Welcome to another episode. Today, we are thrilled to have Ken Majmudar, Founder and Managing Partner of Ridgewood Investments, join us once again. With an impressive background that includes an honors degree from Harvard Law School and extensive experience on Wall Street, Ken brings a nuanced understanding of value investing to today’s complex real estate landscape.
Since founding Ridgewood Investments in 2002, Ken has honed a keen focus on value investing strategies that have consistently outperformed in dynamic markets. His profound insights have been shaped by decades of high-level experience in IPOs, mergers, and acquisitions, earning him a notable reputation among elite investment circles.
In this episode, Ken dives into the current state of the real estate market, sharing innovative strategies and emerging trends. He tackles the intricacies of ground-up multifamily development projects, discussing both the challenges and key considerations that can make or break an investment. Ken also explores the impact of private credit and immigration on housing trends, providing listeners with a deeper understanding of these critical factors.
Additionally, Ken outlines what investors should consider when planning and budgeting for property development projects. He emphasizes the importance of adhering to fundamental investment frameworks, especially in a market rife with potential risks and rewards.
Whether you’re an experienced investor or just starting out, this conversation with Ken Majmudar is essential for anyone looking to navigate the complexities of real estate investment with confidence and strategic acumen.
HIGHLIGHTS OF THE EPISODE
00:23 – Guest Intro: Ken Majmudar
01:37 – Navigating the current state of the real estate market
03:54 – Investment strategies and market trends in the real estate industry
11:54 – Challenges and considerations in a ground-up multifamily development project
25:01 – The impact of private credit and immigration on the housing market
28:01 – Budget and plans for a property development project
34:45 – Exploring investment opportunities and strategies
38:58 – The importance of fundamental frameworks in investing
45:14 – Challenges and risks in real estate investments
If you found this episode substantial and want to dig deeper into real estate, or maybe you want to discover better investment opportunities, be sure to check out www.tempofunding.com.
CONNECTING WITH THE GUEST
Website: https://ridgewoodinvestments.com/
Linkedin: https://www.linkedin.com/in/kenmajmudar/
Instagram: https://www.instagram.com/ridgewoodinvestments/?hl=en
Youtube: https://www.youtube.com/channel/UCH9bBby_oLefFBq0lpOQZ6g
Full Transcript:
Intro/Outro: Welcome to The BigMikeFund Podcast, where you’ll learn about advanced wealth building strategies from real estate investing to creating massive ROI and secure retirement profits. So pour yourself a cup of coffee, grab a notepad, and lean in. Because Big Mike has got the mic, starting now.
Mike Zlotnik: Welcome to the BigMikeFund Podcast. I’m the Big Mike, Mike Zlotnik, and today is my pleasure and a privilege to welcome back Ken Majmudar. Hi Ken.
Ken Majmudar: Yes. Hey, Mike.
Mike Zlotnik: Thanks for coming back on the podcast. And Ken is a founder and managing partner at Ridgewood Investments. He’s an REA registered investment advisor. He does both public markets and private securities, including real estate.
So it’s great to have you back in. Anything exciting going on personally in the life of Ken? Our family, anything super new?
Ken Majmudar: Well, most of my kids are flown the coop, so to speak. So we’re empty nesting. But we’re enjoying that. So it’s like a phase transition backwards. It almost feels like we’re dating again.
No kids around, so it’s been an adjustment, but generally a positive 1 is my wife and I used to travel together. She now accompanies me on some of our trips. We’re both in. So, I know she’s been to a few times now, which never happened when. Kids were home so it’s been great. And obviously business wise on the public side, markets are virtually all time high.
You know, I’ve been also involved in Bitcoin and things like that for a while. I have a crypto fund and that’s obviously at all time highs pretty much. And on the other hand, real estate, you know always something I believe in. But with interest rates, having gone up real estate. I think is a little more stressed there’s still opportunities, obviously.
And in fact, I partnered with another of our folks in CG and some other folks, and we created a an entity called Banksmore where we’re going to focus mostly on multifamily, but it’s probably going to be a fair amount of that is going to be grant multifamily as opposed to the traditionally, a lot of the stuff we did was value added where we would buy existing multifamily Increase the rents. So that’s been recently a focus of our.
Mike Zlotnik: So that’s interesting that you said that few things you are. I know you’re a big, big fan of Warren Buffett. You’ve gone to for halfway annual meetings. You’ve got pictures with Warren Buffett years ago, all pictures, but you certainly follow Warren quite a bit.
And the, you know, when Charlie was alive, you, you to follow Charlie. So using exactly what Warren of course teaches. Don’t you think that the biggest value, and I may be wrong, I’m just asking for opinion. So based on what you said, public markets, especially the stock market, is at all time highs. Bitcoin is at the, and crypto is at the all time high, while a lot of real estate is substantially depressed.
Because of a high interest rate wire, so from a value in that perspective of fresh dollars going in today, don’t you think that investing in real estate now feels a lot more attractive on a risk adjusted basis versus trying to chase the stock market and trying to chase the Bitcoin? I’m just just trying to put on my good old value investor head.
What do you think?
Ken Majmudar: I would say. Yes and no. I would say more no than yes. The, and what I mean by that is I think if you were to just invest in a market as a whole, of course the stock market is higher than it used to be. And it has had a great run for the last 10 12. Yeah, people say that it’s a market of stocks, not a stock market.
And that’s the analogy to, you know, all real estate is local. So I, I think that there’s still many opportunities in the stock market, and there’s always going to be many opportunities in the real estate market. But the opportunities, you know, they, they shift from 1 area of the market to the other types of companies to another.
So I’ll give you an example, even in the stock market. So there’s a lot of real estate companies. In the stock market, and so, for example, there’s the leading homebuilders in the United States. You know, there’s a couple of just, I’m thinking of, you know, they’re trading at 10 times P. Meanwhile, technology companies are, some of them are trading at 40 or 50 times earnings, or some are even more than that.
So, you know, they’re both in the stock market and so I don’t necessarily look at things in such a bulk way. But rather try to be more nuanced about it. The other thing is, you know, in the real estate side you know, the biggest, a big part of real estate is leverage. And so, I don’t know, for example, I haven’t seen, we, we just, we happen to have bid recently on a value added multifamily in central Pennsylvania.
It was about almost 200 units, 198 and we were nowhere near the, the, the winning bid, you know, we were, we were 5M less and we didn’t want to go higher. So, you know, even in that market, the value added, it’s a, it’s a good project, but, you know, at 5M more than what we were willing to pay you know, we’re, we’re scratching our heads.
So the, I have not seen, I don’t know if you have a tremendous amount of, you know, really cheap commercial real estate, you know, in, in the multifamily area, at least that’s like, you know, you’re just like stealing it. So, so maybe that will happen, but I have not seen that. So I don’t, I don’t see any major deep value yet in multifamily.
I see, I see, you know, pressure and distress, right? Like. People calling for capital. The original business plan hasn’t really panned out. It’s not, it’s taken too long. They’re having trouble refinancing and rolling debt, but that has not in my, so far, I’m not on my desk. I’m not seeing a series of amazing deals, you know, like at rock bottom prices.
So I’m not sure exactly where this value on the real estate side is. And, and more broadly, you know, I, I, I cover all these different areas, whereas I think a lot of folks in real estate, a lot of folks, I personally know, you know, through CG and other places, they believe only in real estate and I’ve always been consistent saying that that’s not the only game in town.
But, you know, you know, and we just agree to disagree and we’re, we’re all still friends. But I think in the fullness of time, my approach has certainly worked very well for, for our clients that I don’t just limit myself to saying the stock market is bad and real estate is good.
Mike Zlotnik: Yeah, I appreciate that you, well, you, you are a much more flexible investor because you, you basically have the flexibility of doing things in various markets picking obviously it’s a market of stocks, not the stock market.
So you like that to be a lot more picky. In your selections. And of course same thing with real estate, just like you said, all real estate is local. So it’s all different market by market, but all I was trying to refer is on a relative basis. If we looked at a really big picture, if you were just given a few simple choices.
Yeah, it feels like the stock market is fully priced and the Bitcoin, again, crypto, I’m not going to comment anything beyond the fact that it has had a great bull run. Speculation, of course, that it could be in a balloon of sorts, who knows. But real estate market, again, based on the theory, if you can get the right deal, and what you just described is An environment where getting a great deal is still rare, and the the, the distress is there, but to buy really, really deep, that, that, that’s still happening pretty rarely.
So more, maybe more time is needed for these distress situations to come to actual market and transact at a price that you want to buy. And that’s why a few things are transacting, right? The buyers and the sellers bid and ask spreads are pretty significant. And that, that might take time to shake in.
So, l l l let’s Go back to what you’re, what you’re doing. I know you partner with Eric in Pennsylvania and you’re building ground up. Are you building new multifamily ground up? Is that what you’re doing? I’m just curious what
Ken Majmudar: well, we, we, we’re doing, we’re doing we’re going to do some value of that too, if we find the right deals, but the, the first two deals that we’re focusing on and there’s, there’s going to be a few more probably this year.
So it’s, one of them is we’re taking a. Existing building of approximately 80, 85, 000 square feet. Somewhere in that range. And we’re going to turn it into you know, I think it’s 97 multifamily units with amenities and also that’s an exit, that’s a commercial office building that we’re going to convert office,
Mike Zlotnik: office, the multifamily.
Ken Majmudar: First two residential apartments. Yes.
Mike Zlotnik: Okay. So that whole theory makes a lot of sense in the post COVID world. If you can convert it, right. At the right price, because the conversion process is, is difficult and expensive in general.
Ken Majmudar: Exactly. So I think we’re, let me do the math on that. I think. We’re probably gonna buy that building for under $30 a square foot.
And then even with all of the costs, if you look at our cost per unit for 97 units, how much units is the cost
Mike Zlotnik: per square foot? If you’re buying 30 a foot, how much are you converting? And of course, some, some square foot is just gonna go away. But if you yeah,
Ken Majmudar: I, I think we’re gonna be let me just quickly do the math on it.
If I’m doing this right so I think all in. We’re going to have 97, you know, so we’re probably going to be all in at 125 or 130. But and that’s going to be completely new sickly class a product with you know, with humanities, you know, Jim and a nice lounge and business center and all this kind of stuff.
And this 1, this 1 is outside Harris. I had not known before. We looked at this but. Partners on the educated me that Harrisburg just turns it out. It’s sort of. You know, secondary. Rental markets in the Harrisburg, of course, the capital of Pennsylvania.
Mike Zlotnik: Okay, folks, this is big Mike on a big Mike fun podcast.
I’m back when with Ken much tomorrow, we had a little bit of an interruption with technology being a little, little choppy. So we’re back. So we’ll continue straight from where we left off. Cancel. Let’s talk a little bit about your projects this year. And you were talking about a project. In Harrisburg, Pennsylvania, capital of Pennsylvania, where you’re buying an office building for about 30 a foot, and you’re all in expecting to be about 130 a foot.
So you are your construction cost is about 100 a foot, which is a lot more than the price you’re paying for a building. For the bill, of course, of course, when you’re done, right? That’s the thought process.
Ken Majmudar: Basically, right? That’s the thought process. And obviously, we’re getting, we’re getting the building for 50 percent of what it appraised for 20 years ago, which it was already vacant for a long time.
So, you know, we, we really like this project. We’re going to turn it into 97 units. But, you know, what I was saying was that if you can create new product. At a significant, like, even if it’s a little more expensive than existing product, but you don’t have that all the deferred maintenance. You clearly have a superior you know, op op.
The offer for people who want to live somewhere, obviously, I don’t know if you ever lived, like, in a new building versus an old building, but obviously it’s much better to live in a new building. At least, I find that to be the case. And you usually get a premium on a per square foot basis. Meanwhile, your operating costs and operating expenses tend to be somewhat lower.
So it ends up being you know, I find, if I can, if I can get new product at even a reasonable premium to existing value add, you know, product that was built in the 70s or 80s. I would rather have new product. And so what we’re finding is that at least we’re looking at. Build to rent as maybe a big focus area.
You know, separately, we were talking earlier about the stock market and stuff. And, you know, I, I mentioned that there’s, there’s for example, home builders, leading home builders that are trading for 10 times, you know, 11 times PE, even though the market as a whole is trading at, you know, close to 20 times PE and they’re good companies in there, you know, there’s about I was, I was just listening to a podcast, there’s about a 3 million You know, housing deficit still to be worked through and every year we need about 1 5 Million new homes. And so, if even if they push that and say, they’re able to make 1. 7Million new homes a year, it’s probably going to take, you know, the better part of a decade and a half or more to work through the existing shortage. And so, you know, so even in the stock market, there are opportunities in and outside of real estate.
And in real estate until prices of existing multifamilies, maybe adjust, or maybe you know, maybe the distress finally comes through enough where there’s actually assets that get sold at much better prices. We think that if you can find. Land or existing assets at the right basis and convert them.
There’s there’s clearly the demand is there. You know, for for good housing, that part is there. And the other thing I want to mention to your point about, you know, is there value in real estate is partly it will depend on what happens with interest rates. Right? So, if we’re in a higher for longer thing, or if interest rates continue to go higher, it’s going to continue to add.
Okay. Pressure and stress real estate, but right now people are thinking that we’re, we’re at that kind of plateau and that people are anticipating that the Fed will. Will start easing and so if that ends up happening, and you buy assets that, you know, 7 percent mortgage rates and I mean, maybe they won’t go all the way back down to, you know, 3%, but even if they go down to 5 percent that that’s a 200 basis points drop that will probably put some real tailwind again behind all kinds of real estate.
So, you know, but. We’ll see what happens, you know.
Mike Zlotnik: Yeah, I appreciate it, Ken. So I completely support that theory. Of course we can talk about a couple of possible scenarios, more of economic, where there is a stagflation and Fed is forced to keep the rates at an elevated level higher for longer and versus an environment where we really start decelerating.
And the inflation comes down, even though the economy is softening and the Fed cuts. So that will be a tailwind. But let’s go back to the basics here, because there are a couple of things I wanted to dive a little deeper. Number one, of course you are converting what is dislocated asset class. And there’s been a lot of discussions on the topic, what to do with all this office space.
So if you’re taking an old office and repositioning through full renovation and redevelopment into multifamily units, which is in high demand and the demand for multifamily is fundamentally very strong. So there’s no argument we are in severe shortage. Especially this is true in some markets. So some markets have seen a lot of new construction and some markets are certainly on the undersupply.
So I’m assuming in Harrisburg it’s significantly undersupplied versus some of the Sunbelt areas where there’s been a lot of new development. So you’re bringing new product to the market and you’re also demonstrating what to do with dysfunctional office that has been kind of a dying asset class for many years and COVID obviously.
Completely buried the asset class or, or, or near the grave. So you can buy it at a steep, steep discount, steep discount, right? Yeah. To the, to the reconstruction cost. But the big question becomes obviously complexity of redevelopment. This is what I’ve heard. If you can redevelop. At a reasonable cost.
Are you getting any incentives? Because what I’ve seen and heard that in order for their math to work well, you got to give some either tax credits, state, city, federal tax incentives, because if you don’t, it gets tougher because the cost to redevelop is very significant.
Ken Majmudar: We think we will apply for and get property tax relief.
Because, you know, 1 of the good things about these type of projects, and by the way, the other 1, which you didn’t talk about or touch on even yet. That 1 is a ground up multifamily development, and that 1 will be outside Columbus. So, you know, those are the 1st 2 Columbus, Ohio. So those are both. The 1, those are the 1st, 2 that we in this new group are working on together.
Obviously, it’s called banks more, but the, all of the principles, including myself, have a lot of experience, you know, doing things individually. And so these are the 1st, 2 projects that we’re going to work on as a group together, but, yeah, I mean, you know, like every project, there’s always risks and uncertainties and things and like pure ground up like the 1 in Columbus that I’m alluding to that 1 is just a lot more under our control.
Right? Like, you know, there’s no surprises or anything like that. Whereas in the other 1, you know, you can have a potential for surprises. So you always build in a, maybe a contingency in both but the thing, you know, that makes it attractive is 1 is like. Yeah. In that area, right, it’s just outside Harrisburg, you know, there’s not there’s not going to be a lot of land, like, in good prime locations and in good prime area.
So, right. You know, you’re in a more of an infill location. So, where are you going to find land to do? You know, big ground up? You really you can’t. But the other thing is, like, I think, like, that particular 1. You know, we’re probably buying it more like 20 something a square foot, but if you just look at the structure and the parking lot and the foundation and everything, right, the replacement value, you probably couldn’t even build that for a hundred a foot.
Mike Zlotnik: So I agree a hundred percent. So there’s no argument that office trades at, you know, 30 a foot, 30%, Versus the price of what it used to be, and if you compare it exactly what you said, the price you’re paying versus what it was worth 20 years ago, you’re still getting a steep discount. That’s crazy. Right.
What’s happened to office space. So no argument. At the end of the day, what it’ll come down to, is it cheaper to redevelop versus building ground up? Yeah. Yeah. So, and
Ken Majmudar: that’s what we’re looking at. Yeah. Yeah. But in this particular case, where you couldn’t even find land there of this type, And then to replicate that same amount, demolish
Mike Zlotnik: the asset completely
Ken Majmudar: and demolish it.
Right. Right. So clearly it’s all based on like the condition, the floor plates and all of that. This particular 1. We feel is is actually quite low risk. But, you know, but we’ll see, and, you know, I don’t think that, you know, some of them that you could have a lot of risk, right? This 1 was generally a.
Functionally good, solid construction. And so we’re, we’re essentially having to redo all the interiors, rip out all the walls and everything and then redo the plumbing, electrical walls and furnishings and fixtures. So, well, you know, we’ll see, because it’s the, it’s the 1st, 1 of these 2, and then we’re, we’re planning to maybe do 4 this year.
But, you know, I do, like, I like ground up because of the risk is lower. And then obviously in certain markets, I like this this sort of adaptive reuse. Idea as well, if the basis seems attractive enough and, you know, we feel that the risk of any surprises is low, which is our assessment. Now, again, we’ll see.
It could turn out that we, we could have missed something. I mean, generally, there are always surprises and everything, including all the stuff we’ve done together, but you just work through it, you know. And you build in contingencies.
Mike Zlotnik: Yeah, I appreciate that, that overview and I, I concur with you. The the surprises could be significant, especially on the projects where there’s a lot of work, right?
Anytime you go to heavy value add, development redevelopment, or ground up, you can see obviously surprises, one in the cost of inflation, two in the complexities, and I’ve been involved with a few redevelopment projects and I can tell you it’s always, whatever you think you’re going to get, it’s always a lot more than that.
Ken Majmudar: Yeah, and, you know, that may turn out to be the case here. We’ll see but, you know, we, we thought these ones were attractive relative to what else, you know, the, the other alternatives that we had and, you know, the other thing is what’s nice about redevelopment is you can build in greater cushions and things.
Because, you know, costs tend to be higher anyway so, you know, if you make the project successful, then those are assets that you probably could, some of them could, you could hold generationally but, but, but we’ll see.
Mike Zlotnik: Well, I certainly wish you best of luck. I appreciate the explanation. The, the theory makes a lot of sense.
Ultimately, the devil is in the details and then. The only other comment I’ll have is the I’ve seen people trying to apply for federal and state credits if the building has some historic value or, or, or some, some of that, you know, those credits become available because the city is wanting to incentivize certain redevelopment.
Ken Majmudar: Well, and that, that’s a very good point that I want to bring up that is true here is like, so, like, in these kind of projects, when you have an empty. Building, especially they usually get a fairly good amount of cooperation from the towns and the cities, because they’d rather not see a vacant structure.
They’d rather see it being put to productive use. So they tend to be a little more supportive from different different angles.
Mike Zlotnik: Local politics. The key is local politics because at the day, there are even local brands, all kinds of local incentives. But you’ve got to be connected to the community at that other thing.
Ken Majmudar: And, and, and the other point I should make is, you know, obviously like the degree of difficulty when you do ground up or even adaptive reuse compared to value add is just a lot higher. So that means that you have to have the ability to execute and that requires a great team. And, you know, you’re managing more complexity and more risk that ultimately, if you can manage all of that, which not everybody can successfully, then you should, it does generally lead to Better returns. So we’ll see.
Mike Zlotnik: Yeah, I appreciate that. And the theory is absolutely correct. And then at the end of the day, if the interest rates cooperate, they move in the right direction. You get the project rolling with interest rates being where they are today. You have a tailwind. But exactly. Yeah, we don’t know this whole great, great discussion.
And I’ve had discussion on this topic. Whether we can actually see a stack inflation higher for longer rates stuck And which will not necessarily be good news for real estate. We have stagnant economy while we still see inflation
Ken Majmudar: The surprising thing, though, is the surprising thing is that the economy though, has been very strong in spite of these lower rates.
And you’re seeing that, like I said, in the stock market, among other areas. So where you would have thought, Hey, if you told somebody two years ago that interest rates are going up, you know, 400 basis points and mortgage rates are going to be at 7%, we, both of us probably might’ve guessed that the economy would be much softer than it is right now, and that’s been an interesting thing to see.
Mike Zlotnik: Yeah. I just had another episode released. And that episode, I had a guest who is one of the brightest minds on the Fed policy. And the way she attributes to the strength in the economy is to the private credit. So the banks withdrew credit, cost of money obviously much higher for the high interest rates, plus the bank much harder, much tighter lending conditions.
But not to repeat what she said but the basic summary, private credit has stepped in. Private credit has been, and the private, private credit has been surprisingly resilient and strong. And in fact, it’s a lot more attractive. If interest rates have gone up, it’s more attractive for private credit or all the hard money loans or call it whatever you want to call it.
But that’s been sort of substituting what the banks have done in the past. But let’s continue the discussion to what you are doing, where you’re seeing the opportunity. So I agree that Fundamental demand for housing units is strong and will continue to grow. One of the real basic things what has happened is we’ve got millions of undocumented immigrants.
And I’m an immigrant. I don’t know if you are a first generation immigrant or you were born in the States, but we all immigrants became I’m first generation immigrant. Yes. So when we came over, we came into the process. I came to a political process where I applied for it to be a refugee from the former Soviet Union.
And the U. S. allowed me to enter and I had to wait to go into the country, right? This is many, many, many years ago. Now the undocumented immigrants just kind of went over the border and they need a place to live. And the demand for units is just, has grown quite a bit. And it’s an aggregate demand. And they’re sitting, you know, I’m in New York City, and there’s no place to put them.
They’re everywhere. And many other cities are overloaded with these folks, and they continue to come over. But it’s increasing aggregate demand. So demand for housing units in aggregate continues to increase. And maybe, ultimately, folks will have to be, leave New York City and go to Harrisburg, Pennsylvania, and increase demand there, right?
And it’s aggregate demand. It’s not demand for those units. Brand new units. Maybe least to the folks who were living in different units, but the folks who will who will get government checks and government help, I’ll have to go into the less expensive units, but aggregate demand is growing and growing at a pretty healthy pace.
So immigration in general grows aggregate demand as a basic sort of a concept in addition to that shortage of supply plus population growth in general is just so I’m completely in agreement. Multifamily housing or built to rent housing. He’s going to be fundamentally a great asset class, but you’re still dealing with the construction in the high interest rate environment.
And of course you’ve got to raise equity. Have you, I’m just curious, have you built the plans yet? You’re just starting you’re just looking at these projects and you haven’t yet put them together. We’re chatting briefly. You were saying that you will, you will be working on capitalizing for these projects.
Mike Zlotnik: Do you assume you’re going to be raising some debt, some bank debt? You’re going to try to,
Ken Majmudar: yeah, we’re going to have bank debt on both. And then we’re going to have equity on both the Harrisburg 1 is going to be 97 units. But that 1 is going to be about 2 and a half million of equity. So it’s a relatively small amount of equity.
The 1 in Columbus we are looking at more like. Seven and a half million of equity. Oh, so that one’s a 20 something million dollar project. The other one’s about an 11 plus or minus an 11 million project. You’re talking about pretty high
Mike Zlotnik: leverage. The example that you just gave, the leverage you’re talking about is pretty high and this environment, the banks are lending very low leverage, like 65 percent leverage is extremely high leverage in this environment that you don’t go higher.
How are you able to get that kind of leverage?
Ken Majmudar: Well, we’re I’m saying, well, we’re I’m not count. I’m saying outside capital. So, you know, I’m not counting capital that we might be putting up. And then there’s some other credits and things that we’re going to get. But we’re probably, you know, we’re probably still we’re not going to be at 65. I think we’re going to be at 75. Percent something like that.
Mike Zlotnik: Yeah, I’d be surprised and I mean, this not necessarily negatively if you can get the 75 percent leverage on a ground up or redevelopment, but I think part of it may be like,
Ken Majmudar: for example, the, the, the project where the 1 in Harrisburg, as an example, where we’re actually buying the property for 50 percent of the appraised value from a while ago.
Mike Zlotnik: But that that’s on that argument. I just want to put this point. I’ve seen this argument so many, many times and people tell me I’m getting a great deal on land for new construction, or I’m getting a really great deal on an old office building for a developer.
And I’ll say that’s wonderful. But what overall percentage of the cost is your land or your building? It’s small. So if you take 30 of food and it used to be.
Well, usually it’s 20%. You know, it’s roughly, you know, yeah, so if you’re getting a discount on something that’s worth 20%, the overall impact is not
Ken Majmudar: the value is 3 million. Let’s say the value is 3 million, even though that’s way below the cost to build a structure like that in that place. So so if that’s 20%, then 5 times 3 is 15, which is roughly the value when it’s done will be more in that 13 and a half 14 range. Okay. But our, our budget is to do it, including the acquisition, everything.
Or under around 12. A little less than 12.
Mike Zlotnik: So you’re gonna buy for a million and a half, you going correct. All in all in for 12 million? Is that, is that what you’re saying? Roughly? Yeah. But how all the horses, I guess you got 196 units at a hundred and No, no, no. That one is 97 units. 97. 97 units. Mm-Hmm. Total cost about $130 a foot. Right?
Ken Majmudar: Something like that. Yeah. Whatever you’re, I’m looking at it more on a unit basis, but yeah. So maybe 130,000 a unit is what you meant. So per unit. Yeah, per unit. Yeah. Yeah,
Mike Zlotnik: that’s fine. And then what’s the valuation? What’s the exit value? What’s the are you probably going to
Ken Majmudar: be probably going to be in. In the, well, we’re the overall project is probably going to be worth around 14, 15, right? You know, initially based on NOI and all of that, but wait a minute.
Mike Zlotnik: Wait a minute. What you just said, say 14.
Ken Majmudar: Yeah. Yeah.
Mike Zlotnik: 14. And you have 96 units. It’s like a little over 140, 150, 000 per unit, right?
Ken Majmudar: Yeah. Right.
Mike Zlotnik: And you’re all in to build 1, 1, 25, 1, 30. Does that sound? Yeah, that feels way tight. I, I mean this for all due respect. Mm-Hmm, , it feels, feels super tight. I mean, that, that, that math W 1 45. Yeah. Yeah. Mm-Hmm. .
Ken Majmudar: Well, we’re also, that we’re not counting yet. We’re expecting a tax credit and there’s some other things, but I mean, you know, we. We will be happy to share the details with you and get your, your, your input on it.
I don’t have all the Excel sheets right in front of me.
Mike Zlotnik: 1 quick, 1 quick comments, not saying the numbers you map may be totally fine. But if you’re all in for 1, 1, 25. Per unit.
Ken Majmudar: Yeah,
Mike Zlotnik: 130 per unit. And when you’re done, you’re worth 145 150. Only way that can work obviously if you get tax abatement for the next 15 years, that’s wonderful But you need more incentives.
I was looking another project with actually another cg guy where he was getting historic federal and state tax credits Tax credit is a hugely valuable without tax credits The math just didn’t work and I looked at it in the past because of heavy redevelopment cost and the crazy part You That project is very similar.
He’s taking an old office building downtown trying to redevelop. You need additional incentives. That’s my general feedback here. And, and without looking at the math, I can’t tell you anything other than if you, if you’re all in 125 and you’re selling for 150,
Ken Majmudar: I’m using like round numbers. So maybe it’s 120 and 150 and maybe there’s a tax credit, whatever, you know, where this is all back of the envelope, but yeah, it’s you know, it’s been underwritten, I’ve looked at the underwriting so have other folks.
And, you know, we’re. We’re planning to move forward with it. So, and I had the initial comment, just the same comment that you’re making. Now, I had my 1st pass through it. And then when we dug down deeper into the details, you know, like, for example, I said 12, but it’s probably like, just over 11, you know, there’s, there’s a few 100, 000 here and there that moves around and that probably makes some difference.
Mike Zlotnik: So I’ll give you the following final couple of feedback. So one, I applaud you for doing this, right? This is, this is important. This is good for the community. This helps redevelopment whatever city in town, Harrisburg or Columbus, it helps local economy. Two if you run under it and conservatively, and you, you have significant buffer and you still, the numbers still pencil, that’s wonderful.
Ken Majmudar: Right.
Mike Zlotnik: And ultimately, if the interest rates help, then the project could be
Ken Majmudar: right. Now, obviously, like, we’re, we’re looking at kind of almost a, a base, somewhat conservative case with the numbers that I’m quoting, but, you know, a few things could make it, you know, quite a bit better because I didn’t want to, like, quote you, like our optimistic projection but we, we, we’ve, we’ve, you know, We feel for whatever reason, because I think we’re working with the bank already, then we’re working to get a loan commitment.
I think we’re, we’re looking at about 2 and a half million of equity for that project. And I think the total cost is like, 11 something.
Mike Zlotnik: So the bank’s giving you floating rate that I assume for construction, right? They’re giving you some kind of, we’re
Ken Majmudar: going to try to get a permanent, like, take out as part of the original package.
So essentially. The way the package should hopefully work is that we put up the equity, but by yes, the bill to perm. And so we wouldn’t have that, that uncertainty. And so the idea is like, basically once we get it, once we get the CEO, they’re willing to flip it into a longer term financing.
Mike Zlotnik: I’m just still, but you’re still starting with a floating rate debt.
And then the one question that I have is what rate are you getting? What is bank quoting you on a way that we have not gotten that far, but you know, we’re, we’re.
Ken Majmudar: We’re assuming it’s going to be at whatever current market is, and that’s really more. One of my partners was more on the development side is negotiating with them
Mike Zlotnik: on this. So let’s switch the subject just for a couple of minutes, and then we’ll wrap up. What else is it? What are the opportunities you’re seeing? And by the way, the public market comment about the builders stocks of the builders, I’ve heard that argument too, that they’ve been beaten up. And the, there is some potential discount, but you have to be a specialist in these publicly traded reads developed, especially, you know, build a reads where you’re feeling that you’re, you’re genuinely getting a.
A good discount. I have no other comment other than the price of those stocks as a function of the stock market so they can go up and down with the you know Depending on what the stock market decides versus private investment. Of course you’re building, based on sort of inefficient markets It’s where you don’t have this type of market driven forces.
You have more supply demand and fundamental math. So what are the opportunities you’re seeing? I’m just curious, anything interesting?
Ken Majmudar: Well, well, I think obviously the ones in real estate that we’re talking about, but I. I think there’s still a lot of opportunity, like, even though you have, I mean, let’s just use homebuilders as just an example that are publicly traded.
You know, there’s probably 5 or 6 leading ones. There are capital allocation policies and their valuation, is as if they’re below average businesses, but they’ve become probably above average businesses. So that transition hasn’t been fully reflected in in in the market. And so that’s like kind of a niche example.
I think if you’re a long, I mean, most of my investing is very long term, which is different than most people. But so I look for really opportunities to create wealth in the long run. And one of the reasons, by the way, I like the stock market is because I personally, you know, have a very substantial, you know, that I built, you know, great portfolio of companies that I’ve invested in that are now well appreciated way beyond my basis.
And I get liquidity. And I get to create this wealth without doing any work, but then on top of that banks love the collateral. So I can leverage that and then do real estate with, with the collateral that I build in the stock market. And I think since your audience is probably more real estate and private market people.
I’ll say the same thing, which I’ve been saying for years that no real estate people ever listened to and constantly argue with me against, which is, which is fine. But you know, is that there’s more than, you know, it’s not that the only place to make money is in the real estate market. And in fact, it makes sense to have some liquid, all the, all these other investments that we’re talking about in the market are liquid.
Now I should make a point that what, what, what should be an advantage that you can have liquidity ends up for most people being a disadvantage because mindset is one of a trader or of a short term. Owner of something rather than a long term owner, which is what I, what I do and what I encourage, but buying a great business and letting it compound and, you know, go up 10 X or 20.
I mean, you know, not too many people probably have experienced where you buy a company and it goes up 5 or 10 times your cost basis and it still has growth ahead of it. I’ve experienced that many, many times. And so my clients and it’s just, you know, it’s just a different, you know, You know, it works well, I think, with real estate and other things.
So I still think there’s opportunity there. I actually think there’s opportunity in crypto. I’ve been involved in it since I first figured it out, and that was in 2013, so 11 years. I’m probably one of the earlier people, at least in my field. And I, you know, I went on Freedom Founders. This was two or three years ago saying, you know, crypto, and I explained my whole thesis and everything.
But, you know, like, you know, and again, more power to everybody, everybody, you know, there’s wealth in real estate. There’s wealth in all these different areas. I think a lot of people make the mistake that just because something went up that the opportunity is gone and the really good stuff. If you figure it out, and you’re a long term oriented, a lot of times, there’s still many, many years ahead of you, but not everything.
So that’s where you have to sort of, you know, have some framework and apply it consistently, you know
Mike Zlotnik: Yeah, I can appreciate your wisdom and, and some of the things you, you mentioned, I, I will agree on some things I will not necessarily agree. I I might, might disagree a little bit, so Absolutely.
I’m like Warren Buffet. I, I struggle with this and I have a lot of friends who are crypto box and Jake in the crypto box. Mm-Hmm. . And they, they feel I’m, but
Ken Majmudar: I, I, I, I’m not a crypto bug and I’m not a gold bug, but there’s a fundamental. Framework that a lot of people that I, I have this framework since 2013.
This could be the subject of a different conversation someday. I’ve been explaining this consistently. I have not changed. It’s been the same exact explanation that I figured out in 2013. And it’s been playing out gradually, but it’s still, I think we still have another decade or two to go.
Mike Zlotnik: So I’ll let you provide that comment. So why do you think and again, I follow Warren Buffett and Warren Buffett said, and he’s been wrong, right? Yeah. He said something like this that, you know, if he had all the money in the world, he wouldn’t pay 25 for a little Bitcoin in the world. So yeah, well, well, it’s actually, he doesn’t see that.
There’s no. You know, there’s a, there’s a network effect. There’s all kinds of things that maybe he doesn’t see in real value behind it. It’s actually
Ken Majmudar: ironic because one of the, one of the reasons I was able to figure it out in 2013 was because of a comment he made at a Berkshire Hathaway annual meeting.
With respect to gold and that comment, I don’t remember the exact year, but it’s probably around 2010. And he said, Hey, if you took all the gold in the whole history of the world that had ever been mined or created, or, you know, stored or whatever, and you put it in 1 place, it would fit into an Olympic sized swimming pool.
And it would be a cube, a couple of 100 feet on a side. And that cube, the value that cube is 10 trillion dollars. And so when I heard that, and then I made the connection to crypto and what, what crypto represented, which I can’t get into all the details, but that’s, I had presented that exact thing to a small group of freedom founders people.
That is what I think that framework now, Warren Buffett was also really good friends with Bill Gates and he never invested in Microsoft. You know, Warren Buffett. A brilliant, he’s got opportunities
Mike Zlotnik: too. Yeah. No, he’s smart.
Ken Majmudar: He’s smarter than me. But, and, and, and you know, some of it I greatly admire and I’ve learned a tremendous amount from Charlie Munger, who I also greatly admire, who recently passed away that you alluded to at the age of 99.
He called it rat poison. You know but you know what the great the great thing about the world and the great thing about markets is everybody can have their opinion and everybody, you know, and there’s no one who is right all the time, even the smartest guys in the world. And maybe they are right this time.
But I, you know, ultimately, we need to make a bet based on our own thinking, even though I admire them incredibly. And I’ve learned a lot from them. I don’t just copy or believe everything they say.
Mike Zlotnik: Agreed on that point completely. So what’s really, you know, one of the greatest wisdoms is that even the, the wisest of us all, and the best investors in the world, they probably don’t see plenty of opportunities that they miss.
They, they invested what they understand. Some reason. Didn’t understand some of those things and they didn’t want to understand then maybe.
Ken Majmudar: And it’s not even surprising, right? Like Buffett is like 94 and Munger is 99 and he died. Like, would you expect them to figure every new thing that comes? They
Mike Zlotnik: invested in what they understood.
And then they, they, they are kind of old dogs and old dogs don’t always learn new tricks. So, I mean, it’s all due respect. A couple of final things and then we got to wrap up. And I wanted to add with one comment that most investors don’t do this, but this is the most important thing when you invest, you got to have a long term time horizon.
And especially if you invest in real estate, maybe either private real estate or public real estate, when you’re buying the stocks of these publicly traded companies. You’ve got to have a long term horizon, like the Warren Buffett says, I want to own something forever. This is a fundamentally good company.
I’d rather pay a fair price for a great company than a great price for a fair company. See, it may so be, again, what you alluded to, some of these publicly traded stocks are the builders. If they’re fundamentally strong companies and they’re trading at a discount, Maybe that creates an opportunity, which you alluded to.
And there could be also a great opportunity in private real estate when the market is genuinely dislocated and deeper discounts become available. So most of the audience is real estate audience, no argument at all. But I do like provide just a comment on what you said. If these are publicly traded real estate investments, they do provide better liquidity than the private ones.
That’s one of the major things that people don’t, don’t necessarily appreciate. Liquidity could be important and a publicly traded security has liquidity while a private investment doesn’t. So which makes a big difference in some ways. Yeah.
Ken Majmudar: Yeah. I mean maybe where’s, you know, with the multifamily now we’re starting to get a lot of capital calls and stuff.
You know, I betcha when that starts happening, people will appreciate that they wish they had some more liquidity than they did when times were booming.
Mike Zlotnik: Well, the whole capital call and I’ll tell you this just one quick comment, capital calls. It is very difficult methodology, which is faltering today.
Folks that are trying to look for capital calls, a lot of these projects are failing to achieve what they need from capital calls. From what I’ve heard, only about a third to 50 percent of the investors That they, that they receive capital call letters participate. So with that in mind, a lot of projects struggle and they’re forced to do to raise mass capital.
It’s one of the discussions we’ve had in the past. And I
Ken Majmudar: know, but then that’s going to eat, you know, that’s potentially going to eat away with the equities.
Mike Zlotnik: Yeah. Dilutes, dilutes existing equity. Yeah. The investors. Might as well participate in the new mass equity rather than try to feed the capital call because new mass equity gives investors, all the investors and new investors opportunity to participate in the outside of the project. And a lot of the past dollars were invested in these rough situations financially. It’s, it’s, it’s, it’s a terrible picture, but investors have to realize if they wrote a check and the property lost 20 percent of the value, and then there was a leverage on a property. Maybe worth only 20 cents on a dollar.
Maybe even not worth 20 cents. That’s the crazy part, right?
Ken Majmudar: But that’s a lot of, you know, like, and we’re both in this area, but like a lot of the folks that run around, you know, syndicating things you know, they, they make it all sound like so rosy and like guaranteed, you know, and the stock market is risky and this thing’s so great.
And look at the reality is going to hit the road soon. And all those guys selling syndications two years ago, promising the sun and the wind. Let’s see how their reputations you know adjust to the new reality.
Mike Zlotnik: Yeah, the difficult part is, of course when the markets were hot and everything was going well these deals looked great, but when the market changed fast and furious, of course, a lot of these projects have just, have, you know, You know, I don’t want to put it any other way, but it’s a, it’s a massive collapse.
It’s a, it’s a tidal wave that, that hit the market. And many of these deals are just going bust completely. And well, but
Ken Majmudar: look at, look at those deals that, you know, I, I was saying, Hey, like their folks would come to me and say, Hey, you know, I’ll give you 10 percent and I’ll get 80 percent of the upside for the sponsor and 20%.
And people sign up for that deal. Well, how are they going to do in the cycle? They did, they did some deals like that when times were good and they got 20 percent of the upside. Now, then they did some more deals and now the, now they’re going to, those, those deals are going to lose maybe half their money or more.
And in the cycle, are they going to make money on real estate? I I’m kind of scratching my head.
Mike Zlotnik: Well, what you just described is deals that were not offered at the fair pricing or proper risk adjusted return type of pricing. And the other big challenge, and I can tell you this over the years from the great financial crisis, let’s just call it 2008 9, for many, many years, there were years of great recovery and people made lots of money over the years.
And they kept piling up and kept piling up, and they didn’t use plural diversification. And the checks straightened in 21 22 were greatly outsized relative to their past checks. Or new people entered the market, and they didn’t enjoy those great years.
The lack of diversification and really not understanding that the risk, the steel risk and everything were not appreciated, maybe understanding, but not willing to appreciate is now teaching a very hard, harsh lesson.
I’m one of these people who made significant investments last couple of years, and it’s very painful. It’s very, very painful because the market, well, the way it turned. By the way, it’s, it’s a, it’s a such a rare event after Mm-Hmm. almost 20 years of zero interest rates to see the rates rise like this.
Mm-Hmm. being a black swan event. Complete black swan. When it happens, it dislocates the market. And when it dislocates the market, you don’t take a 10% haircut or 20% haircut, you can take a entire principle loss. Right. And it happens. It’s . Yeah. Well, with, when you have,
Ken Majmudar: when you have 70% leverage, you know you don’t need that much of leverage.
A decline. Leverage. Yeah. Leverage. That’s why real estate works so great. On the upside too, but then that hurts you on the downside. So it’s really what you do in the cycle. I mean, you know, I’ve done a few things here in the last few years, but a lot less than I did, you know, the years before. And but you know, I, again, as a long term investor, I, I believe in real estate through, through the cycle, but you just have to be smart about it.
Mike Zlotnik: I agree. And the final comment I’ll make this is of those folks that have been hurt significantly last couple of years because the market has changed. Well, they’re hurt now. They invested 21, 22. My view on the world is this you can be upset and discouraged and completely shine away from real estate investments.
And in my view, it’s the wrong thing to do. The right opportunity is to be prudent, of course. But if you run away from the market, when the market is bottoming out, you may agree you may miss a great opportunity. And that’s always been kind of Warren Buffett’s scenario. Be greedy is when I was a fearful and be fearful.
Right now is huge and it’s growing and the time to be greedy, maybe not immediately today, pretty soon when the market sort of hits a great discounted price. And if these deals can become available, that’s the time to come in, right? Interest rates are high. Prices are low. You come in at that point. You can pick up a lot of upside from there, right?
That’s the general Full disclaimer, you know, we don’t have a crystal ball. Absolutely.
Ken Majmudar: Yeah, let’s let’s I agree with everything you said. So
Mike Zlotnik: thank you, Ken. How would folks get ahold of you? What’s the best way to reach out?
Ken Majmudar: My website is Ridgewood investments. com. Actually if folks are on social media, please follow me on LinkedIn, Ken Modjmodar and Instagram.
Also Ken Modjmodar just search for me. I post a lot of content you know, investing and real estate and just live, you know, wisdom in general. And yeah. And then as I mentioned, banks more is the other company that’s really focusing on the ground up opportunities as well.
Mike Zlotnik: Thank you again for coming on the podcast.
Thank you for sharing your wisdom and your experience and let folks reach out. And thanks again.
Ken Majmudar: Thanks Mike. Appreciate it.
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