The $100M Mistake: Why Investors Confuse Market Price with Investment Value with Ryan Cadwell

Hi, I'm Ryan Cadwell, and today we're going to talk about the $100 million mistake and ways to avoid them and help discipline your investing.

Welcome to the Rental Property Owner and Real Estate Investor Podcast, brought to you by the Rental Property Owners Association, where real estate investors have found success since 1968. I'm your host, Brian Hamrick from Hamrick Investment Group.

This episode is sponsored by Green Property Management, managing everything from single-family homes to apartment complexes businesses in the West Michigan area. Find out more at greenpropertymg.com.

And RCB and Associates, helping real estate investors and small business owners navigate the complex world of health insurance and Medicare benefits at rcbassociatesllc.com.

Hello and welcome to episode 540. Most investors think they understand market value.

They look at comps, they listen to brokers, they assume price equals smart money.

And that is where they get into trouble. My guest today is Ryan Cadwell, principal of Resolute RDM, an Indianapolis-based firm involved in over $100 million in transactions, development, and asset management.

Ryan's not in the business of selling optimism. He is in the business of not overpaying. Ryan has flipped nearly 150 houses and is currently developing 252 duplexes.

Today we are digging into what he calls the $100 million mistake, why investors consistently confuse market price with investment value, and why so many so-called experts get valuation wrong. Ryan, welcome to the show.

Ryan, I'm glad to be here. Thanks for having me.

Why don't you give our audience a little bit of information about you, kind of your background and how you got started investing in real estate?

Started about 18 years ago. And was making the transition between locations and jobs and grew up, grew up in a family that had low-income housing apartments. So was involved in the, you know, the basic maintenance from, from when I was a kid, just trying to make some money. And then that turned into what us want to focus more on the investment side. 18 years ago. And then that's just grown through, you know, the, the list of stuff we just talked about, or you just mentioned, where we've flipped properties, we've built our own operations team. We're now doing the development on 242 duplexes as well, or 121 duplexes, 242 units. Yeah. And, you know, made, made mistakes, made some money. Done both sides of the deal. Now just trying to, trying to help our clients continue to grow their portfolios in a positive way.

What are you seeing right now as far as other owners and operators out there?

It varies. And it's the ones that are usually in over their head. They made some assumptions that didn't work. Their management plan wasn't, wasn't as tight as it should have been, or their, you know, their overall plan for getting in and getting out There are some that made— there are some that are okay. They're going to ride it out. They're going to use time to their advantage because they're not lacking in cash right now. Right now is a capital game. So if you've got enough capital to make it, some of the things you did or you may have underwritten, knowing I just need to get this asset because I can't have the capital just sitting here not being active. So there are some of those. The ones that are tighter right now in the market, a lot of times they didn't underwrite with the right plan in mind. They didn't fully underwrite. They, they maybe they did straight pro forma analysis expecting for consistent appreciation. That's technically the appreciation of the most recent years was astronomically higher in growth, even though we've been on a steady decline on cap rate for a while, over 25 or 30 years, I think. But yeah, I mean the, For the most part, the, the investors that, that are struggling or, or, or got caught, something in their plan changed or an assumption they made. Maybe they underwrote on pro forma numbers expecting their ability to operate the asset was better than, better than what's actual. And so now, you know, now the realization is coming about. So they've— in some cases they contact us. We kind of go through the financials. We look at what, what they were planning on doing, what isn't working, and then trying to devise a plan around that.

You're in Indianapolis-based, so you're Midwest market. Is— are all of the properties that you sort of asset manage or oversee, are they in that the Midwest market or are you all over the country?

Midwest market. Right now we're in Indianapolis and that developments in Missouri. We have a development in Missouri.

The Midwest market has held up pretty well as far as rents and rent increases and occupancy, just because we didn't see the— and I'm in Grand Rapids, by the way, Grand Rapids, Michigan. We didn't see the overbuilding that a lot of the major cities did. If you really look at what you just mentioned about some of the stressors that operators are seeing right now, and you're looking at their portfolio with them, helping them assess the challenge, What are some of the solutions that you're coming up with?

The solutions, so they range around what the problem really is. So there are some— in some cases the solution is you got to recapitalize, you got to get some of the downward pressure from the debt gone because, you know, the original plan was to have a lower interest rate than what happened during, during construction.

Interest rate is definitely one of the issues. They're not able to transition into a lower interest rate and that's kind of turned their pro formas upside down.

Yeah, because, because it's gobbling up all the capital for deferred maintenance and then you've got the— I mean, in our market, our market's gone kind of flat on rental rate, at least from the— our market's flat rental rate on the, on the residential side, the bigger, you know, the bigger multifamilies and, and the single family scattered lot. Operators, that a lot of that has gone, has gone flat. It's, it's not necessarily— I mean, it might have gone down a little bit, but not enough to really matter on a graph. It's going to look flat. The problem with that though is a lot of underwriting was done with, with, with more growth. And then our Indianapolis particularly, we did a lot of overbuilding in the MFR space. We've got a ton of Class A that came online and they're working through. I, I don't expect a lot of, of issue there. I think the underwriting there and the, and the particular assets that they developed, that most of what was developed in the Indianapolis market, most of that's going to be stable. I think we're going to see a lot more downward pressure is how the Class A is going to start affecting B and C underneath it. Because they're, they're going to be able to give more in amenities and you're going to have a flight to quality where right now the Class A's are, are pulling people to get that, you know, the vacancy down, occupancy up, top line revenue flowing within a lot of those. And some of the deals I'm even underwriting right now, one of the biggest disconnects that I keep running into is is what the people are asking for and then what the asset's actually producing. You know, in the multifamily space, it's— there's so many expenses and things that are, that are tied, that are tied into the experience. You can't pass those through like you can in commercial. So a lot more of it has to do with with the things you can control. And within that, it's, you know, is there anything— is there anything on the expense item that we don't need or we can cost cut? A lot of times those are already pretty thin.

What do you find on the expense side that can be cut? Because I can think of a couple of things that we've been able to cut on our properties. But I'm curious what you find.

The first thing is go through the contracts for any— for any ongoing maintenance. When was the last time they were fully bid out. Do that for insurance, do that for, for all of your, all of your contractors. A lot of people are hungry right now. Make sure those are, those are in line. Is there a way to build back any of the things that, that you are offering, whether it's internet or any other amenity piece that might be specific to the property that you're dealing with? Now, if you're talking about a lot of single families, that those operators, they don't really have all that, but they also don't have as much pressure as far as like ongoing, ongoing lawn care contract type services because they pass that on. So those are the big things, as long as those already haven't been tapped, at least in our market.

I wanted to say about utility buildback, right, and on the larger apartment complexes We started instituting that probably 5 to 6 years ago, and we've seen a real improvement in our NOI because of it. And there we used to think, well, here in Grand Rapids you have a lot of older buildings, so chances are if you're buying an existing property, it's 100 years old. So on the larger apartment building, sometimes the utilities aren't split the way they are in the Class A buildings, the newer builds. And we found that figuring out, okay, what's the correct rate that we would bill back to the tenant for the utilities that we're paying, not just the utilities, but like the trash, maybe if we have— if we're, you know, have off-street parking, include some additional costs for that. And we build that in now to— you've got your base rent and then you've got your utility reimbursement and we get almost no pushback on that because I think tenants realize no matter where they live, they're going to have to pay for the utilities. And it was really a mindset shift for us, though, to be able to switch to that because a lot of owners think, well, I'll just charge a higher rent and that will cover it. But then what happens is that higher rent dissuades people from renting there in the first place because they can find cheaper rent somewhere else, even if the utilities are billed separately. Does that make sense?

Yeah.

I mean, a lot, a lot of it has more to do with communication and trying to make— trying to involve the tenant a little bit more in the decision-making process, especially in the day— in today's day and age where they have the ability to essentially ask AI, they can now ask AI, is this rent good? And if you can break it down for them and give it to them to where, okay, this is for rent, but this is for you know, this is for all the utilities and things you're using, it starts to kind of separate it in their mind. Whereas if you don't, if you don't do that step, if you don't have that communication, sometimes I think it can be perceived as, well, if you're hiding, if you're increasing the rent and you're not billing back for that, what else are you hiding in that number? I don't know if I can really trust you. But if you come out and you're like, here's everything, like for us, for this to work, this is what it is. And I think that goes a lot further with tenants nowadays.

It has to be a real number based in real expense costs and, you know, applied correctly to the square footage of the unit that they're renting. But I found that that's really helped boost our NOI over the past 5 years because we were able to break it down and convey it properly to the residents in such a way that they, you know, they just kind of assume, well, I've got to pay for utilities anyway. What about marketing expense? Do you find that there's a way to decrease marketing costs? Are you dealing with owners of like maybe larger apartment communities who might pay for some of the, the premium marketing services that are out there?

We are. But at the same time, I mean, the majority of what our marketing, marketing and retargeting.

I—

it really depends on how are we cutting costs within the marketing. It really— it depends on the property. It depends on how you're targeting. You can dial in marketing so direct nowadays. I mean, you can even get it, you know, geo-related. So people that are adjacent to a property are the ones that are going to see it if they're looking at a specific thing. I mean, you can, you can really dial that in to where to where you're not just wasting marketing dollars just blanketing everybody. I do really think the, the main thing in marketing is going to be to continue to share your value that they're going to get by being there to even take a look.

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What does that mean, share your value? Like, what, what are the amenities that you're offering, or, or what does that mean to you?

The amenities, of course, are going to be something that's, that's naturally on people's minds, but I do think I do think it goes beyond that and it becomes more of a culture of, a culture of communication, of openness. I think one of the biggest complaints I get between owners and tenants regardless has to do with just communication, understanding things, having answers available. So that, that in turn goes from the very first experience they have with you, which is your marketing, and how are you communicating the value you bring, the way the messaging, the way it comes across, how open you are about, about the costs on the front end during that whole conversation, just taking that relationship a little bit more serious than what I think the previous years really allotted for. I think when you have people crawling over each other to try to get apartments or try to get housing, you don't really have to do any of that. You just have to kind of throw out a shingle and everybody starts running. I think nowadays it has way more to do with, if I'm going to live there, how are you guys going to treat me and how are you going to treat my family depending on who all is involved? And then just kind of maintaining, just setting the tone within the marketing of it being a community, I think starts to just draw people. It also, I mean, one of the big things in MFR too is the referral, trying to get tenants to refer people, trying to get tenants to talk positively about the environment. And for us, one of the biggest things is, is make that, make that part of the experience that's real from the very beginning, in line with the marketing, how, how you communicate, what you communicate, how open you are, all those things. And then, and then making sure you listen, don't talk over, you know, find a way to get into a conversation to where you learn what their needs are and you find a way to answer those needs.

You talk about what you refer to as the $100 million mistake. That investors make. Can you tell us what you mean by that?

I think the biggest difference in today's market than in a few years ago is, is whether people understand investment value and market value. Investment value, to an investor, that's going to be specific to you as an investor. It's going to have to do with— it's got to do with what other opportunities you have available to you. It's going to have So you need to know your numbers. You need to know what you pay in taxes. You need to know if you invest your cash here, how much you're going to make, because that is going to generate the value you can pay for something. And then you also have market value, which is what all brokers are usually pushing their sellers to get. The, the tug of war and the give and take in any transaction is trying to find a way to meet buyer and seller in a situation. And I mean, and sometimes it's just the broker selling the buyer on potential as opposed to actual. And a lot of that's coming up. I mean, a lot of that's coming up in my underwriting right now where I'm looking at, I'm looking at deals and then I ask the broker, where are you guys at? And I'm, I'm like, I don't, I don't see how this is going to work. I don't, I don't see how you're going to get this. But again, that's from my perspective. That's my investment value based on what I have available and, and what I'm willing to pay. So I think the biggest mistake, and I've heard a few other brokers call it buying, buying strictly on pro forma, I kind of call it the very extremely optimistic approach that every, you know, every real estate deal appreciates and The income's going to appreciate, the expenses, we can fix that and drive those down. The extremely optimistic approach that has pushed some people into bad deals, I think there were bad deals done by some very successful people and they'd probably look back and say, "Yeah, I wouldn't do that again." And it didn't necessarily hurt them because they caught the market just right. They got in, they got out. But in today's market, I've been hearing that there's a lot more people that are being more selective with their underwriting. And the mistake I'm talking about is, is being overly optimistic in projections of value, not paying attention to some of the assumptions that are being used in the marketing materials to generate market value.

What are some of the assumptions that you typically see? I know one thing I always see, and I don't think I've in the past 5 years I've ever not seen a Class C apartment building marketed as being $100 per unit under rent.

So that's—

that would be example number 1 right there is you can bump the rents $100 each.

That and then when they, you know, if they, if they outline the pro forma and they make some assumptions and they call it, you know, right now it could be 3%.

And, and they're, you know, they're escalating rents at 3%, but they're only escalating expenses at 2, 2.5%. That's going to naturally create a higher NOI. But, but the bigger question is, is where did you get those numbers from? Are you just getting it because of inflation, or, or do you have a historical metric? If I ask you, this particular submarket, has it grown 3% in the last 10 years, 20 years? Can you show me an average? And if, if the average doesn't match that, which most— I mean, like, for us, for us it's not over. I, I wouldn't use over necessarily too. Now, do I think Indianapolis is going to grow at an average of about 3? Yeah, over the last 15 to 20 years, even with the big, the big bump. But we had that big bump between '21 and '23 in rental rate. And then when I did the math and I took all the, you know, all the appreciation in rents and I put it on like a 15-year timeline, it still came out to 3% on average for our market. So some of those assumptions are going to work, but they're only going to work over a very long timeline, not, not if you have like a 3 to 5 year window where you've got to get operations or, you know, your plan of what you're going to do with the property and then everything has to line up, those, those assumptions are probably not going to be great if you're not paying attention to what's really going on in that particular submarket and neighborhood.

You also mentioned at the beginning that for some of your owners, you know, time will be their friend. Like over time things will work out. Can you just talk about that briefly, the relationship of time to success when it comes to owning these types of properties?

There's two different probably like avatars that I'm thinking of. Well, the, the most common one in today's market is people that have a lot of cash and they're okay with a 10 to 15 year hold.

So they might pay a little bit more to get a hold of that asset and then ride it up for a longer period of time. That's going in I would say with your eyes wide open, you kind of know how much capital you're going to deploy. You expect this to be a longer hold than 5 to 7, and you're going to use time and the stabilization that's going to happen to be one of your primary growth factors. On the other side is if you've bought, maybe you overpaid a little bit, you're realizing that now. You didn't realize it at the time, but you're okay. You can ride it out. You've got enough cash flow from from things to ride it out. And, and in that case, it's what I always say is if you do make, if you do make a, a purchase that's a little bit over what the numbers show, the only real answer to that is time. Time and stretching it out is going to allow markets to stabilize. It's going to allow wages. I mean, the main, the main problem right now with spending and inflation is the power of the dollar and that wages aren't going up. Wages aren't going up fast enough for rents to go up, and then rents trickle down into, you know, into everything else. But overall, I mean, employment's not terrible. There is, you know, there is some readjustment in employment. There's fear about AI and how it's going to take over jobs. I I don't think it's necessarily going to have as much of an impact as they thought immediately. I think in the long term there'll be some of that. But, but the biggest, the biggest thing with time is and how real estate performs comes back to— it comes back to there being enough time from when you acquire it to when you're going to liquidate it, sell it, achieve your goal. For, for the market to, for the market to set up again after what we've been through with the most recent COVID, the amount of money into the market, the interest rates going down and then spiking in, in '23, '24, going through all that stuff. Ultimately, you've got to, if you stretch it out on a long enough timeline, a lot of those things start to have less of, of an impact to the overall growth.

Tell our listeners and viewers how they can find out more about you or get a hold of you, and feel free to plug whatever you'd like to plug.

ResoluteRDM.com, that's our website. You can check us out on LinkedIn. So I think we've got social presence— LinkedIn, Instagram, TikTok. We do, we do stuff on there all the time. Our team does. Check us out on there. Reach out to me. LinkedIn's my primary way. Or the website.

What kind of AI are you using right now? Like, what's your favorite AI?

I love Claude. I actually built some self-designed analyzer tools to where I can dump a bunch of data into it and have it running while I'm doing other stuff. And then, and then, and it outputs, it outputs the things I want to look at on a deal. It even ranks particular properties. Claude is my, is my go-to. Our team all uses Gemini. And that's, I mean, that has a bunch of cool features with it too. So I'm using both of those right now. And then we intermix a bunch of things between Notion. I mean, I use Notion for organization and that kind of stuff, but Claude is the main one and then Gemini and then integrating, like learning how to integrate is big.

Did you do Claude Code to develop your analyzer or did you just do it in Claude Project or what?

I did it in Co-Work. The new thing in Cowork, they just launched that Opus 4.6 and then I think Sonnet 4.6 was last week. But in Cowork, I went in and I mean working on what— so what I would tell people with AI is dedicate an hour a day, 30 minutes a day and just work on a little bit at a time and let it build.

And then it'll— you'll start to figure out how to do it. The main thing is learning how to talk to it. If you treat it like an assistant and you prompt it with, hey, this is what you're going to do and I need these outputs this particular way. I mean, even basically, so like the deal analyzer skill I built in, in Claude, it built it for me. I told it what I wanted it to do and then it went in and I told it to ask me specific questions. What are my opportunity costs? What's You know, what kind of lending am I looking at? Those kinds of things. And then it'll build a lot. It's way smarter than I need to be. I just need to learn how to talk to it.

Ryan, thanks for coming on the show today to talk about the $100 million mistakes and just the, you know, some of the due diligence and verification of income and expenses before you buy a property that, you know, if you don't really pay attention to them, can lead to a lot of problems later on. So Really enjoyed talking with you today.

Thanks for being here.

Thanks, Brian.

Appreciate it.

I want to thank everybody for listening to this episode. I'm your host, Brian Hamrick from Hamrick Investment Group, and you can find out more about me by going to higinvestor.com.

That's higinvestor.com.

This episode was sponsored by Green Property Management, managing everything from single-family homes to apartment complexes in the West Michigan area.

Find out more more at greenpropertymg.com and RCB and Associates helping real estate investors and small business owners navigate the complex world of health insurance and Medicare benefits at rcbassociatesllc.com.

You've been listening to the Rental Property Owner and Real Estate Investor Podcast brought to you by the Rental Property Owner Association. You can find out more at RPOAonline.com. If you enjoyed this podcast, please go to iTunes to subscribe, rate, and review.