Long term Value through defensive real estate investing with Alex Roudi - Episode - 543

After the distressed debt environment went away, we kind of morphed into a savvy, opportunistic investor in real estate. And by real estate, at the beginning, we were looking at and we were doing deals in multifamily, hospitality, in office, industrial, and retail.

Behind every great fortune is a blueprint. This episode reveals how a disciplined approach to vision, scale, and impact can turn bold ideas into thriving investments, and how you can apply the same principles to accelerate your path to freedom. Welcome to Streams to Impact, brought to you by Stude Talker Capital. I'm your host, Dr. Allen. Most professionals I meet are thriving in their careers, but still they're trading their time for money. And too often, their portfolios are exposed to risks that they're not even aware of. And that's why we built a different path. After meeting with more than 750 operators, fewer than 1% make it into our Deal Vault. This system is designed to protect your capital and open doors to opportunity usually reserved for the ultra-wealthy. Because the real danger isn't just bad deals, it's the loss of years of compounding growth You'll never get back without the right infrastructure. So before we begin, I want to share 2 free gifts designed to help you accelerate your journey. The Clarity Timeline gives you a simple framework to see exactly where you are on the path to financial freedom, while the Investor Shield shows you how to safeguard your wealth from hidden risks that most professionals never see coming. You can grab both at go.steettalker.com/gift. Just a brief disclaimer. All information shared on Streams to Impact is for educational purposes only. It is not to be construed as investment, financial, legal, or tax advice. All investments carry risk, and you should not invest if you are not prepared to lose 100% of your investment. Always consult with your legal, accounting, and tax advisor before making any investment. From transitioning an $8,000 investment into a $250 million global enterprise to leading more than $2 billion in real estate transactions, today's guest has mastered the art of scaling with vision and purpose. He built Coverall North America into an international brand, later becoming managing partner of Plug and Play's San Diego, and he holds degrees from Purdue, UNC Berkeley, and Harvard Business School. A longtime member of the Young Presidents Organization and active philanthropist, Alex Rudy brings both entrepreneurial grit and investment insight. Today, Alex Rudy joins us to share his blueprint for engineering wealth and Purpose at Scale. So welcome, Alex. We're happy to have you with us today. Let's go into the show, Alex. And if you— if you've— you have gone from building $250 million global enterprise to leading over $2 billion in real estate transactions. So what was the guiding philosophy that has shaped your approach to scaling both business and wealth.

Thank you very much, Allen, for first of all, for allowing me the opportunity to be on your podcast. Greatly appreciate it. So really, I think at the end of the day, what drives you in life is the makeup of the experiences that probably precedes the upcoming events in your life. And in my case, I had the fortune of getting the top-notch education in engineering at Purdue and then later at UC Berkeley. And following that, I ended up really having to change my plans, my life plans. My life plans were to go back to my birth country, which was in Iran, and to join a family business up there that also included construction. After what happened in that country with respect to the Islamic Revolution, They took everything that we had amongst them. Of course, we were amongst many other people that lost their livelihoods. But in our case, my plans essentially shifted because there were no more— nothing to go back there to. And I was up in the Bay Area in San Francisco following my graduation for my graduate degree from Berkeley. And I ended up working in an engineering company designing nuclear power plants for about 2.5, 3 years, after which, through a series of events, I started my first company that you mentioned. Didn't have any, again, money or capital, and so bootstrapped it. From the beginning to what it became, essentially an organization that had about 4,500 franchise units, about 23,000 customers, and it was in 66 different markets. So we were fortunate that I gained that experience. And through that experience, really, the way that it all came together for me was, I think it was really from a standpoint of I just wanted to get ahead. And for me, the path was more along the side of starting a company, starting a business, which of course is fraught with a lot of risks. And but through being through having certain amount of luck and also having a lot of hard work, you know, you can make things come together. And in my case, that happened. But then once I was able to sell that business to a couple of private equity firms back in 1998, I had the capital, but I was used to having an organization that I had built from scratch around me. And now I was back down to really not having anything of that sort and needed to create again. And so that was— it was not time for me to hang the shingles out the same way and retire. I had 2 young kids and I was, I had just turned 40. So I started looking into different things, investing in early-stage companies, trying many different arenas, some success, some not that successful. And then ultimately, I felt that real estate was really a fantastic, fantastic business to really get into because it provides you with the ability to own hard assets. And by owning hard assets, especially in real estate, you have a lot of tax advantages because you can depreciate the asset over time. And which you still own the asset, but you can deduct that from your— deducting depreciation from your income. You can generate cash flow. And this depreciated book asset would actually increase in value over time. But you also have to be very careful. And so, I started in this in 2004 to the end of 2003 and put together a team to really start looking at investing from a value orientation, buying, buying down more or less distressed debt on real estate, uh, with the, with the look, with the objective of owning the actual real estate. That business actually started taking off, and we, even it was not the heyday of distress, which came later in 2008. It was also— it was a great training ground. It was a great period for us to prove our mettle, if you would. And we established a pretty good track record. Didn't really have any investors at the time until 2008, when We had a big line of credit from Goldman that went away. And then we opened up to investors in 2008, which was now we had a lot of opportunities, but capital was scarce then. And we were fortunate to have a couple of institutions getting attracted to our track record and our team. And they started, you know, they basically became our partners. We started acquiring a number of fantastic assets at really low prices and built a nice portfolio from 2008 to '12 through primarily getting— again, acquiring the debt. After the distressed debt environment went away, we morphed into, if you would, a savvy, opportunistic investor in real estate. And by real estate, at the beginning, we were looking at and we were doing deals in multifamily, in hospitality, in office, industrial, and retail. But then after 2012, we really became focused on multifamily. And the reason for multifamily is housing is, for the most part, very much in demand in almost all markets, all markets that have population growth. And housing being so important in people's lives gets them a huge support from the government through its facilitation of providing the debt resources through Freddie Mac and Fannie Mae and FHA. So, you have all these agencies that are providing you with the debt that is at a very good— actually, I don't want to say cheap, but a very reasonably low price. And that allows this asset class to be as liquid of an asset class as you can get in real estate. And liquidity is always very important because you don't want to just be the one last owner of a property and there's no other potential buyers from you. You'll want to enjoy the fruits of your labor as far as creating A value strategy in buying the right asset in the right market, getting the rents, being able to increase the rents. And at some point, you would then want to harvest all of that because the value keeps going up as your rents go up. And then return those monies to your investors and then go from there to the next. then just keep doing that. Our investor base started with institutions. So we are very much— all of our reporting is very much institutionally oriented. But then we also opened up to private investors and family offices. And we have a great set of investors. But we are always looking to add to our family of partners. And where we are at today, Alan, which is pretty exciting, is we had a good 4 years of period that was opportunistic between 2008 and '12 because of all the dislocation in the market.

Mm-hmm.

Then we got to the crazy heydays of 2021, 2022, and 2023. Where interest rates were super low and people were making extremely optimistic projections of what the future is going to hold, buying things super expensive at very low cap rates, and then assuming that by doing XYZ as far as renovations, it can increase the rents by 20%, 30%, 40%. And then turn around and sell that asset back out again at super low cap rates again. And these were— this obviously all changed when the interest rates just started shooting up. And so that environment created a lot of distress, which we are now seeing coming up through the market. And so we pick our markets Because that's the first thing you want to do. You want to be in the right market, in the right city, in the right community. So we pick that. We work in a number of really strong markets throughout the SMITE states. And we look for economic drivers that can sustain over a long period of time. And for every deal that we acquire, we have a business plan. But the first and foremost is that we want to buy things at the lowest possible pricing. And today, that means at less than replacement cost. Doesn't happen that often that you can buy real estate assets at less than replacement cost. But today, you can do that. You can buy really good assets at less than replacement cost. These are newer assets that are built, you know, from 2000 and later. And we essentially want to buy them. We have a strategy for them. And, you know, looking back, if we go forward 5 years and we look back to what is happening today, between today and next year, I think all the deals that we're going to be making are going to be one of the best deals that we have done. So it's an exciting period to be active in real estate and specifically in multifamily real estate. I'll let you— you want to do all the talking.

Yeah.

Thank you for that information and taking us through the development of your company. And bringing us up to today into the processes you're involved in, uh, and picking markets and purchasing at less than replacement cost. So what markets— you said you— what markets are you specifically in today?

So we are, uh, today we are in a few places in Southern California. We are in Phoenix, we are in Las Vegas, we are in some markets in Texas, we are in some markets in the Midwest, and we are in Nashville, Chattanooga, and some markets in Florida. We are also looking, you know, these are markets that we have active projects or assets today, or we've had assets in the near past. These are markets that we understand well. And there are, within these markets, there are particular submarkets that we like more than other submarkets. So we are very active in these. We have a good network of brokers that we are in, that we interact with on a daily basis through our acquisition team. We probably go through underwriting, you know, over 100 deals before we have one that we execute on. So, we're very picky to start with. And if you'd like an asset, again, our setup, our set of assumptions are, by many people, would be viewed as conservative, as very conservative. Because the way we look at underwriting, Alan, is we look at how are we protected on the downside. And if you are protected on the downside, then we know that by doing what we're going to do, the upside is going to be taken care of. But what we don't want to do is to take any excessive risk. And by that means going into buying an asset, putting in some type of financing that have short maturity, and that may expose you to some outside economic conditions, and then have a business plan that has to work like a clock before it to produce anything. So we like to have contingencies along the way, and that means we need to be very careful about what our views of the future is. It's going to be. So protecting the downside is our number one task. And we go through those assessments of a project once and we have a business plan, we undertake it. We have great third-party companies that we have worked with in the past and we currently are working with in different markets. These are great regional property management companies that we will bring in early on, even when we are underwriting a potential deal. And then once we own that deal, they become our third-party management company. And then we have a team of asset managers that are on top of the day-to-day operations. So to make sure that you're in line to meet our objectives and to meet that business plan. So doing this then provides us with a way to provide our investors with regular quarterly cash distributions, and which is what any investor likes. And then, you know, we go through all of that. We make sure that we are being very efficient in using all of the available tools in providing the best tax-advantaged returns and cash flow to our investors. So that's been— that's really our They do the job here. We have a great team, and everyone on our team is incentivized as to how successful the project is. And so they all get a piece of the profit, if you will. So we have a very strong profit-sharing system. And that means that people that are with us they stay for the long term. We have people with us that have been here for maybe 17 years, and that's unheard of in a lot of different companies. So with that tenure comes a lot of experience, a lot of knowledge, and how to deal with people. And as I mentioned, having institutions as our partners has really made us become very transparent, has made us become very detail-oriented in our reporting. And this all provides the investor with the peace of mind that, okay, if I'm investing my money here, I'm getting regular updates and reports back about how my investment is doing. and a regular cash flow as the investment grows. So these are exciting times, Allen. It is really very interesting to see how things are changing as the interest rate environment shifts. And we are in the midst of it.

So Alex, could you give me some specifics in terms of How it is that you are protecting and planning for the downside? What are the specific aspects of the operational plan that you're utilizing to protect for that downside?

Good questions. So we start with the physical asset itself. So what we want to buy is an asset that is in a great physical condition. So we don't go after, you know, 1970s, or even today we don't look at any 1980s-built products. We are very selective in what we pick as far as the vintage of that, and we go through a complete assessment of engineering and physical, everything about the properly. So the physical asset has to be sound. The downside is protected really by making sure that there is a constant demand for your rents, for your product. So this means that we look at a situation where, number one, we are buying the asset at a lower than replacement cost. Number two, is we look at where our rents are, okay? And it has to be in a market where we have limited new supply. Because if you have— if the market is flooded with supply, and over the past 3 years, actually every single market was flooded with supply, some more than others, which means that then the rents are either staying flat or they go down. So We want to make sure that the supply projections are in line with what we are thinking is. But also, we go to the next step of saying, okay, if our rents are, for example, $2,000 a month for our apartment, what would it take for someone to decide they're going to build here? So we go and we say, okay, the land cost X to build today would cost Y. And all of this, we go through all this calculation to see what that new build cost is going to be. And then looking at where the rents are, we want to see, is this— whoever is going to build and invest this kind of money, are they going to get the necessary return on their money or not. If somebody is building all of this and getting at the end a 4% yield on that cost, they're not going to build it because they can go and put their money in Treasuries. So, they're not going to build that. So, if the rent is really high, and the cost is on a relative basis not as high, Then it would make sense for someone to come and build. But so, we look for those situations where it would not make sense for somebody to come and build anything new again for a while. So, that protects us against new supply. Physical aspect protects us against physical, actual, real depreciation of the asset. And then making sure economic drivers are there. And then really it comes down, Alan, to our assumptions. Okay, are we assuming that we're gonna make money only if we can increase the rents by 5% every year? If so, that's a very risky assumption. So it goes into every piece of our assumption has to be well thought of and has to be viewed as— for lack of a better word, conservative or super conservative. So, we go through all of that and basically come up with it. Today, we also find, for example, some dislocations with developers that built products. And they have now— they had difficulty getting the rents that they thought they would get. And because of the way they built it and the way they financed it, Today, when they want to refinance it, they're going to have problems unless they bring in several million dollars to refinance. So a lot of them don't have the resources or they don't have the intention to do that. So they want to sell it. And sometimes when they sell it, they're going to incur a loss. If you're currently, for example, you're under contract to buy a new asset, which is 2022 asset, which is around 93 or 94% occupied. And because of property tax abatement, because of some additional benefits that they're getting from the municipalities in a form of a TIF, the cash flows are such that today, the way we are buying this is we are getting it at around the, 6.4 or 6.5 cap rate, and you're assuming the loan, which is in around 5% interest rate. So, we have a positive of 150 basis points there. But when you put all of that together, our cash-on-cash on a new asset or newish asset, 2022 construction, is around— is over 9%. And so that's a pretty attractive investment thesis then. That's, you know, you go in, you make that, you get the depreciation benefits, and then ultimately when you're going to sell this, we assume that you're not going to have the property tax abatement anymore. And we assume they're not gonna have the benefits of those other TIFs. So we assume there is none of that. It will have to pay property tax, it will have to do all of that. And then we use an exit cap rate at that point that is relatively high. I think in this case it's around the 5.5 cap rate. But for a new product in some good markets, that's still the high cap rate. Once we exit, our overall IRR comes to somewhere in the high 15, 15.7 or 8. And of that, you have over 9% on a current basis. So that makes it a pretty kind of a safer bet. If somebody says, hey, I'm gonna make 17% IRR, but along the way, my cash-on-cash is only 3% a year. That means you're getting all of your return from the exit. And if you make the wrong assumption on the exit, you're basically not going to make that return. So, these are the type of calculations we go through to make sure that our downside is protected. And then we let the upside take care of itself.

I like that. Very thorough process there. And those assumptions are critical, and, and your years of experience are how you can reliably make those assumptions, which is, which is, I think, one of the biggest parts of actually purchasing correctly and being able to sell correctly, are, are being able to reliably make those assumptions because they make or break.

That's right. I'd love talking more, Allen. Hopefully, maybe we can schedule another session if you like. But I would like to also, if you like, leave you my contact information if anybody wants to find out more about our company. Or anything of the sort. I do have to, as I mentioned earlier, to go on another call now. But I really, really enjoyed this. I like the way you approach it. I like the preparation, the prepared questions that you have to keep us on track of everything. That's good. Thank you for all of that. And so my name is, again, is Alex Rudy, and the contact is Alex at interriskcapital.com. InterRisk Capital is the name of our company. You can check it out, also check our website as well. But we would love to hear from any of your listeners that would like to learn more.

Well, Alex, it has truly been a pleasure, and I wish that we had had more time, but with the technical issues getting started, it kind of cut us out here. So I do apologize for that.

No worries.

It'd be wonderful to have you back on. Your experience and insights are extremely valuable to our viewers and listeners. So we will have to arrange another time to connect again. Sure.

Just send me an email and I would love to do that with you, Alan.

So Enlightened Investors, I know you had to get a whole lot out of today's episode. I'm glad that you were with us. And, uh, if you find value in this, please like, share, and subscribe. And we look forward to being back with you in our next episode.

Thank you. Thanks everyone. Have a great day. Bye-bye.

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