Real Estate Underground

The Engineer Who Traded Rockets for Real Estate with Chris Lento

• Ed Mathews

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Ed Mathews:

Greetings and salutations, Real Estate Undergrounders. It is Ed Mathews with the Real Estate Underground. Thank you again for joining us and making us a part of your day. With me today is Chris Lento from EM Capital, based up in my old stomping grounds in Boston. Chris, welcome to the show. I'm excited to have this conversation.

Chris Lento:

I'm happy to be here.

Ed Mathews:

Yeah, great.

Ed Mathews:

My history is I spent a bazillion years in the tech world, and so I was bouncing between mostly Silicon Valley, but also my wife and I actually had our two daughters in Boston and lived up there for about 10, 12 years. I'm green with envy because I love that place. So, Chris, for those folks who haven't come across EM Capital yet, I want you to tell us about yourself and your company.

Chris Lento:

Yeah sure, I was in aerospace engineering for 17 years, so tech adjacent, I would say.

Ed Mathews:

It's pretty technical.

Chris Lento:

I'm at a cutting edge tech defense industry stuff. In parallel I was doing small multifamily investing in the Boston area the entire time so three families, five families, always was trying to figure out how to get that to be my full-time career but didn't really see a path and didn't think about it too seriously probably the first 10 years of my career. And then, as I figured out what the entire career world was in the defense industry, started plotting a course to transition. So that happened in 2017. We're focused exclusively in the Southeastern US. So I got out of all my Boston area properties, rolled them 1031, exchanged them, sold them into the properties in North Carolina downtown, northern Florida and we focus on now 100 plus multifamily $10 million to $50 million acquisition price in the major markets of the Southeast.

Ed Mathews:

Okay, how many markets are you in right now?

Chris Lento:

We're in four markets, so we're in Charlotte, Raleigh, Columbia, South Carolina and Atlanta.

Ed Mathews:

And I'm curious about what drew you to those markets, like what in particular kind of piqued your interest.

Chris Lento:

Yeah, we're really looking for population growth, job diversity and volume. If there is one city that you could just focus on and get the deal volume to be able to grow, that would be great, and Atlanta is almost that Right. It's a big market but there are limitations and the downturns and people aren't selling here. So we want a number of markets to have enough deal flow, but we want a small enough number that we can really understand those markets and develop relationships in the markets and have property managers and vendors and really know the neighborhoods. So we're looking for population growth and economic diversity. And then size right, we don't want anything below, say, 250,000 people.

Ed Mathews:

Target rich environment for new residents. Exactly Okay. And then in terms of I think when I looked at your website, you had just over 800 units under management, right? Does that sound right?

Chris Lento:

Yep, that's right.

Ed Mathews:

So is it semi-equally dispersed among those four markets, or is there one market you're a little heavier in?

Chris Lento:

Yeah, we're heavier in Atlanta. Right now we have 300 units actually 420 units in Atlanta and we're under contract for another property in Atlanta. Yeah, the Atlanta market has a lot of assets, a huge population growth and a lot going on there.

Ed Mathews:

Yeah, it's a huge growth opportunity. I'm curious about the one thing that, when I talk with operators and investors who target the Southeast, the insurance risk has been a pretty significant challenge for a lot of us, myself included and I'm in the Northeast with my portfolios here in Connecticut. I'm curious how you are navigating that.

Chris Lento:

Yeah, so anything coastal is very difficult due to hurricane risks that have really gone up Atlanta. It's interesting you raise that because it has its own kind of issues. One problem the Atlanta market has is that it has a very high cap on liability for the property owner. So if someone gets injured on your property, one resident hit the other resident with their car on your property, you have a lot of liability. So because of that the insurance is higher than you would expect and really get good insurance brokers that really know that Manage the things that you can. Meaning what are the insurance companies looking for in those policies to bring your premiums down and then underwrite it correctly? If that's the cost of the market, then you have to make sure that you're aware of it and the risks as far as increasing and put that in your underwriting up front.

Ed Mathews:

Yeah, so I've been a limited partner in Atlanta, but I've never operated down there.

Chris Lento:

I think it's Georgia.

Chris Lento:

So I think Florida had a somewhat similar law with not as high of a exposure, and they've recently changed it, and my understanding is that Georgia is talking about it. I don't know when that will happen which will happen, but there's a big demand right. The people that are lobbying are the owners and they don't want to be liable for non-related incidents on their property. If you're at fault, if you have a sinkhole or something, that makes sense.

Ed Mathews:

If some dude drives over somebody a foot in the parking lot.

Chris Lento:

You have $3 million exposure to that. I really know your insurance market. It's crazy how much it changes state to state.

Ed Mathews:

Yeah, indeed, here in Connecticut we got walloped with significant increases, but they were all storm related and the thing is that we've had one hurricane make landfall here in the last 30 years, Exactly In 91 or 92,. We get the residuals right.

Chris Lento:

And actually, if you think about it, a lot of the Southeastern population is not near the coast. And because all the Northeast population is near the coast, correct, Charlotte and Raleigh are two and a half and three hours away from the coast, Columbia is at least an hour, Atlanta's probably two hours, so they're all inland, right, I guess Charleston, south Carolina is the only kind of major population center Think of. So they're all inland, I guess Charleston.

Chris Lento:

South Carolina is the only kind of major population center. Yeah, Myrtle Beach, maybe something like that.

Ed Mathews:

So, as far as your buy box goes, what does that look like, or what class are you looking at and what are some of the attributes that you're keyed in on when you find a potential deal?

Chris Lento:

Yeah, we're looking for 1985 or newer, $10 million to $50 million acquisition price, like I said, in 250,000 person population area or greater with significant above average job and population growth. And then on those older units, if it was right, on the line 85, if it has two bedrooms, I'm looking for two bedroom, two baths, okay, two bedrooms. I'm looking for a two bedroom, two baths. You could renovate a two bedroom, two bath and give it one upgrade and give it a new feel. But a two bedroom, one bath, no matter what you do, it's a two bedroom, one bath and I think that's also an indication of the quality of the property when it was built. So if in 1985 or six someone was building a two one, they were going cheap.

Ed Mathews:

And so when you say cheaper, you mean the mechanicals are the shortcuts or something.

Chris Lento:

I mean targeting a lower price point on the rents and what else is inexpensive Plumbing wiring Inside the wall.

Chris Lento:

Clients have probably already been changed, but roofing structural. If you find a two bedroom, one bath property from the mid 80s, it also has a non-interesting aesthetic. It's basic Right, Doesn't have any gables or any architectural distinction.

Ed Mathews:

So architectural distinction are you looking for unique properties that are curb appeal? Or is it something else?

Chris Lento:

I wouldn't say we're looking for trophy properties by any means. We're looking for properties that have a value-add component, that the numbers make sense and we can underwrite realistically. Yeah, you have to underwrite realistically, in my opinion, with a realistic underwriting list. Hey, this is what we really think is going to happen, what we really think the exit price is the market's going to do, and then add in a little factor of safety, sure, to make it a little more conservative, and that's where we like to sit. It's a property that shits that box, 2022, under contract right now in Atlanta, class A. Yeah, I don't know the line I would say but it's new.

Ed Mathews:

So it's almost by definition, a class A, but it's not like what does that look like? Is it a lot of class A?

Chris Lento:

The portfolio is A's and B's, and on the A side we like to think of it as A minuses. We're not pushing the market in rents, we're not the brand new thing with a rooftop pool or anything like that. But the A's have they're relatively new or they're refurbed older buildings that are newly renovated, so we can keep our prices $200 below the local class A's but have a very similar experience.

Ed Mathews:

Smart, and when you're doing it that way, from a strategy perspective, obviously you're looking to push occupancy. So I'm curious what are those numbers typically look like in the markets that you're in?

Chris Lento:

We'd love to be 95 plus in all the markets. Atlanta right now is hovering around 92. I can see market 91, 92. Yeah, that's not bad. We do a property in Baltimore that had struggled when we bought it and a lot of bad debt and a lot of tenants that didn't meet the credit requirements and the prior owner just filled it. So we struggled there and now we're at 98, which is crazy. We're in the process of increasing the rents To some degree. You want to be, in my opinion, at the 95, 96 max level, Otherwise you're not getting enough charm and you're not keeping up with the market.

Ed Mathews:

And then you stagnate, and that's a problem too.

Chris Lento:

Exactly

Ed Mathews:

so I'm curious about the Baltimore property. It probably applies to a lot of your properties when you're inheriting residents who don't fit your resident profile what's your strategy there?

Ed Mathews:

How do you handle that?

Chris Lento:

Well, you need a strong property management team. So we do third-party management, meaning that we hire local property management to run the property. We try where we can to use the same property management company. So we have a good relationship with a reasonably large Southeastern company that does a number of markets, but not all of them. And then we're very hands-on and we focus on bad debt. Every week we have a meeting with our property management team and one of the tabs of our spreadsheet is just a cut and paste of their paid receivables 30, 60, 90. And we have notes next to each one Like where are we with this person? Who's talking to who? And that's a big focus of the property management team and they're incentivized to drive the bad luck down.

Chris Lento:

It's a process. It's not going to be fixed in two months. It's going to take. What are the local eviction laws? How much you want to work with people? What are programs that are out there for people that are behind on rent? And it's a constant kind of weekly. All right, what's next?

Ed Mathews:

yeah, honestly, I usually find that it's best case 12 months, sometimes 18 months, to stabilize building

Chris Lento:

oh, yeah, I agree, 12 months is you're doing great.

Chris Lento:

I think

Ed Mathews:

that's home run

Chris Lento:

because at the beginning, behind the tenant basis, but for those first maybe months, it's hard to get high quality new tenants because the property has this certain feel and it can be a culture too. Hey, you don't need to pay for three months here and then they start sharing the information and you're like, oh, how do I change dynamics? So yeah, 12 months, I agree with you, is on the positive side.

Ed Mathews:

Yeah, that's great. So tell me, where are you taking the business now? So you're at 800, you've got a complex under contract. What's next?

Chris Lento:

We're looking to continue to grow. 2023 and 2024 were just slow years, I think, for everybody, and so we didn't grow. I think one deal in those two years, so it was just really tune up the deals. You have handle some refis in turbulent markets, keep swimming, check the 10-year treasury more often than you think you should have to.

Chris Lento:

Like multiple times a day.

Chris Lento:

Exactly. Which is crazy, it's a 10-year treasury number. So, yeah, we're back in acquisition mode, like we're seeing a lot more deals come on the market where our investors have a more positive feel. There's just definitely a change. There's still some wait and see going on, but I think to some degree, the lenders, a lot of these bridge loans are finally coming due for real. The lender's like, all right, yeah, this time we meet it. Interest rates are coming down. I feel like the sentiment at the end of 24 was oh, 25, the interest rates are just going to come down.

Ed Mathews:

I'm curious where you think rates are.

Chris Lento:

So I think they're going to stick around where they are now for a while. I don't see anything pushing them. The Fed can lower the short-term rates if inflation doesn't go up and that would be, I think, good for construction loans and for adjustable rate loans, but that's not really tied to the long-term loans which most of the loans I like to get are based on, and really the short terms are too high relative to the long terms. Anyway, I think they're going to stick around and that prices are going to have to adjust and I think you're going to inflate the rents out of this.

Chris Lento:

It'll be a little time for everyone's income to go up and then okay, now the deals start making sense a little bit more.

Ed Mathews:

Right on. So you're probably raising a little more capital, right? Oh yeah, you put it under a 30, 40 year. You put it under a 30, 40 year.

Chris Lento:

We used bridge debt on some heavy CapEx properties in 2022. When, frankly, if you weren't using bridge debt, I don't know how you made a deal pencil. We got out of one of those last December and it worked out. We're working on one right now, rolling into some permanent financing, but right now, no, we're not looking at bridge debt at all. The rates are so high, interest rate caps are so high, but we're raising. No, we're not looking at Bridget at all. The rates are so high, the interest rate caps are so high, but we're raising. Yeah, we're at like loan to value maybe 65, 62% on some deals.

Chris Lento:

Yeah so we're raising a lot of equity and we're doing more preferred equity right, which either institutional partners or family offices. That'll get us up to 85% LTV, and then we raise limited partner equity.

Chris Lento:

for the rest,

Ed Mathews:

yeah, nice, that's a smart way to do it.

Ed Mathews:

It's so easy to get over leveraged in a market like this. The fact I agree with you on the interest rates. Everybody was like survived to 25 and then everything will be okay and we'll get back into the force. And it's just historically, where the interest rates are these right like right now. Today, historically is right down the middle of where it has been 50 years back.

Chris Lento:

And it's not that bad.

Chris Lento:

It just feels so painful compared to three years ago yeah,

Ed Mathews:

Three years ago, 4% interest rates made all of us look like geniuses. But I think it's time to actually play where the normal, historically, the big boys play. And I have a mentor who told me look, if you can't make a deal, pencil at six and a half 7%, that might be a you problem, not a building problem or a market problem. And if it was easy, everybody would do it. But the fact is that there's other levers you can pull to get creative, to be able to make a deal pencil and do it responsibly and conservatively.

Chris Lento:

Yeah, no, I agree, and it's right now. It's been changing so much right In the last five years. It's constant, like the financing and the debt structures. It's a constant churn. You have to stay on top of it with your lender.

Chris Lento:

We have standing lunches, like at least once a month, where I'm there to buy him a turkey sandwich and, all right, spill it. Tell me what's going on in the world. Okay, hey, why don't we get into the final five, our lightning round?

Ed Mathews:

I love to learn how leaders like you think and how they approach their day and also their businesses. First and foremost, purpose right. I think that at a certain point, when you reach and I think you're probably beyond it, I'm guessing but where your personal mortgages are paid, the kids' colleges are either on track or locked away and ready for them, the cars are paid, you've done all the responsible stuff, stuff, and now you're doing some of the fun stuff, and nevertheless, you get out of bed on Monday morning like a shot and you're fired up to go to work. Right, for me, that's purpose. Coming out of the tech world, I met so many multi-multi-millionaires and a few billionaires, and for them there was a certain point where it just stopped being about money. It was something else, and so that's what I'm curious about is, from your perspective, what gets you out of bed on Monday morning?

Chris Lento:

I think at that level, thinking about it, it's constantly learning. I like to constantly learn new things, dig into the details, whereas real estate is constantly changing, the economy is changing, the markets are changing. It's just always exciting to meet new people, learn new things, and I learn by doing as are changing. It's just always exciting to meet new people, learn new things, and I learned by doing as we get into a deal. We're going to 1031, our syndication is deal. Okay, how do we do that? What do we need to meet to figure that out? Okay, who are the right people? How do we learn this? What's the best practices? How can we be better than the next guy on this? How can we make us smoother? How can we improve the relationship? And everyone wins.

Chris Lento:

So I think, for me, really constant learning environment is what I

Ed Mathews:

Okay cool and we don't get to where you are, I don't get to where I am, and the folks that are listening probably didn't get where they are without mentorship and really good coaches and people who you know early on and even to this day, take an interest in our success. And so I'm curious about the mentors and coaches you've had in your life and teachers for that matter, and what's the best advice you ever got and who gave it to you?

Chris Lento:

So I've had a number of mentors, but I've also done this coaching program that was really valuable, called strategic coach, and two things came out of it that really stuck with me, and one is this top of the who, not how. I'm like somebody who wants to know everything and do everything. You're an engineer, so let me figure it out and just the idea that everyone has a unique ability and that, if you hate doing something, one thing I just can't stand doing is anything related to lender re-imbursements. Just find the whole process annoying, tedious and no one knows what they're doing, right? Some people don't mind that. They'll kind of like that. So find that person and have them do it. I have them do it. I'll focus on the stuff I want to do and that whole idea. You don't need to know it and train someone. What you need to do is find someone who knows it or it lines up with what they like to learn, and then partner with them, work with them, hire them.

Ed Mathews:

Yeah, I'm a numbers guy, but I don't like doing books. We hired a Cracker Jack controller and accounting person and they are awesome.

Chris Lento:

It's great seeing someone who loves it.

Chris Lento:

Right, you're like oh this person loves this

Ed Mathews:

An accountant so I know the personality types. It comes in handy. I'm also interested in lessons learned. I fundamentally believe that we learn more from our mistakes than we do our successes, and I'm curious about a professional decision you'd love to have back, and what did you do to navigate it and figure it out and even recover, if that was something that you had to do?

Chris Lento:

Yeah, we had a deal where we had to go hard in order to win the deal and we had confidence that we could raise the capital, but it wasn't by any means in the bank, and that's part of this game, right, I want us to pull all the different pieces together, and they're not all there yet. You have to be confident that this will come in and convey that confidence to the other group. And so I would say we got a little bit over our head with the amount of capital raise. Luckily, it was last fall where capital was scarce. We had the election.

Chris Lento:

That's when the 10 years started going up, to people's kind of surprise. We weren't the only ones that were having this problem. We were able to work with a seller to negotiate some extensions, and then we were able to pull in some press equity to fill the gap. But I would say the lesson was have an A, b and C plan and actually think through it with you and your partners ahead of time. Okay, if not this, then what's next? Because that scramble feeling when you have money on the line.

Ed Mathews:

I'm also interested in how leaders like you take in information and how you grow. One of the things you said earlier is that you're always looking to learn. So are you a physical book person? Are you an audible or something else, and who are you paying attention to these days?

Chris Lento:

I listen to a fair amount of podcasts, often depending on which podcast on 1.5x, because fair amount of flow. I do read a fair amount of real estate and business books, but the same thing. I feel like maybe one out of 10, you will want to read it. It could be a 10 page pamphlet, Right? So I just fly through them Like where's the yeah, where's the thing?

Chris Lento:

Yeah.

Chris Lento:

This person has one thing or two things that they're probably have a great idea, and there's why I should believe them.

Ed Mathews:

I always skip the first three chapters.

Ed Mathews:

It's a story and something else, but where's the nugget?

Chris Lento:

I do read a fair amount of books, I listen to podcasts, I read the Wall Street Journal real estate section every day, if not every other day, and then just talk to people. A lot of it's talking to people. It's like we said earlier lenders see a lot of different variety of people. Your lawyers often have good ideas see different structures.

Ed Mathews:

It's amazing what they see because they have such a broad view into the market, because their client base is diverse, so they're seeing a whole bunch of stuff that never hits your radar unless you ask Yep, all right. Last one, how do you define success in your world?

Chris Lento:

I think adding value and not just like from a real estate perspective, helping people learn, improving these apartments that I'm buying, it's nice. When you buy a heavy value ad and it just looks terrible and you're like, oh, I can, this is not that hard Like landscaping, paint roofs, like we can make this place look pretty nice. Just adding value across the board is my answer to that.

Ed Mathews:

Chris, congratulations on all your success. I'm really excited for you and I can't wait to see you continue to grow and maybe you'll let me become one of your investors someday. But how do you spend your time?

Chris Lento:

I have an eight-year-old daughter. She's pretty active, so the winter we do a lot of skiing, we do a lot of bike riding. We just got a dog that's a holding thing. A lot of family stuff. We go to the beach in the summers, yeah.

Ed Mathews:

He's married to an amazing woman and they decided not to have kids. When he's exciting, he's got a boat and he restores cars, all the cool stuff. He's literally that cool uncle that everybody wants. But he asked me once what do you do for hobbies? And I'm like you see that little girl over there and the taller one over there. Those are my hobbies Right Swimming. I do dance, I do softball, I do soccer, I do beach and whatever else they want to do.

Chris Lento:

And we do a fair amount of traveling too.

Chris Lento:

Yeah,

Ed Mathews:

best thing ever.

Chris Lento:

We like that.

Ed Mathews:

I just have a child, that is, and especially daughters. I'm partial. I'm a girl dad, so I'm like you, hey Chris. So if folks want to learn more about EM Capital or want to get to know you, what's the best way to get in touch?

Chris Lento:

You can check me out on my website at emcapitalgroup. com, and then I'm very active on LinkedIn. I'll reach out to you on LinkedIn and we can set up a call.

Ed Mathews:

Awesome. Chris Lento, thank you so much for your time today. It's really good to see you and continue. Good fortune.

Chris Lento:

Great questions, good conversation. Thanks

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