The Hidden Opportunity of Property “Rezoning” Making This Investor Wealthy

If you're treating your real estate portfolio as a business, as I hope you are, you should always be thinking about product market fit. Basically, are you buying the right properties to meet the needs of the tenants or the eventual buyers who will be interested in that property? And doing this thinking about those end users is seriously the easiest trick to maximizing your profit. And today's guest is doing this really well and making complex zoning regulations work in his favor to meet the needs of his future buyers and tenants in Philadelphia. Foreign.

Dave Meyer here. I'm joined today by my on the Market co host, Henry Washington. Hey Henry, how's it going man?

What's up Dave? Thank you for having me, man. I love doing these. This is fantastic.

Yeah, I'm excited to have you here and I think we're going to learn a lot from our conversation with Stuart. I do want to get into his backstory because when we were looking into this guest, I came across a mistake he made early in his vesting career that I think every everyone here is going to really relate to. But then we'll quickly fast forward to some amazing progress Stewart's made in his investing career and the way he thinks about his portfolio and how he's found a really specific niche that's helping him drive huge profits. So let's jump in. Here's the conversation Henry and I have with Stuart Udes. Stuart, welcome to the Bigger Pockets podcast. Thanks for being here.

Thanks for having me on today.

So I understand you've been investing in real estate for quite a long time. When did you first get started?

I began while I was in law school. So that was between 2009 and 2013.

And where were you in law school?

I was enrolled in Widener University, which is in Wilmington, Delaware. At the time I lived in Philadelphia. I took my courses at nighttime, so it was a four year program as opposed to the traditional three year programs. And I worked for a real estate development company in Philadelphia at the time that focused on multifamily geared towards the affordable housing space. So I worked there basically nine to five and then took my course at night and started to slowly buy real estate while I was working that job.

Did you look for that job because you were interested in real estate or did you get interested in real estate because you found that job?

I was always interested in real estate. So even going back to when I was in college, I went to a small liberal arts college that I was a business administration major but with a student body of 2,000 students. They didn't have real estate finance Courses, nothing that. That was that granular. So on my own, I was always reading up on it. You know, I read books, was online, got my real estate license while I was in college. More just for informational purposes and to kind of learn. And I always knew I was interested in real estate, so.

So you like education? You just like. I just got my real estate license while I was in school and then decided to go to law school. No, no big deal.

Yeah. And working, because you were working full time and did law school, and then you start investing in real estate. So it sounds like you were very busy. How did you know what kind of deals were you doing, given everything else you had going on at the time?

The first purchase was a duplex in a neighborhood where my employer focused their business. $56,000 purchase, Section 8 type tenant base that I put in there. Once renovated. From there, I bought another two single families. The first was a flip, and then the second I held as a rental. And that was in the Germantown section of Philadelphia, which is where I really kind of cut my teeth early on.

I'm just curious because Philly is still, I think, a relatively inexpensive market. And I'd imagine, you know, this was right after the crash. What were you buying these homes for at the time?

So the profile is pretty consistent. This, this at the time was also not a very affluent neighborhood of Philadelphia, but 40, $50,000 for your standard 1200 square foot, two story, three bedroom, one and a half row home, shell condition and gut renovation. 40, $50,000. So you were in these homes for 80 to $100,000.

And what were they renting for?

Typically I was renting for 1,400 to $1,500 a month. So the rent roll is pretty good because of the price point. You know, you are disproportionately impacted by your operating expenses. So one maintenance request wipes out a month's worth of cash flow. So they didn't cash flow very well, but I think that's inherent of single family portfolios. Generally speaking, they're relatively inefficient from that standpoint.

So this was around the 2009 time frame. How long did you continue to buy these types of properties and how many did you accumulate?

So between 2013 and 2016, that's where, along with the apartment, time acquired just shy of 30 houses. Four of them were renovated and sold as flips, but the others were held as rentals.

I mean, that's. That's pretty extensive.

Yeah, that's pretty good. Given everything else you had Going on. Have you been doing that ever since? For the last 10 years? Since?

No. So I'm kicking myself now. The cash flow, it's not meaningful. You're not really paying down principal very quickly. So I decided to sell those houses. We sold them between, between 2016, 2017. And it was a slow process and I was so focused on cash flow and I didn't understand. The business I was in at the time was really the appreciation of these assets. And these assets could have gone from a C to a B neighborhood. And that's what happened. So we were selling some of the better blocked houses for around 200, which was pretty good. But a lot of them were like 140, 150. By 2019, almost all of these homes were unblocked, trading for 275.

Wow.

So.

And that's before COVID This is before.

COVID So these FHA buyers were literally putting down like 5, $6,000 of their own money to buy these homes. Given the seller assist and all the concessions that we were giving and they were turning around and you know, reselling these homes for $130,000 profits.

So what did you learn from that, Stuart? Because, you know, your logic was somewhat sound. But looking back on that, is there something you think you could have identified before making this decision?

It was staring right at me. I mean, I saw who my tenants were. They were college professors, nurses, teachers. The home buyers were moving into the neighborhood. I was just so hyper focused on the cash flow and the operating expenses of those single family homes. I lost sight of what I was really investing in. I also at the time, what led me to exit that portfolio was my desire to get into doing ground up construction, which was becoming more prevalent in areas closer to the center city area of the of Philadelphia. Seemed like it's an easier way to make money. So in hindsight, there were probably ways where I could held on to some of that, that portfolio. Some of that money was needed to kind of seed capital to get into the, the new construction. So I definitely had to exit some of those properties. But there were probably ways I could have done it that allowed me to share in some of that upside that I was literally two years off from, from experiencing.

Yeah. So what you're saying is you feel like you kind of missed an opportunity to read your, your business, Right. Who were the tenants that you had, what was coming to the area and to time better on when you should sell the properties. And one thing you said I think is a lesson that we all learn as landlords which is we a lot of times get into this because we want cash flow or because we hear that cash flow is the thing that you should be looking for. And it is. You should always be looking for cash flow. But once you get into the game, you quickly realize that cash flow is not what builds the wealth. Right. The wealth comes from the equity and the appreciation over time. As real estate investors, it's very easy for us to operate as a real estate investor and not as a business. Right. So when you stepped back and looked at your real estate investment business, you saw that you could have made better business decisions. I don't think you made bad investment decisions. The investment decisions were phenomenal. But when you look at the business holistically, could you have made a better decision? Sure, probably. But I also want to say to people, they say this with the stock market, but I believe it is true for real estate is you should never ever feel bad for taking profits because profits are profits.

That's a good point.

You could easily read your business wrong or read your business perfectly right? And then the world does something crazy like Covid that you can't predict. And then you would have been saying, man, I should have sold when I was thinking I should have sold. So you should never ever feel bad for taking profits. But I love the idea of looking at your portfolio as a business and then making the best business decision given the factors of the economy, of your tenant base or your customers, and of your cash or business position. And then you make the best decision to move forward.

All right, it's time for a break. But stick with us. We have more with investor Stuart Udes after this.

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Welcome back to the Biggerpockets real estate podcast. So Stuart, I mean it sounds like this was a, you know, a not a bad situation, but looking back on it, you would have done something differently. This was in 2016. So like what did you do between then and now?

So as I exited that portfolio, that's when I got more involved in doing the ground up projects. And in Philadelphia, a lot of the neighborhoods around Center City had zoning that allows for parcels to be developed, either single family or like stack duplexes or small multifamily. The people that tend to do best in that market were the ones who either bought the land five, six years previously, really inexpensively and just kind of sat on it. So, you know, their base land might have been 30 or $40,000, whereas I was paying 80 to $100,000 or they were self performing the const. I didn't fall into either those categories. I was relying on third party general contractors and I was paying fair market value for the land at the time. I did that for a few years and there was money to be made, but it wasn't very consistent. I think the aha moment was like my third round of these projects I was doing. Actually it was two quadruple, two four unit condo buildings and then two townhomes that I had to obtain a variance to build. This was in the middle of COVID so everything kind of got bunched up and delivered around the same time. And one of the condo buildings was a four unit building in the same neighborhood where most of my previous duplexes were built, which is Fairmount. So it's a little north of Center City. The townhomes were in South Philadelphia and then the other four unit building was in University City, so very close to Penn's campus. And I noticed that across the street, these smaller, like 1920 vintage two story townhomes were selling for like $550,000. And then you go two, three blocks further west. You know, the streetscape looked the same, the people who lived there looked the same, but there was about $100,000 drop in value. And I couldn't quite understand why. And I was researching a little bit more and what I ultimately uncovered was there was a catchment. The attachment is the, the boundaries in which you have to live to be eligible to attend this public school that does receive additional funding from University of Pennsylvania. So a lot of young families would actually spend a premium to move to this neighborhood to extend their stay in the city before making that ultimate move to the suburbs. So we decided to build four larger condo units on this lot, which no one was doing in the neighborhood. And the contrast between the sell off of that building versus the other two projects was like night and day, within 30 days, all four under contract, way over the projected pricing that we had underwrited. But it came down to supply and demand. It was a unique product. No one else had that product. If you wanted to live in that neighborhood, there was a limited, finite amount of inventory. And if you wanted to be in. My product was what was available at the time. So that really got me thinking. This is a far better process that I would like to experience on building something that's unique. There's limited competition, and how can I replicate this?

So real quick, I just want to summarize for people kind of what you were saying, because I think it's really, really smart. What you did was you saw you had different projects going on in different areas of town. And then when you were researching the different areas of town, you saw that, well, where one of these projects was just a block or two away, the home values were much lower. And so that's what helped you figure out, okay, the values are higher in this particular neighborhood because demand is higher, because people are trying to get an address in this neighborhood so that they can get kids into that school. And that makes a ton of sense because supply and demand dictate property values a lot of the times. Right. And so if more people want to live in this area of town and there's not a lot of supply, then they're willing to pay more to get there. And so if I'm hearing you correctly, what you decided to do was then modify your plan so that you're building as many units as you can reasonably that don't fit the model of every other kind of unit in that area, so that now you have multiple units in that area so more people can live in that area of town and you're offering a product that nobody else is offering. And I'm assuming since you're offering multiple units, you're offering sometimes smaller units than what other people can buy. And so it's probably more affordable for them to come and move into one of your units. And so that helps you maximize that opportunity or value, Is that what I'm hearing?

Yeah, absolutely. I think we were selling off at like 480 a unit, whereas the most inexpensive single family home in the neighborhood was like starting in the 550 range. So for those who wanted to be in the neighborhood, for the school, I was one of the few options available. And I was also more affordable.

I think it's brilliant. I mean, that's business 101, right? Find a problem, figure out a way to solve the problem and then capitalize on the financial benefit that that brings. But how do you scale that? Like how did you repeat that at all?

Yeah, so this particular lot, the zoning was by. Right. And it was a bit of a unicorn acquisition. I knew I wasn't going to replicate it over and over again. You kind of hit on it right there. What housing product is, is missing in the market that's needed and why isn't it available? And in many instances it's a zoning related problem. So being that I'm an attorney, zoning and land use is something that I'm very in tune with. So I really set out to try to use the zoning process to solve that problem. I went back to Northwest Philadelphia, which is where I started my investment journey, in a neighborhood called Mount Airy. And the neighborhood itself had become very popular during the pandemic because it was not as urban, but it wasn't the suburbs. So it was that kind of in between neighborhood that a lot of people were trying to test the waters in. One of the problems was, despite its popularity, it is a neighborhood with pretty prohibitive zoning. So a lot of single family, low density zoning uses. So you know, I started to look at some of the commercially zoned properties close to the commercial corridor and seek zoning changes to build larger condo style like walk up units that provided the dimensional open floor plans that the buyers were looking for. Usually when a developer goes to a neighborhood seeking a variance, it's I want to build more housing, greater density, or take this commercial use and build residential. When it's not allowed, there usually isn't really a reason behind it. It just comes across as being another greedy developer. If you frame it as I know young families want to live in this neighborhood, but the housing that's available doesn't really cater to them. Or there's a demographic of people that want to stay in this neighborhood, but they want to get into a smaller, simpler housing stock. I want to provide that housing. It's a very different conversation you're having with, with the community.

So sir, it sounds like, you know, you founded a great neighborhood where there again was a zoning problem. Seems like this is sort of becoming your thing here where you're finding neighborhoods that don't have ideal zoning. And this is something I've actually enjoyed looking at my career and trying to find places that have upside for zoning. But at least in my career, because I am not an attorney like you, I look for places that have properties that are already built and already have the existing zoning that I want. But it sounds like what you're doing is actually finding, finding places and trying to change the zoning, is that right?

That's correct, yeah. So usually these are functionally obsolete properties that had zoning that does not really match the way it should be zoned, given the surrounding area.

Can you tell us what that means? Functionally obsolete.

So an auto body shop that is closed down and the rest of the street might be single family homes or a property that zone commercial mixed use on a residential street that has a commercial corridor that's being revitalized a block away, that's where the commercial activity should be located, not on the street that has a bunch of single family houses.

Changing zoning sounds difficult for me, but it sounds like what you're doing is identifying properties where the neighborhood is very likely to be supportive of the zoning changes. Because if you're, you know, in a single family neighborhood and there's a closed down auto body shop and Stuart comes in here and says, hey, I'm going to build a nice new single family home, people are going to be like, yeah, we would definitely like to support that rather than a lot of these sort of horror stories you hear from developers who try and change zoning and get a lot of pushback from communities. So that. That's the plan, right? The play you're making?

Yeah. So you definitely want to have a hardship claim that you can make. But then in addition to that hardship claim, you have a story to tell of why you want to build this specific housing product and how it will benefit the neighborhood and the people who are already living there or the who the current residents would like to see become part of the community but are unable because of the restrictions on the housing product that's currently available.

I think this is very smart, obviously, because you're identifying a need and then you are working with the cities to help them service that need. And working with cities and municipalities to get zoning changes can be not just very difficult, but extremely overwhelming, expensive and time consuming. Unless you are doing what the city wants to do in that area of town, then those processes magically become much smoother and easier to navigate. And you have more advocates on your side because you are building what they want you to build. And so you going into these areas and saying, well, clearly they're okay with, you know, single family and small multi family use here. And so you can Identify dead spots like this, this auto body shop. And the city is typically going to want to help you continue to do that. And even if they aren't wanting to help you do that, you have, what do you call it in lawyer talk? You have a precedence because there's other single family or there's other zoning already around it that matches what you want to do. So it's harder for them to say no, which I think is super brilliant. And the other, the other thing I like about this strategy is I think what most people would do is when you found that school zone where people wanted to move to, and then you fit your property to meet the demand for that school zone, what most other investors would probably do is go look for other school zones and try to repeat the same thing, which I think is smart, but probably a little narrow focused, you just widen that. And you said, instead of me just going to find another school zone, where can I go find where there are demand and where the zoning doesn't fit the demand. And that kind of opened your horizons because now you're looking at commercial properties instead of just looking at residential properties. And that probably opened up your wallets as well as I'm assuming, while you're still doing it.

Yeah, it's been productive. And the Mount Airy neighborhood has really become my focus. You know, the feedback I'm getting from the buyers really helps fine tune the next project. So like now I'm getting ready to build an 18 unicondo building on what was a auto body assemblage that was zoned very low residential use that I got entitled to build 18 condos on elevator, 1600 square feet, single floor units. And I know when I deliver that project, I'll be the only one in the neighborhood with that product because the zoning doesn't allow it.

Again, I think that's exactly what you should be doing is identifying where the opportunity is. But at the end of the day, you still have to go and present what you're wanting to do to the city. And for a lot of investors who haven't done a deal yet, or maybe even have done a deal, but haven't had to go in front of a city or a municipality and present their options, can you give us a couple of just good tips on what you should or shouldn't do in order to help you get the approvals that you're looking for when you're working with the city or a municipality?

Sure. I think that in Philadelphia particularly, the neighborhood organizations play a pretty pivotal role. So each neighborhood Philadelphia will have registered community organizations, and they are organizations that you will have to meet with, and they'll help put you in touch with the immediate neighbors who are the stakeholders. And it ensures a more transparent process. And usually, I think the mistake most developers make is they'll go to these meetings or these outreach events, and they're there to convince the neighbors why their project should move forward, as opposed to listen beforehand, meet with them proactively, ahead of time, hear their wants and needs, their concerns, and then go to the meeting saying, hey, I've heard what you had to say. I've already made these tweaks to my plans. I understand traffic congestion could be an issue if the entry to the site is on the east side versus the west side. I understand the setback concerns. I understand that you want some more affordable housing options within the unit mix. So if you can go to these meetings having already engaged with the stakeholders and they feel like you're listening to them, then it allows for a much better process because you're working collaboratively. And usually the collaborative projects are the ones that are best because these are the people who already live in the neighborhood so they understand what people want. So you're foolish not to listen to that.

So for those of you who are listening and you're thinking, well, I'm interested in doing a project that I know I'm gonna have to get approval for, and that's really overwhelming. One of the things you should be doing is to get involved in your local city or municipalities zoning meetings before you have a project so that you can understand exactly what Stuart's talking about. What are the needs of the people in the neighborhood where you're looking to do business so that you can develop a plan that addresses some of those needs on the front side. Another thing that we like to do is to with the zoning and planning and give them a general idea of what we're trying to do and then ask them what their opinion is. What would you do in this situation? Here's the need we're thinking we want to fill. Is this something that's needed in the area? What suggestions or what tweaks would you like to see for this area? Because what happens a lot of the times is these real estate investors and developers come into these meetings, and the city officials feel like the real estate investors think they're smarter than everybody else, and they think they're smarter than the people who live in these communities, and they don't care about the people living in these communities. And so if you can Dispel that imagery on the front side by showing that A, you care because you're there and you're listening before you need something, and B, you want their opinion involved in what it is that you're creating. It's really going to help speed up some of that process. So I think that that's, that's a really, really smart move.

And I also, Henry, I just want to say that, like, although we're talking about development here, I think that there's a lot of lessons here that are applicable to people who already own properties and are either thinking about adding units, who are thinking about redeveloping a site, or are trying to entitle a property and sell it off. You know, these, these types of zoning changes add value to your existing properties as well. And so all the stuff that Stuart's talking about, what Henry's just talking about, apply to most neighbor, not all neighborhoods. Some. It's going to be really difficult, but if you're in a neighborhood where you think it's feasible to change the zoning, you should be looking at these types of things for your existing properties and seeing if there's some upside there as well. Okay, we have to take a final break, but we'll have more of this week's investor story in a few minutes.

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We're back on the BiggerPockets Real Estate Podcast. Sister, I've noticed something you've been talking about over the course of this interview, which is that whether you were building single family homes, the catchment, these new developments you've been working on, you seem to always be thinking about who the end buyer is, who the end tenant is, or who's going to be buying these properties, occupying your units. Can you tell us a little bit about that? Like how do you go about putting yourself in the shoes and developing this profile of the person who's going to be ultimately living in or buying a property for you?

I would say that I really listen to feedback. So, you know, when I have my units listed for sale, you know, on the mls, there's usually an automated message that goes to the buyer agents, one to five scale, like whether they like it, what they like about it, you know, commentary. I want the feedback because I want to know what about the houses they don't like, whether it's the floor plan, the layout, the bedroom sizes. That's all really important information for me and that's so valuable in determining how I'm going to fine tune the next version.

That totally makes sense. And I think as you start building out these projects and getting in your reps, you're going to learn a lot. I think just having been a property manager and doing a lot of showings for, you know, for rentals, you, you learn the same kind of thing. People, the questions that they're asking, the rooms, they walk in and then quickly turn around and walk.

They don't like the bathroom and they just leave right after seeing that. Like, you have to start taking notice of those types of things and incorporating that into your, into your strategy going forward. All right, Stuart, so it sounds like you've done a lot. You started with single families, you moved into, you know, started doing a birth strategy. Now you're doing this very interesting development with zoning play. Is this your plan going forward into 2025 to keep basically doing this development type work?

I'm continuing to look for opportunities where they have these functionally obsolete properties, although admittedly, I'm not really in a position where I necessarily have to buy More entitlement land. Because I do have this 18 unit condo project with a second phase with 12 townhomes that's already approved. And I'm breaking down a couple other townhome type projects in the neighborhood. So to kind of counterbalance that, I've started to want to build out more of a rental portfolio. Again, kind of got away from that the last seven or so years with my focus on the for sale projects. But the cost of construction, cost of land, it made it, it makes it pretty difficult in this particular neighborhood, which is where I want to focus for the time being building ground up. So I've been looking at buildings that I could do heavy rehab or convert into residential use or multifamily use below replacement cost.

And so given all your success you're having by being really, really good at identifying opportunities and then capitalizing on those opportunities. Are you doing that full time now or are you still lawyering?

No, I haven't for a long time. In fact, when I left Hersha Hospitality Trust, I started a solo practice. And in Philadelphia, you're dealing with like landlord tenant issues.

Wait, you're a lawyer and you don't want to deal with your own types of issues as a landlord?

Right, right.

Yeah, yeah, yeah. So I actually got a, I got a broker license because in Pennsylvania an attorney can petition for a broker license to the state real estate commission. So I was doing some commercial transactions to supplement my development business, but now my focus is entirely on the development business. I'll do some consulting, like asset protection and contract management consulting from time to time, but most of my day to day is focused on the development business.

Awesome. Well, Stuart, thank you so much for joining us today. It was great learning about this really unique niche that you've carved out and just want to reiterate to everyone, even though we're talking about development, these types of lessons about understanding your end buyer, your tenant, and trying to add value to properties by changing the zoning or just even looking for underutilized properties where there's upside for zoning. This applies to almost every type of investing. Whether you're flipping houses, you're buying long term rentals, even short term rentals can benefit from this type of thinking. So, Stuart, thanks so much for sharing it with us.

Us, thanks for having me on today.

And Henry, thank you for being here. Appreciate it.

Thank you for having me, man. It was a great time.

Yeah, it's always a great time. If you enjoyed this episode, make sure to leave us a review or share it with someone you think would learn something from Stewart's experience and lessons. We'll see you again soon for another episode of the Bigger Pockets real Estate podcast in just a few days.

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