Latest / Real Investor Radio Podcast / Ep 91 | Build-to-Rent, Interest Rates, Tenant Selection & Market Trends with Bruce McNeilage
Transcript
- Craig Fuhr (00:02) Hey, welcome back to Real Investor Radio. I'm Craig Fuhr joined again by Jack BeVier. Jack, how are you today, Jack BeVier (00:07) Great, great, good morning, sir, great to see you. Craig Fuhr (00:10) in your remote ⁓ dungeon I see today. Jack BeVier (00:13) Always get to move the backgrounds around, keep the people guessing. You know, can't dox yourself. You gotta move it around. Craig Fuhr (00:19) undisclosed location as always. So Jack today I'm really I'm so excited to ⁓ to bring on our guest. We'll just start off immediately get the conversation going. Real Investor Radio always bringing you the legends in the industry. Today is no ⁓ exception. Today we have on Bruce McNeillage. He is a 36 year investment veteran. Let me put my glasses on here Jack and co-founder of Kinlock Partners and Kinlock Homes. They're a Nashville based firm focused on build to rent housing and single family development across the southeast specifically in South Carolina, Georgia, Nashville. Kidlock has built ⁓ in nine areas subdivisions five in Nashville and others in Augusta, Columbia, Aiken, Greenville and Spartansburg. Bruce launched the B2R business in 2005 and since then his firm's assets have been acquired 19 times by private equity funds and REITs. Bruce W. McNeilage (00:59) . Craig Fuhr (01:16) Kinloch builds homes for its own portfolio and sells to institutional investors and tenants alike. And Bruce has been featured on, ⁓ and the company has been featured on NBC Nightly News, Wall Street Journal, Bloomberg and New York Times, and local affiliates with CBS, Fox and ABC. Bruce, it is an absolute pleasure. Really, really was looking forward to bringing you on. It was all my idea, none of Jack's on this one. So we can't thank you enough for coming on the show. and looking forward to getting the conversation started. Jack, I was taking a look at the five-year treasury yield. We just passed the big, beautiful bill and the bond market seems to be, what's the word that I should, sort of not excited. You know, Jack, I think folks are still looking at it and going, hey, we've got $36 trillion in debt. Bruce W. McNeilage (02:09) you Craig Fuhr (02:11) $2 trillion deficits for the foreseeable future. There wasn't any significant cuts in the budget. think the country is going to budget this year is going to be about $7.4 trillion. And that is definitely not pre COVID spending. So give us your thoughts. Bruce, feel free to jump in. Honestly, we're just a free flowing conversation here on sort of where we're seeing the bond market today, Jack and Bruce W. McNeilage (02:15) . Jack BeVier (02:25) Mm-hmm. Craig Fuhr (02:39) and what real estate investors around the country can expect over the next several months. Bruce W. McNeilage (02:44) Yeah, so I'm sorry, Jack, go ahead. I think there's two things we look at is one, what are the interest rates for buyers, for home buyers, and how does that affect sellers and home buyers? Two, what are the interest rates gonna be for investors like us? For Kinloch, we look more at the five-year treasury, and we're between 250 and 275. Jack BeVier (02:45) So we go ahead, you gotta go first. No, get it, get it. Bruce W. McNeilage (03:08) over the five-year treasury when we're borrowing. So the numbers still are not compelling, and we'd be looking at a negative equity situation on most deals if we were borrowing. For the 10-year, people are looking at approaching seven, right? 6.8, 6.9, and that stayed pretty flat over the last year or two. mean, rates haven't really moved up or down, and I think a lot of people have been waiting for them to move down to buy. And we've been told by now, marry the house, date the rate. People have been dating for a long time. And so I always tell people, when are you going to get married? right now, I don't know if people know when they're going to get married. But people have been dating the rate for a long time. Craig Fuhr (03:44) Yeah, we're gonna go put a ring on it. Jack BeVier (03:54) So like in infinite infamously amongst my friends, I dated my wife for 10 years before, before I popped the question and we just had our six year anniversary. I only get credit for the six, which I'm pissed about in retrospect, right? Cause we've been together for 16 years, but ⁓ yeah, 10 years was a long slog though. I don't think that our real estate investments are going to be as forgiving as my now wife was about a 10 year dating period. So yeah, at some point, we're, know, things are getting antsy in terms of a date in that rate. Craig Fuhr (04:25) Jack, what are your feelings on sort of the big bill that passed the House working through the Senate right now and how that's going to affect us over the next six to 12 months and possibly even long term? Jack BeVier (04:38) Yeah, like it's a past as of today when we're recording, it's the 29th. It passed this the House a couple of days ago, headed to the Senate. But as you mentioned, you know, there's like kind of like a mixed message coming out of the Republican side of the aisle right now. Right. Like it's been they've been like defending Doge attacks since the, know, since the first 30 days of the administration. And yet. Bruce W. McNeilage (04:58) Thank Jack BeVier (05:01) None of the Doge or very few of the Doge recisions were memorialized in this bill. like that 150 billion didn't even get codified into a congressional bill when the Republicans have a albeit very, very thin majority right now. And I think that thin majority may be the, the, you know, the real like problem, you know, the issue and it Craig Fuhr (05:20) Yeah, it almost feels like the doge, the whole doge thing was performative, you know, when, when none of this stuff makes it into law, right? And, and frankly, they didn't even cross the Potomac and get over to the Department of Defense and make any significant cuts there. In fact, the budget for the Defense Department actually is now a trillion dollars up from about 900 billion last year. So don't didn't see any significant cuts there. Didn't see any significant cuts in Medicaid waste, fraud and abuse. Bruce W. McNeilage (05:40) Thank Craig Fuhr (05:48) And so I'm just starting to wonder whether or not the, know, Elon bringing out the chainsaw was really just performative or whether it was something that we can expect to see in the future in terms of cuts. Jack BeVier (06:00) Yeah, like who knows like what the conversations are happening behind closed doors. And I'm obviously completely speculating here. I spend time looking at houses, not, you know, wandering the halls of Congress, but ⁓ the tax cuts that but the that the Trump tax cuts being made permanent. That seems to be like the big feature of this bill, right? So we get we get back 100 % bonus depreciation. Otherwise, you would have seen significant tax increases. Craig Fuhr (06:13) One day, Jack. One day. Jack BeVier (06:30) on corporations and lots of folks. ⁓ And so it feels like the trade off was, hey, let's get these track tax cuts made permanent. And I'm completely speculating here, but I wonder if the political calculus was get the get the you know, what's one more year, right? Like we have such a big problem. What's one more year? If we can with the thin, super thin majority that we have right now, can we if we can get the Trump the tax cuts made permanent? We'll then start to hack away at the bigger problems. the idea that we were going to like balance the budget, you know, within 90 days of, you know, the first term or, you know, first year is, you know, would have been an extraordinarily ambitious idea. And maybe this is just what they think that they can get done and they'll continue to hack away at it. ⁓ That said, it hasn't come through the Senate yet. And the Senate, you know, with their longer tenure is allowed to be a bit more thoughtful. uh, has the opportunity to be a bit more thoughtful and long-term in terms of what they want through. And there are still some tea party Republicans and it's a super thin majority right now, and even on the Senate. So there's still some tea party Republicans that are having none of this approach to the budget. So I think we're going to see some volatility over the course of the next couple of weeks as, and some brings because of some brinksmanship, um, because people feel that this was the platform that. You ran on, you know, and so far Trump's been he's been in the Middle East. He's been dealing with the war in ⁓ Ukraine. He's really not chimed in on this topic at all so far, which is, you know, pretty uncharacteristic of him. So we'll see what what what what, you know, game theory he thinks is appropriate over the course of the next couple of weeks here as the Senate tackles this. Craig Fuhr (08:20) Bruce, why don't you give us a background on, I mean, 35 years in the business. I always love speaking with investors like you who have seen good times, bad times. You lived and obviously figured a way through 2008 through 2010, 11. Talk about, let's give us a background on sort of how you got into the business and bring us up to speed on where you are today. Bruce W. McNeilage (08:44) Sure, Jack BeVier (08:44) And by the way, just Bruce W. McNeilage (08:45) yeah. Jack BeVier (08:46) before you get started, Bruce is the OG of build to rent. Bruce was doing build to rent as a business model 10 years before people were talking about before, before, you know, they coined the term. So like he's been doing, he's been doing built rent longer than literally anybody, I think. so sorry with that, ⁓ minor introduction diversion. Go ahead. Bruce W. McNeilage (09:05) Yeah, so Barbara Mandrell sang a song. She was country before country was cool. I guess I was billed to rent before billed to rent was cool. And you know what? I didn't know I was in the built to rent business, right? I came up with an idea. I did one house next, you know, I think the first year and I was part time. had 57 houses. That portfolio was eventually purchased by American Homes to Rent. And so I was a banker for six months out of college, realized Craig Fuhr (09:13) Yeah, you were. Bruce W. McNeilage (09:33) I didn't want to work for a salary. I then became a financial advisor. I did that for 24 years. And about halfway through my practice, started buying these houses. Again, one, two, three at a time. A friend of mine financed me. I used OPM, other people's money. And that's when we started doing the houses at a larger scale. And once I built up that portfolio, which for an individual investor without any equity behind you, You know, to have 57 brand new houses the first year was a pretty good accomplishment because again, I didn't know in 05 and 06 really what I had started doing. And then we got into duplexes, triplexes, fourplexes, got into apartment buildings, then apartment complexes. But then I really came back when we started Kinloch Partners in 2010. I really came back to kind of what I knew and where I started, which was Build-A-Rent. And we started doing that in Atlanta. both building but buying, you know, houses that were a year, two, three years old and fixing them up a little bit. And we wanted to build a portfolio like I had done in Nashville. And within about six months, the big boys started calling. And we didn't know who some of them were, right? Because they were new as well. And so that's where we got bought out that many times is, you know, in the early years, instead of building our own portfolio. because again, we didn't have any capital or equity behind us and it was very tough to get debt, especially in Atlanta. ⁓ We kind of became de facto aggregators for the big boys and it was easier to buy from us. Brand new houses, fully rehabbed, a tenant already in them. And so it was a pretty sweet deal for them because they were just buying the things, cash flowing right away. And we developed a reputation. And I want to say every single sale we made to an institution, that institution came back at least one more time to buy another portfolio. And for me, I think that was a compliment because they were buying repeatedly. So they were certainly happy with the portfolios and the houses we were selling. And I think a lot of that goes down to the tenant selection. In our business, tenant selection, I believe, is most important. Craig Fuhr (11:55) What did the margins look like back then for you? mean, and what was it like to deal with these guys, you know, get a call one day and I can't imagine it's fun sitting across the table from these types of sharks, right? Bruce W. McNeilage (12:09) Yeah, so our cap rate was 24 % gross. And what we were doing is we had an average of about $50,000 in a house. A lot of them were the models. The first three or four houses in a neighborhood. We bought most of them from Bank of America or from Countrywide, you who bought Bank America. And so here we've got $50,000 in a house. We're getting $1,250 to $1,300 a month for the rent. And there was no cap ex. I mean, once you... maybe put a water heater in that was stolen or appliances that were stolen, you know, the roof's not gonna leak. know, people are in the houses, they stay for more than a year, because what's better than a brand new house, right? You're not gonna move out unless you buy or build a house or you're moving out of that city. And so, yeah, cap rates were just crazy and we were able to sell with a lot of meat on the bones, so the institutions that were buying from us were really doing well. We needed that money to kind of keep. know, chugging along and keep financing our operation. But once we had one house and sold it, we could buy two houses. We had two houses and sold them. We could buy three or four. And so that's really how we saw the business for homes. Now, in a lot of these neighborhoods, had PVC pipes sticking out of the ground. You had vacant lots. The neighborhoods were already built. I mean, the road streets, the pools, the clubhouses. But it was like a time, like a bomb went off. and you were just stuck in time with all these pipes sticking out of the ground. We started buying finished lots that you could put a house on, pad ready, develop lots for $2,000 a piece. And my partner at the time didn't wanna do it, because it didn't create cash flow. And I'm like, listen, this is the time period in your life where you're gonna make a decision and you're gonna sit on a front porch one day and tell your grandkids how you got rich. And when you're buying lots for $2,000 a lot or when you're buying brand new houses for $40,000, I knew there was only a window in time. Now that window in time stayed open a lot longer than I ever expected, but I knew there was going to be a piece in time where it was going to be like that. And we just tried to exploit that and do that as long as we could. Jack BeVier (14:23) So I totally screwed that up. I was your partner and we were like same thing like limited capital. We were doing turnkey rentals in Atlanta. What part of Atlanta were you in by the way? Bruce W. McNeilage (14:33) Southwest would, which would not be the most desirable part of Atlanta. Jack BeVier (14:38) Yeah, like Fulton Southwest Fulton County. And. OK, yeah, yeah, yeah, so we were that's similar, similar neighbors. We were we were Fulton Clayton, DeKalb, a little bit North Henry, ⁓ South Gwinnett, like didn't do enough in the north. Wish I'd gone. Wish I'd done more in the north because the home price appreciation in the north was was phenomenal, but the cash flow wasn't nearly as good. So that was like the draw. But dude, I. Bruce W. McNeilage (14:40) Southwest Fulton, North Clayton, yeah. Exactly. Jack BeVier (15:06) I remember I we literally had a conversation. So we were were buying like 30 houses a month at that 2011 to 2014 timeframe. And same similar model, right? Like buying houses, fixing them up newer vintage stuff, and then selling them to to aggregators who are who are, you know, building portfolios. And but we had to really like I wish it we wish we could have kept them. But there was like you said, no availability of debt. So like, just we just ran out of cash, you know, we just had to sell. And I remember the having the conversation with Fred and saying like, Hey man, all these pipe farms, like these things, we can get these lots for like super low. Like it's a levered asset. If we ever get above replacement costs again, that'll be, you know, these things can like 10 X and that's only a lot going from two to 20 grand. Like that's nothing. It's still way below replacement cost. And we just didn't have the damn cash to be able to, to sit it aside and like have it just being like, Bruce W. McNeilage (15:48) Yeah. Mm-hmm. Jack BeVier (16:01) you know, cash flow negative, right? Cause you still got to like mow the lots and pay the taxes. And so we just didn't have the, yeah. Bruce W. McNeilage (16:07) HOA fees as well. had, you you buy a lot for 2000, but you're paying a $50 a month HOA fee. You're going to have more in HOA fees and property taxes than you're going to have in block, right? Jack BeVier (16:17) In that lot. Yeah. Two, Craig Fuhr (16:19) Right. Jack BeVier (16:20) three years. Yeah. Yeah. But man, if that, would have been, uh, I know some guys in like Southwest Florida who did the same thing, uh, just started buying the lot, the excess lot inventory down there, the finished lot inventory and man, just murdered it. Um, but we just never, we were, was like, we should, maybe I was like, there'd be an argument from like a portfolio management perspective. We should take 10 % of our equity and buy this like highly levered assets, right? Like buy land with it. Bruce W. McNeilage (16:33) Yeah. Jack BeVier (16:45) because it's just like a portfolio diversification thing. Cause if it pays off, it'll pay off huge. And we said, hi, yeah, we should, you know, we should do that. We should think about that. And then we went back to buying rentals and never did it. And then lo and behold, that had been a killer strategy. Bruce W. McNeilage (16:48) Yes. Yeah, and we looked at it two ways. We looked at it that we could sell these to builders one day, but that we could also build on them and kind of create our own inventory and control what we were doing. And so we ended up doing both. We built for some of the majors and flipped the houses, but we also built for ourselves. And then we also just held on to them. And like you said, know, 10X, 8X, 7X, ⁓ those just to home builders throughout Atlanta. I thought it would take five years. It was much, much quicker than five years. And those lots right now are probably minimum worth $50,000. And that's just in the areas of town that aren't as desirable. But yeah, was just a time and place that if you did it, it worked out. If you didn't, you just never see anything like that again. Craig Fuhr (17:51) That same phenomenon was happening in other places around the country. I got a call from a buddy of mine whose father-in-law retired from AT &T, had a big bucket of money. And he's like, Hey man, we can go to Phoenix right now. And parts of me is like Queen Creek, Apache junction, Gilbert, like these places that were pig farms. And he's like, you know, we can buy these houses that were built in 2005, six, seven for 85 grand at the steps. go in, put carpet and paint and some, some granite on the countertops and sell them the next day for 190. And, ⁓ that was a, that was a great play until, know, all the money, all the, all the money from California discovered the same tactic and, ⁓ stuff got bit up too high, but what a, was a great play for a while, but you're absolutely. Bruce W. McNeilage (18:31) Ha ha ha. The biggest problem, the biggest problem is banks, conventional banks, community banks that we worked with would not lend the money. For us in Atlanta, Atlanta imploded, I was trying, my lead bank, I was trying to borrow $19,000 on an asset that had sold for 200 that I had bought for $38,000. I literally was trying to borrow 50 % of a price that had gone down 80%. Craig Fuhr (18:44) yeah, I Bruce W. McNeilage (19:05) I had money in the bank. I had other performing loans. That particular bank and others, I just could not get any money. Jack BeVier (19:13) Well, Hey, that's what the office investors are saying right now, right? They're, they're talking about this, this building that they're looking at, that sold for 250 bucks a foot last time. And they're buying it right now for 80 bucks a foot and can't get a loan for 40. ⁓ it's, know, that's, that's, that's when the asset value is like, there's a really, you know, opportunism that top opportunism there. so it'd be interesting to see if that market plays out in a similar way or not. Yeah. Bruce W. McNeilage (19:38) The only problem with office buildings, and I actually looked at bidding on one, a $100,000 one in an office park here in Nashville, is you buy it, you steal it, you get a great deal, but now who are you going to put into it? It's 100 % vacant or it's 20 % occupied or whatnot, and the value of that asset is to have it leased out, right? So you're getting a phenomenal deal, but where you're going to create value is you've got to get a tenant inside that office building or multiple tenants inside. And that's the challenge right now. Jack BeVier (20:10) haven't seen just not, I don't spend a ton of time on the office side. As you know, Fred and Dennis, Fred Lewis and Dennis Astaire and I have a company called Sentinel Net Lease that does office that works on in the office space or net lease space broadly. And sometimes that intersects with office, but it's just, it's still weird to me that I haven't seen like office rents reset. Like I would think that because of what you just described, there'd be folks who were coming in opportunistically buying those and then just undercutting the shit out of the market from an office rents perspective. Now I understand that TIs tend to be go tend to go along with office leases. And that makes that equation very difficult. ⁓ But but you know, I look at the asking rents on CoStar for like downtown Baltimore office space, because we have a building down there. So I keep tabs on that market. And the office rents haven't moved since pre COVID. They're the same as they were before COVID. despite the 30 % vacancy rate in that market. I mean, I, well, I mean, I understand like that they have to, there's like, they have to be above a level where you can pay for TIs and maintain the building, regardless of the cost, the price of the, you know, the price of the asset that you're getting. And I just don't think enough deals have transacted to what, know, there's, hasn't been enough sellers that have been, you know, had their throat slit where they forced to sell. Like we had on the residency side, you know, 15 years ago where there was just a, Craig Fuhr (21:10) Why do you suppose? Jack BeVier (21:36) tremendous amount of inventory available. You go to the steps and they were just, you know, handing houses out for 20 grand at a pop. ⁓ so that hasn't, that same phenomenon hasn't really happened in the, in the office space yet, the force seller side of things yet. Hey Bruce, you mentioned so you based out of Nashville and then you were do you went to Atlanta for that period of time? ⁓ Was that were you in multiple markets at that point in time or just? ⁓ Bruce W. McNeilage (22:00) Yep. Now we really just started in Nashville. We started Kinloch Partners, I'm sorry, in Atlanta in 2010, 2009, 2010, which was just a great time to start it. And then after a while, things started drying up or the cap rates really compressed. because now these houses are $150,000, right? And so what we did is we looked at a map and said, okay, let's go to Greenville, Spartanburg. And Greenville, Spartanburg was just Virgin territory. There were no nationals, there were no mid-tier players. And when we went to Greenville and Spartanburg, we would ⁓ get houses and we had no competition. We were renting them in a week, getting what we thought we would get or a little bit more. no concessions whatsoever. But again, now the big boys came in the market, which is nice. We got ahead of it and we started selling to the big boys, but then all of a sudden it's hard to compete against them, right? So you're kind of one and done or two and done. You get into a market, you exploit the market as long as you can, but then, you your customer becomes your biggest competitor and then you've got to move on to the next town. And so we went an hour away. to Columbia, again, Virgin Territory. And then we went to Aiken and Augusta, ⁓ Aiken being a great town, really nice tertiary market, high growth town, lot of things going on there. And so if you look at a map, we just kind of connected the dots from one Southeastern city to the next. Jack BeVier (23:40) And were you buying lots and building there? Or were you still buying houses that were like, you know, recent vintage and selling turnkeys? Bruce W. McNeilage (23:46) Yeah, we were doing everything, lots, CO deals, takedowns, ⁓ built some, but we really started going more to the CO takedown, because Jack, I really didn't know the market. You go into Greenville, Spartanburg, you don't know the market, right? So you can really stub your toe on it. So we start off talking to builders, getting with builders, buying product, and then you can get into doing the other things. But I've gone into cities. where you think you know the market and you don't. So we like to kind of test the market or go in and once we test it, if it comes true and we were right, then we could start doing the three or four things that investors like us do. Jack BeVier (24:31) Yeah, gotcha. When did you become a, ⁓ well, where you had projects going on in multiple cities and how did you know, frankly, how did you, how did you manage operations for that? you traveling a lot, just bouncing back and forth in places? Bruce W. McNeilage (24:42) Yeah, yeah, I was probably 50,000 miles a year in my pickup truck. We I had to buy a house in Atlanta and live there part time. Greenville, Spartanburg, Columbia were just hotel rooms. But yeah, I was on the road every week, at least two or three days a week, just looking for deals, you kind of like Indiana Jones. I remember Atlanta ⁓ hopping over fences, climbing through windows. We found an Escalade one time. Jack BeVier (24:46) Yeah ⁓ Bruce W. McNeilage (25:10) with really nice wheels on it, in a totally vacant ⁓ community. The entire community was vacant. There's like a gorgeous escalade. And I said to one of my guys, go up and smell it. You is there a dead body in it? There were no dead bodies. But I'm like, man, somebody is watching this complex. And I'm getting out of here a lot quicker than we got into the complex. But yeah, we never found better than an escalade, but we found a lot of funky things over the years. And there were a lot of people many times running out the back door when we were walking through the front door. Craig Fuhr (25:45) Bruce, I've told the story before where we were doing a house and we were just looking at houses in Phoenix. And, you know, you never knew what the person was going to do. You see paint thrown on the walls and you know, things put down into the HVAC system, stuff like that. But this guy pulled his truck and his boat, you know, into the house. So he, you know, the truck is now pulled, you know, gone through the wall that that is the garage. And the boat is still half in the garage, half in the house sets the thing on fire and says, you know, I guess, you know, Hey, hey bank, this is your house now. So, so yeah. Bruce W. McNeilage (26:20) I have the all-time greatest story. It's a Friday. I buy a house. I have the HUD one, you know, whatever. I get to the house. There's a young guy in it. He's starting to redo the house. And my brother, this is my house. You're confused. He's like, no, no, no, I just bought it. And I said, hey, here's the deal. It's Friday afternoon. I'm worn out. I said, you are younger, richer, better looking, smarter, whatever you want to do. I said, but what are you doing on the house? Well, he told me. And so he called me the next week. goes, do you remember me? I said, yeah, you were the arrogant guy that thinks you own my house. He goes, well, I just found out it's not on Hackamore Drive. It's on Hackamore Court. I said, yes, I understand that. I said, what have you done to the house? He goes, I've totally rented everything. He goes, I've done flooring, paint, new cabinets, new appliances in the kitchen, and I did a brand new HVAC system. And I'm like, wow, you know, that's really nice of you. And he kind of paused for a minute. He goes, can I at least have a couple thousand bucks back for the HVAC system? And I did give him a couple thousand dollars back, because I figured he'd trash the house or come back and steal it. But literally, the guy redid my entire house for me. Craig Fuhr (27:34) That is a story. ⁓ put that gab note put that one in a sound bite. That's hilarious. What Jack and I always love doing the stories from the edge like you know, the thousands of houses that he had read or purchased, they've seen more than they that just great stories. So what was it? Bruce W. McNeilage (27:39) Ha ha ha ha! man. Jack BeVier (27:51) I have a word document on my desktop. It's called the book. And it's just a bunch of notes to remind me of all the different chapters, the random stories. Bruce W. McNeilage (27:59) Jack, I have the book, but it's in my head and I'm Fred's age. So over time, I'm starting to forget the book. At some point in the future, the book won't be written because I won't remember most of the stories. But I'll always remember Hackamore Drive. I will always remember Hackamore. Craig Fuhr (28:14) One of the things you said before we turn the mics on today was that you are the boots on the ground guy. ⁓ Love that. And so ⁓ what was it like, you know, so you're learning new markets ⁓ and you're out there constantly looking at houses, you're obviously raising capital, stuff like that. But what was it like just to find, go into another town, go into another state and have to find all the guys that were, you know, the contracting help that alone is a babysitting job. you know, unlike any other. Bruce W. McNeilage (28:45) Yeah, so I did something unique. I took a couple crews out of Nashville and then they were doing the work for me in Atlanta. So we had kind of a rotating thing where they would come in for three or four days at a time. They would leave, the other crew would come in from Nashville. And so I didn't have to hire new people, but finally we got big enough that I needed more people. So you had to hire Atlanta people. And I don't want to say we got burned, but yes, you're kind of hurting cats. You're trying to get everybody to show up, everybody to do the right job. Sometimes they're walking on top of each other. Sometimes you have nobody show up. So yeah, you start to build kind of a Rolodex of who's a good ⁓ sub and who's a bad sub. and you learn pretty quickly what you're working with and you just try to find the good ones and you try to pay them well. And what I did is I made them a little partner in each house. I want to say we were giving our guys a good wage, paying them well, but we were giving them, I think, or $500 a house for every house we turned. So there was a real incentive for them to turn it quick because we would pay them quick. And know, $500 a house if you can do five a week. plus get paid, that's a real good living. Craig Fuhr (30:02) Hell yeah. Jack BeVier (30:03) So fast forward, I mean, the build to rent space that you've been working in has matured a lot, a lot of capital has come into this space. then the rising interest rate environment has been a real headwind against that. What's the roller coaster been like from your perspective over the past, I don't know, five, six years? Bruce W. McNeilage (30:10) Yeah. Yeah, so the last 12 months has been a real challenge, right? I mean, if you used to go to these meetings, Fred, that we used to go to, the wine was flowing and a lot of people were eating filets. The last meeting I went to, we were eating little ⁓ barbecue sliders and they had beer. So if that's a good indication of kind of how the market's gone, anything I've looked at, at best is breakeven and really it's been negative. And because it's our own money, we can't go negative. We can't say, okay, we'll lose money for a year and then we'll make it up, you know, three, four, five years from now. So for us, it's kind of come to a halt or just a little north of a halt. People are starting to buy again. People are starting to transact again, but they're looking for returns in the high fives where we used to sell to the majors in the high fours. So our margins have really gotten squeezed. Jack BeVier (31:20) And that's 20-25 % difference. High fives versus high fours is a lot on the percentages. Bruce W. McNeilage (31:24) Yeah, well, it's the difference between me making $50,000 a house and $5,000 $10,000 a house. And you can't get the houses anymore, right? Or you have to gamble. ⁓ Jack, we used to put 20 % down. Now we've got to put 30 % down. So you've got to put more capital. And to your point, that's 30%, 40%, 50 % more. It's not just 5%. It's not just 10 %—I'm sorry, basis points—percent. When you go from 80 to 70%, That's a much bigger deal as far as needing capital. And you start running out of capital quicker, therefore you start doing less deals. And so we are seeing some of the majors come in the market, but what they want to pay us for houses, we'd really work for free or close to work for free. So why do we want to go to work doing houses? If we're going to keep them ourselves, we'll lose money. And if we're going to try to sell them to institutions, you know, we're going to make a little bit of money. So it's kind of put us in a stage where we've slowed down considerably. We want to crank the wheel back up, but like I said earlier, when are interest rates going to come down? We've been dating this rate for a while and we've just kind of put things mostly on pause and a lot of investors have because of the interest rate environment. Jack BeVier (32:39) So I would imagine that, I mean, if that market stays, market can only stay quiet for so long, right? Until people have to modify behavior and then capitalism works it out for us, right? And so I would argue that if eventually, if this market stays stalled or stays difficult, that eventually land prices should come down to accommodate that so that because there's somebody who needs to sell land. You know, it could take a while, right? They like, maybe they can hold on for a year or two. But in year three, you know, mom, dad passed away and mom, you know, mom's now got this, you know, 30 acres of land that she wants to sell. And she just is a seller at whatever market price is eventually right. Like, are we in that adjustment period right now? Or are you seeing any any symptoms of that? Bruce W. McNeilage (33:25) Right. I we're in a period, know, these big builders can't carry the land on the balance sheet, right? So they've got to deal with developers. And sometimes people don't understand what a builder and developer does. And most builders are not developers. But Jack, think what we're gonna see is a lull in the market in the next year, two, three years, there's gonna be a big shortage of finished lots in the market, because people aren't developing them at the rate that they need to be developed. You you hear about the million of houses were short in this country. And so, yeah, people have to buy the land. The land does have to do a reset. I have not seen land do a reset yet. At some point, your points while taken, it will need to. But right now, the lots are what builders need. And going into the future, the lots will, you know, there's just not going to be enough supply of lots. And so right now, you know, it's a mad dash to get the land. to develop it, but banks are tougher with money. Now they want to loan you 50 % of land cost, maybe 50, 60, 70 % of development cost. And a lot of people don't want to take the risk or with higher interest rates, they're more worried about it. So they're going to pad their profit or pad what they're charging a builder extra. And of course, you got to pay more for the land. You got to pay more to deliver the lot. and now you've got to pay more for the house. And so that's driving ⁓ affordability and it's making houses less affordable really throughout the country. Any place that we know of housing is becoming less affordable, whether that's just buying the house or whether it's financing it because of the higher interest rates. Jack BeVier (35:15) Yeah, let's dig in. want to dig in, pause here for a moment and kind of double click into this. What you just talked about. There's a lot to unpack there. So, ⁓ you've got a, say you've got a willing seller of whatever, you know, an agricultural piece of land that that were, where a developer is highly optimistic that we could get this thing subdivided in, ⁓ and turn it into a hundred lots, making up a, making up a project. ⁓ the, developer is buying that is generally putting that Bruce W. McNeilage (35:18) for listening. Jack BeVier (35:44) piece of dirt under contract subject to the entitlement process subject to the and then the developer says you know what I'm willing to put an option either an option price down or deposit down or make option payments while I also go fund the civil engineering to get this land ⁓ entitled and and cut up into a hundred lots and that's that can be a Bruce W. McNeilage (35:50) That's correct. Jack BeVier (36:10) That can be a six month process. That can be a three year process depending on where we're talking about, right? So the developers generally funding that with equity. There's this kind of no money has changed hands right now other than the developer just paying the civil engineer. But once they get that land, once they get that subdivision approved. you know, and eventually there's a, you know, a finite term to that option agreement or that contract to buy the land from the little lady. Um, they've got to take that in that land down, right? They've got to actually close and send by that real estate. And you're talking about the debt that that developer gets on to acquire that still raw but entitled land, right? And then, so we saw, I would say like our experience was Bruce W. McNeilage (36:41) . Yes. Jack BeVier (36:59) You know, 2021 people started, you know, money was flowing. Interest rates were low deals really penciled very well and a lot. And so private lenders got a lot more aggressive on and some companies got really big specializing in that kind of financing, right? Where they were lending to those developers to do take down of entitled lots plus do the horizontal construction to get it to a finished lot state. ⁓ those w something that I've seen, ⁓ so I was a long preamble. Something that I've seen is that that those late 2022, 2023 vintage deals, ⁓ a lot of those have gone sideways because by the time, you know, they got to the end of it now where that we're like, Hey, we're funding the horizontal construct. We've finished the entitlement process, but now we have to go through the horizontal development process and we get the thing to finish lot. And it's like crap interest rates are up. And as a result, that, you know, it's not that four and half. It's not that high force cap. It's that high fives cap and construction costs is still up. ⁓ And we carried the thing for a year and a half. And a lot of those developers ⁓ would be developers have ⁓ have just run into cashflow issues, right? Because they get to finish lot and the bidding there anymore or they'd be working for free. ⁓ So we've seen like a, you know, certain. certain private lenders that specialized in that space have a significant default rate, like 25 % default rate on that profile of project. ⁓ and I feel like that stuff's just working its way through the system right now, right? Like no one wants it yet. They all see the value in it. No one's willing to just like get wiped out on it, but they also, ⁓ aren't ready to actually go out of the ground and then build the houses yet because of the economics that you just described. that's what I've seen. Is it similar experience? Is that resonate? Bruce W. McNeilage (38:29) Yeah. I mean, you hit the nail right on the head. And so you have to tie up the land, right? Let's say agriculture. You have to get it entitled that I'm going to say that's a year, maybe 18 months, but usually it's about a year. Now you've got to get it entitled. So, yes, now you have 60 days to close on the land. You are paying roughly fifteen hundred dollars a lot. We would pay average to get a subdivision laid out. So now you've got a hundred house subdivision. You've laid it out. You're paying the the engineer, and now you're ready to go. ⁓ One of the problems in areas we're in is sewer and water capacity. The cities, municipalities, counties don't have the sewer and water capacity, or they don't have the roads and the infrastructure. And so they're gonna say to you, the developer, hey, we need this road expanded, or we need this park built, or we need this, or we need that. I don't wanna use the word shakedown, but... you've got to put a lot more into a deal just to get it approved, get it entitled, get it developed. And a lot of times you're not factoring that in. Now that's going to become a pass through or hopefully for the developer and builder it'll become a pass through, but it's just more money out of your pocket, right? So it's the entitlement, it's getting the land the way you want it from a development standpoint. In Nashville, we hit rock. mean, there's no part of Nashville where there's not rock. And rock could cost you millions of dollars. You kind of know what's under there, but you don't know how much is under there. Just to hire a machine called a rock crusher is $40,000 a month. Just to rent that machine to crush the rock. And you've got to first bring the rock out of the ground. And you've got to do that. Why? You have to the sewer and the water pipes in, right? And so... The whole process is taking longer. The A and D loans are still out there, but the LTV, LTC, what you've got to put down, that's all changed. And again, it's making the numbers. ⁓ People are extending these contracts longer. And if I'm the farmer of the family is, hey, I've had it tied up for 12 months, I might as well extend the contract another six months because if I don't sell it to this guy, the next guy is going to tie me up for a year, right? And so I see a lot of contracts being extended at very reasonable, I guess, terms or just, I mean, legitimate excuses. This is not, I don't have the money. This is the engineering, the entitlement. All these things are just taking long. Craig Fuhr (41:34) Jack, as a debt lender, ⁓ we do A &D loans. We have some great customers that we're doing A &D loans for. But if they came to us and they were like, yeah, the municipality that I'm in wants us to widen this road that's not even in our development or put in this amenity down the street because we're being, I'll use the term, shaken down for that. mean, we're not going to lend on that stuff. And so now the developer, I would think, has to come out of pocket for, has to bring equity for that. Jack BeVier (42:03) Yeah, they've either got to come out, come equity out of pocket to pay for that overage. Or I mean, it's big enough incremental expense that also demonstrably improves what the after repair value is going to be, then it could be worth doing a loan modification and adjusting the budget from 3 million to 3.5 million. ⁓ But if it's like, know, but if it's 100 grand, it's not going to be worth it to like to go through that whole rigmarole. That's just going to be additional equity out of pocket. Yeah, I agree with that. Craig Fuhr (42:17) That's value. Jack BeVier (42:34) We've got some good A &D loans and we've got some bad A &D loans from that vintage of time. We've some stuff that good projects pencil well, just penciled great then and pencil meh now ⁓ and ⁓ cashflow issues. You can't just hang on. This thing is not income producing. So they just can't hang on indefinitely. No one thinks that it's going to be a bad project. Five years from now, I am sure Bruce W. McNeilage (42:57) 100%. Jack BeVier (43:03) All of these are going to be totally great, fine, viable projects. But, but over the course of the next 12 months, you know, there's cashflow issues, you know, like they can't carry it out. Bruce W. McNeilage (43:07) percent. Yeah, and it used to be you can roll that interest into the debt, right, into the loan. That's not as that now the banks want you to pay the interest every month. And so now you have to have reserves to do that. What we're seeing, though, is a lot of companies are just tying up land. They're just running all over a city, tying up this parcel, tying up that parcel. And what they're going to end up doing is spinning most of them out and then closing on the one or two. that worked out as far as financials. And so you're just tying up land. If I'm the land seller, unless I get the entitlement, unless I get the engineering, and unless I put a bow on it and then take it to you, I'm going to let you tie me up. And I'm to let you tie me up with very little, with very little earnest money. Why? Because you can get out of the contract no matter what. So whether you give me a million dollars of earnest money or 10,000 or 50,000, you know, I... Jack BeVier (44:10) Yeah, it's kind of meaningless. Yeah. Bruce W. McNeilage (44:12) Yeah, it really is meaningless. That's correct. Craig Fuhr (44:14) So Bruce, are you just sort of largely on the sidelines right now? you in the markets that you have, you know, that you've really enjoyed? Are you looking for other markets that might be more opportunistic right now? Bruce W. McNeilage (44:25) Yeah, we're not looking for other markets. You know, I get pitched on Texas and Florida daily, right? And what you've got to say is if you're pitching me on a deal, I'm not the first guy, right? I mean, I appreciate you telling me you're a legend in the business or, you you've been in Build to Rent forever, so we're bringing it to you first. It's almost like... Craig Fuhr (44:31) I bet you do. Yeah, okay. Yet yet yet you you who has been in the business for 35 years have never heard of them, right? Like. Bruce W. McNeilage (44:50) Well, yeah, and also one of the reasons I've been in business for 35 years is I don't believe I'm the first guy that they're pitching the deal to. And so it's almost like Kinloch is in the middle of the alphabet. McNeilage is in the middle of the alphabet. And so I'm like not the first guy. And I'll call guys that I know, like the Freds and the Jacks of the World, and I'll say, they'll say, man, I was pitched on that last week. Or, you know, I just got off the phone with the guy yesterday. Craig Fuhr (45:03) Alright. Bruce W. McNeilage (45:16) And I'll call the guys out. I'll call them, hey, I guess Fred passed on this, or I guess Bob passed on this. And they go, well, yeah, as a matter of fact, he did. I'm like, well, I'm passing on the hot potato, the same reason he passed on it. So thanks for letting me know you thought of me first, but you didn't think of me first. I'm the higher fool, but you've got to get a higher fool than me to do the deal, right? And if you're raising capital, Jack BeVier (45:41) We see some light there. Bruce W. McNeilage (45:45) You know, there's an old saying, he spends money like it's not his, like it's not his own. And it's easier to make mistakes or it's easier to kind of be a rogue when it's not your money, right? It's our money. So, you know, I need the return on my money. But Will Rogers once said, my greatest goal is not the return on my money, it's the return of my money. And that's been hard to do. on some occasions and so if I have one deal that ties me up that I've put all my eggs in one basket, the next great deal is gonna come along, right? And so no, we're staying in the markets that we're in, we're for the most on the sideline, but I'm fielding calls daily, know, forward takeouts, current takeouts. We just got a deal offered again, you know, we're great, they're calling us first. They need to start doing the takedowns. Well, they want us to start doing the takedowns in July. And I asked them, is July of what year? And they said, well, no, July, like in six weeks. Well, I'm pretty much sure that's a pivot. And I'm pretty much sure other people have spit that hook out. And it's just not going to work. If you're trying to dump something and get out of it, it can't be that good of a deal. So why would I want to jump on board of something you haven't been able to pitch or you haven't been able to close with other people than you've been pitching? Jack BeVier (47:11) What's your take on how to read? There's a little bit of like how to time that market that you that you're inherently trying to do there. ⁓ Now just literally please devil's advocate for a second. Like if you were buying in Atlanta in 2011 ⁓ and prices were falling and prices were falling and you know, and clearly no one wanted this stuff, right? Like, know, like they were just giving, know, they were selling lots of houses, you tons of short sales. get our, you know, anything that was REO was on the MLS was, was already out, you know, retrospect a phenomenal deal, right? But at the time we were like, ah, I don't know. just paid 20, they want 32 for that one. And I just paid 24 for the one down the street. And like I'd hem and haw and not buy the one for 20, you know, I'd submit my $24,000 offer and like cross my arms and hold firm. And then, you know, today I look like you've Bruce W. McNeilage (47:47) Yep. Jack BeVier (48:07) I don't know what the hell you were doing. mean, of course, we're always everyone's always capital constraints that there's like some practical limitations there. But like, you know, at what point do you think, you know, if you're still bullish on residential housing long term, at what point do you say, hey, you know what the win here is just like getting this getting these projects under control? Because ⁓ I do believe in the asset on a long term basis. And like, you know, how much of game you know, how much of timing the market do you do versus being like Bruce W. McNeilage (48:13) Right. Jack BeVier (48:35) Hey, we're at replacement cost, let's go, you know? Bruce W. McNeilage (48:37) Yeah, so I think the replacement cost is a big deal. Like for us in Atlanta, when we were buying those lots for two, three, $4,000, the replacement cost was somewhere between $25,000 and $40,000. So I know I'm not making a mistake. Now, the mistake might be it's going to take longer to get out of the lots. But when you're paying $2,000 for something that you end up selling $40,000, it was OK if you stayed in the deal longer. I don't think we're at the bottom yet. But where I've made a good living, I don't consider it genius, I consider it a lot of luck, is getting into a city, an MSA, or getting into a product, or getting into ⁓ what you're doing, a subdivision or the type of asset, before, again, it's kind of cool, right, before everybody gets in it, because once that pendulum swings back, it swings fast and it swings hard. And if you kind of are now trying to figure out, what should I do? That thing's already passed you by and it's too late. And so, you know, what I learned at a very young age, and I think this is Sage advice is I've never made a dollar, never made one dollar when I sell an asset. I sell an asset today. I didn't make a dollar. I made it five or 10 years ago when I was boots on the ground the way I bought it. So you don't make money when you sell it. Because people aren't gonna say, Bruce, you're a great guy, I'll pay 10 % more than it appraises for. I mean, they'll kind of pay you the appraisal, right, the value, but you're gonna make the money the way you bought it, not on the day you sell it, if that makes sense. Craig Fuhr (50:17) Sage advice indeed. Jack BeVier (50:18) You seen any rest so you're you seeing any restructuring happen or is it all like folks who you can tell are a little distressed but don't really want to take a right down yet so they're trying to restructure without changing any of the numbers is that that it's we're in that phase of like scrambling but not actually like hands in the air you know distress. Bruce W. McNeilage (50:39) Yeah, that's a great question. think there'd be two levels of distress there. There's bank distress. They don't want to take down or take back the asset today. They want to kick the can down the street to the next quarter or the next fiscal year or whatnot. So we're seeing a lot of those banks. They just don't want to take the asset back. So if they're just collecting interest, the loan is performing and they can keep the regulators off the back. The minute that loan stops performing, the minute the interest rates come in, they have to do something about that loan. As far as the buyers, the buyers are also kicking the can down the road. You call it pretend to extend or fake it until you make it. There's a lot of people that they can't pretend anymore. You can't raise more money from investors that are losing money. And it'd be hard to pitch an investor, hey, If you just give me another million dollars, I promise I'll give it back to you, plus a return. So I am seeing things taken back. I'm seeing people stopping, ⁓ throwing good money after bad to keep things afloat. But I think the next quarter or two, you're going to see some great opportunities on things that are being taken back by people that just can't, just can't keep going anymore. Jack BeVier (52:01) Yeah. So we've been in this phase where people are literally just running out of money, right? They're just like, you know, they, make their interest payment. The interest is loan is current until it's not. And then like, and then the guy's like, I'm done. Like I'm totally done. Right. Like you do see that. Um, yeah, that's unfortunate. I think you're right. I completely agree with you. I've seen, you know, canaries in the coal mine of those kinds of situations. And it just feels like within, with a somewhat of an increasing pace, Bruce W. McNeilage (52:06) Yes. Jack BeVier (52:30) people are like, like, nah, I'm just spent like I'm literally there's just I just have no I've literally no more options. Like we've been talking for a year. But today, I'm literally just out of cards to play. ⁓ And that's that's the time when behavior actually happens. You you'll sell Bruce W. McNeilage (52:42) Yeah, and And I would say I've done very well over the years doing something that I think is kind of innovative. I'll go to the bank and say, listen, you have a non-performing loan. You've taken back this asset or portfolio of assets. I will borrow the money from you, and I will start paying on that loan. So now you take an unperforming asset or a non-performing asset to a performing asset. That same bank is going to loan me the money to buy that asset, which is going bad with them. And so I've convinced some banks to loan me the money on the bad asset that they have, make it performing overnight. Now they have a performing loan. They've written it off to a degree, but all they've done is loaned a new customer money. And that's worked well for us over the years. Craig Fuhr (53:34) Is that largely like small locals and small regionals or Bruce W. McNeilage (53:38) Yeah, yeah, it's been more community based banks. They can't afford an REO department. They can't afford to have a lot of REO assets. So they even have a list. I'll get calls like, hey, you're on my list. We are taking this back next quarter. Is this something that you're interested in? And yeah, when you have relationships with those banks, it's great to hear from them because you're going to get great deals. And they know you could be the ⁓ are the REO guy and they don't have REO departments. They might have a couple bad deals. And then they know that you have a good balance sheet. They know that you have good financials. You might already have a loan with them and they're very positive. They look at it very positive loaning money to you because they know you're a known commodity versus just putting it out there on an REO list and fielding phone calls. Jack BeVier (54:37) Bruce, what's your perspective? Just like general sense, like I know like, you know, not going to data behind this, but like, what's your general sense of the banks that lend on these A &D deals that are not making it out of the ground, right? They're not actually getting fully executed. The, you know, the developer makes his payments until he just can't anymore. And it's just like out. And then the keys get tossed to the bank, the bank takes a little bit while to foreclose depending on where you're at. And is when the bank comes to you with that deal, Is the bank taking a loss? Like, do you think that the bank lent at a basis that is now below market? you know, so are you, you do you have to convince that bank to about how much loss they're going to take? Or do you just have to be at the front of the line and it would be nice to get a loan while you're at it because Hey, loans are on AMD deals are a little bit harder to come by as well. You know, like, what's the strategy by and large? You know, what's the prevailing strategy of these banks taking losses or just getting in front? Bruce W. McNeilage (55:31) I think for the bank, they're trying to break even. They know they're not going to make money, right? So they're trying to break even or write down as little as possible. Because even a big community bank, you take down an apartment complex and you write off a million bucks, that's a significant write off for a community bank, right? It's a rounding error for Bank America. And a Bank America, big money center banks can have larger loans anyways. They're not going to be writing off a 50 unit apartment building or 20 houses. They're going to be doing larger deals. And so you're getting a deal. They are willing to take a loss. They're not looking at making a profit. They're just looking at getting out as close to what they have in as possible. And I might be willing to pay more. I might say, hey, I'm going to make you a Sharkey offer. But if you'll loan me money at 4%, if you'll loan me the full purchase price, which I've done before, I'll pay your number. And so the bank's kind of saying, okay, performing loan now, bad asset, he'll pay us X, but we've got to loan him the full boat or we have to loan him 80 or 90 % of it. Loaning me 80 or 90 % is better than having 100 % loan that's gone bad. I just need to be the first one in there with money or they need to know, they need to call me first. And that's because I've executed first or they know I have money in the bank. You show them a bank statement or you're already banking with that bank. yeah, mean, it's the idea is not take a loss, but to get the asset off the books as quick as possible. Craig Fuhr (57:13) So given the given the current environment, ⁓ are you just in equity rates position right now or looking for these opportunities coming? And then and then if you are, you know, what's the general consensus amongst the folks that you're speaking with in terms of them wanting to put up? Bruce W. McNeilage (57:29) So Craig, I can tell you we're different. I've never raised a dollar of equity in my life. I've just bootstrapped this thing. Now we've gone to New York, we've done the dog and pony show, we have been offered equity, we've been underwritten by equity, both smaller and larger operators, very large operators. But it was kind of like one of these things, like if you work real hard, you'll only owe them a little bit of money, and I'm not looking to work for the man. So for me, it's always been I could make money on 20 houses or I could make the same amount of money on 200 houses. It's a lot easier to manage that smaller portfolio and then sell those in the future. And so we manage everything ourselves. We've looked for equity. We have the ability to get it, but the deal's never been sweet enough for us. Or it's always just been one sided where we just weren't comfortable with who the equity provider is. And this is another This is something else I've said and I've learned and I think this would be for your good investors out there that are looking to grow. If I can't see myself fishing with you on a boat for a couple hours just spending time with you or if I can't see myself going to a ball game with you and actually enjoying your company, I'm not going to take your money, right? Because life's too short to deal with people that either you don't trust or you don't like. And there have been a lot of people in my life that I haven't wanted to go fishing with or I haven't wanted to go to a ball game with. Let's just put it that way. Craig Fuhr (59:04) I'm with you there. I'm with you there. Jack BeVier (59:05) Yeah. Yeah, I think it's going to, I'm interested in how the next 12, 24 months is going to play out from that perspective. Cause I think there's a lot of stuff that needs to be restructured on the Rezzi side that hasn't come out. Uh, I think there's a bunch of, there's some overlevered DSCR loans that have, that I think are starting to come out. Like I'm watching the, the DSCR delinquencies tick up a little bit. Uh, and then there's, there's these two portfolios in Baltimore right now. This is totally an anecdote, but like there's, there's like a 200 property. 200 single family houses portfolio that's in the process of being foreclosed on right now in Baltimore, um, that were DSCR loans, just out of state investor, just over levered of them. And I guess couldn't operate. don't know what the, I don't know a lot of the details in the backstory, but it's like an interesting canary in the coal mine. You know, if I, uh, it may be nothing, it may be just complete anomaly, but I don't know. For me, it feels like a canary in the coal mine, um, for, for other, uh, other distress to come. So Bruce W. McNeilage (59:49) you Jack BeVier (1:00:02) I think that's going to be our source of inventory is kind of like the exuberance of 21 fallout, 21 and 2022 fallout. Bruce W. McNeilage (1:00:08) Yeah. This is not going to be 08 and 09 because people were speculating. They were spending or investing money they didn't have. They were borrowing money to borrow money. You are going to see, in my opinion, one of the greatest opportunities. going forward in the next year. You can't say, this is a great opportunity compared to 08, 09, but in my lifetime, in my career, which will extend X period of time, the next year is going be a pretty good opportunity to buy assets. And if you remember what I said, you don't make money on the sell, you make money on the buy. If you can raise the capital, if you can get the debt, next 12 months are going to be where you're going to get rich. Jack BeVier (1:00:53) Do you have a view on where rents are going? are. Craig Fuhr (1:00:56) I was gonna Jack, I hate when you ask my questions. Yeah, I mean, let's I was hoping that we could pivot to rents because I was actually reading some of your stuff prior to prior to the podcast today and get a pretty rosy outlook for ⁓ rent increases over 2025. You still feel the same way about it. Bruce W. McNeilage (1:01:13) Yeah, so rent increases certainly aren't what they were two or three years ago. And I think people really got addicted to double digit rents. You looked at these proformas that said you'll be able to raise rent 10 to 15 percent for X period of time. Something else I always say to people is trees don't grow to the sky. mean, sooner or later, you can't keep raising rent 10 to 15 percent. So we've been pushing rent two, three, four percent. But a lot of that is just to cover the cost of insurance going up. or taxes going up, know, things like that. So yeah, we're able to push rents a little bit, but not what we need to. And I'm not looking to break someone's back. I'm not looking to make something unaffordable, because then you start losing tenants and you start having a vacancy rate that's higher than normal. So I'm looking to rent that house and make a little extra money every year. But it's nothing, it's nothing substantial that we were doing. you know, two, three, four years ago. Jack BeVier (1:02:14) Hey, I press you on a question that I've never really gotten answered ⁓ to my satisfaction? ⁓ The expense ratio, the part of the pitch behind the expense ratio of build to rent is that it's, hey, it's their brand new houses. Your expenses are going to be very, very low because it's brand new. There should be little to no maintenance. And so as a result, those performance for build to rent deals get presented at, you 25, 30 % expense ratios when my experience is like 40 to 50 % expense ratios in older vintage houses. But when I break, here's the part that's been unsatisfying for me. When I break apart the expense ratio, my expense ratio, repairs and maintenance is not the driver for my 40 to 50 % expense ratio. It's the turnovers. it's the tendency duration and the turnovers. And my thought is like, whether the house is built in 2024, Bruce W. McNeilage (1:02:45) Right. Yeah. Jack BeVier (1:03:12) where whether the house is built in 1965, I'm painting the house on like every turnover. Like I have a very hard time avoiding painting the house. And that ends up being like the biggest driver for my turnover costs. And are you seeing, you, or are you getting the sense that build to rent operators are actually seeing turnovers where you don't have to paint the house? Cause for me, like that's the biggest driver. And if you still have to paint the house on the turnover, like your expense ratio ain't going to be 15 points cheaper based off of this new vintage alone. I don't know what you take. Bruce W. McNeilage (1:03:45) Right. So in the markets we operate, like in Nashville, I'm running about a 30 % expense ratio. And the reason you are is you don't have to worry about the capex, roofs, water heaters, appliances. Now you need to save a little bit for capex, but specifically painting, right. That is one of the biggest deals. When you rent a brand new house and you give it back to me, I expect it to be in the same condition it was given to you in. So 20 or 30 nails in the wall. That's not ordinary wear and tear. Little bit of wear and tear on the carpet after you clean it is normal. So what we do is we send out a letter about 45 days before someone's going to vacate and we say, hey, here was the condition of the house. Here's the check mark, you know, box, check the boxes of what you need to do to ready the house to give back. And we always communicate that we don't want to keep a dollar of your money. But if you don't do these things, we have to hire someone that will do that. and we'll wave off on anything if you use our preferred vendor list, which is really, we have a great painting company and they do things at a very ⁓ reasonable cost. So about 90 % of our turns are covered by the security deposit. We want to return the whole deposit, but a lot of times we're returning part of the deposit. And I've been in the multifamily business. The average tenant stays about 18 months in the multifamily business. I think in our industry, it's about two and a half years. I mentioned that American homes for rent portfolio we sold way back when, I accumulated those first houses. Shock and statistic, a third of the people that when I sold them, the houses were nine years old. A third of the people had been there for the nine years. A third of the people. So you think there was no turnover then. Now, when I get a house back from them, I'm going to give them all their money back because the carpet's worn out, the paint needs to be painted. So that's not going to be an issue. When they've been there for a year, that's something else. people stay longer in a newer house. That drives your expenses down. And really the thing that's hurting us and changing that ratio, maybe from 30 to 35 percent in Nashville, is taxes and insurance. know, taxes and insurance are not going down. taxes and insurance are going up at a higher rate, then maybe you can push the rents right now. And so that's gonna drive your expense ratio up, but an expense ratio on a multifamily community is gonna be higher than on a single family community for those reasons. Plus you don't have things like elevators, dumpsters, ⁓ lighting, ⁓ pest control, ⁓ leasing per se. ⁓ A lot of times you don't have all those things or you can have those things on a part-time basis. Where in an apartment complex you need a lot of those things on a full-time basis or you have expenses that you just don't have in a single-family rental community. Jack BeVier (1:06:54) Are you how big is the portfolio that you guys are that you own and you guys are managing? Is that the same number? Bruce W. McNeilage (1:06:59) Yeah, so we never were smaller operator. We never want to own more than 250 houses. So once we get up there, I'm looking to have a liquidity event, say of 50 houses. Then we build it up and have another liquidity event. And one of the reasons is I don't want to go out and raise capital, right? So it's our own. So our business has to grow by taking one step backwards so we can take two steps forwards. But the portfolio is never going to get large. And that's really because of the way we run the portfolio. Now I could get to a hundred, a thousand houses, two thousand houses and still manage the company ourselves. But my problem is now I have a partner that's going to take a larger share of the equity. And so that goes back to I'd rather own 25 houses than 250 or I'd rather own 200 houses than a thousand. You can just make as much money owning a hundred percent of a smaller portfolio. And that's what we've seen over the years. Craig Fuhr (1:07:58) You're so old school, Bruce. Love that. So old school. Bruce W. McNeilage (1:08:01) Ha Jack BeVier (1:08:01) You are you just paying the cap gains? Bruce W. McNeilage (1:08:05) Yeah, I've done one or two, I've done one or two ⁓ 1031s, but I can't do a 1031 in most instances, because I need that money to keep greasing the wheel. So I need the capital and I need my basis back so I can keep growing the money. And truthfully, when I look at 1031s or I look at ⁓ these opportunity zone ⁓ properties, I see people have a tendency of overpaying. because they've got to do a 1031, identify it in a short period of time, close on it at a short period of time. And so people run around looking for 1035 opportunities and they end up overpaying for them. And I feel that the long-term capital gains tax we're paying right now is a really good deal. And you won't hear a lot of people say, hey, my tax rate is a really good deal, but we're at a very low long-term capital gains rate and I don't mind paying it if it gives me the money. to keep growing the business. Jack BeVier (1:09:05) We've been, ⁓ we basically, we, we started doing some OZ deals ourselves. I just, but I looked for stuff that was like long-term that was going to take several years to do because I didn't know how much cap gains I was going to have each year. Right. And we sell some properties out of the portfolio and because we've depreciated a bunch, there's a taxable gain or there's a recapture. Yeah. Hopefully we've got some home price appreciation also, but like, I certainly have to have a depreciation recapture. And so we have these cap gains that we have to pay. And I've been kind of I've got a two OZ projects kind of like that we're just working on for like several years each. And we like each year just put more equity into them. So they're like very low leverage deals because that's there. It's a bunch of dollar cap gains goes into that stuff. ⁓ We'll see if it works out as a strategy. I don't know. It's that's Craig Fuhr (1:09:52) Is that Bruce W. McNeilage (1:09:53) If I owned a Craig Fuhr (1:09:53) Baltimore, Baltimore check? Bruce W. McNeilage (1:09:54) Noz deal, you a Noz deal you have to keep for ⁓ a long time. If I owned a Noz deal, I'd probably keep it forever or a little less than ever, right? Because of the way you buy it, again, the tax play on it. But I probably wouldn't be selling it in 10 days. I'm sorry, 10 years in a day. I'd be keeping it probably long term and just making it mailbox money. Jack BeVier (1:10:17) Yeah. Craig Fuhr (1:10:19) Hey, but while we still have you, Bruce, I was wondering if we could just touch base quickly on some of the ⁓ legislation that we're seeing in certain states around the country and at a federal level, know, Texas bill 33 proposes fines on investors with more than 10 single houses, Washington state, no more than 25 houses, Virginia ⁓ looking to ⁓ Bruce W. McNeilage (1:10:30) Sure. Craig Fuhr (1:10:45) cap, cap assets at 50 million, Nebraska's trying to pass legislation, New York, Minnesota. And then at the federal level, there's several, you know, the stop predatory investing act and our American neighborhoods protection act. I thought I read that you were ⁓ a member of the NRHC. ⁓ And so love to get your thoughts on, you know, what Jack and I feel is like, hey, there, you know, you got these, these ⁓ state and federal ⁓ politicians that are probably shooting for the moon right now, but they're just going to keep biting at the apple until they get something passed, right? And as a guy who plays in the space and has for a long time, what are your thoughts there? Bruce W. McNeilage (1:11:25) That's an excellent question. I can tell you about a case in, ⁓ Tennessee and yes, great organization to join. That's really our trade organization. You have to be a member of the NHRC. But in Tennessee, county by county, they can now take your single family rental neighborhood from a 25 % assessment taxing you at a 25 % rate now to a commercial rate of 40%. And so that's raising our taxes by 60%. And when I testified, I basically said this. You get elected on affordable housing, affordable housing, affordable housing, less crime, better schools, right? That's the three-legged stool a politician runs on. But I'm just going to pass that new tax or that increase in tax onto the tenant. So you're not screwing me. You're screwing the little guy that just wants to rent the house. And we just had our first notice for a neighborhood. Our taxes are going up about $80 a month. Let's call that $1,000 a year. We're gonna try to or pass that along to the tenant. I now can't bump my rents up because I've just bumped it up to make, you know, due for the taxes. And so, yes, I would say nationwide, dozens of states are coming after our industry, but I would just go back to the same thing and the argument is you want affordable housing. If people weren't buying those houses in 09, 08, who would have bought them? How do people rent a house if there are no rentals out there? And you're also screwing mom and pop. know, in lot of areas they're saying if you own 10 houses or more or 10 doors or more, we're going to outlaw. I mean, my grandparents, you know, if you want to subsidize your social security, you might own two or three duplexes. You might own five or 10 rental houses. And now you're going to tax me, just the guy that wants to live off of a little bit of social security and ⁓ some positive rent. And that's not good. And so all you're doing with all those changes or most of the changes is you're increasing the cost or you're making it tougher on landlords to provide affordable housing. And so really who you're screwing is the little guy who's renting the house from you. So I will either have to sell my houses and dump them. If you make me have only a hundred houses and I have a thousand houses, I've got to dump those houses on the market. You're going to make me sell them. after a certain time and a certain place, there are no buyers. I can't sell 900 houses in the Nashville MSA. So if I start dumping houses, now you screw up everybody's comps. And that further hurts the American dream. And so I think it's a good buzzword. It's a way to get reelected. Let's go after these hedge funds. Hedge funds are ruining America. But you look at who owns apartment communities, insurance companies, hedge funds. private equity. For some reason, they're not going after multifamily operators, which are all owned by Wall Street, but they're going after the people that are providing these houses. And, you I tell people, if you don't own a house, there's only two things you can do with the house. You either own it or you rent it. If you make it tougher to rent and it's more expensive to buy, what are you doing? Jack BeVier (1:14:24) and funds. Bruce W. McNeilage (1:14:50) You know, what are you doing? And so I think a lot of politicians are trying to get elected or stay in office by, you know, chasing the institutions away. But it's the institutions that have saved housing. In my opinion, it's the institutions that have saved housing. Jack BeVier (1:15:06) Yeah, it's such a small percentage of the total ownership of single family housing too. It just seems like barking up the wrong tree. Like you said, good politics, but like not really going to make a meaningful impact. And certain politicians like have like, you make that argument to him, right? Like I've made that argument to politicians and they don't like to hear that at all. Right. They're like, if anything, that's like confirmation that like they're like, no, but I want to screw you. Right. Like I thought that I'd figured out the way to screw you. And you're like, you're not, Hey, you're not screwing me. Like, I mean, you're moving the goalposts. So I don't like it. but like it's just going to get passed through to rent. And so people are going to have to like spend a higher percentage of their incomes on rent or consume less housing because they get it. Got to get a roommate. like I'm just a mech. I'm just a cog in the, in the wheel here, right? Like I'm just a mechanism of the capitalistic system, but that just makes them even angrier, right? Because they're like, no, but I want to screw you in favor of, I want to screw the landlords in front of in favor of the tenants. At least that's a political view that I encounter in our jurisdiction. Bruce W. McNeilage (1:16:05) Yeah, it's just, it's not the right thing to do. It's coming. We're fighting it. There's going to be compromise, but at the end of the day, it's not going to help the guy that needs to rent the house. Jack BeVier (1:16:16) Yeah, rent control becomes kind of the rent control becomes kind of like the if you really, you know, if you really want to like go after the landlords, right? That, you know, when you do rent control, that's essentially in my opinion, that's a taking right? Like that's where we're an eminent domain land there, right? Because you're like affecting the nature of my property rights. You can't just arbitrarily put deed restrictions on my real estate. That's a taking. ⁓ And so it's hard to get done because you get so much pushback. like every landowner understands that that's a taking and fights back on that. so only in the most like kind of extreme jurisdictions do you have rent control. But I've got you know, but but we've seen down the down to 95 from me in Prince George's County and over in Montgomery County, like some very, very, very blue parts of Maryland. That's, know, normal pilot political conversation. And, ⁓ you know, I'm sure you would agree that like the The effects on property values throughout that entire jurisdiction are significantly impacted when you, ⁓ when you do something like that, when you do a taking like that via legislation. But that's the thing that is like, you know, trying to hold the line so that that doesn't become part of like an actual, like real conversation is the thing that I like. that's the only thing I'm really concerned about. Otherwise I generally take the view that you did that I'm just like, Hey, I'm just a cog in the system here. Like you raised the costs of operating real estate. rent goes up to pay for the costs of operating real estate. You know, like, what do want from me? Bruce W. McNeilage (1:17:47) Right. Well, it's also the NIMBYism, right? We haven't talked about NIMBYism. So you've got the government entities coming after you're making it tougher for you to develop or build or own rental houses. But then you have the people that say not in my backyard. And I always tell people it's not in your backyard until someone offers you a million dollars more for your property. And then it's OK to be in your backyard, right? Because you sold it for more. And so Not in my backyard. I'll tell you another quick story. was in I was in Loganville, Georgia, east of Atlanta, and I'm buying this neighborhood. It's PVC pipes. It's half built, busted out. Bank of America is not paying the HOA fee. So I come in. The property values are going to go up. I'm going to build houses. And one older guy stands up. I don't want to hear noise. know, your houses are going to create noise when they're constructing them. And I said, sir, let me ask you a question. when they built your house, did it make noise? Did the builders make noise? And he thought about it for a minute and he said, yeah, but I wasn't around to hear it. Well, that's a nimby, right? And I said, I'm gonna increase your values. Oh, but that'll increase our taxes. And I'm like, you know, you're right. It's gonna increase your taxes, because I just made you wealthier. And he... Jack BeVier (1:19:08) by a hundred times, ⁓ Bruce W. McNeilage (1:19:10) People don't think, I've been at a meeting of an HOA where someone says, your people are gonna ruin our neighborhood. And I said, well, sir, who are my people? Tell me who they are. Well, he got quiet. I said, I have three houses on the street. One's rented to a tight end for the Tennessee Titans. One's rented to a cardiologist and one's rented to a cardiothoracic surgeon. Which one of those people is gonna create crime or make the neighborhood better? As a matter of fact, those people probably make a lot more than you folks, but please don't call them those type of people. And I would like to say that doctors don't create more crime and they stay here and they're good citizens. And that's the way, you know, that's the way our people are. You can always take the bad story about the party house or the house that a hedge fund is not taking care of, but they don't talk about the 99 stories about the teacher that was able to raise her kids. in a school district that was better than the district maybe that she could only afford to live in. And so it's our job and HRC does a good job in painting the picture, giving the narrative and telling the positive stories about what we do. But it's a lot tougher to get that positive story out than to be negative. There's an old saying in television news or in the newspapers, if it bleeds, leads. They talk about the bad stories first. But if you help the little old lady cross the street and save her life, that's on the back page or they don't even talk about it. So we need more positive press and not negative press in our industry. And really that's all of our jobs, right? That's everybody's job. Craig Fuhr (1:20:52) We had David Howard on the show ⁓ several months ago. And for those of you who haven't had a chance to check out that episode, they're doing great things at the national rental home council. I believe that's ⁓ N R H C dot org could be wrong about that, but look them up. And ⁓ it doesn't matter where you are in the country. You can start your own chapter. ⁓ They are a phenomenal organization that are, you know, perhaps the greatest advocate that the country has for landlords. big and small. You don't have to be, you know, BlackRock to be one of their members. You can just be a mom and pop who owns 10, 15 houses and you care about some of this crazy legislation that we're seeing across the United States right now that that honestly Bruce doesn't appear like it's going away anytime soon. No, sir. Jack, any final thoughts so we can let this gentleman on his way? He probably has a, you know, 10, 15 houses to go out and walk through today. So Bruce W. McNeilage (1:21:36) No. ⁓ you Jack BeVier (1:21:48) Yeah, we really appreciate your time, Bruce. Enjoyed the conversation. Looking forward to seeing you at the next conference, Bruce W. McNeilage (1:21:54) Absolutely nice talking to you guys and it's real honor. Thank you for inviting me. Craig Fuhr (1:21:57) Bruce, if folks want to find out more about you and Kinlock Partners, you have an amazing LinkedIn page. would ⁓ tell folks to look up Bruce McNeillage on LinkedIn. Where else can they find you? Bruce W. McNeilage (1:22:09) Bruce at KinlochPartners.net is my email if anybody needs help. It's K-I-N-L-O-C-H partners.net. And you can also check out our website. It's KinlochPartners.net. Talks about what we're doing. You can look at the assets we have to get an idea on what we're doing and the quality that we provide people. And I also post some articles that I write on LinkedIn. We also post them on our website as well. Craig Fuhr (1:22:35) A true OG and legend in the industry, Jack and Bruce, you're welcome back on the show anytime you want to come, Sarah, just send us an email and we'll make space for you. It's just been such a pleasure to have you. That's the episode for today coming up on Jack. think we're coming up on a hundred episodes soon. We're going to have to do something crazy for that. realist that's a real investor radio. I'm Craig fuel or Jack BeVier joined by Bruce McNeillage. Thanks for listening. Jack BeVier (1:22:52) We're getting there. Yeah, we're getting there.