#285 - Gabe Bodhi - CEO of Tekton Group - Expert in Sub-Institutional Multi-family investments

Chris Powers: Thank you so much, Gabe. I'm very excited to have you in Fort Worth today.

Thanks for coming in. 

Gabe Bodhi: Thanks for having me, Chris. I've been looking forward to this for a while. 

Chris Powers: It's been a treat getting to meet you on Twitter, and today will be a great conversation. I appreciate that. Let's start with where you grew up, where you came from, and then your early career on Wall Street and how that set the foundation for what you do today.

Gabe Bodhi: I grew up in Western Massachusetts, an old town called Amherst. My parents, who I love dearly, couldn't spell business if asked to, so I was an odd child in that I got really into and interested in math business young in my life. There was a show in the eighties called family ties, and it was these hippie parents and then this kid named Alex p Keaton, who Michael J. Fox played. 

And people used to joke that I was like the Alex p Keaton of my family. I got into the business early and was good at math. And remember going to the guidance counselor in my high school and saying, Hey, what's the best business school?

It is probably the junior year of high school. And Alex said, have you heard of a place called Wharton? I said, no, what's Wharton? And she said that's probably the best undergrad business school. And I was like, that's where I want to go, and I was fortunate enough to go to Wharton and move from Western Mass to Philadelphia.

By the way, I listened to Kyle Matthews yesterday on the plane, which is a fantastic episode. Oh yeah. Infectious energy. I have no college athletic experience, and I did not play sports. 

Chris Powers: You don't have 13 family members in the NFL.

Gabe Bodhi: I do not have 13 members in the NFL. So went to Wharton undergrad and had a great experience.

Found out for the first time in my life that I wasn't as bright as I thought I was, which was very humbling and motivating really. I was there for four years in Philadelphia and then moved to Boston, where I worked for Putnam Investments, which focused on investment management and stock picking.

And that was my first career on Wall Street. And then, after a year and a half, I moved to New York City and worked in corporate finance consulting for two and a half years at a firm called Stern Stewart and Company. And I was there for two and a half years before business school.

Amazing experience. If you're young and interested in having nine years of life experience in three years, I strongly encourage living in Manhattan at some point. It was a fantastic experience for me, and I loved it. I worked my tail off, then went to business school in California at Stanford about 23 years ago.

Chris Powers: If you had to go a little deeper, in Manhattan, you work long hours, and you work hard, so that's part of why you would get nine years in three years. I went to Manhattan a couple of months ago and had a tweet about it, and I was like, this is the most insane energy I've ever felt. Like, what is it?

Gabe Bodhi: You hit the nail on the head. It's the energy; it's everything to excess. There's nothing in moderation. You, you overeat, you go out too long, you sleep too little. Your apartment needs to be more significant. Everyone used to say that. Pre Covid, the joke was your living room is the neighborhood bar. And so, instead of you, you could only afford a tiny apartment.

And so everyone would meet at the neighborhood bar and hang out and socialize. And I was doing consulting, so I'd be out on a gig Monday through Friday, and I'd be exhausted cause I'd worked 80 hours that week. And you'd fly into LaGuardia on Friday night at six 30 or seven right over the city, and you'd see the lights and have this adrenaline pump.

And the first thing you want to do is call your friends and see where everyone's at. And next thing you know, it's two o'clock Saturday morning. So you just, everything to excess. And it was a wonderful experience, and I wouldn't trade it for the world. I have a six-year-old boy, and my wife and I talk about encouraging him.

He will make his own decisions, encouraging him to live in New York after college. 

Chris Powers: Yeah. I loved it. I'm going to be back up there in a couple of months. I've been there throughout my life, but never really as an adult and never for work or an extended period. And I just thought the world of it.

Gabe Bodhi: Yeah, It was entertaining. It was a good experience.

Chris Powers: When we did our call to think about some things we could discuss, we ended that call. And a great place to start describing that was you said there is a particular set of investment principles I live by.

And some of those were garnered from your time on Wall Street, some of which you probably developed in real estate. But let's just set the stage with those investing principles. What matters to you, and how did you develop them? 

Gabe Bodhi: Sure. So to return to post-business school, I moved to Denver in 2002 and took a job at Janice Capital, a significant investment management firm.

And I was a financial analyst focused on literally financial services stocks. And I was fun, learned a lot, focused on the area, and made great friends across Wall Street. And then obviously 2008 hut in. And the epicenter of 2008 was the financial service industry, which got destroyed.

So, Throughout my investing career, I've been an investor first, and real estate is where I apply my trade today. But I've developed strong beliefs about how markets work throughout my investing career. And I'm a student of the history of markets and have been for a long time.

I have four or five foundational investing beliefs. One is humans make markets, and human nature is governed by fear and greed, and that's almost immutable. And this means that risk assets tend to overshoot both on the upside and the downside, and being disciplined to take advantage.

And obviously, this is not a unique version of my perspective. Buffet talks about this often, but being disciplined enough to take advantage. Overshoots are one of the few durable sources of outperformance. And so, letting the market get crazy and not buying is generally a good strategy.

I am waiting till there's fear. People use the term blood in the streets to buy is generally a good strategy. And so I've always wanted to deploy capital closer to the bottom than the top. And we've built our organization to take advantage of that principle. So one perspective is that markets are cyclical and governed by fear, Andre.

One A is, and this is very relevant today, is don't fight the Fed. It's a losing battle. Could you not do it? If you had listened to Powell in 2020 when they said, we're opening up the money gun, and we're just going to obliterate stuff at the end of March, you would've made a fortune. And then, if you listened to him in December of 21 and sold everything, you would've made a fortune and don't fight the Fed.

It's a losing battle. So that's. Three for me is real estate, and as time has passed, I've begun to apply this to real estate as real estate is a procyclical business. So markets are cyclical real estate within markets that are even more pro-cyclical-cyclical. And if for no other reasons because the duration mismatch, supply, and demand can change.

People's jobs go away. We saw unemployment go from four to 10% overnight during Covid, but supply stayed relatively high. If the demand for iPhones goes away, apple can cut off the production of iPhones in six months, nine months, or something like that. You and I can only cut off the supply of real estate slowly, and we can only add to the supply of real estate slowly.

 It takes two or three years to, in a market that's conducive to building, and if you go to LA or New York, it takes much longer than that. It takes two or three years from idea to completion to add supply to the market. So that duration mismatch ends up making real estate more cyclical.

It’s a procyclical aspect of real estate. So that's another belief of mine. Another one is that excess returns are inversely correlated with market efficiency. And so I'm constantly looking for market inefficiency. When I think about deploying my investors' capital into real estate, I'm looking for inefficient pricing.

And that has driven me primarily to the sub-institutional scale is generally the bigger you get, the more efficient the pricing gets. And so we've taken advantage of opportunities of inefficient pricing in sub-institutional scale real estate that only exists to some extent.

Now, some fantastic investors make a lot more money than I do in more considerable-scale assets, so that's not a hard and fast rule, and it's just been my perspective on it. Another buff I believe strongly in is that investing has no cult strikes—so Ted Williams is arguably the greatest hitter in baseball history and the last guy to bat over 400 in the season. He had perfect vision, was a left-handed hitter, and had a great combination of near-sightedness and farsightedness in his right eye and his left eye, such that he could see the baseball better than anybody else. And if you take the size of a baseball and put it across his strike zone from his armpits to his knees, 77 baseballs would fit in there.

And he had figured out his batting average for each of those 77 strike zones. And he knew that if he waited for the fat Pitch, he would bat over 400. And if the Pitch he didn't like was the low and away strike, his batting average was like two 30 and low and away strike.

And so obviously, if there were 3 to 30 pitches in a row, he struck out. But as an investor, you can sit around and wait for that 400 pitch down the middle of the plate and swing when you see the fat Pitch. And so that's been a definitional approach that we've taken: waiting for the fat Pitch.

There are no call strikes In investing. We can have 72, 30 pitches across the plate and pass on them, then wait for the 400-batty average Pitch. It is an aspirational goal, and it's yet to be one that we're at. However, the holy grail in real estate investing has a differentiated lens.

You can buy assets at the market, clearing prices and generating market-beating returns. And you look at some folks who have figured out a way, whether it's student rental, pro on, where he lives, I don't want to say, but on where he lives and his student market. What you guys have done, you can buy assets.

You're picky on price but can buy assets and out-execute the next guys. And that's not necessarily a place we're at. Still, I'm constantly searching for that holy grail and being able to buy assets at market prices, not necessarily inefficient, but efficient market prices, correct to generate market-beating returns.

And then the last belief I have, which I've started to move away from, is the saying that there's no such thing as bad buildings, just bad prices. And so I just went wherever I thought the best risk-reward was. That led me to the C-class part of Denver, and I ended up being one of the largest landlords in the C-class part of Denver.

But the return and financial returns were compelling—the return on headache needed to be sufficient to justify deploying resources into that market. And I ended up moving away from that. There are office buildings that people say it's worth the land minus the demo cost. And so it's not true that there's no such thing as bad buildings, but I do believe that price is; Buffet talks about the price being his due diligence, and I do believe in that concept of trying to pay as little as a possible basis is forever. Yield is temporary.

Chris Powers: I'm with you on that one. You said a lot there, and we'll talk about how that relates to sub-institutional real estate. The one that you said we could go a little deeper on. Don't fight the Fed; you would've killed it if you had just listened in March 2020.

And if you had listened in late 2021, you would've done well. Then I think about the 12 years before, where nobody was thinking about the Fed, but they just dropped rates a bit here and there, and there wasn't this constant conversation about what they would do next.

Now we are where we are at the top, and you've seen cycles and maybe not at the top of interest rates. If we're going to listen to Fed, he did say on the last one; this might be it. Yeah. What is the signal that, what are we listening to now that maybe he said, we're here, we're at the top, but we're going to hang here for a while, And you got to build your strategy around that and not think, oh, he's kidding us?

He's going about to start lowering him. Like, how are you thinking?

Gabe Bodhi: So I'm hyper-focused on employment. Fed has a dual mandate, stable prices, and full employment, and they've been fighting a single-front war so far, which is to kill inflation. And by the way, employment. The last rate, the last report, was three and a half percent.

So unemployment's still very low, probably below frictional unemployment, so I'm hyper-focused. Fed will stand their ground until inflation is wriggling on the ground, dying, unless unemployment spikes. On the most recent earnings call, Jamie Diamond said I don't know what rates will do.

And I agree. I am still determining what rates will do, but if you're not planning to hire longer, you're doing yourself and your investors a disservice. And so we could be at borrowing costs for our asset, mid-sixes, and fed funds around five for a year, maybe more.

That could be a possibility. Yeah. We talk a lot, and Garrett and I talked about this like Baron, I'm sorry, talking about this last night, which is, are we seeing stress in the market right now? And we see stress only debt-fueled stress. Like folks who took out floating rate debt in 2021 and had a two-year rate cap, and that's expiring. And now the cost of the rate cap is 20x what it was in 2021. And so they're being forced to sell, and if there's any equity there, they could recoup it if there isn't. But we do not see fundamental, and I'm not in my market seeing fundamental distress yet where rates, rent, and vacancy are starting to hurt the underlying fundamentals.

I'm in the same boat. And so I'm not too fond of static single-scenario forecast. Cause it ignores the probabilistic nature of the future. So I despised them, but a friend asked me, what do you think will happen? And this was when the Fed started in the spring of last year. So I wrote on my board, What my base case assumption was, and it's still sitting on my whiteboard in my office, and my base case assumption was threefold.

Inflation will go up, and rent rates will go up to try and conquer inflation. Transactions are going to fall off a cliff-esque spread are going to widen, and prices. People won't sell unless they have to, and some people will hope that race will fall and they will get rescued.

I've always said hope is not a strategy. So that's version one; we're in the middle of that now. Step two is between 23 and 25; unemployment starts to go up as a function of tighter monetary and fiscal policy, and fundamentals roll over, at which point we enter a recession, and that's scary.

And then sometime in 24 to 26, prices start to come down, esque spreads narrow, and transactions go up. That could unfold that way. So far, it has unfolded that way, but it's a single scenario forecast instead of a dynamic one that looks at all the possible outcomes in the future.

But that's how the world's going to unfold. And you talk about unemployment going up in fundamentals. So we have a stabilized portfolio of apartments in metro Denver. Right now, we're at 97% occupied, a hundred percent collected every month for the last six months, and rents are up 10% year on year in our stabilized portfolio from where they were a year ago.

So I do not see the fundamental rents occupancy change, and I am seeing bid-ask spreads staying very wide, and getting transactions done takes a lot of work. And I've always said there are real estate economies, right? There are the underlying cash flows generated by rents minus expenses in which you and I participate.

And then there's a transactional real estate economy, mortgage guys, title guys, and sales brokers, and the transactional industry is struggling right now. While cash flows from the underlying assets remain reasonable as long as your debts are in decent shape. So I suspect, and Kyle alluded to this, that there will be some tough conversations between brokers and sellers; if you want to sell this asset, you probably have to change your price assumption a bit.

And so anyway, that's a long-winded way of answering your question. 

Chris Powers: Yeah, no, on the backs of that, we talked about it on Kyle's, but I'll repeat it as in and upmarket. Off-market deals are often the best deals. Yes. In a down market.to what you just said, maybe it's not the whole way through the down market, but where we are today, if a broker is in front of the deal and they're a good broker, they've already gotten the seller to realistic expectations.

 I'm not saying all the deals are the better deals, but they're the ones that are going to transact and look the juiciest compared to a lot of off-market where you have to remind a lot of these folks, one that either they don't want to sell or if they do is like 2021 and 2022 are long gone. 

And that'll consider what my partner, Jason, and I discussed yesterday; it might be till the second half 2024. Before you start seeing that bit ass, start coming back in.

Gabe Bodhi: That's reasonable, and you have to expect that to happen. And part of our philosophy, and we can go into this more about how we structure our investments and LPs, part of our philosophy around waiting for the fat pitches is never being forced to do anything.

Like we don't want to be forced to buy, we don't want to sell. We don't want to be forced to refi. We want to choose from a position of strength and not a position of weakness. And unfortunately, we see some folks; I saw many people coming into Denver who weren't Denver investors, that were coastal investors coming into Denver in 2020 and 2021, paying huge prices.

I didn't know what their debt was then, but now CoStar has this tab that allows you to look at the debt, and you're like, what were they doing? Like there's a deal that just hit the market, and I don't want to say which one, but it paid a high price in 2021 from an out-of-state investor IO floating rate debt in the twos when they bought it; it's; it's readjusted to 7.17%.

 It shows NOI from when they bought it, and then they're trying to sell it. So I looked at the T3, and NOI has been down over the last two years, which is hard to do. And then, the debt coverage ratio is 0.77. And so every month, they write a $ 20 or $30,000 check to cover the debt. And so that's scary stuff.

Chris Powers: So if we just went a little further, like how do you see that, we know how that could play out maybe a couple of years down the road when things have really, assuming that, let's say, that case comes true, but how do you think that trade's like today, in summer of 2023, what are you thinking will happen there?

Gabe Bodhi: It trades for whatever the market price is. We have a version of what it's worth, but somebody will buy it, and they'll probably put market debt on it and trade accordingly. And outsized returns are not available on that asset right now. You pay what it's worth.

It is worth less today than in 2021 because rates have increased by 500 basis points. People and people talk about power a lot, and you can only raise rates by 500 basis points and break things. And we're seeing that in the banking industry, and we're seeing that, starting to see that in real estate like.

Things are breaking. That's a little scary. So to answer your question, it'll sell for sale for a price. Equity will likely take a haircut and not get a hundred percent haircut and move on. We want to be aggressive when pricing is most attractive. And to your point, it might be at the end of 24 or 25; I don't know.

But we want to be aggressive at that point, and we're biting were biding our time to get to that point.

Chris Powers: Now, I know why Uncle Warren plays like Jen and cards and cards all day so that he can figure out how to get through the next year without making a stupid decision. 

Gabe Bodhi: I was looking back, and I think over the last four or five years, there have been very few times where we didn't have something in escrow where we weren't buying something or selling something, and I'm a deal lover, but we didn't have anything in escrow from November till today, and we decided to focus more on looking inwards and doing some work on how to be a better company and take some inspiration from what you've done here at Fort. 

But I hired a consultant who's an M I T process engineer, and we're taking every business process that we have, taking it out of my brain, out of my partner's brain, putting it down on a piece of paper such that we can create a sort of playbook for what it is that we do.

I should have done it six years ago, but I've been fighting deals daily. And that's been an enjoyable, exciting experience for us to try and improve the company over the last six months.

Chris Powers: That's awesome. Well, it's where we started the conversation.

You had said something about being able to buy at market prices but still achieve some alpha through operations. And that's the world we're heading back into: you must operate for a long time. As we discussed, you could buy something with 2% leverage, bridge debt, fumble through it, and still make a profit.

And the next, I don't know if it's a decade, I don't know how many years, but if you can't manage expense, create ways to create efficiency, I think the next five, ten years will be difficult for just about anybody. And Kyle said it on the podcast, there could be pain, and you don't wish that on anybody. 

It eliminates a lot of your competition, which is healthy for the industry overall. There's been a lot of people that have real estate. You don't have to be the most thoughtful person in the world. 

Gabe Bodhi: I'm always fortunate to be in it. But you're selling yourself short.

Chris Powers: Well, seriously, you've just seen a lot of people be able to, to get in money was cheap—banks for lending. I'm just buying a building, and I'm going to put a little lipstick on it. Those days are over, and I'm excited about the next decade. 

Gabe Bodhi: I agree. It'll reward excellent operators and investors, so we're trying to be there.

Earlier, You discussed sub-institutional, and I would love to do bigger deals. I wish that we could buy 200-unit deals, and the acquisition fees are sweet, and the promotion, if you make any money, are pretty sweet. But I have fou that they're much more efficiently priced than the 10 to hundred-unit deals.

One of the sorts of this for everybody is to pick an investment strategy matching your personality and skill set. One of my enduring skillsets is I only like to play winnable games, which is an obvious statement, but you go to a casino and look at how many people are playing; what; what do you call it?

 Slot machines or blackjack, and there are a lot of them. And that's how the casino industry makes billions of dollars. And so I go to a casino, and it's not much fun, but I'll sit down at a poker table, play the two five game at the win, and usually win a few hundred or a few thousand bucks.

It's a winnable game. You go to the win and play blackjack for 50 bucks a hand, a hundred bucks a hand. You're not going to be a winning player, and I don't think, back in 2014-15. An industry called pdfs, Daily Fantasy Sports, took off. And there, two of the top 10 players of all time are Denver natives and friends of mine.

And so Iso I got on their coattails, and I started researching the industry and betting with them. And they were betting hundreds of thousands of dollars every weekend. And I was betting hundreds of dollars every weekend, but it was inefficient and an opportunity to take advantage of a winnable game.

A lot of other people figured that out. I started writing scripts started coming up with solver algorithms, and the inefficiency was squeezed out of the game. And so I try and play winnable games, and I want to play something other than hard-to-win games. Going back to the poker analogy, seat selection, and game selection can be more important than how well the cards are that you turn out to be.

And so I'm choosing a game where the odds are stacked in my favor. And that's what's led us to sub-institutional scale real estate. The question is, can you build a real business? Can you do enough deals to put food on the table? So my opportunity set, what my partner and I have decided, is we want to be able to drive to every one of our buildings in the morning, do whatever we need to do there and be home at night.

So we have this two-and-a-half-hour semi-circle radius around Denver that we invest in. We don't tend to go east, so it's north, south, and west, basically Denver to Aspen, Fort Collins, de Pueblo, and everything in between. There are 5,279 properties with 10-plus units and 3,513 properties between 10 and hundred units.

And that's your that's your shopping list. There are 3,513 properties between 10 and a hundred units, and 10 to 20% of those transact in an average year. So you're looking at 700 properties trading hands, and we're looking to buy the best risk-adjusted two to three to four of those in a given year. And we can do well with that.

That's ourThat's our business model. I also have been incredibly fortunate and don't ever want to ignore the fact that I'm not working to put food on the table today, I am working for my son's legacy, and that's an essential concept. An old Goldman Sachs says long-term greed is much more potent than short-term greed.

I like greed like I am a capitalist. I want to make money, and long-term greed is much more potent than short-term greed. I aim to create as much wealth as possible for my family over the next 20 or 30 years, not necessarily this year or next. And so that mindset has driven me to the sub-institutional scale.

Colorado, you ask why to ask why Colorado? And the easy answer is, That's where I live. And that's when I started in real estate, and I just wanted to invest in my backyard more; the honest answer is it's got a fantastic quality of life and more days of sunshine than San Diego or LA.

It's got no humidity, which I found out this morning. I walked from the hotel to Chris's office, which was small, three-quarters of a mile, and 60 degrees out. It would be a good exercise. It just came in, ending still; it's pouring sweat. So that was pretty dumb.

But it's also a very, very diverse economy. So only some sectors make up more than 15% of the employment base. You look at what happened when tech fell off, and San Francisco historically struggles. You looked at Houston, which was oil and gas driven, or New York, which Denver has a very diverse economy, of the top 20 US cities has a minor concentration in any one industry of employees. And so that, to me, makes an attractive backdrop. 

Chris Powers: And the weather, when does the snow season, doesn't it warm up relative to other parts of Colorado pretty quickly? 

Gabe Bodhi: It does. It snows, but the lackey humidity makes 10 degrees in Denver feel like 30 degrees in Philadelphia. And the snow melts. But, where I grew up in Western Mass and went to college in Philadelphia, a snowflake falls in November, and that same snowflake is on the ground in March. It has grown because it's accumulated a lot of dirt.

And Detroit is from the road for the winter. It falls in November in Denver, and it's melted by falls November 10th, and it's melted by November 12th. And so the weather is quite good in Denver. 

Chris Powers: If you get nothing else from this podcast, you know snow melts. 

Gabe Bodhi: Deep insight that we came up with there.

Chris Powers: Alright. I want to unpack a lot. We've set the stage on sub-institutional sub-institutional real estate. But I wanted to ask you a question. You came from Wall Street. One of the things we discussed early on was you were buying; I; think when we talked, you said, like, we bought JP Morgan stock like there's only so much advantage you could have in that world.

And then you look at sub-institutional real estate, and there's alpha there, an additional return, which could be more efficient. My question to you, having been on both sides of it, and I ask a lot of folks this maybe not on the podcast as much, but when some people say, well, I do sub-institutional because I can get a, I'm just making a number 25 IRR over five years.

But if I was to do a big deal, I could only get a 15 IRR over five years. My challenge back to them is, what if each equity partner in each deal is equally tickled and happy? Somebody wants a 15; somebody; somebody wants a 25. How do you reconcile that? 

Gabe Bodhi: So I think that's the truth. I have had LPs tell me, Gabe, to stop being so picky.

It's about developing an investment style that works for you. And there are tickle pink LPs with 15% IRRs on 50 million deals. I have a lot of friends who do those kinds of deals, and they're genius, ruthless, incredibly good executors, and it's just not me.

I'm looking for those fat pitches, and I reserve the right to change my mind in the future, but that's a good thing about investing right now, especially with what I think will happen over the next couple of years. We can deploy a fair amount of capital in these smaller deals and earn excess returns.

Chris Powers: We've jumped to this spot, but give a quick before we start talking real estate; why; why did you go from Wall Street to real estate? 

Gabe Bodhi: Great question, and this is another thing I'd say to your listeners like I was 30. Seven. I had worked and gone back to Kyle's podcast; he was like, work-life balance doesn't exist in your twenties and thirties and didn't exist for me in my twenties and thirties.

You weren't thirsty Thursdays. I was working meme behind off. It was growing then, but I was working hard and got burnt out. It was the stress. Janice was a fantastic company, and I had a unique experience. Still have some amazing friends. Many of my LPs are colleagues of mine from Janice, but it became, I was 37, and I got burnt out, and I was not doing myself or my family any favors.

I was very fortunate to have done well and had some capital, and at the same time, I was seeing the rise of algorithmic and high-frequency trading. The efficiency in the stock market was getting even more challenging. So go back to what I was saying about winnable games. Large-cap financials are not a game in that you can generate a lot of alpha.

I covered JP Morgan. I was not friends, but I knew Jamie Diamond well and fought very highly of him. We owned a lot of the stock. And yet I had a 45-tab45-tab model. I had every business they modeled down to the balance sheet and income statement. It traded 3 billion a day. That means there was informed 3 billion worth of buyers and 3 billion worth of sellers, and there were 42 sell-side analysts that covered a lot fewer stocks than I did who were in there picking apart the publicly available data.

And so the ability for that game to be winnable, large-cap stocks, felt like a challenging game for me to win. So I had the fortune and courage to say, no moss. I didn't have a plan to go into real estate. I took six to nine months off. I ended up taking some woodworking classes at my local community college, and this is the origin story of Tecton, but my wife at the time, ex-wife, said, I got those woodworking tools out of the garage.

And I was like, okay, where do I put them? And she said I don't care. Just get out of the garage. So I bought a single-family student rental at the University of Denver, which I found in 2013, and it had a detached garage, I bought it only because it had a detached garage, and I moved my woodworking tools in there so that I could rent out the house and use the garage as my wood shop.

The lease came up. It was being rented for 1900 bucks a month, and I made $200 in cash flow. I said, Hey, let's lease it. So I put out a Craigslist ad and said, let's figure out what the market is. So I looked up what market was, and it was like, 800 bucks a bedroom or something like that, 700 bucks a bedroom.

And let's under-price the market to fill it up. So I rented it for 2,500 bucks, went like that, and now suddenly, my cash flow went from 200 to 800 a month. I was like, Oh, this is interesting. And the light bulb went off. And then, I started buying real estate.

And that was when I found that deal in 2013, spent 2013, 2014, and 2015 just buying on my own, making every mistake in the book, and losing capital. We would've lost capital if it had been a more challenging market. But it ended up being many tailwinds, and we started raising outside capital in 2016. I married my wife, my current wife, in 2016.

She's Greek, and Tecton is the Greek word for woodworker. And so my company's name is Tecton Group because woodworking effectively got me into real estate in a sort of backward way. 

Chris Powers: One of the more impressive things you've said that I caught wind of earlier in the conversation is that You know exactly how many buildings are in your target market.

I talked to many people in this industry, and only a few people know exactly how much they're after, and they think the whole world's their oyster rather than this. And then not only did you know that, you just knew I need three to five of these a year, two to three of them a year. And then we just talked about you buying a spot.

How do you source deals? Again, as you said, where some of the inefficiency is institutional, you sell a 400-unit apartment complex. And again, I'm also a proponent of this because we've had this success, but only some of them; you're catching a seller calling them off-market.

That's a dime a dozen, and you can't build a company around that. Let's say it this way. We've done it once or twice at the highest-highest level, but most of them have had a broker. But as you move further down the chain, things get more interesting. How do you source stuff?

Gabe Bodhi: So we're almost entirely through the brokerage industry.

And this is one of the dumber things that I've ever done, and I'll tell you why, but Tom Bailey, who was the founder of Janice Capital, had a say, and brokers in equities; stocks; stocks are very different than investment sales brokers in real estate. But Tom Bailey says, for what it's worth, brokers are trying to turn your net worth into their current income.

And so he said that because he wanted us to focus on our fundamental research and not on somebody else's research. But we had this healthy disrespect for the brokerage community. And I took that into real estate, where I thought I was smarter than everybody and would show them.

And your Performa is wrong. And let me show you why your Performa's wrong, which is the dumbest thing you can do. And so, I have matured beyond those original years in real estate and made many friends in the brokerage industry in Colorado. Smaller-scale smaller-scale brokerage is not CBRE and JLL and probably Kyle Matthews, although I've never seen Matthews in my market.

I'm sure he's coming. I'm sure he's coming. And Kyle, give me a call if you have. By the way, if anybody in Colorado has a sub-institutional deal they call, come across, call me. And so, I have become friends with some of the smaller brokers in Denver.

We've paid millions of dollars of commissions, both on the buy and sell side, and shamelessly borrowed an idea from you. We've recently developed a Tecton incentive program where we're willing to pay buy-side commissions, give coal investment opportunities for brokers, and a weekend at an EL condo. So those are the incentive program that Tectons developed for attractively priced deals in Colorado.

Chris Powers: It's fantastic, I mean, these brokers, we say the word broker, but the ones that you work with over and over, they become partners. They're as trusted as anybody in the company. And so to pay them, well, to treat them on trips, to let them invest is they become your partners.

We use the word broker, but the ones we work with the most are as many partners to me as anybody is.

Gabe Bodhi: a hundred percent. And again, my bad, sorry for anybody that I screwed over earlier; I did the same thing, and I was like, I had this mindset that that probably came from the CFA and from the fiduciary responsibilities that are beaten are beaten into your brain as a public equities investor.

But my North Star was in my investors' best interest. So if I can chisel the seller, if I can chisel the broker, my investors are going to make a little bit more money. And then a light bulb moment went off for me as nobody's getting wealthy off one sub-institutional scale deal.

It's a repeated game, and you need to constantly, and they won't play the repeated game with you if you chisel them. And so after that, I was like, Hey, can I pay you more on this deal? It's a delightful deal, and I'd love for you to bring me the next one and the next one.

Chris Powers: And what technology today and where we've been, especially in a 12 to 13-year bull run where many brokers come into the industry. That's another thing that's going to happen in a downturn. They're going to exit, they're going to eat what you kill, and the best ones will be around at the end.

And you want to ensure they remember you when the second half of 24 comes, and there are opportunities. You need to be on the call. That's the goal. Kyle set on that podcast, and it resonated with me because I Love brokers, but I often take their calls. He just said, so you want to be the guy that gets the call when there's a great deal, but you also want to avoid taking their calls? That? That turned me upside down for a second, and he's, it was brilliant. Ten minutes, 12 times a year, is 120 minutes for a million-dollar deal, a million-dollar profit somewhere down the line.

Gabe Bodhi: It's a good ROI. 

Chris Powers: I thought it was brilliant; what; what does a great deal look like for you? We talked about 10 to a hundred units, and we could generalize a little bit, but what does a fat pitch look like without giving your real secret?

Gabe Bodhi: Yeah, we are, again, going back to my concept that it's hard to predict the future and the future's probabilistic, and multiple scenarios can unfold. We're hyper-focused on the current yield we can generate once the deal's stabilized. We try and know the rents in our market as well as anybody.

And so we, it's iterative. You own a bunch of real estate in one place, and you know what a certain renovation quality can generate for a two-bedroom, two-bedroom, a one-bedroom, or one-bedroom, which feeds back into your underwriting for the next deal. So we're constantly trying to generate stabilized unleveraged yield above the market cap rate and the debt constant.

And so borrowing costs are five and a quarter to five and a half for me. Debt constants will be mid to high sixes, so I need to generate a stabilized yield above that. Another thing that's translated from my days on Wall Street two my days now is there was zero goal in Wall Street to be optimistic in your modeling.

You had to eat what you killed. You were judged on your performance and not on getting stocks into the portfolio by lying about how good the outlook looked. I have found with LPs in real estate that they automatically just haircut your numbers.

They say you're being too optimistic. You're trying to get this deal done. I'm going to take 10% off your retreat. My goal in building a model is that 50% of the time, I will be too high 50% of the time, I will be too low. I want to try and. Estimate what's going to happen.

And so I've had to train my LPs; hey; hey, listen, I'm probably a little conservative here. Don't haircut my numbers because this is what we can achieve. And so far, so good. And so a great deal to us looks like a deal where we can stabilize to a very high return, and let's just the best deal.

We bought it in 2022, and we only bought three but one value-added deal in 2020. It's like a seven-month even-month escrow. One of the more challenging deals I've ever done. Workforce housing in the mountains. We were very conservative on the rents and thought it was an eight on levered yield in a 3.5% debt world.

So that's a great deal. We got in there; we renovated every unit. We did curb appeal work. It's a very supply-constrained market, and we've stabilized it to a 10. So it's a stabilized ten un-leveled yields, 20% cash on cash. We've got three and a half percent debt on it and long-term debt that we don't have to do anything with.

I'd love to refi because we've created all this equity, but we still need to, so I need more time to stomach it. We were paying off three and a half percent debt with five and a half, 6% debt. And maybe it's the right thing to do, but I still need to get comfortable. And again, going back to what I said earlier about not being forced to do anything like we're not forced to refi if the market comes back to us.

I've got two or three debt brokers saying As soon as we get rates back in the forties, I'll call you. And so we're waiting, we're waiting, and we've got a few deals that will refi and, but that's what a great deal looks like to us, is Misprice brought to us off the market by a broker that we know. And it built a relationship with tons of hair on it.

Rents were half what they should have been because they had been owned forever. The seller had a basis of 25,000 a door. We bought it for one 15, a door put in 50 60, a door into it, and now we have an un-leveled stabilized yield on cost of 10%. And we bought that in 22. When at the beginning of 2022.

Chris Powers: I was going to say three and a half. You were like right up, and you were at the very beginning of 2022. 

Gabe Bodhi: We bought it in January 2022. And that was when this goes back to my point about equities being much more efficiently priced. And so when the world is overpriced, like in late 21 and early 22, it's tough to find a grossly mispriced equity.

But we found a grossly mispriced piece of real estate because of the need for more efficiency in the real estate market. 

Chris Powers: Real clarifying question. Not just about that deal but any deal. There's no rent control in Denver or in Colorado, or is there? 

Gabe Bodhi: There is no rent control In Colorado, and there was a bill in the legislation.

The legislative session just ended this week. There was a bill in legislation, and a statewide law on the books says No municipality is against institute rent control. There was a bill attempting to repeal that statewide ban that would allow local municipalities to institute rent control.

And that bill was defeated with a democratically controlled legislature and a pretty centrist Democrat governor. But that was scary—rent control's scary talk. Our good friend Moses has mastered it. God bless Moses. God bless his soul. Like, he's like, you can make money in a rent-controlled world, but it's going to be hard to make money going from free market to rent control.

Everything needs to adjust. You look at all these buildings in New York that were bought before 2019. They instituted these rules in 2019, and now they're selling for fractions of what they were worth pre these vacancy control and rent control rules were in place. There were a few scary bills, and to be completely frank, I don't have any answer.

How do you create more affordable housing in Colorado or anywhere else? We desperately need it, and it’s a thorny public policy issue. Four or five bills were in front of the legislature in Colorado this year. Rent control was one. There was a land use owning, which said the state was going to usurp all local control over the density and force you to build high-rise towers next to mansions, and people were very offended by that.

That ended up getting defeated. Those are caused by eviction, which says you got to renew every tenant no matter what, which is scary. That got defeated. And the one still alive is a rite of first refusal, which says the state can come in, and you have a building to sell; I; I want to buy it from you.

I will give you an offer. You have to notify the state, and the state has 2, 3, or 4 months to decide if they want to match that and buy the building and turn it into affordable housing, which is a terrible piece of legislation, as I understand. It's still alive, but it has yet to be enacted.

Chris Powers: Yeah. They can come up with every little gimmick they want to.

The most powerful one is building as much damn housing as possible. 

Gabe Bodhi: A hundred percent. I couldn't agree with you more, so Denver City, both the city and the county, passed peacefully peaceful legislation last year. City Council requires all new developments to have a certain percentage of affordable; it's either 10 or 15% of the units to be affordable.

So there's this huge rush to submit their plans before June 30th of last year; plan; plan submittals have fallen off 90 plus percent. Because everybody wanted to get their plan in beforehand, this vast pipeline of plans is in the system, and it's still being determined whether or not they will get built.

A funny story. A LA or New York group was interested in a Denver site, and they were talking to the seller. The seller said I'm not selling, but they said, you know what? This affordable deal is scary. So we will submit a site development plan for approval to the city.

So on a deal, they didn't have, under contract, they didn't own, and there was no chance of them owning. They submitted a plan for a 300-unit apartment building to the city just so they could have that placeholder before June 30th, 2022. How much of the pipeline will get built is still being determined.

Yeah, that one will not get built because they don't own the land and won't buy it. But People did rush to get that into the system. 

Chris Powers: It's not a Denver thing; it's a US, a global thing. But where land costs are construction costs, labor markets, the amount of permitting you have to do now, and regulation on building, the whole system is designed to create more expensive units that take longer to get.

And as I sit here and I go, okay. And we have a congested economy, and we've been booming for a long time, so a nice recession would likely bring things down a bit. But man, we have a lot of regulation, and the government continues doing all this. And now you have social media where if you even like to attempt a multifamily development, you're already like, they're coming out with pitchforks like before you've even, and I'm just going, man, there's a lot of headwinds to this clean, sustainable clean, sustainable path to the development of consistent housing.

And you look, and multi's got a lot coming out right now, but you look at single-family homes the last decade. We've built a third of what we've built in the previous three decades, and it's a real problem.

Gabe Bodhi:: I couldn't agree with you more. If you want more cheap housing, you need to let people build more and make it easier for people to build.

We are primarily a value add shop. We have done ground-ground-up development. I joke that I'm a 185-pound185-pound athlete stuck inside a 225-pound grey-haired body because of my development experience, which worked out great. We're fully leased. We got our CO in October last year, but it took years off my life.

And it's a complicated business. And you buy a piece of dirt, and the first thing you do is reduce the value by knocking down the buildings on it, and then you've got a piece of debt on it. And it was intimidating and scary. And we'll do it again in the future. But we had a Co-GP opportunity for one of the best locations I've ever seen in Denver that came up a couple of weeks ago with a good friend.

He said, do you want to co-GP this with me? And I had to swallow hard and say sorry. No, the math doesn't work right now. Yeah. But I wish I could have done it cause it's a killer location. It's a beautiful building but hard to pencil ground up. 

Chris Powers: So let's go back into sub-institutional for a bit.

So you talked about that deal that kicked ass. What are some of the things you're doing to these buildings? So you talked about curb appeal, you talked about unit renos. How else do you create value in this asset class? 

Gabe Bodhi: Unfortunately, there's always not always an operational upside. Which is the best upside?

Because you don't have to, you will put professional management in place. We will put professional management in place regardless of the existing management is. If we're buying a professionally managed building, there's not going to be some uplift in NOI by putting in professional management.

Suppose you're buying a poorly managed building, like many of the ones we buy. In that case, you get that uplift from just communicating with your tenants, collecting rent on time, or ensuring somebody's not stealing from the company. I can tell you some horror stories about stuff we've bought and uncovered, but our significant sources of value, primarily unit renovations.

If we can get a greater than 10% unleveraged yield on our re dollars, meaning the rent uplift divided by the renovation cost, then we're going to do that all day, daily. One of the areas that we found that's been incredibly beneficial is that I haven't talked much about my partner, but we've known each other for 35 years.

He was my best friend growing up. Wow. And he is a contractor by trade. And so we walk into these buildings, and frequently there'll be a laundry room that's an oversized laundry room. And one thing we found that people love to have is in-unit washers and dryers. And so we'll take an older building, make sure there's a place, a cabinet with a water wall next to it, whether it's a sink or a shower.

Put a stackable washer and dryer, remove the washing machines in there, and add a unit. So one thing we've done is optimizing square footage, whether it's making units bigger, turning a one-bedroom into a two-bedroom, or adding a unit to a building, going through the permitting process, and hiring a GC when we need to.

But one thing that we've said is, Hey, if you're buying a 15-unit building and you can add a 16-unit, and you're paying one 50 a door for the first 15 units, and it costs you 75,000 for the 16th unit, you've just created a lot of value. So we've done that in a quarter of the deals we've bought where we've been able to add rentable square footage, and that's huge.

Those are the primary things that we do to improve the building, improve the management, and try to find rentable square footage where it is. You and I talked a little bit about some inside baseball stuff, and I was racking my brain about what I could share without giving away all the playbooks. Here are a couple of things that your listeners might find interesting.

One is when we're going to a new market in that we don't have existing assets, we will take pictures from our beautifully renovated buildings and post Craigslist ads on a location that we don't currently own or ever operate in. And we'll say, let’s say we think we can get 1500 bucks.

We'll put an ad out for 1700 bucks. We'll gauge demand, and it has a sense of whether or not. People are willing to pay 1700, much less, 1500 in that market. And we know what the renovations look like. Cause we've done four or 500 unit renovations at this point. It doesn't create a flood of fake Craigslist ads.

And disappointed renters thinking that there's a new unit in their market. But that's one of the inside baseball things that we've done that's been beneficial for us.

Chris Powers: And so those people will, you’ll see demand, and you’ll think, all right, there’s a market here for 1700. 

Gabe Bodhi: Yes.

Okay. And then we change our underwriting a little bit and say, now this was the deal I discussed. We were underwriting 1500 bucks a unit and getting 2000 a unit. And it was because we had such a flood of inquiries for it. That’s one inside baseball thing. Another one is we still, to this day, secret shop; it’s hard for me to be looking like I do to walk into a unit and pretend to be a C-class renter or a B-class renter, but we’ll Secret Shop our competitors to try and understand what someone’s getting for units.

You can do a lot of that online, whether it’s apartments.com, Zillow, or Craigslist, but nothing replaces being on-site and going in and looking at the stuff. And so, we’ll secretly chop that I have, and hopefully, my third-party manager needs to listen. Still, I have hired people to secretly shop our buildings to ensure the third-party manager is doing a great job.

If I show up, they’re going to know who it is, but if I send a friend or somebody who works for me and I say, pretend you’re going to rent and see how the experience is. Yeah. And so, one of the other things I wanted to talk about is 2018; we bought a 276-unit Class C portfolio in one of the worst markets in Denver for $92,000 a door.

I ended up selling the last of that at an average of, don’t even know, 150-160 a door—enormous returns for our investors. We bought a 276-unit portfolio while I started my own internal third-party management company and hired 10 or 15 people. So we had 16 employees, 400 units, all class C doing our management.

And you asked me why I have grey hair, which undoubtedly contributed to it. And I hired a third-party management company in 2020 to take over our portfolios. And it’s the best thing I ever did. Mr. Matthews and Kyle talked about revenue-producing activities, RPAs, me, and managing me. Being me, not some skilled property manager like Peter, but me being me, running a property management company, taking time away from raising capital and finding great deals is not a good use of time.

Hiring a third-party manager would be better than me. Taking everything we learned from running our own property management company and implementing a proprietary management manager system has allowed us to grow in ways we wouldn’t have been able to grow otherwise. So I’m incredibly grateful to our third-party manager.

We’ve been through four or five third-party managers. Finding a good partner is challenging. So when you do, you take care of them, and we’ve found a perfect partner. 

Chris Powers: Well, that’s a top thing to talk about. Let’s finish that conversation. But I have some other questions about what you said before, but if somebody’s listening to this, how do we find a great third-party manager?

Is there even a playbook for that? As you said, the story of, we’ve been through three or four before we found the fifth that worked is a familiar story in this industry. And from what I’ve found, you’re either overpaying people, you have to pay too much, and it doesn’t; it makes the deal not work.

Or you get the person that’s undercutting the market, but the service defines that nice balance. One of the most challenging parts of the industry is finding a tremendous third party you can trust and grow with. 

Gabe Bodhi: What’s like your feedback on that? I couldn’t agree with you more X ante.

It can be challenging. It’s almost impossible to say with certainty that this will work out, but here’s where I would start the conversation if you don’t have good accounting if your numbers are not immaculate and accurate. Up to date, it’s nearly impossible to be an excellent third-party manager because you need something to manage.

You manage what you measure. And so, I would start the conversation with. What is your property management accounting software? What is your reporting cadence, and can I have a seat license for your property management software? So I have a seat license, and I pay 75 bucks a month for it, and I can see everything that happens to every one of my properties.

The first thing I do every morning when I get into the office is update this tracker that I have for all of our properties, occupancy, vacancy, notices to vacate collections, and future occupancy. I go through the maintenance log to see if anything’s happened overnight. And so that’s part of the asset management piece of it.

But if I can figure out what’s happening on-site with a seat license, they will know what’s happening. So everything to me starts with that. You got to have accurate numbers, and you got to be able to manage those numbers. Number two is leasing. We are vigilant and ruthless about staying as occupied as possible, so there’s a turnover cycle.

Somebody gives you notice, and they say, Hey, I’m going to move out. The 1st of July. Okay. You now know somebody will move out on the 1st of July. Do you wait till the 1st of July to do anything? No. You walk in; you take a look. You see what the condition of the unit is; you see if you need to order anything. Will it be a complete turn, or will it be a make-ready?

What do you need to do to get ready for that day? Boom, they move out on the 1st of July. You start pre-leasing. If it’s make-ready, you’ve got all your materials ordered; you’re ready to walk in the door; you trash out and change the key immediately. Then you do your maintenance or renovation items. You start pre-leasing, and you move in, and we break that down into the time from move out to ready to rent.

Then the time from ready to rent to lease, and then from lease to move in. And we’re constantly trying to shorten all of those timelines. We’ve gotten to the point with our property manager where they can have it ready to rent within five days after somebody leaves on a standard unit that’s already been renovated.

 And then if we’re pre-leasing it, doing tours, have videos up, they have these matter ports now, which are super cool. We’ve used virtual staging, which is super cool. You can get a pre-lease going even before somebody moves out. Yesterday, one of our buildings showed up as notice to vacate on the 1st of July and was pre-leased for the 7th of July.

I’m still determining what today is. Today’s the 11th of May, so almost two months out. Because we’ve got this system down, we will reduce our vacancies. And vacancy kills you, and I’m sure it kills you in industrial, and it indeed kills you in multi-family, kills you in single family. And so we’re ruthlessly executing against minimizing our vacancy.

And they were talking to your third-party manager about how they turn units, lease, and minimize your vacancy? 

Chris Powers: Cost is critical in the market right now. Are there wait lists of people where it’s an entire market? You said occupancy is at Virtue, or is it a hundred percent 97%?

So when I hear what you just said about notice coming in, we’re pleased, two months out. Is that because there are waitlists already at a lot of these properties?

Gabe Bodhi: So in some of them in our value add stabilized properties, yes, without a doubt. We own a couple of core buildings closer to the top of the market on pricing, which takes a little longer to fill up.

But our value add stabilized properties where pricing is 1.50 to 2 bucks a foot. Yeah, and boom, they’re going to sell immediately.

Chris Powers: Are people staying in units longer? Is there anything you’ve noticed there?

Gabe Bodhi: In that portfolio, which is probably a hundred and some odd units?

Yes, I have noticed that. If you’re adequately priced because rents have gotten so out of control, and when you turn over a unit, somebody moves out, you bring it up to the market. If somebody’s going to stay there and they’re paying 1300 and the market’s 1500, you don’t bump them from 1300 to 1500; you bump them from 1300 to 1350, and if they were going to go somewhere else, they’d be paying 1500, so they’ll stay. And so we found, if you’re appropriately priced, Well located, well managed, safe, clean, inhabitable property in a good part of Metro Denver, you’ll do well. So yeah, people are staying longer.

Chris Powers: Renovations, and you said the property manager, I think doing those. Are you all picking the materials and the playbook for how you turn these over to that when something happens, it’s not like a bunch of back and forth between you and your third party? They know it goes vacant. Tecton likes its units like this.

It will bring the most rent and go in with flooring paint. Or is it? Do you have different plans for different properties, or is the same playbook everywhere you go? 

Gabe Bodhi: So, a couple of things there. One, we differentiate between a make-ready and a complete renovation; a make-ready is a unit that’s already been renovated; it just needs to be made-ready.

So you might have to tighten up the towel bar, or you might have to replace a faucet or something like that. We might have to touch up the paint. Make Ready is what our third-party manager does. We do all the construction management in-house, and my partner, who’s a contractor, manages all of that. And we have a couple of crews that work for us and use the same materials.

We’ve gone straight to wholesalers for cabinetry and countertops and flooring, and we’ve not gotten to the point where we bought a warehouse, and we’ve put a bunch of stuff in there, which probably would’ve been a smart thing to do during the Covid supply chain stuff. But we use the same stuff repeatedly at a specific price point.

So my partner Chris, who’s pretty amazing, manages that. At one point, when we bought that 276-unit portfolio, he was overseeing the renovation of between seven and ten units a month, and we were trying to turn them over on a monthly cadence. So we were trying to, somebody moves out the 31st of May, and we’re trying to rent it for the 1st of July, completely changed the unit, and almost put both of us into the grave.

But it was, it was amazing what he was able to do during that time. 

Chris Powers: It’s interesting; you and Moses are very similar. His partner’s a construction guy, and his partner’s name is Chris. 

Gabe Bodhi: I appreciate the compliment. I’ve gotten that before and couldn’t think more highly of Moses. What a guy. And so I’m flattered, but I do not put myself in the same category as Moses.

Chris Powers: Same structure. Moses, you all are each your own, but we love you, Moses. If you’re listening to this, you said a second ago. When we started, we talked about return on hassle. And it’s no matter what industry you’re in, and a spreadsheet will always look great. But what’s the stuff that you have to do? And then you also said I could tell you some horror stories, so I’ll just put you on the spot and say, let’s talk about what you see on Twitter often.

You want to be a landlord, and then they’ll tell you a story. Oh God, what are things that might happen? That would create a lot of hassle for anybody, even the experienced people listening. But someone that’s like multi-family looks easy. 

Gabe Bodhi: So it’s a overplay joke at this point, but there’s no such thing as passive income in multi-family.

We have earned our battle scars. One of my favorite sayings is from a movie called Law Abiding Citizen. It’s about this guy who goes to jail, but he says lessons not learned in blood are soon forgotten. And that resonates so much with me, and like some lessons are tattooed onto my core because of being through this.

So, one horror story. The thing that pushed me to get out of property management was I had a maintenance guy. One of my employees went to a call, and he had a gun pulled on him. As he walked in the door and he left, the police came. They took them away, but I was literally like, this is what I’m spending my day doing, like dealing with the police.

It was comforting this guy who was an employee of mine, with a gun pulled on him in his face. It was a Class C apartment, and so that was pretty terrifying. We had a tenant or one of these 276 units cooking in lard and going to take a nap. She just happened to have the large boil over large flammable burn her unit to the ground, so get a call.

Hey, we got a fire over here. Don’t worry about it, and it’s not a big deal. I was like; It’s a fire, and a big deal. So I drove over. Fortunately, nobody was hurt, and firefighters showed up on time. Still, we had X thousands of gallons of water flowing through our building, and we were very fortunate that, at the time, we had forced all our tenants to take on renter insurance.

And so we didn’t even have to make our insurance claim. We had the renter’s insurance that the tenant was paying for pay for the renovations to that unit. Interesting. So got incredibly fortunate for that perspective, but I had that burned down, which was a little scary. One time I was in bed, I had taken a sleeping pill, and I was going to sleep, and my partner’s wife called me and said, I can’t get in touch with Chris.

And I knew he was walking in this dangerous building in the afternoon. He said I couldn’t get in touch with Chris. And so I call him, go straight to voicemail. Shit. Oh, so I get in the car after taking a sleeping pill, which is not a good strategy, drive out to the building, and halfway there, he calls me, and he is like, oh, sorry.

My phone ran out of battery, and I was walking units, and it was like nine o’clock at night, and he was walking units to make sure that the crews that we had renovated the buildings were doing a good job. He was quality-checking and doing his job, but we had so much work. We were terrified that something had happened to him, and it was not a super safe neighborhood, but we had a tenant; sorry, I could go on forever about these horror stories.

We had a tenant doing drugs, who lit a candle, lit his unit on fire, then escaped by jumping out the window of a third-story unit, landed on a parking lot, and broke. Fortunately survived, but he broke a whole bunch of bones in his body and left the unit on fire, which was awesome.

Chris Powers: Yeah. I will tell you my high respect for people who manage properties where people live.

Because it’s a different experience than I do commercials, I’m not saying there are no problems there, but just it’s business. You’re showing up to work, usually in your best form, and you want to make it look nice because it’s your place of business. I mean all those things, and I’m not saying people don’t take care of their houses, but people’s issues in life show up more in their home environment than at work.

And so you hear stories like that all the time, and I greatly respect it. I used to own a lot of residential, and I’ll tell one quick one you didn’t ask, but it’s funny. I think Johnny’s heard this one about the bees. Yeah. I bought all these duplexes down in South Fort Worth.

You might even know about this. I tweeted about it a long time ago, but I bought these duplexes, and while we were doing our walk, we noticed bees on the back porch buzzing around, but it was like 10 to 12 of them. And I probably thought, we’ll just get a can of raid and kill them.

When looking at a hundred duplexes a month, you can’t get a full inspection on each one and pay 500 bucks, so you walk your crew around. You make your list. So we were like, yeah, we’ll kill the bees. No problem. My buddy was a professional golfer then, and he asked me to go caddy for him in Midland, Texas.

Was it Midland or Abilene doesn’t matter. We’re out on the golf course. I love it. And I get a call from my contractor, and he’s screaming bloody murder. Oh, Jesus. And he said boss, boss. The bees. The bees. And I’m sitting here thinking there’s like 12 of them. Man, get over this. Well, millions of African killer bees had nested in the walls.

Oh, God. And when you look at this wall behind me, the nest was as big as this entire wall. And they come in from Africa, nestle in warm climates, and love like the insulation, but you can’t hear them. The only thing that sets them off is lots of noise. Or if you kill one of them and if you kill one of them, it puts an order out that alerts all the bees were under attack. 

Gabe Bodhi: Oh my goodness. 

Chris Powers: So the story, for entertainment purposes, gets a little better, but it’s not better for anything other than that, but, Okay, so they poke a hole in the wall. They’re gutting the kitchen, and millions of these bees start pouring out of the walls.

They put several people, sting many workers, and put people. It was just; I was freaking out. I thought people might die. I was young twenties and had just raised money for my first couple of projects. They then flew outside, and the neighbor, I said, they don’t like noise. They were mowing the lawn in the backyard and had just had a litter of puppies.

Bees fly over the fence. Kill every puppy. By the time I showed up at the property, they had stung them so many times they had gone from being the size of this cup to these brand-new puppies. They had swollen up, and the whole thing just is dramatic. There are firefighters there and mounds of bees in the front yard.

I mean, like mountains of these bees. And all I’m trying to do is like renovate a unit. And it was just one of those days where you talked about no passive income in real estate. It was one of the craziest stories ever. That’s ridiculous, and I would’ve never known. So now, whenever I see bees buzzing around, I always think about that story.

And I remember calling my mentor, who was also an investor, And I just said like the world’s falling apart. I felt so bad for our people. These puppies, there’s like seven of them, and they’re swollen, and I mean, the whole thing kept getting worse. The neighbor said he would sue me, and I was like, well, they’re not my bees technically.

He’s like; I don’t care. You’re going to pay for this anyway. He just said One day, you’ll be able to laugh about it. But I remember then, and it was like the worst thing ever. So that’s my story of renovating. 

Gabe Bodhi: It triggered a memory—one other thought. Merril Stillwell, a partner of mine on the deal, has a terrifying 20-pound French bulldog who wouldn’t hurt a fly sweetest dog ever.

And at the property that we cologne, he was up in the mountains, and he was walking the property with his dog and just walking around, and a whole sudden, the police show up. And they come up behind him and say, Hey, put your hands up. You go, okay, what? What happened? Somebody had called, one of our tenants had called saying. There’s a stranger on my property.

He was the owner of a killer pit bull, so literally a 20-pound French bulldog and police had to come. So we always joke about Winston, the killer French bulldog.

Chris Powers: Let’s bring it full circle so we know where we’re in the market. We’ve talked about where the market might be headed.

We’ve talked about the types of deals you’re doing. You did have the money to sell quite a few deals. 2021- 2022. How are you positioning your company for the next three years? Like we’ve touched on many of these things and answered that question here and there, but as we look at the next three or four years, how are you positioning, and how do you think about that?

Gabe Bodhi: Great question. I mentioned earlier that my mindset, my investment style, and my belief system is you make more money buying closer to the bottom than you do buying closer to the top. We are still closer to the top, and we are not closer to the bottom. I want to be positioned to hoover up great deals if and when we approach a bottom.

I am still determining what that’ll look like. I am still determining when it’ll happen, but I had taken my team from 16 when we had in-house property management. It’s now three, my partner, myself, and an accountant/analyst. So part of what I want to do is hire some killers. Okay? I want a team of assassins ready to execute if and when the opportunities arise.

By the time this podcast is announced, there will be a job posting for an asset manager, coo, whose job would be to manage and maximize the cash flow of all of our existing and future existing assets. Freeing up some time for me to spend more time on acquisitions, and I’d like to hire an acquisitions person at some point in the next couple of years.

We’re at a little over 200 units. We’ve bought or built 676 units over the last decade. We’re at over 200 units right now, and my goal is not to sacrifice our underwriting standard one iota and grow to about a thousand units over the next five to eight years. Okay? And so, I need to have the team in place to execute 150 or so units of acquisitions per year.

And that’s the plan, and that’s the goal. And I am reinvesting all the fees we earn back into the business to hire people. We’re very lean right now, so we don’t worry about running out of capital, which I worry about for some folks. The market for assets is very similar to the market for labor.

The ability to hire a great person a year and a half ago would be challenging. Over the next couple of years, some talented people will shake free from some real estate platforms. And if you’re interested in living in Denver and working with me on building that business and getting some equity and promotion, give me a holler.

So that’s a plan. We have five verticals of what we do. We acquire, we renovate, we asset manage, we do accounting, and we have investor relations. My ideal team to execute against that business plan would be five people, one per vertical with me on top, so a team of six.

And we can grow as big as we want with a team of six. And then the second piece of it is my LP relationships. We currently have 190 LPs in our database and 90 active LPs. I have always felt like they’re true partners, not just legal or limited partners, but true partners in the business.

And one of the things that call me naive, I don’t come from a real estate background, but I call it non-recourse equity. And I have seen this time again over the last couple of years where people raised capital from people they didn’t know, from fundraising, from realty Mogul, from course equity. I’ve seen brokers like brokered equity relationships who don’t have their equity’s best interest at heart.

And my investors are partners of mine, and I think of it as a trust bank. Every mediocre deal I passed on in 2021 was a deposit into that bank. And there’s blood in the streets, and there are fantastic buying opportunities. In that case, I’m going to be making some withdrawals from that trust bank and saying guys, I know it feels scary right now, but this is a generational opportunity to own this piece of real estate.

That’s my mindset have the team in place, build trust with your equity base, and execute when the opportunities arise.

Chris Powers: I love that. If you’re listening and that role would fit you, I would consider taking Gabe up on that offer. That sounds like an incredible opportunity. Let’s talk.

I love what you said about non-recourse equity. That’s the first time I’ve heard that, and I just made it up. It’s brilliant. It’s what you said; it’s the lack of relationship, and because of that lack of relationship, things get tough, and you have to do a capital call or start talking to these people.

The lack of relationships will put further stress on many of these deals.

Gabe Bodhi: A hundred percent. And people will screw you, and I won’t write that check. 

Chris Powers: Come after me. Well, you think about it the same way you do. There are many people I don’t know because we’ve grown, and we have, of course, but my mom and my sister are in every deal.

I have many good friends, but when I think of my mom and sister alongside me, no offense to everybody else; that alone is like, okay, we will never let this thing sink. It creates extra motivation you can’t get if you have quote-unquote non-recourse equity.

Gabe Bodhi: I couldn’t agree with you more. I mean, I have a lot of my friends, and we’ve grown to the point where now it’s friends of friends and things of that nature, but I have many of my friends, my parents as investors. My parents were their $50,000 checker; my mom’s probably one of our hardest LPs.

She gave, what’s this capital call thing? Yeah. I don’t understand. Why do I need to give you money? I was like, well, the docs you said signed, but I couldn’t agree more. We had a deal, and we have one deal right now where we went over budget on the renovations, and we had penciled it to an eight.

It’s probably going to be a seven-stabilized yield. It’s doing great, but we needed extra capital to finish the deal. And I said to my partner in the deal, listen, I’m not going to do a capital call, and I don’t care what it costs and will not do a capital call against my investors. We messed up.

If I have to write the check, I’m going to write the check to fill that hole ended up being $350,000, and we were able to get a second loan from our lender, and it ended up being not a big deal, and we’ll be fine. But my mindset is, You put your investors first and do it repeatedly, and they will begin to build trust in you.

And when you come to a knocking, there’s a lot of fear in the streets. And you’ve got the killer deal; they will be stroking that check, even if it’s all cash. The debt market may have closed completely, and you got to buy a deal all cash. Like they’re going to be excited about that. And so that’s the trust I’m trying to build.

Chris Powers: One hundred percent and you talked about you, your partner obviously on our end, Jason and I; we have lots of our employees now in the promotion; they’re also putting up LP dollars. I’ll always remember that. You want recourse equity partners, and it brings focus, concentration, and grit to the table that you can only have if you know who you’re dealing with.

Gabe Bodhi: I couldn’t agree with you more. And one of my first bosses, Patrick O’Donnell at Putnam Investments in Boston, said that when you’re in investment management, you have these quarterly earnings seasons, which get a little hectic because you have to update the model. And when you’re 22, your job is updating the model.

And he was like, if you’re trying to update the model late at night, pretend that one of your LPs is looking over your shoulder, and don’t cut corners. And that’s always stuck with me. That was probably 1997 that he said that to me. So that’s 26 years ago. That’s how I try and approach it, is like, No one’s watched me right now.

I could play golf; I could go home. No. I’ve got these LPs counting on me to execute and find good deals, not waste their money, and not take advantage of them. How GPS takes advantage of LPs causes me to lose sleep, and I never want to do that. The way I structure it, I wish I had more recurring revenue coming in.

I’m very fortunate not to need it, but the way I structure it is that my base case promotion on every deal should be multiples of my base case fees. And so all of my fees pay for the business. They pay for the employees, they pay for the rent, they pay for the software. My ups and my benefits all come from promotion.

And promotion is purely aligned with investors. 

Chris Powers: Yep. Do you do some pref, promote structure?

Gabe Bodhi: We do pref, promote structure, we do European waterfall, which is, is debatable, but which means European waterfall means that all the equity and accrued pref gets paid back before we participate in the profit.

So American Waterfall is, once the accrued pref is paid off, you begin participating in the profits. And so of our, 40% of our deals we’re into the promote on right now. And so that is nice because that helps me. 

Chris Powers: There’s nothing better than being in the promotion, babe.

Gabe Bodhi: It’s nothing better. And it’s like I’m in the promotion because I did right by my investors, right?

I gave them all their pref and all their money back. We still own the deal, and its cash is flowing nicely and a double-digit un levered yield. Let’s ride this thing out. And so, yeah, I’d love to do that with all my deals.

Chris Powers: Last thing we’ll chat about; we don’t have to be long-winded on it, or we can be right now.

I’m assuming you’ve syndicated one-offs. 

Gabe Bodhi: Both. We’ve done funds and syndicated one-offs.

Chris Powers: So if we were to go back to how are we looking at the next three years, especially if there’s a buying opportunity with a lot of stuff coming to market, how are you going to be capitalizing that, or how do you think you’ll be capitalizing it?

Gabe Bodhi: Great question. So Moses and I have talked about this. He’s moved away from the fund structure. There are some structural negatives from a GPS perspective of a fund regarding the cross promotes. I like the fund structure and putting a lot of heart and soul into raising capital upfront and then being able to deploy that capital, and the opportunities arise.

So we’ll continue. We’re currently investing out of our second fund, and I’ll raise a third one. What it does if you do both funds and certifications is create a potential conflict of interest. And so my goal with conflicts of interest, which are inevitable in this business, is to be transparent.

And so what I did on the current fund is every deal from one to $10 million from Fort Collins to Colorado Springs, a value add deal that we buy throughout the life of this fund, will go into the fund. Anything outside of this, I can invest up to 25% of the fund without permission into great deals outside of those parameters, whether they’re too big or in a different market.

And then we’ve syndicated a few deals while the fund’s been in place, but those deals were different. They were a ground-up development, a pre-TCO OZ deal, and a joint venture down in Pueblo. And so, I think if you’re going to do both a fund and a syndication structure, you have to be aware of the risk or the optics of cherry-picking the best deals out of the fund and into something else and be upfront with your investors about it.

So we’ll continue to do that. We’ll put value add deals that frequently move quickly as an advantage into a fund structure, and we’ll syndicate deals that are, whether they’re ground up or core or outside of our traditional markets. We’ll continue to syndicate those deals. 

Chris Powers: We can discuss it over lunch, but your next investor might be sitting in front of you 

Well, thank you. It has been unbelievably impressive. I think the world of you. I love your strategy. I know you’ve brought a lot of value to the Retwit community, and I wish you nothing but the best. 

Gabe Bodhi: Thank you, my friend. I appreciate your time and the opportunity to speak to your listeners. 

Chris Powers: Let’s break some bread.

Gabe Bodhi: Let’s do it. Thanks. 

Chris Powers: I hope you’ve enjoyed this episode of the Fort Podcast. Be sure to follow us on your favorite podcast platform or hop over to YouTube to watch full video episodes if that’s what you’d prefer. For more information, you can check out fort pod.com.