we sign off? Yeah, absolutely.
[00:15:53] Ryan Webster: Long term, we're pretty bullish on multi-family.
[00:15:55] Ryan Webster: I don't think there's any indication that demand is going to go anywhere. Structuring a capital stack that makes sense. And making sure that your debt term exceeds your business plan that you can get into fixed rate debt or the business fund requires it really makes sense of variable rate debt and have plenty of contingency there.
[00:16:13] Ryan Webster: But long term, I think it's going to perform people will always need housing. Right,
[00:16:18] Sam Wilson: right. Nope. I love it. I think you're absolutely right. Ryan. If our listeners wanna get in touch with you and learn more about you, what is the best way to do that?
[00:16:25] Ryan Webster: Yeah, the best place is to go to our website at, equity yield group.com.
[00:16:29] Ryan Webster: There, you can sign up for monthly newsletter and kind of stay up to date with what we're doing and what we're seeing in the market. You can also subscribe to our investor network. You can. Some of our recorded podcast episodes like this. There's a bunch of content up there available for anybody looking to learn more about multifamily real estate investing.
[00:16:46] Sam Wilson: Awesome. Ryan, thank you for your time today. Certainly appreciate it. Yeah. Thank you.
