Jorge Abreu is the Co-Founder and CEO of Elevate CIG. Jorge has been Investing in Real Estate for over 15 years. He started in Single Family, small Multifamily properties and eventually worked his way up to large 100+ Unit Multifamily. He also started and built a Construction Company which is the in-house construction arm for Elevate. Jorge and his company Elevate combined have acquired 6,849 Units. They have exited out of 1,416 of those units and currently have $500M+ Assets under management. In this episode of How to Scale Commercial Real Estate show, Sam and Jorge are going to discuss rate caps, what to look out for when buying Class A and Class C properties, the growth that Jorge has done in Elevate, and Jorge’s approach when it comes to real estate investments.
Highlights:
[00:00] – [04:03] Elevate Commercial Investment Group: A Growing Business
· Jorge has been investing in real estate for over 15 years and has acquired over 8,000 units.
· Jorge is currently working on deals that are lower risk than in the past due to the current market conditions.
· Jorge is also looking into options such as seller carryback and agencies to lower the risk of investment.
[04:03] – [08:10] Avoiding Interest Rate Caps Can Affect Property Values
· Jorge discusses how the capital stack has changed for the company, which has led to a shift in returns.
· ElevateCIG has been able to maintain attractive returns by avoiding interest rate caps and by building up reserves to buy future properties.
· Jorge also shares how interest rate caps can have a negative effect on a property’s value, and how the company has been able to avoid this by purchasing properties on the front end.
[08:10] – [12:39] Why Class A Deals Are a Preferable Investment
· Jorge explains the differences between Class C and Class A apartments, and how Class A offers more margin for investors.
· He also discusses how the market conditions for debt and equity have changed, with debt having lower leverage on entry and equity diluting returns, but still seeing opportunities.
· And explains how they are positioning themselves to take advantage of these changing market conditions, with a focus on class A deals where there is a large gap in the market rent.
[12:39] – [16:19] Reaching New Heights
· Jorge spoke about the team’s approach to buying properties, noting that they are very methodical and take into account a variety of factors when making decisions
· His team is also working to build relationships with large equity partners in order to bring them deals should they become available.
· Laying the groundwork for future deals early is important, as large equity partners are more likely to invest with a company that they know is prepared to move quickly
[16:20] – [16:31] Closing Segment
· Reach out to Jorge
o See links below
· Final words
Tweetable Quote
“We’re really pushing to get the top of the market rents with our properties. We’ve been able to continue to increase rents and haven’t had any issues”. – Jorge Abreu
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Connect with Jorge Abreu on his website and write him an email at jorge@elevatecig.com
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Want to read the full show notes of the episode? Check it out below:
Jorge Abreu (Teaser) [00:00]
So, kind of just positioning yourself in that way. I do still see a lot of opportunities. We’re doing a lot of class A stuff right now, where we’re buying straight from the developer and we’ve had a lot of success with that. There’s still a housing shortage, right? That’s still a thing. And yeah, recession is gonna affect that, but depends where you’re at.
Intro [00:19]
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we’ll teach you how to scale your real estate investing business into something big.
Sam Wilson [00:31]
Jorge has been investing in real estate for over 15 years now. He started in single family, small multi-family properties, and eventually worked his way into large 100 plus unit multi-family properties. They have acquired over 8,000 units to date. Jorge, welcome to the show.
Jorge Abreu [00:47]
Thank you. Excited to be here.
Sam Wilson [00:48]
Absolutely. It’s a pleasure to have you on. If I recall, and I’m going back I don’t recall, what was it here, Jorge, the last time you came on this show? May 19th, 2021. That was episode number 171. I don’t know what this will be when it comes out, but we’ll be in the 700. So, it’s been a while since we’ve connected and caught up. I’m glad to have back on the show just to hear kind of how things have changed from that point till now, where you guys are, what you guys are doing. So, if you’re listening to this today and you want to hear kind of Jorge’s backstory a little bit more, go back to that episode. Again, that’s episode number 171 on May 19th, 2021. Nevertheless, Jorge, it’s great to have you back on the show. Thanks for being here.
Jorge Abreu [01:27]
Yeah, yeah. Just a little, little’s happened since, right?
Sam Wilson [01:31]
A little bit. A little bit. It’s been a busy last I guess this has been in, what’s that, 18 months? My math is probably bad here on the fly, but close to 18 months. So, tell me, where are you guys now? What are you guys working on? What’s the state of Jorge and his company?
Jorge Abreu [01:47]
Yeah, you know, things got a little crazy this year with the Fed raising the rates and we had a lot plans for ending this year pretty strong, which I feel like we, we still are, but we’ve had to make a lot of adjustments on the type of deals that we want to take down and how we’re gonna structure those, how we’re gonna structure the capital stack. You know, the lenders are tightening up rates are a lot higher than they used to be, and. Just getting creative, man. I never thought loan assumptions would look these attractive. But yeah, they sure are. You know, we’re asking every seller to carry back some of their money if they’re willing to. Getting creative.
Sam Wilson [02:25]
Getting creative. I want to hear as much as you are willing to share on that topic. I know you said that you’re adjusting the structure in the capital stack. How are you changing that capital stack? I know you touched there on asking the sellers to do seller carryback. Any anything else come to mind that you guys have adjusted on that front?
Jorge Abreu [02:45]
For sure. So, I mean, we’ve seen opportunities popping up. We think they’re gonna continue on. There’s gonna be a lot more opportunities coming next year as well. So, for us to put a deal on contract right now. One, we gotta feel comfortable with the basis, a low basis of entry. That’s been a struggle on itself, right? Trying to get these sellers to reality. So, it’s been a lot of submitting offers and just following up and staying in front of them. And then, what we wanna do is we either want to have that loan assumption, like I talked about, at a low interest rate. If not, we wanna see if going in with agencies a possibility. The leverage is gonna be really low when we do that, most likely depending how much value we need to add to the property. But if not, you know, we’re, we got one right now that we’re gonna be doing a local bank at a fixed rate. Just trying to avoid those. Those adjustable rates at all cost the really high-rate caps. And then filling that gap, right? So, if our loans are coming in at, let’s say 55 to 60% LTV, then that’s where we’re gonna ask the seller if they’re willing to carry back some of their funds then possibly bring in some private equity, JV equity, you know, fill that gap and then finally come in with the GP equity as well as some of our investors. So, it’s become a little bit more work, but it, you know, I’ve been through a down cycle and I know the last time we kept buying and everything we bought turned into gold later.
Sam Wilson [04:15]
When you start changing the capital stack, that dramatically, it really changes the dynamics of the return profile. How are you doing that and still producing respectable returns or I guess attractive returns, perhaps I should say to your investors.
Jorge Abreu [04:34]
Yeah, man, it goes back to some of those things I mentioned, right? So, a seller carries, when we’re asking a seller to leave some of their funds in the deal we’re asking for some pretty attractive terms. I mean, we’ve gotten some at 4%, 6% not a two-year balloon either. We’re talking about like a 10-year balloon and give ourselves space. So, when you do that, it increases the returns, same thing with if we’re bringing in a JV equity or private equity partner you know, we’ve been able to, we’ve got one partner right now that we use quite a bit, and they’re at right around 11% all in down to a six or 7% on the current part of it, and then the other piece gets accrued. So that also helps with the returns. And then the expectations of our investors. We’ve come down a little bit on that, especially on the IRR and some of the equity multiple. We’re still trying to hit that two X, but um, yeah, just, it’s still better than putting it in the bank, as far as the returns you’re gonna get. As long as you’re with an experienced operator, I do think operations is gonna be very important through these times.
Sam Wilson [05:46]
Yeah. And that’s uh, that’s a great point. And I was reading something earlier that in that said something about whatever the particular asset class was, and it said buying in this particular asset class. Beats Wall Street any day. And so just playing off of what you said there is better than putting the money in the bank. Maybe those return profiles are shifting and I think it’s gonna take a little bit of us training our investors to say: “Hey, you know, downplay your expectations, cause we’ve really ridden a really good ride for a while but still a good place to be”. I was talking to another sponsor here recently and this is a topic I am relatively ignorant on, so I will need to have your help in kind of filling the gaps. You were talking about interest rate gaps. And how they had, and maybe you can explain this for me and then tell me how you guys are avoiding this if it has affected you at all. But he was saying: “Hey, we had a property” and they were paying like $1800 bucks a month for the interest rate cap, whatever, and now it’s costing ’em $18,000 a month. To the point where the property’s no longer solvable. And I said: “my gosh, like how did that happen?” I didn’t quite understand that. Can you tell me about interest rate caps? Is that something you guys have exposure to? How does that work? And is how has that changed now for you guys, if at all?
Jorge Abreu [06:58]
So usually you pay for it upfront, right? So, a lot of the ones that we have…
Sam Wilson [07:04]
It was an interest. It was reserved, I think was the word he used.
Jorge Abreu [07:07]
Okay. Okay. So, we got one deal that has, that, it’s a Freddie floater and it’s got the reserve and yeah, it’s gone up quite a bit. You know, we were. Pretty shocked. But we’ve been able to add enough value to that property where it’s not an issue. But yeah, that’s just one. On the other ones that have a rate cap, it’s we purchased it on the front end and most of ’em we did pretty well on cuz they’re paying out more than we paid for it.
Sam Wilson [07:31]
Got it. Okay. So, there was, there’s a reverse way that, that could pretend. Again, I have no exposure to this personally which is why I don’t understand it, cuz I’ve never had to deal it.
Jorge Abreu [07:40]
Yeah, it’s you’re building up a reserve to buy the next one when the term ends. So, if you do a one-year term, then Freddie wants you to have that reserve to then buy it for the following term. But as the price of the rate caps go up, so does that reserve to keep up with it?
Sam Wilson [07:58]
Got it. That’s, see, I need, I needed an explanation on that. See, if you’re listening here, there’s always something to learn. And that’s, uh, that makes a lot of sense, because I asked that sponsor to explain it and they couldn’t quite put it in words that I could grasp. I’m like: “wait, huh, I’m confused here”. So, there you go. That makes sense. So, when they have to re-up their policy, then they’ve got…
Jorge Abreu [08:17]
Right. So, if the Fed comes out and softens their approach right. Then that reserve should start going down to go down as well.
Sam Wilson [08:24]
Wow. Yeah. That make, that makes a lot of sense. Well, good. Well, I’m glad to hear that you don’t, you guys don’t have a lot of exposure on that side. You said that agency debt has a low leverage. Is that always the case or is that just unique to the way or the market conditions right now?
Jorge Abreu [08:41]
The market conditions, cuz the way they’re sizing up the deals on the exit of it is lowering their leverage on the entry. So, you know, they still say the 70 to 75% or whatever, but when you actually size up the deal, you’re more at 50, 55%.
Sam Wilson [09:02]
Okay. And that’s do you think that’s all bad actually as a deal sponsor to have lower leverage?
Jorge Abreu [09:08]
No, absolutely not. It’s. How you gonna fill that capital stack? And what returns are you going to have your investors expect? And obviously there’s more equity, so that dilutes the returns.
Sam Wilson [09:21]
That’s the downside. Diluted returns, but the upside is less exposure.
Jorge Abreu [09:25]
For sure.
Sam Wilson [09:26]
On the debt side of things, what do you think opportunities are coming? You know, how are you guys positioning yourselves for the opportunities coming your way?
Jorge Abreu [09:37]
You know, I think we positioned ourselves already with a lot of the main brokers on the fact that when we put something under contract, we’re closing. You know, we have that, track record. So, when there’s an issue on a deal is when they usually come to us, which is where we want to be. We’re also reaching out to other vendors you know, debt brokers or the lenders themselves and just putting that in, in, in their ear. ” Hey, we’re here. Let us know”. We know it’s maybe you’re not taking properties back right now; you’re having conversations and we want you to think of us. So, kind of just positioning yourself in that way. I do still see a lot of opportunities. We’re doing a lot of class A stuff right now, where we’re buying straight from the developer and we’ve had a lot of success with that. There’s still a housing shortage, right? That’s still a thing. And yeah, recession is gonna affect that, but depends where you’re at.
Sam Wilson [10:38]
Yeah, no, absolutely. Tell me about the Class A. That’s a really interesting, probably not the thing I would’ve expected you to say. So…
Jorge Abreu [10:46]
Yeah, I mean…
Sam Wilson [10:47]
Why Class A?
Jorge Abreu [10:48]
Well, one, it’s a lot easier to manage.
Sam Wilson [10:51]
Makes sense.
Jorge Abreu [10:52]
Yeah. And you know, so one that gap between the Class C and the Class A during this whole run we had in the market, that margin began to shrink, right when you’re buying. So, we bought end of year, last year we bought a class a deal for I think it was about 180 a door. And Class C deals were selling for 130, 140 a door. You know, it doesn’t, it didn’t make sense, right? So that’s when we started looking at it a little bit harder and going after more of ’em. And as far as adding the, everybody always says, well, how are you gonna add value to that class A deal? And it depends look, a lot of developers are there to build these apartments. Get ’em filled as quickly as they can and get rid of ’em. They don’t wanna operate ’em, they don’t wanna push rent. They don’t wanna see how much other income they can put in there. And I mean, that’s what we specialize in, right? So, we come in and we say: ” There’s this much gap in the market rent that we know we can take that opportunity”. And then we know we can implement let’s say internet or whatever it is, all this other income and I barely have to do any renovations versus a Class C, I’m almost gonna increase it by the same, but I’ve gotta do a ton of renovations and I have the risk of all this old plumbing and old electrical so yeah.
Sam Wilson [12:17]
That makes a heck of a lot of sense to me. I mean, I wouldn’t see a reason to invest in Class C with those dynamics that you just mentioned, that it just doesn’t pencil. Have you seen any softening in the class A demand?
Jorge Abreu [12:31]
Not so much. That’s another thing. You know, we make sure that we’re positioned to not have to be like an A plus product. We’re really pushing to get the top of the market rents. With our properties we have not. We’ve been able to continue to increase rents and haven’t had any issues.
Sam Wilson [12:49]
That’s awesome. No, very cool. I love the way you think and just your overall approach to how you arrange debt, how you arrange your equity stack or the capital stack as a whole. You know, the types of assets you guys are buying. It seems like you’ve put a lot of thought in and have moved pretty methodically through this process. Does that sound about right?
Jorge Abreu [13:09]
Yeah.
Sam Wilson [13:10]
Jorge, you guys, I mean, we talked, you know, a little bit about you guys being very methodical in what you do. I know we talked a little bit about you guys have been reaching out to brokers and other industry players in the market saying: “Hey, keep us in mind in case you find stress in particular deals we wanna obviously be your first call”. Is there anything else you guys are doing right now, maybe isn’t action oriented or taking, you know, buying things, but just positioning yourself for a change in the market?
Jorge Abreu [13:35]
Yeah, I mean, there’s a ton, right? So, like I mentioned before we’re, we’re talking to a lot of our vendors that we have relationships with already, and reminding them: “Hey we’re still here. We plan on continuing to be active. We wanna buy a lot of deals next year. And you need to come to us if you have something”, right? We’re also making sure we line up large equity partners, building those relationships, even if we’re not putting a deal in front of ’em, we’re just kind of touching base with them. And letting ’em know that we’re ready for them to be ready when we bring ’em a deal, and that’s it. We have other CO-GP investors that look for deals for us too and bring us deals. So, kind of just letting them know exactly what we’re looking for. And then hopefully all that comes together.
Sam Wilson [14:16]
Yeah. It’s not necessarily the one ingredient that makes the the recipe. It’s a whole bunch of things all at once. So that’s that’s really cool. I love that. One last question for you there when you talk about lining up large equity. How do you position large equity and say: “Hey, in the future I want to have or we may have an opportunity for you”. Is that patient capital? Or is it, I guess in my lack of understanding, I would say that they’re like: “Hey, this is going to work. And if it’s with you, it’s not with you, it’s with somebody else cuz we can’t have it sit here.
Jorge Abreu [14:49]
That is true with an individual, right? If it’s a 10 31 or let’s say somebody sold a business and they’ve got that money sitting there. Not necessarily for some of these larger private equity firms, right? They’re constantly raising equity or, if it’s a family office they usually have a good chunk of money to move around. So, more of that level and kind of just: ” Hey, let’s get vetting us out of the way. What do you need to know? How do we skip that whole part?” Cause we wanna be able to bring you a deal and move quickly.
Sam Wilson [15:19]
I love that. I love that lay in the groundwork early. Very cool. Jorge, thank you for taking the time to come back on the show here today. Certainly, appreciate it. Loved hearing your market, just kind of, sentiment or your view on where the market is and how you guys are positioning yourself to take advantage of the next opportunities coming your way. Have enjoyed it thoroughly. If our listeners wanna get in touch with you and learn more about you, what is the best way to do it?
Jorge Abreu [15:43]
Best way to do that is uh, they can check us on our website. So if they go to elevatecig.com, stands for Commercial Investment Groups. So, elevatecig.com. Or if they wanna shoot me an email, it’s Jorge or Jorge, jorge@elevatecig.com.
Sam Wilson [16:01]
Fantastic. We’ll make sure we include both of those there in the show notes. And Jorge, thank you again for coming on. Certainly, appreciate it.
Jorge Abreu [16:06]
Thank you, Sam. Appreciate it.
Outro [16:07]
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can, do me a favor and subscribe and leave us a review on Apple Podcast, Spotify, Google Podcast, whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank hire on those directories. So, appreciate you listening. Thanks so much and hope to catch you on the next episode.
