Table of Contents - Buy on the Line, Move the Line with Victor Menasce
Dave Debeau [00:00:08] Well, hey, everyone, this is David Debeau with another episode of the Property Profits Real Estate podcast. Today, we've got a very special guest zooming in with us, Victor Menasche. And Victor is a very accomplished real estate entrepreneur and an author. He's written a book Near and Dear to My Heart, Magnetic Capital, which I have just ordered on Amazon. So I can't say I've read it yet, but it's it's next on my list when it shows up on my doorstep. So, Victor, how are you doing today?
Victor Menasce [00:00:37] Great to be here.
Dave Debeau [00:00:38] Doing great to have you. So are you based in Ottawa? Is that correct?
Victor Menasce [00:00:43] I am based in Ottawa, although we have projects all over North America, both in Canada and the U.S..
Dave Debeau [00:00:50] OK, so, Victor, why don't you tell us a little bit about your primary focus these days when it comes to real estate?
Victor Menasce [00:00:57] Best we if I go back a decade ago, you could buy things for far below construction costs. So it certainly didn't make sense to build. You could buy things, real bargains. I was buying things in Arizona for 30 cents on the dollar compared with replacement cost. Today, of course, prices have come up and it's very much an auction environment if you get in the marketplace and almost any multifamily complex that comes in the market is going to be 20 bids on it, just like there are four houses in most major cities. And if you're the winning bidder, you're virtually guaranteed to pay too much. So I just don't like being in that auction environment. Whereas if we're building something brand new, taking a piece of dirt, conceiving of a product that's going to be in high demand when it's completed, there's no competition for that idea. That's in my own mind. I'm alone in the marketplace. And so I can buy. Right. I can come up with the concept, develop something that's got a decent profit margin, be it for a long term or short term, depending on what the desired exit strategy is. And we just love new construction. It's very controlled. We get to deliver the product that the market wants. So there's not even a question of, well, if we, you know, improve these kitchens and bathrooms, is it going to do enough to juice the rents we're delivering the product that the market wants today.
Dave Debeau [00:02:24] That's nice. Now, Victor, when you were kind of talking before I press record here and you said that the topic you like kind of like to talk about today is what you call buy on the line, move the line. So for myself and everybody else who's wondering, what the heck does that mean, buy on the line and then move the line, what does that mean exactly?
Victor Menasce [00:02:48] If you imagine virtually any city in North America, there's that line where on one side of the line, it's kind of a hot neighborhood. There's coffee shops, there's art galleries, there's a hole in the wall restaurants that people love to frequent. And you go two blocks too far and you're in the hood.
Dave Debeau [00:03:09] Every city in Vancouver, the east side of Vancouver,
Victor Menasce [00:03:12] absolutely, you have it in Vancouver, you have it in Winnipeg, you have it almost any city in America for sure. So that line in many cases is arbitrary. Now, if it's a if it's a rigid boundary, that's not going to move maybe a municipal boundary, a freeway or a railway line, a school district, it's hard to move that line. But if the line is arbitrary, as it often is in many areas, then why not buy on the wrong side of that line? Not too deep, but on the wrong side of that line, you're going to buy that line for pennies on the dollar, redevelop it. Now you've got new product that is competing with the hot neighborhood and there are no comps for that new product in the hood. So the only place to draw your comps are from the hot neighborhood next door. Now, you might not get 100 cents on the dollar. Maybe you'll get 95 cents or 98 cents. But if you bought right, you can create an extraordinary amount of value by building on that line. And now guess what? The lines on the other side of your property, you can go do it again. It's playing a large developer's game on a smaller scale. Now, if you just do, one or two may not be enough for the marketplace to take notice. You put a little bit of scale behind it, maybe bring a few friends along and you do five or ten. Then the marketplace says, oh, I get it. The line is moved. And so now the fear of going one block over, oh, no, you don't want to go on that street. That's not a good street. That fear can be overcome because they have confidence that the line is moved. It's a psychological thing. This notion of value is highly subjective because there's two ways to value things more, at least two. But even if you talk to an appraiser, they look at replacement cost. But buyers don't care about that. They look at comparable sales and they look at multiples of net income. If it's an income property, that's really what it comes down to. So if the buyer is going to be someone who is interested not in the multiples of net income, but do they like the property they're willing to pay for it? Well, that's who you've got to target. What are they willing to pay for?
Dave Debeau [00:05:24] And what would be an example of this kind of a project? I know you're probably weren't focusing on much larger developments these days, but you know where you see where you time DIMOS start small, maybe get in with a few friends. What are we talking about here? Are we talking about tearing down a crappy old house and building up a nice house? Are we talking about small multis, mixed commercial residential type stuff? What do you what what are you talking about here?
Victor Menasce [00:05:51] We're talking about infill. I mean, every city has a band that's usually outside the downtown core between the downtown core and the suburbs that's been neglected for thirty years. Right. And so, you know, it's fashionable to move out to the suburbs. Then it became fashionable to live in the downtown core. But still, that band in between that missing middle was really neglected. And that's where the opportunity lies, is that band between the suburbs and the downtown and whether it's pushing back inward from the suburbs or pushing out from the downtown core, you want to exploit that boundary. So these are infill projects, maybe some land assemblies where you're going to put together three, four or five properties into something that's a little bit bigger, that you could go build something more substantial. And by the way, you don't actually have to go build it yourself. You could just go do the land assembly, get it entitled for something bigger, and then flip it to someone who actually wants to go vertical on it and build themselves. Now, you've added a tremendous amount of value because with land, there's really two ways to make money. You either take raw land and you carve it up into smaller pieces and sell it at a premium, or you take land that's already been carved up and you put it back together. So it really comes down to those two.
Dave Debeau [00:07:03] Yeah, yeah. So do you have any examples of property or mind of projects like that that you've done over the years and kind of how the where those were, the how they turned out and how you're able to move that line?
Victor Menasce [00:07:18] Sure. Maybe my favorite example is Philadelphia. We've mostly mostly wrapped up our work in Philly. I mean, we still have, I think, about six units in construction there right now, but we don't have a ton going on there. If I go back to 2011 was when we started in Philadelphia, it was an extraordinary time. We literally purchased fifteen properties in one day in an auction for 350000 dollars,
Dave Debeau [00:07:47] and
Victor Menasce [00:07:48] we weren't even sure that we wanted all of them. But they were in a good you know, they were they were in a rough area. And over time, over the next five, six, seven years, we probably acquired about 85, 90 properties within a five block radius. Wow. So we were able in many cases, to do some small land assemblies. You get three townhouses together. If you could salvage the buildings, we would. If not, we tear it down, put up a new building in its place and we would build largely by right. Which means whatever the zoning permitted, that's that's the density we would get the odd occasion. We saw the zoning variance to get a little bit more density. And that almost always worked out, but it almost always resulted in delays. So is the trade off between do we want to wait six months for the possibility or just want to. Go forward with the certainty that you're going to get this density and if the numbers pencil, then go for it. So, you know, we would build. I'll give you a simple example. We did a great sorry, we did a 10 unit building. Give me the address. It's twelve twenty eight North twenty Fifth Street in Philadelphia. For those who want to Google it, it is a 10 unit building. It was zoned for eight units. We got the zoning variance for the extra two units. We built that at eighty eight dollars per square foot. Hard construction cost a very solid B class product. Hardwood floors, granite countertops, stainless appliances, nice quality finishes and our total investment. Including land, hard costs, of course, everything was a million and 50. It appraised at one point eight million back in 2014, and the lender gave us back a million, three in three. When we went to get our permanent financing today, if that building was to be reappraised or if we were to sell it, it would sell at about 2.8 million euros.
Dave Debeau [00:09:43] All right. Very, very smart. So makes sense. And obviously, you've had great success with this. I'm feeling a little tingly sensation. Some of our viewers might be feeling a little tingly sensation that it sounds great, but it also sounds very, very risky. What if what if the line doesn't move? Yeah, what if it doesn't budge? So we we go in there even if we get a bargain on the property and we build something at a reasonable cost. But now we've got a nice property and we've got the lousiest street, kind of like what do we what are what are your thoughts on that?
Victor Menasce [00:10:24] Here's the bet that you have to make. So in our case, one and a half blocks away, people were renting apartments for six hundred a month. People two blocks north were renting apartments for 800 a month, so the bet is, would people be willing to walk an extra block and pay twelve hundred a month to be in a brand new building? Would they be willing to take that one extra block walk to save a few hundred dollars a month? That was the bet that we made. Now, if you go deep into the hood, you're taking a ton of risk. But if you're right on the line or if you're within a block of the line, I think that's a very calculated risk.
Dave Debeau [00:11:05] OK, yeah, that's I think that's the whole thing right. There is really understanding where the line is and making sure that you are close. You're right on that or you're cozied up to it as much as humanly possible. That makes a lot of sense because, yeah, if you're a block or two off that, that can sink the ship right there.
Victor Menasce [00:11:26] Absolutely. And then once we finally got the building leased up, you know, we built the pro forma on the assumption of twelve hundred a month in rent, the end on the top units that had the nicest views. We were getting 14 fifty a month. Nice. So, you know, you get a little lucky bounces that way. Not going to say it was skill or because we're, you know, we're geniuses or anything like that. We were lucky. We'll take it, you know. Of course. Yeah, of course. Even in a in any project you're going to have your share of good luck and your share of setbacks as well. One of our setbacks, all of the buildings in the area had their foundations dug to about six and a half feet. Well, we were digging down 11 feet. We had groundwater. So we have to have two some pumps running continuously in this building. We also had to underpin the foundations of the neighboring building so that they wouldn't fall down because we dug such a deep hole.
Dave Debeau [00:12:23] You know, these a little girl. Yes. Like like any real estate. Well, that's that is fascinating. I really appreciate you sharing that with me in with the audience as well. And something definitely to to take a look at if you're interested in doing development type deals. Now, Victor, we don't have too much time, but I just want to get your perspective or get your experience when you first started doing real estate deals, when you first started raising capital, and you remember way back when whenever that was. How did you get started bringing investors on board with you for your deals were or are some things that worked and did work? What would you do differently if you're doing over again these days?
Victor Menasce [00:13:07] You're kind of touching on the core of my book, Magnetic Capital. I'm not here to plug my book.
Dave Debeau [00:13:13] Give me a plug. That's that's what this is for. That's. Yeah, they've got a capital.
Victor Menasce [00:13:17] Yeah. I wrote the book because I saw a void in the marketplace because most of the examples in the market for books were highly academic. And so I really wanted to write a book from the perspective of a practitioner, someone who's doing this day in, day out. And I learned first raise money in the high tech industry. So if you think raising money for something as simple as real estate is hard, try raising money for something that is just an idea in a market that doesn't exist and you're going to get investors to sign up to not only are you going to run a business successfully, but the market's going to develop the way you expect it to as well. That's hard. OK, so what I discovered was there were really five elements that when raising money was easy, every single one of these five elements were present. And when one or more of those were missing, raising money got extraordinarily difficult. And I'll just go through real quick, because I know we don't have a ton of time. But number one, it starts with relationship. And I'm not talking about networking or any of those other utilitarian things. It's really genuine relationship. People want to invest with people that they know, like and trust. So if you're going to focus on getting to know people, especially people with money, focus on relationship number one. Number two is trust. You've got to establish trust as a psychological contract. It's got a lot of layers to it. It's not just are you dealing with an honest person, it's, you know, are you are you able to put together a good plan? Are you able to execute the plan? Are you able to hire the right people? Can I trust you to communicate in an open and transparent way? Can I trust you with my money and on and on and on. And if any one of those elements are missing, it doesn't work. Number three is your track record. Show me that you know how to be successful. Show me that you've if you've screwed up how you handled it, what you did to make it right, track record is vitally important. Now, you might have someone new saying, well, I don't have a track record. How am I going to raise any money without a track record? It's a circular argument. Well, it doesn't have to be that way. This isn't like your grade three math test where if you collaborate with your partner, you're cheating, right? Right. This is a team sport. Business is always a team sport. So depending on the project, for example, one of my projects, two of my projects, actually, my partner has built 10000 apartment units so far in his career. When I go in front of a lender asking for a 30 million dollar construction loan, I put his resume in front, not mine. So I'm borrowing some of his credibility, some of his track record, and that's perfectly legitimate. So align yourself with people in your team that have that track record. Number four, you've got to have a compelling opportunity. This is where most rookie investors start. They say, you know, I've got a deal and it's all about the deal. And I I named it fourth because it really is that far down the list. And what's compelling to you may not be compelling in the eyes of the money, right? You know, it's like is the image on the magazine cover beautiful? Well, maybe for one person there, their image of beauty might be an industrial warehouse building with refrigeration in hundred thousand square feet. Another person's definition of beauty might be a medical office building that can hold family health teams. It's in the eye of the beholder. Right. And then finally, you've got to have perfect alignment between the goals for the project and the goals for the money. If your money is interest because money has an agenda, it's not all green. If the money says I want to put the money to work, I don't want to see it for 20 years. I just want cash flow. That's one set of objectives. If someone else says, I want my money back in six months and I want to make this much in fees and I want to churn my money every six months into a new project, that's a different agenda. So you've got to align your project with the goals for the money. Don't try and fit a square peg in a round hole. And it's you know, there's about a dozen criteria that you want to look at in understanding the goals for the money, it's like, you know, what's the tax consequence? What's the size of the investment? What's the terms of the investment? What's the rate of return? What's the control structure? And on and on and on, you get alignment on all of those. Then you have a good shot at having a fit between the goals of the money and the goals of the project. And it's seductive because you might have a fit on a few of those, but not all of them. And it's like something that almost works well, something that almost works doesn't work. Right. So don't try and force it. If it's a natural fit, perfect. If it's not, if there's any part of it that feels forced, move on and find another source.
Dave Debeau [00:18:01] Yeah. Yeah, definitely. Because if you get that investor in and and they're not happy, it's going to become a massive headache very, very quickly, that's for sure. Exactly. This has been awesome. If people want to find out more about you and what you do, how can they find out more about you?
Victor Menasce [00:18:17] They can connect with me directly through my website at Victor Morcom. That's Victor James dot com. I also host the daily real estate espresso podcast seven days a week. So love to connect with people that way. It's a short form podcast, so the weekday show is just me. Five minutes and the weekend edition are interviews with notable people from the world of real estate investing. So love to connect with you that way as well.
Dave Debeau [00:18:43] Sounds good. Thank you very much for your insight, your wisdom and this whole idea of buy on the line. Move the line. Now I get says. Thank you very much, Victor. It's been a pleasure.
Victor Menasce [00:18:56] Thank you, Dave.
Dave Debeau [00:18:57] Andre. Take care. We'll see you on the next episode. Well, hey there. Thanks for tuning into the Property Profits podcast. If you like this episode, that's great. Please go ahead and subscribe on iTunes. Give us a good review. That would be awesome. I appreciate that. And if you're looking to attract investors and raise capital for your deals, that may invite you to get a complimentary copy of my newest book right back there. It is the money partner formula. You get a PDF version at investor attraction book, dot com again, investor attraction book, dot com ticker.