Rocket Your Dollar Ep. 46: Understanding REITs with Upside Avenue

Upside Avenue CIO, Chi Hathiramanis, goes in-depth into REITs.

Transcript:

Thomas Young:

Hi everyone. Welcome back to Rocket Your Dollar podcast. Today, I'm joined by Chi Hathiramani from Upside Avenue. Chi serves as the firm's Chief Investment Officer and is responsible for basically executing the Upside Avenue's growth strategy. And we're going to get into what Upside Avenue does, what their investment thesis is, all these different, cool things. But Chi really specializes in identifying and acquiring multi-family investments throughout the United States Sunbelt region for the parent firms, institutional, family office, and high net worth clients. Chi also leads the Institutional Equity and Debt Capital Raising activities and provide strategic oversight of the company's overall portfolio compensation and performance. So if you want to talk about anything Upside Avenue investing, Chi's the guy to talk to.

Chi, thank you so much for being here.

Chi Hathiramani:

Definitely, Thomas. Thanks so much for having us.

Thomas Young:

Absolutely. So before we jump in, we've got a bunch of topics to cover, I want to really hear a little bit about you and how you got to be the CIO of Upside Avenue. And maybe tell us a little bit about exactly what Upside Avenue is and does.

Chi Hathiramani:

Yeah, absolutely. Definitely. So yeah, personally, I mean, it's all about blessing and grace that gets us here and the great people and teams that we work with that have allowed me to do what I do today and continue to. I'm originally from the Philippines. I came to the States in 2002, so looking for that American dream, and it was amazing. It's been a great run over the last 15 years, I've had an opportunity to participate in about $2 billion of transactions across most of the office, retail, multifamily, a little bit of industrial as well, but gaining that experience has been a fantastic opportunity that I would say is dedicated to all the teams and folks that we've had, I've had the blessing of working with.

As far as our company, I'll talk about the parent company, and then I'll talk about Upside Avenue real quick. So the parent company's Casoro Group, it's an affiliate of Upside Avenue and the company has been around for 18 years, specializes in value-add multifamily, is basically a vertically integrated company with property management, asset management, construction management, general contracting, utility building, green improvements, sort of the whole ecosystem that you'd be looking for to create value for residents and make their lives better.

As a company, we hold high to a purpose of creating better homes for better lives and that was part of the impetus of actually founding Upside Avenue back in 2017, was to give access to individual investors that could not invest large amounts of dollars into individual real estate properties, access to the entire portfolio of our investments and more. So Upside Avenue is really that vehicle today that it's a REIT, a real estate investment trust, that allows retail investors, people that are saving money for retirement via, call it, 401(k)s, SD IRAs, and all these other avenues to effectively get exposure to great real estate projects that are doing well for the communities, for the residents, and for themselves as well. So that's a little bit about us.

Thomas Young:

Yeah. And I love that. And one of the things that's been really encouraging for me just in this Rocket Dollar journey is seeing all these different firms like yours that are really giving access to everyday people, to some of these investments that might otherwise be really difficult to get into, like multi-family. There's not a lot of people that can go out, just buy a property, and then there's even fewer that want to do it and can manage it or pay for it and deal with it. So I love what you guys are doing and specifically Upside Avenue giving that access to people. But you mentioned that you guys were structured as a REIT. Tell me a little bit, for someone that might not be super familiar with what a REIT is, what's the difference, the big difference between investing in a REIT or a syndicate or a direct deal?

Chi Hathiramani:

Yeah. Sure, sure. Maybe understanding what a REIT is, is a good starting point. So a REIT is actually a special vehicle created, it earns a special qualification by distributing 90% or more of its taxable income annually to its shareholders. The earnings, what that does is it gives you the benefit of the earnings are not taxed at the company level, but rather at the investor level. So this avoids double taxation, like you would if you were to invest in other public traded corporations on the stock exchange. There's obviously tax benefits to a lot of them, but in particular, a REIT is a very strong vehicle from a tax management perspective. It avoids double taxation and really maximizes the recurrence to you and then you can obviously bear the taxes based on your income profile.

Now separately, and I'm not trying to give tax advice here, but also just to share that the Tax Cuts and Jobs Act of 2017 has actually added special tax deductions for income that comes from REIT dividends. So this continues to be an ever-evolving vehicle that's very strong. Now, another thing structurally about the REIT, how it's different from a direct deal is, when you buy into a REIT, when you own a REIT, you're actually buying into a fund that owns a portfolio of properties, as opposed to when you're investing in an individual deal, you're buying into a share of a single company that owns a single deal, or in some cases, a small portfolio of deals, but the real difference is diversification versus concentration. That's the first part.

The second thing about REITs versus direct deals is with a direct deal, you're more focused on sort of active decision making and using your expertise to decide on what you're going to invest in. When it comes to a REIT, it's actually more of a passive investment. It's beneficial, most beneficial people who are looking for retirement accounts or long-term wealth generation in a passive manner, it's really about letting the professionals do what they do best. And so you get to sit there and watch your money grow while people who really know the business, get to do what they do.

Another different between REITs and direct deals is liquidity. REITs tend to be more liquid, generally speaking than direct deals, because with direct deals for example, if you're looking at a value-add deal here in [inaudible 00:06:25], Texas, generally the value-add play tends to be, you go in, you fix it, and then you sell it. And that usually takes anywhere from two to five years. Sometimes it could be a little longer, but generally in that range. Versus a REIT, you can jump into a REIT and many REITs are different. And using our REIT as an example, we have a one-year investment minimum investment period, but after that, you're sort of free to move about the cap. If you want to exit, you can exit after year one. So there's a bit more liquidity on that front.

Now that said, even though there is more liquidity for a REIT, a REIT is designed as a longterm value creation vehicle. There's actually a study, a fascinating 90 year study out there that shows investors who stay invested in the markets over the long-term need two and a half times the cumulative return that investors who basically tried to time the market in and out made. So really keeping your money, the REIT is designed as a longterm open-ended vehicle to really keep your money in there and grow all the way through to retirement. Does that help?

Thomas Young:

Yeah, absolutely. And I think that as more and more people get educated about even just in the markets and stuff, the days of trying to time everything are going away. And I love what you said about letting the professionals do their job, because even if you go to a real estate seminar at its very basic level, the first piece of advice you've ever given when doing a deal is, partner with a professional. And investing in a REIT is doing that from day one, right? So it's really a good way to get started in real estate. I think, especially if you don't have the time, a lot of us would need to go swing hammers and go do a ton of due diligence. But speaking about due diligence, what are some of the things that you should look for when evaluating a REIT or evaluating basically any real estate? I mean, what are some of the things you look for?

Chi Hathiramani:

Sure, sure. And maybe, yeah, for a REIT, there's actually quite a few things that you really want to be focused on. There's a variety of REITs out there actually, if you just look at the REIT universe, they're in every segment of society focusing on almost every industry you could think of. So really, the first thing is to, as an investor, to really think about your focus area, what industries or asset classes are you interested in? There's REITs that focus on office, multi-family, retail, industrial. Those are just the four major food groups. Within them, there's all sorts of subgroups. Like for us, it's conventional multi-family, as well as senior housing and student housing. So there's all these different subgroups that you might be interested in looking at. There are also REITs that invest in equity and REITs that invest in debt. In our case, we're a REIT that invests in equity. So just from a focus area perspective, that's one aspect.

Another one is strategy. What's the strategy or risk return profile that the REIT is targeting? There are REITs that focus on core, core plus, there are REITs that focus on value add, there are REITs that focus on development, all of these have different risk return profiles and it really depends on what you're looking to accomplish as an investor. Is it income? Is it growth? All those things play into that idea of strategy.

The next one is the sponsor itself and the management team's experience. There's so much to be said about the level of the management team's experience and their ability to work together and track record working together to deliver real returns and real benefits to all the stakeholders involved. So that's one key aspect that you're looking for. So when we look at an investment just ourselves, we're looking at two things, generally, we're looking at the deal and we're looking at the management team. And in our case, when we're doing our own deals, obviously we know our own management team with an 18 year track record. So that helps us. The other side is-

Thomas Young:

Yeah...

Chi Hathiramani:

Sorry. Go ahead.

Thomas Young:

Sorry. I was going to ask you what the percentage split between the deals that y'all do with another team with management in place versus the deals that you guys do on your own with your team?

Chi Hathiramani:

Yeah, definitely. So early on we did do, I think, a deal or two outside our management team, and then we found out just a lot of vertically integrated operators are vertically integrated for the reason that they believe that they have the secret sauce and have the ability to really generate outsized returns. We do believe the same as well. And so we've actually brought, for the most part, all of our investments these days are actually just in-house. They're related. However, as sort of the rediversifies, continues to diversify, we on the [inaudible 00:10:32] side, on vertically integrated side, don't actually currently operate senior housing or student housing. So that's a great avenue for the REIT to continue to diversify as those markets grow and become more mainstream.

Thomas Young:

Yeah, no, I really like that. And so talking about retirement housing or student housing, yeah, I'm curious as to just some of the projects that you guys have done recently, maybe in the last couple of years. Is it high end luxury multi-family? Is it more maybe government house? What's kind of y'all's sweet spot in terms of the kind of properties y'all are looking for?

Chi Hathiramani:

Definitely, definitely. So our sweet spot has historically been and continues to be workforce housing and that's a segment that lies, that's the vast majority of the US population. When you think about it by income, by demographics, that profile sits sort of in that middle. And what that translates to in terms of real estate is mostly we're looking at B, B minus product that can be improved and create a better resident experience by converting it to a B plus, A minus product.

And so when we look for real estate, we're looking for both that opportunity operationally from a capital standpoint as well, how we can put in money to make the property look nicer and function better. And generally from a vintage standpoint, if you're just talking about, how old is this product? Historically, we used to look for that 70s and 80s product, but more so as of late in the last few years, we've really transitioned to 80s and now pushing 90s and more recently even 2000s. We own over 1,200 units today that are 2000 or newer. So it's definitely a move in that direction, but continues to be workforce housing that caters to the broadest segment of the American population.

Thomas Young:

Yeah. That makes a lot of sense. I mean, if we just look at that demographic specifically, you might have a lot of long-term renters, maybe a lot of newer entrants into the workforce, passed, when they graduate college or high school and are looking for an apartment. So I think that's a really good sweet spot and focused primarily in the Sunbelt region?

Chi Hathiramani:

That's correct. Yeah. Today we primarily focus in Texas, which is actually the fastest growing labor market in the United States, has been and continues to be, I think between Texas and Florida. So having a very strong hold in Texas, we've got economies of scale here in this market and continue to leverage that economies of scale to drive the best opportunities for investors.

Thomas Young:

Yeah, absolutely. I'm in Austin too and I think that we're continuing to explode. I mean, we just got the news that Elon Musk moved here, but even just driving around, I'm seeing so many California, New York, and Illinois license plates, it's crazy. So I don't think Texas is going down anytime soon.

Chi Hathiramani:

Absolutely. I saw a statistic, I think single family homes appear to be up almost 10%, if not even more than that, in Austin, just with [inaudible 00:13:16] demand over the last, call it, nine months. It's amazing.

Thomas Young:

Yeah, it is. I mean the amount... I think rent's beat down a little bit in downtown Austin, specifically, but everything else it's kind of the flight to the suburbs right now, I think for a lot of people, but at the same time, it's just because of the situation we're in. I think as soon as we're done with COVID, hopefully in the next 12 to 16 months until we're out out, I think it's going to go back and it's going to explode and people are going to be wanting to move back into these cities and back into these apartments. And I think that it's a great opportunity to continue investing in Texas as well as elsewhere in the country. I mean, I really think that we're in a good spot in terms of investing. There's other things we need to work on too, but...

Chi Hathiramani:

Right. And you bring up such a good point, the flight to the suburbs, and it has been such an interesting trend. And we are actually, as a firm, we tend to focus more on suburban garden, multi-family because this trend has been occurring for nearly a decade now of this movement. And with COVID, the entire world just accelerated into the digital age. We think we've probably aged from a digital perspective by several years or have moved in. There's so much innovation and disruption on the horizon right now from technology that's coming, we ourselves are asking, "How many people are actually going to be going back to the office five days a week? Or what does the new normal look like?" And all of that factors into your outlook for the future and therefore the investments that you look for.

Thomas Young:

Absolutely. I know for us personally at Rocket Dollar, I mean we basically went from one day to the next to being in an office to, I haven't seen some of my colleagues in person since March, but we talk every day and I'm one of the flights to the suburbs. I was living pretty close to downtown, a mile, and now I'm 30 minutes away, yet I feel as connected as I did to my colleagues before and probably more productive. So it is amazing how things have changed and how fast it's gone. I mean, we're recording this via Zoom and just what's happened with them. I mean, Zoom was a very niche business product a year, and now it's synonymous with video calling.

Chi Hathiramani:

So true.

Thomas Young:

So, jumping back into REITs, before we go down the digital rabbit hole. Who is y'all's typical investor at Upside Avenue? Is it... Well, I'll let you answer it before I-

Chi Hathiramani:

Definitely, definitely, yes. It's a combination of folks, right? It's folks really generally who are thinking about their financial, long-term financial future and are looking for passive investments. They generally tend to be a few years, they've saved some money, they've got some retirement money that has been stashed away, and they're looking to grow. It could be in their 401(k), it could be their SDIRA, it could be just cash in their savings account, and they're looking for a place to actually put it for long-term growth. So they're saying, "I want my money to compound and I want that power."

And one interesting thing about REITs actually, or our REIT in particular, as opposed to a direct deal where the cash that you get, so we call it the dividend for a REIT, versus the cash on cash for a direct deal. When it comes to a REIT, you can actually have an automatic reinvestment of your dividend. So it continues to compound into perpetuity, which is a very powerful tool. So we tend to have investors that are quite interested in compounded growth of their investments over the long run, invest with us. And sometimes it comes in with the minimum $2,000 check, I believe is our minimum today. But at other times, it comes in and $100,000, couple hundred thousand dollars, we've got investors over half a million dollars invested in our REIT. So all of it is with the view of longterm financial independence and also just asset portfolio growth in the long run.

Thomas Young:

Yeah, absolutely. And another follow-up question is, you mentioned cash in a savings account, you mentioned self-directed IRAs, what percentage of your investors are actually using a retirement account to invest with you guys? Because obviously at Rocket Dollar, that's kind of what we're about. I'm curious to know what your mix is.

Chi Hathiramani:

Yeah, that's a great question. And I don't have the answer as to what the specific percentage is, but I do know that we have a significant number. I'm not quite sure if it's 50%, but a significant number of our investors are actually investing through a retirement vehicle.

Thomas Young:

Okay. Yeah. So I guess what I'm getting at is, it's easy to do and totally not a prohibited transaction and we were actually talking about, before we started recording, is that when you look at a REIT versus a direct deal, owning a property outright, instead of a retirement account, is allowable. You can absolutely do it and you can collect rent and it can go into your retirement account, but there's also opportunities to potentially make mistakes in terms of maybe putting a dollar out of line for doing something to the property that you're not allowed to do.

And so we were talking about how a REIT can be both a great way to have a lot of diversification if you don't have the funds to go out and buy 15 different properties and be diversified that way and investment in a REIT, whether... That was a follow-up question I also had was your minimums, it's $2,000 up to, you said half a million. I mean, this is a great way for that money to work over a ton of properties with a ton of doors. So if one tenant doesn't pay their rent, it doesn't affect you really.

Chi Hathiramani:

Right. Right. That's a fantastic way of putting it. In the REIT today, we're exposed to thousands of units. So it's a very well-diversified portfolio, not only in terms of just the fact that there's a number of units, but even geographically. We're in all four major markets in Texas and with different age groups and vintages of our assets that charge different rental levels, you're diversified across income groups as well.

One of the really interesting things we saw with COVID this year is for the first time, it impacted a very different segment of society than historically. And we were quite insulated in this COVID environment. Our rents and collections have actually been higher than the pre-COVID environment in this post-COVID environment specifically because of all of the diversification we've had in the REIT's portfolio. So it's been a really positive, it's been a great thing to see the power of diversification in your portfolio in a downturn. It's sent a [inaudible 00:19:13] message. Yeah.

Thomas Young:

Absolutely. I mean, that's something that we preach and it's on our website, this concept of the 21st century diversification where, it used to be that being diversified was having a stock mix of 60 stocks, 40 bonds, kind of straightforward, easy. But today, with the opportunities that are out there for retail investors, individual investors to invest in places like Upside Avenue and there's a ton of asset classes out there that people can invest in, from their laptop really, from their computer or their phone. But being diversified is not just having a little bit of real estate, but it's actually being diversified within the asset class [inaudible 00:19:50] and this is a great way to do it.

Chi Hathiramani:

Yep. Yep. It's fantastic. And we say now, money is no longer a real thing. It's no longer tangible. It's now an idea. It's a digital idea and having the best ideas and having the best execution on those ideas tends to generate a very strong return. And so that's what we're focused on, right? Is having the best ideas, knowing where to invest, and then having the best team in place to act on those value propositions, those value-add strategies, particularly has done very well.

Thomas Young:

Absolutely. And I think that's a great segue to speaking of ideas and speaking of investment, this is like, what are you guys looking at for next year? We're recording in December of 2020. So what's on the horizon for the next, call it, 12 to 18 months for you guys?

Chi Hathiramani:

Yeah. So we are value investors by nature, and so we're focusing on basically leveraging where we are in the business cycle, which right now it's a focus on low basis, going in at the best pricing that we can for assets, which is very key component of doing well. And then margin of safety in our underwriting. So those are some of the key. We're also looking at higher quality assets in those bulletproof locations as longer-term investments. We think that coupling great assets with a longer hold period is going to do very well over the next 10 years.

The truth is value added, the idea of value add going in, upgrading units, upgrading the property, and then just popping rents, that concept has extended a little bit just in light of the macro situation right now. So the strategy of just finding great assets, holding them longer, and value adding them at the appropriate time has gained more weight.

We're also looking for distressed opportunities. The markets, in the post-COVID environment, multi-family and industrial have done very, very well. I mean, I'd include self storage as well. These segments have done fantastic in the post-COVID environment, but we're on the hunt for opportunities, particularly in the multifamily space. And if and when we do find opportunistic investments with a great basis and a great upside story, we'll make those investments as well. That's what the next, I'd say probably 12 months looks like for us.

Thomas Young:

Yeah. Fantastic. And I'm excited to continue. We have a lot of co-marketing things that our team and STM is going to do together, so I'm excited to stay on the pulse of what those things are and share them as they come up. But if someone's listening to this, what's the best way for them to learn more about what you guys are doing? Get in touch with someone on your team or with yourself and maybe begin the due diligence process with you guys and maybe make an investment?

Chi Hathiramani:

Yeah, definitely. The best way is to just hop onto our website, upsideavenue.com, and take a look at what we've got there. We explain REITs. We explain how you invest. We've got a way for you to contact us over there. We've got a lot of educational content that's already there and is coming online in the near future. So I think upsideavenue.com is the best way to start.

Thomas Young:

Fantastic. Chi, I want to thank you for taking the time to be here today and sharing what you guys are working, what your thoughts are on the space, and I hope to stay in touch and continue working with y'all's team. Really appreciate it.

Chi Hathiramani:

Likewise, Thomas. Thank you so much for the opportunity.