Podcast Episode 111 Transcript

Episode 111: Best Of Kent Ritter

Are you ready to bring your real estate game to the next level? My name is James Prendamano. I'm the CEO and founder of Prereal. And over the past 25 years I've closed over a billion dollars in transactional real estate. Each week I'm meeting with outstanding and investors, highperforming individuals and visionaries operating in the real estate space. These are the people that are actually out there in the real estate game right now getting it done. This podcast aims at bringing anyone's game to the next level. This is the prereal podcast. Welcome everyone to the Prereal podcast. We're joined today by Kent Ritter. So Kent is the founder of Hudson Investing multifamily private equity firm, has had a tremendous amount of success, an amazing story. We're going to talk about the why and how he got to that kind of moment where he really decided it was time to make a change and some of the unbelievable projects Ken worked on and some opportunities that are out in the market today.

Ken, thank you so much for joining us. Yeah James, thanks for having me on the show. Excited to be here. Yeah, absolute pleasure. Anytime we can get you're young, but you've got a heck of a resume and kind of a grizzled vet that understands how to do these. No, you look outstanding, I got to tell you. I'm a bit jealous. But your resume is outstanding. And Kent, there's a lot of folks out there today in the market that are syndicators, but there's a lot to be wary of, right? So anytime we can have a pro on, we're really excited. Really. I started out just by finding somebody that was close to me, a family friend who was doing some real estate investing himself and saying, okay, hey, what's this all about? And so I really started out doing what he was doing, which was buying notes and really being the debt and building out a note portfolio and that was cool. I did four or five of those before. One of those about a year later, house got paid off and you're on the statement, the closing statement because you're getting your loan paid back. And I'm like, wow, this guy just doubled his money. This house doubled in value in one year and that's cool, I'm getting my money paid back. That's all well and good, but this guy doubled his money. I was like, I need to start buying assets instead of holding the debt. And so that really turned me on to starting to do some fix and flip. Started to do some single family rentals, build out a single family duplex portfolio with a couple of buddies from college. We ended up with about eleven units. We're doing three or four flips a year and that was fine too. But that's hard work. I don't know if you guys have flipping is a full time job. So none of it was scalable enough, right? We were making good money, but it wasn't scalable enough for me. That was what I was trying to bring to really that group. One of my friends had been flipping houses for 15 years, since we had graduated college, and he was doing three or four years and self funding, and I was like, hey, let me pump some capital into this. Let's scale it. And we just figured it was harder than we thought to scale. So I was like, okay, well, that was all well and good, and at that time, I was really learning about apartments, though. I was really learning about apartments and multifamily and really getting engrossed in that and really met a couple of mentors that have my eyes open, like, wow, this is how you scale, this is how you go buy 100 units at one time. And that just made all the sense in the world to me, because that was one of the big things that I learned. Being a manager consultant was, as a business, you've got to be growing, and there's safety in scale. And so the bigger you can get oftentimes if you do things right, there's safety in that size. That's what I saw. We got a scale. We got a scale. And so that's what really brought me to apartments. And then I learned about syndications, and then I started investing with other people, and instead of doing the work myself, I started investing with others and said, wow, I'm getting not as good as flipping a house, but it's a hell of a lot less work to just hand somebody $100,000 and have them give you 15, 20% back, right? Yes. And so I did that until really the end of 2019. So it was about a three and a half, almost four year period where I was just doing kind of figuring my way and learning about syndications and investing with other people. And until 2019, when I had been through, I've listened all the podcasts, read all the books, been through the courses, found a couple of great mentors who could help me avoid some pretty large potholes. And I launched Hudson investing because I felt comfortable enough to actually bring other people's money on, because up to that point, I'd only invested in my own capital, and so I didn't want to ever lose anybody else's money, so I wanted to be really sure I knew what the hell I was doing. So in 2019, we launched that at the end, I think it was October of 2019, we acquired our first property to property portfolio with a couple of partners down in Atlanta. It's 250 units, and that was the first syndication, and that was the first time I raised capital from others and really ran the deal. And then from there, now, you kind of fast forward, and we're on our 11th acquisition right now.

Okay, so let's talk deals. You're now taking these deals down. You've got the infrastructure, you've got a pathway, you have access to investors. Kent, when you're looking to identify these deals, are you looking in one particular geographic location or what does that process look like? Yeah, good question. So we focus throughout the Midwest. Primarily, it's Indiana, Ohio and Kentucky. And then as we grow, we're expanding out into geographies. But I really started out with taking about a three hour radius around Indianapolis, where I live, and saying, okay, this is going to be where I focus. Really staying out of Illinois, just because Illinois is not a business friendly state, but all those other states were up for grabs. And so that's how I started networking and started building relationships in those cities. Right now we have properties in Indiana or in Indianapolis, oval, Kentucky, lexington, Kentucky. Cincinnati, Ohio and Dayton, Ohio. And we started just kind of growing out from Indianapolis and growing into those other major Midwestern cities. And so when we're looking for deals, to me it starts with that market, right? It starts with what are the markets that we want to be in? And we like to be in markets that are really similar to Indianapolis, meaning they have a lot of job diversity. There's good job growth. There's non cyclical jobs. Like the things I love about Indianapolis or Youville or Lexington, actually, all those cities I just mentioned, cincinnati, Dayton, they all have major universities. They all have good health care basis, right? Higher ed. You think about healthcare, you think about government, you think about military. Like, those are non cyclical jobs. Those are jobs that don't go up and down as we have recessions historically. And so it's a solid base, right? Because nothing moves more closely with rent growth than job growth. So you really have to look, where are the jobs going and where is there a good job base? And you just don't want to be in a town that everybody's employed by one company right now, one company goes out. So you need job diversity, right. You want a lot of different employers. So it really starts there. And then as we drill down as we drill down into neighborhoods and submarkets, we're really looking at what are the incomes in the area, what are home values, what is crime, how are the schools? Those are four things that we really hone in on. I've actually over the years, I've grown a list. The list is something like 35 now, like 35 kwh key things I look for in any deal. And it's all those things, but it's just over time, you realize you're like, wow, maybe that was more important than I thought it was going to be. I need to look at that next time. One thing that we've realized is extremely important is proximity to an interstate. And it's because if you're close to an interstate, it just expands how far you can get in a 20 minutes period, how far you can get to a job right? Or to school or to anything. So we love properties that are close to interstate anyway, things like that. So that's how we kind of dig into the neighborhood, and then only after you're like, yes, it's a market I want to be in. Yes, it's a neighborhood I want to be in. Are we looking at the property and say, okay, this is a property that we want to own? And then we're starting to look at criteria such as the vintage of the property, 99% of what we buy is 1980s and newer, looking at the construction, looking at the roof, and kind of digging in and then looking especially at one thing I neglected to mention, hugely important, the comps in the area, right? Because if you're going to go in and you're going to add value, you're going to improve the property, well, what's the point in doing it if you can't increase the income on the property or if you can't raise the rent? That's kind of why we're in this and why our investors are in this is for a return. And if you're already top of the market and rents aren't growing, then there's really no reason to dig any further. So you got to look when you look at the submarket, you got to look at the rent comps and say, where do you sit? And I think an extremely important thing to look at is, where is rent compared to the income? And that's why we look so closely at incomes. We look at a rent to income ratio, and we don't want that rent to income ratio to be above 30% after we come in and raise rents through our renovations, because we know above that that's when people become rent burdened and it becomes difficult to pay that much rent. We like markets. The Midwest is beautiful because in many markets in the midwest, the rent to income ratio for folks is in the 20s, maybe low 20s. And so we know that it's relatively affordable. And everybody's talking about how crazy rents are growing right now. But in the midwest, relatively speaking, compared to the west coast, east coast, south, rents are still relatively affordable, and there's a lot of room they could still grow where people can still pay and still have a decent rental income ratio. So, folks, that's what a real syndicator sounds like. So many of the metrics that he's touched on, they're just absent from so many of these decks that I'm seeing in the last maybe six to eight months, man, the market has heated up to such a point that these syndicators are buying payments. They're not buying quality real estate. Here's the difference to me, because I speak to a lot of investors. The difference between the season investors and the new investors are the new investors are concerned about the IRR and the cash on cash and all that stuff, but particularly the IRR, right? Like a new investor will invest in 18 versus 16 just because it's an 18, right. Irregardless of where it's at or whatever, a seasoned investor, when they ask questions, it's all about the downside. What type of debt do you have? Do you have a rate cap? What's your debt service coverage? How much leverage? Right? It's all about the downside and you can see the difference in the sophistication there and just the type of questions. And so I think as investors you guys should be focused on the downside because there's a Warren Buffett quote, right, which is like first rule, don't lose your money. That's the most important thing. Over the long term, real estate will continue to appreciate it, always has. So appreciation will come, but just focus. You got to focus on the downside. Focus on cash flows, really hone in on people's assumptions. Rent expense growth assumptions are extremely powerful because they're compounding, right? So I say, okay, it's going to grow 4% and then another four and another four and another four. Each time it's compounding growth. That's why compounding interest is so powerful. But it's kind of in the other way.

So I'd say the most important thing on deals is just challenge assumptions. And even though I realistically think cap rates will stay flat, we never underwrite that way, right. We're always building in a cushion because we want to underwrite to the downside. If what I actually think is going to happen, happens, then we just look like heroes. It's great. Absolutely. So I think what we're going to see here as we're looking through our murky crystal balls, right? I think it's actually going to get to a point, Kent, where some of these small to midcap fund banks that put debt out in places, now primary markets became secondary, secondary became tertiary and those tertiaries became primaries. What happened here, folks, that's what I was referencing, buying payments, not looking at that long list of metrics that you have to be looking at before you place your money. I fear that the big banks are starting to make some moves that are going to suck that capital out of those smaller and mid caps. Banks are going to fall out of compliance and there's going to be a bit of a debt crisis where when it comes time to refinance with some of these new speculators don't understand, is there is a time when there's no capital available from institutions. Right? I think you're making a great point. The other thing that I really look for when I'm evaluating deals and something that we don't do is we're never underwriting the refinance in a way that we're never going to do a deal if it doesn't work, if you don't refinance, because a refinance, like you said, is not guaranteed. And there have been times in this world where you can't go and you can't get credit. And so I think the deal has to stand on its own. And then if you refinance, everything should just look better. It shouldn't be predicated on a refinance.

Yeah, so look, Kent, you've dropped some really genuinely amazing knowledge today. I'm so appreciative. Folks, you've got to check out Ritter on real estate. He's got a tremendous podcast packed with great guests, amazing, valuable information. Where else can folks find you, Kent? Yeah, you can reach me at my website, Kentritter.com. That's the easiest place to find me. We've got a weekly blog. You can access the podcast there if you'd like to. We've got some new investor terminology, FAQs trying to help people just educate themselves. You can also check out current deals that we have going on, if that's something that interests you as well. Yeah, absolutely, folks. Definitely check it out. Ken is the real deal. It's been an absolute pleasure, Kent. Thank you so much for the time today. Yeah, absolutely. Thanks, James. Had a blast. Yeah, me too. As always, everyone, please stay safe.