Multifamily Investments in Seattle With Expert Michael Voulgarakis

Foreign. Hello. Ginny Bowling here with Pivot to Prosperity, the podcast brought to you by Pivotal Real Estate Investments. And today we have Michael Vulgarikas. Did I say that right?

Yes, you did.

Okay, I should have asked you first. But anyway, thank you for coming. I appreciate coming on the show.

No, thank you for having me.

Yes, I want to read your bio though. You have a good, impressive bio. It's worthy of actually reading. So hang on. Michael is a seasoned industry expert with over 17 years of commercial real estate experience in underwriting and asset management. Michael oversees operations, capital raising, asset management and investor relations at Southgate Ventures while also playing a crucial role in deal sourcing and underwriting. With a focus on Puget Sound, the Puget Sound region of Washington state, Southgate has successfully acquired and managed 20 properties, completing 10 full cycle deals in just eight years. That's a lot. In the course of his professional journey, Michael has successfully underwritten 1.62 billion in commercial real estate loans and asset managed 300 million of real assets. Thank you and welcome.

So thank you for having me, Jenny. I appreciate it.

What can you tell us about how you got here?

Oh, your journey? Well, I, I, I can say that real estate was kind of in my blood. My father was a home builder, so I grew up on construction sites as the cheap labor and you know, as a kid and I, I, I went into some, another profession upon graduating from college but then I gravitated back to it but didn't want to be in the home building business per se, I, I wanted to understand income producing property better. And while, you know, while working these, these jobs in these, in this prior profession, I, I really got the bug to invest because I started acquiring and renovating and selling or holding condominiums in the town that I was living in prior to the Great Recession. So that really sparked in me, you know, using the skills that I knew how to do, the construction skills to, to buy and renovate units. And then I, I said to myself, well, I want to understand how an apartment building works and because I wanted to invest but I, I, I was afraid because I knew that it's very capital intensive, right? You need a, a real healthy amount of money and it's an illiquid asset. So you know, once you buy it, you're probably going to be owning it for, for quite some time. But so I, I ended up going back to graduate school at New York University, getting a master's degree in commercial real estate finance and at the same time got a job as a commercial real estate appraiser in New York City. And then thereafter I ended up at Morgan Stanley working on their commercial mortgage backed securities desk underwriting loans. Then went to another company called Arbor Realty Trust, which is a mortgage reit, so they make bridge loans on commercial properties. And there I learned the value add investing strategy because we were providing bridge loans to value add investors coming out of the Great Recession and there was an incredible learning experience. And then I had an asset management role for a national owner operator and I cut my teeth on asset management there and learned that side of the business. And then while we were doing that, my, my current partner and I had been sort of fiddling around in the Puget Sound region buying properties on a part time basis. And when the, in the middle of the Great Recession, you know, we said to each other, yeah, let's do this full time, let's jump off. And, and we did that about three years ago.

Wait, in the middle of the Great Recession?

Sorry, in the middle of, in the middle of COVID I apologize.

Oh, okay. I was like, yes, yes, gotcha. Okay, well that, that's, that's something that background. And it's funny because I was supposed to read one more sentence I think on that resume, which would have said some of that. I apologize. But yeah, that's underwriting commercially is probably really, really eye opening. And, and so a couple questions. You have a lot to unpack there. Well, first of all, investing in Puget Sound condos. What's the typical price now and then?

Well, I'll let me give you a little bit more of my background. I actually live on the East Coast.

Oh, you do?

My partner is Boots on the Ground. He lives in, in Seattle, Washington. So I've never lived there. He's been living there for eight years, the past eight years, give or take. So where I was buying condos was in my hometown in Connecticut. And so the I, I, I, I couldn't talk pricing about them at this point. It's been ten plus years.

Okay. Yeah, but yeah, yeah, okay, so, and that speaks volumes. Two total opposite parts of the United States and you do a lot of Zoom meetings or how do you, how do you communicate?

Usually we, we communicate on, on the phone via text. Zoom for sure. We have a weekly standing meeting. But in, in many cases we are, my partner and I, you know, we are, are siloed in some ways. Meaning he has his responsibilities, I have mine. Right. We're sort of masters of our own, our own business vertical. You know, I can't be physically on site every day to handle property management or construction Management issues that is clearly, you know, on his, his side. And at the same time, he, if he's on in the field all the time, looking at assets, looking at new acquisitions, interacting with property managers, local officials, etc. He does not have time to raise, to raise capital or to, you know, oversee bookkeeping or other operations. So it actually works out, you know, quite well.

Good, good. Okay. And it's the two of you primarily on your team and some VAs or whatnot.

Correct. We have a VA, we have some property management staff. We also do our own construction management and construction work and maintenance work. So we have a, A, a contractor that we've been very close with for the past four years, give or take. Gone through a lot of contractors in the four or five years prior to that, trying to find someone we could work with. And while they are not part of our company, technically they have the ability to provide us with labor at a moment's notice. If we were to buy an asset. Right. They could, they could make arrangements to be on site within, you know, within 30 days, which is, you know, about the time it takes to raise capital, close on a deal and, and acquire the asset. So they're, I call them like the de facto in house construction crew.

Yeah, I see. Okay. And, and is that for any one area where you're buying or, and that's just Puget Sound, is it?

Yeah, they could. So Puget Sound is the, the general Seattle metropolitan statistical area, which is another name for it. And yes, that, that construction crew has plenty of reach geographically. They could go, you know, an hour north of the city, an hour south, an hour east, an hour west. I'm sure they could go farther than that. I'm not so sure we want to be buying assets out that far. Perhaps we will, I'm not sure, but certainly we have the ability to, to cover ground. And if we were to buy an asset, one of the benefits of having this relationship with them is that we know we have a built in maintenance crew right away, not only the construction part, but you know, after construction and renovation is complete. We have this built in maintenance crew that is plugged into our property management software where it's, they're, they're autonomous to, to field questions and, and, and fix problems as they see fit. So it's very beneficial.

Right. I imagine it saves some money having, having things all figured out and systemized like that.

It does. There is also the trust factor as well. We know they do quality work and, and the ability to, what it really does is provide tenants with a Very good product. Meaning if they have something that's not working in their unit, instead of having to, you know, like in the, I'll call it the olden days, pick up the phone and call an office and then that office schedules a ticket and then they have to play phone tag back and forth to get scheduled to come in. Everything's now done via our property management software via text. We can contact people via text, via email or via phone and we typically do. They typically will reach out to the tenant in all three ways to coordinate a meeting and when they can go in to the unit and what the exact problem is and you know, they swap pictures before they even go out there. It just cuts down dramatically on the time to resolve tenants problems and you end up with a very happy tenant base because of it.

That's good. Yeah, yeah, that's definitely one of the things you hear come up a lot. So for instance, in some of the rea meetings we've had recently, the real estate investor meetings, a lot of people are new in those meetings and we just had a presentation from a syndicator and yeah, that was one of the biggest things that everybody wanted to talk about. In house or not.

Yes, yes, yes.

Big issue.

Yes. I've been hearing the same from other folks, you know, people we're looking to partner with and, and they're. I think we're very well positioned because of the in house management. You're, you. It's a, it's a risk mitigant if nothing else. If it, you know, hopefully it's a profit center for a company. But, but even if it's not, it allows you to retain far better control over all every single aspect of an asset from beginning to end.

Right. Because it hits the expense lines and the vacancy everything. It has such a huge effect on noi. The net operating income. Right, right, correct. I just use an acronym and I usually try to tell people not to do that. Well, so tell us some more about what, what you are looking for now and where you're going to take the company in 2024.

So we are, are poised at the risk of sounding confident, we're poised for growth. We, you know, have a story that has been very well received from prospective capital raisers. You know, people were looking to team up with as well as other prospective investors because in part of the structure that we've set up the in house construction management, property management and on site, you know, in house maintenance crew. The fact that we have my partner each and I, each of us have 17 years of commercial real estate experience and master's degrees and have been through a number of shops that have, have trained us and taught us well. And we're also in a niche market. You know, Seattle, Washington and the surrounding area. It's, it's not, you know, there's a high barrier to entry market, but it is a niche growth market. And the people that we, we really resonate with the most are folks that recognize that, you know, every portfolio, you know, if you're looking at your, your assets on a whole, you know, equities, debt, real estate, whatever else, you ought to have some amount, percentage of your portfolio allocated to growth markets, whether it's growth stock or growth real estate market or something else. And for many people, if you're in a particular stage of life where you have a time frame of five to 10 years where you said, yes, I can, you know, I can go for five to 10 years being in an asset, then, you know, we, we are, that's the niche that we felt for investors.

Right, right. Yep. And through syndication. Correct model you're using, right?

Yes, we are.

So typical investment holding periods, three to seven years. Do you hit, do you, do you write underwrite to one of those? Or do you, do you look at the asset and judge on that?

Well, we, we typically, we have a whole period of about, you know, like you said, it's closer to four to six years.

Okay.

You know, there are, now there are some assets where we may purchase and renovate them and decide to try to sell them right away, which sometimes is, you know, well, not well received in the market. Sometimes there's interest. Depends on the time of the year that you finish your renovation too. Right. If you finish in the doldrums of the winter, I'd rather wait for the, for the spring or summer to sell something. So sometimes we may choose to sell an asset and provide investors with returns, or sometimes we'll, we'll decide, hey, we're gonna, we're gonna do better. And if we hold that asset for the, you know, four to six year.

Holding period, but either way, you, you're driving up occupancy. Right. You're keeping it so that you have a cash flow. It's a producing asset, right?

Correct. Correct. But in a, in a growth market like Seattle, the real big pop comes from taking a tired asset that no one has put any money into. It's just outdated units and really everything, lighting, interiors, etc, and renovating that building so you can capture a far higher rent than what the building is currently capturing. You Know, in some, in some cases the, the rents are 30, 40, 50% higher than what's currently in place. So when we do that, we create a lot of value. We make the building a lot more valuable in a very short period of time and then we will, the building will cash flow thereafter and then there is a sale at the end.

So. And I've always heard it's very expensive up there. I haven't looked at any of the prices, but. So what's a. Pretty typical. Are you, are you in a B or C class property? What would you.

I would say that we are in. We're taking C plus properties or B minus properties and making them into B plus or A minus properties.

So typical price range for acquisition versus resale, what would that be roughly?

So typically on a per unit basis, on a per door basis, it's about $250,000 a unit.

When you buy or sell.

When you buy and when you sell, around 325 to 350 a unit.

Yeah. 300,000 or more per door. Higher than us.

Yeah, yeah, yeah. It is quite an expensive market to get into.

Same with labor and all the rest. Is that all expensive doing the rehabs?

It is, but that cost is tamed or kept reasonable, as much as it can be due to the fact that we do have in house management and there, there's, there's very little waste involved in that. Right. No one, no one is putting, you know, unnecessarily renovating something or spending money on something. Quite the opposite. Instead, you know, we're, we're fiscally, you know, prudent. We're looking at every dollar to make sure that it's going to produce more value and more revenue. But yeah, construction costs are expensive all across the country. Seattle's no different. But we try to do what we can to mitigate those costs.

I didn't think of this, but should we pull up a picture of something in your portfolio? Do you have that on the website?

Yeah. Let's see.

I can share screen and let's see.

I'm going to pick, I'll pick a building here.

I'm thinking yours, yours will look different from ours. I just shared.

You mean the assets themselves?

Yeah, yeah, yeah.

If you go to.

I think I just, I, I'm. Oh, I, I'm sharing. Okay. So I, I guess I can go to it. Okay.

Yeah.

I was gonna let you share.

Oh, okay. I can do that as well. Let's see here. If you go to. Oh, actually on a zoom. How do I Share.

Let's see, you see the share screen button.

There it is.

I don't know why I hit it.

Okay.

So I'm thinking they're going to be pretty cool looking.

So this building right here, we call it Opera Ballard. This is a 14 unit building on a, on a main thoroughfare in the Ballard neighborhood of Seattle, about a 10, 15 minute drive to downtown or South Lake Union, where Amazon's headquarters is.

Okay.

It's on a bus line that goes straight downtown and it is also running up this, this main street. And it's going to be a few years. But a. The city of Seattle has, I'll call it a subway system. It's really called the Link light rail. It's a light rail system that they put in all throughout the city. They're expanding it quite aggressively. And a Link light rail stop is going to be right across the street from this building in the future with direct access to downtown or the airport. You can take it all the way to the airport, you can take it all the way north, you can take it to all the neighborhoods of Seattle. But primarily our concern is can people get to work using this public transportation system? And yes, that's the case. So we were very excited about the location of this asset. It's proved out to be great. You know, the rents are actually higher than we've projected and we've taken, as you can see in the pictures we've taken the interiors and you know, we've put some money into them to make them, you know, bring them much farther upmarket than the building had previously been in. And it was just a very tired asset. But we like this one. It has vaulting, vaulted ceilings on the top floor. And the location really is the linchpin of this asset because of the demand for people who want to live here because it's convenient to get anywhere in the metro.

So. So why are the carports so high off the ground?

No, that's just a cur. You have a curb there.

Oh, you know what, I think it's just a darker color wall. Okay. I thought that it was. Okay, that is a wall. Yeah. Okay.

Correct. Right. Yeah. This is tuck under parking, which is typical of this vintage of asset. You know, 70s and 80s style buildings.

Okay. Yeah. It's just the way the angle on my, my screen. Okay, well, thank you. Yeah. And when you're looking for multifamily properties. Now is there a minimum number of units in your buy box?

Yeah, we like to stick with 20 units and up, you know, because the market is so expensive. You know, 20 units at what did I say, 250,000 a unit is still a $5 million asset. So dollars are still healthy. And the city itself is also built in a very sort of low rise format, meaning this building that you're seeing on screen now is just three stories. Most of the city of Seattle has buildings that are low rise like this, interspersed with duplexes and you know, three unit buildings and, and lots of single family homes. So the, the majority of the properties in the city are between, I'll call it 15 and, and, and 40 units. They're, they're smaller properties. You have plenty of big ones that are 60, 180, et cetera. But because of the way the city was built, that's what we, we currently have. But the benefit is that so many of these assets, these smaller assets that are worth quite a bit on a per door or per unit basis, the owners are turning them over, they're selling them off. So that's the opportunity we see in that market and that's why we're there.

Okay. Okay. Well, thank you. And I don't know if you want to stop sharing. You don't have to, it's up to you. But yeah, it's good to see something there. And you've certainly looked at a lot of different asset types if you've underwritten 1.62 billion. But that was all different asset types I guess too. Not just multifamily, right?

Yeah, correct. Multifamily. A lot of retail, a lot of office, a few hotels, some hospitality, and I think just a handful of industrial properties. So my expertise is strongest in multifamily and retail and office.

Gotcha. Okay. And you were, were you working in real estate? Not in the 80s, right?

No.

Yeah.

No.

Yeah.

Nope.

I was an appraiser back then and I really enjoyed industrial the most. So I'm hoping to get some properties in the industrial side of things at some point. And fulfillment centers are going like gangbusters. But multifamily is still for the growing places, you can't beat it. And Florida is one of them. And so you have a lot of in migration there too.

Correct. The city and the surrounding areas of Seattle absolutely has heavy in migration. And it's really all about job growth. Right. It's a market in which the jobs are very high paying. The city of Seattle itself is actually third on the list out of the top 50 largest cities in the country for median household income. It's second only behind San Jose and San Francisco, California. So the median household income is $115,000 as of 2022. So a lot of money going into the city, going hand in hand with that, that average household income number is the fact that it is the, the most educated big city out of the 50 largest cities in the country. 67% of people have a master's and or bachelor's degree. So it's highly educated. And as I alluded to before, we're there because of that high paying job growth. We see old assets that we can renovate and rent out to people that are making very good livings, that are highly educated. And it's proved out so far and you know, the average tenant in Our portfolio makes $85,000 a year in a class B asset, which is compared to other markets across the country. It's, it's much higher. So it, we're really, you're really buying the financial strength or credit worthiness of those tenants when you're buying these assets.

Right, Right. Now do you renovate all the units or do you plan to leave some for the next owner whenever you do sell off?

No, we, we, we try to renovate every single unit in a building. We've done that every single time. For us, it, you know, maximizing value for our investors by renovating every single unit is, is of utmost importance so we can show investors, look, you know, this is what, you know, we're able to provide you the type of value creation we're able to provide. And because the buildings are small, right? 20, 15, 20 plus units, if we were to leave one unit unrenovated, that's a significant sort of, I'll call it outsized portion of your potential value and revenue stream. So that's why we renovate everything.

Yeah, that makes sense. You're right. That size. What would you say is a particularly great experience you've had in your life doing investing in multifamily?

Oh, I love this question. There's so many things really, the, the, you know, I've sort of had this entrepreneurial spark in me, you know, since I got interested and I was renovating condominiums and that the, the thing that I enjoy most is, is learning something new, understanding a new strategy, learning about how I can do something better. And sometimes you have these aha moments like, oh, this is exciting, this is going to work, we're going to do well with this. And that's what sort of keeps me going. Buying condominiums way back when I was much younger was exciting because I figured out, hey, I'm going to Reach out to owners directly and do a direct mail campaign and see if they want to sell their, their property and if I can get it at a lower price than what it would trade for if a broker had the listing. Right. So, you know, you learn something like that and when you execute on it, the key there is execution. Right. Just learning about it and not doing, putting in the work, you know, you're not going to, you're not going to get far. But once you implement that thing you've learned or that strategy, and even if it doesn't work, even if you flop, you've still learned a lot and you've still moved, moved ahead. But admittedly, when it does work, it's, it's far more exciting and, and it just gives you that spark that you realize, oh, oh, I'm going to do this again. This is, this is enjoyable. I like this work. I want to continue down this path.

Right, right. So you have how many properties, actual properties in your portfolio right now?

We're holding 10 of them. 10 properties.

Okay. Okay. And you've gone full cycle on 10.

Correct.

And how do you do on your performance compared to what your projections were.

Better than our projections? The, the average IRR on, on the 10 that we sold is in the, is in the 40s. 40%. Yeah.

Wow. Yeah. I'd say pretty successful. Right? Well, that's, that's, yeah. Rare that you hear a number that high. It's usually closer to half that. So do you think that's a function of the location where you are?

It is. It's also partly a function of. There's a number of things. The, the asset type that we're investing in in that market, there's the, you know, there's so little vacancy in that market because there's such high demand that we just don't have problems with the market rents achieving those market rents. And now we're never going to be right on every market rent that we project, but we've been pretty good thus far at pegging that number and achieving it. And the other thing is that it's really about arbitrage, which is, you know, the difference between two things. Right. And, and the, the arbitrage between what the rent in place rents are on the buildings we're buying and the rents that we can achieve when we renovate is that percentage is typically very high. Right. There's typically a very big difference there. And what, you know, if you have a, a, you, if you can boost rents by 30%, 40%, that does quite a lot to your, to your ability to create value. So. But what comes with that is a very tired asset that needs a lot of attention. It needs a lot of, lot of renovation. So our renovations tend to be on the heavier side as well.

Like, what would you say your average per unit ends up being across, including exterior, all CapEx 2020 to 30,000 a unit. Yeah. Okay. Do you get into a lot of plumbing problems there?

If the buildings have certain types of plumbing, we try to swap the plumbing out. Absolutely. And same with electrical. Electrical usually is, you know, we're not buying buildings from the 40s or 50s, so we're typically able to keep the existing electrical infrastructure. But plumbing certainly we look at another is if there are central hot water heaters, we swapped out a water heater from 19, original water heater from 1963, which was electric and just burning. We cut the electric bill in half by swapping that out with gas fired water heaters. So we focus on large items like that where we can make a positive impact on our expense side as well, which really, really creates a lot of value.

Well, that's good. Yeah, yeah. My experience with. Sorry, my cat. I should have locked the cat away. Right. We've had lots of plumbing issues come up in our most recent asset that. Well, most of them in Florida, if you're buying anything in the 70s and, and one of them's in the 60s, but 80s and with the trees we have here especially. Yeah, that's. It's an issue. So. All right, well, so. And I don't want to risk getting too close to the hour. We probably ought to answer those key questions here. Now, if, if I were to ask you a pivotal person or event that affected your life and, and brought you to where you are today, what, what would you say?

I don't know if I can pinpoint a specific person. I would just say that the, the people that I've, I've worked with in the past, you know, my colleagues and, and fellow, you know, classmates, that's really been the thing that has, you know, propelled me forward, you know, getting to know those people and benefiting from those relationships, learning from them. And I really think that, you know, the, the relationship building side of this business is, is of utmost importance and they've just helped me tremendously on, on many, many fronts. So I'm always grateful to, to all my past colleagues and, and coworkers.

Good, good. Yeah, I totally understand. And then. So people, so they can get in touch with you. Why don't you say, remember some of this is only vocal. So spell anything that needs to be spelled because.

Absolutely. Absolutely. So you can visit us on our website. It's Southgate Real Estate Ventures. The the website is SRE Ventures. V E N T U R e s again, sre ventures.com.

All right. Very good. And so in the show notes, we'll include other contact information and whatnot for you, too.

Okay.

But, yes. Well, thank you. It's been insightful to hear from you and what's going on over there, and I appreciate you coming on the show.

Thank you.