Rocket Your Dollar Ep. 43: Managing New Jersey Real Estate Syndication

Aaron Fragnito, Co-Founder of Peoples Capital Group discusses New Jersey syndication and shares why management is the most important factor in real estate.

Transcript:

Thomas Young:

Welcome back everyone to the Rocket Your Dollar podcast. Today I have with me Aaron Fragnito. Aaron is a Co-Founder of Peoples Capital Group, which holds a $10 million portfolio. He is the host of New Jersey Real Estate Network podcast, he’s a licensed New Jersey realtor and full-time real estate investor. Aaron has completed over 250 real estate transactions totaling more than $40 million in his career. Welcome to the show, Aaron.

Aaron Fragnito:

Thank you, Thomas. Glad to be here. You are Thomas Young. You look as young as your name. That’s great.

Thomas Young:

It’s always surprising to people when we’re in the Self-Directed space and they see my 27-year-old face pop up. I was 25 when I started Rocket Dollar. So, I think, at least a little bit, I look older. But yeah, it’s always surprising to people.

Aaron Fragnito:

Well, Thomas, let me tell you something, you are in the tech space, my friend. Your asset class is Self-Directed IRAs, but I think Rocket Dollar, with your business model, is actually more in the tech space.

Thomas Young:

Well, I think that’s really the goal of Rocket Dollar, is combining something that a lot of times can be very stodgy and very outdated, and putting sort of a 21st-century spin on it. So it’s really just combining two things and hopefully coming up with something better.

Aaron Fragnito:

Yeah, exactly, exactly. That’s what I like. I had Dan on our webinar just last month, that was great. When I learned more about your model there and I like what you guys do. I work with a lot of Self-Directed IRA custodians, and I think your model is popular, and as more and more people find out about it.

Thomas Young:

Wow. Well, thank you. That’s what we’re working on. But we’re here to talk about you, Aaron, and your work. So tell me a little bit about yourself and your work at PCG.

Aaron Fragnito:

Sure. So here at Peoples Capital Group, we focus on buying apartment buildings in New Jersey, and what separates us from a lot of other individuals that buy apartment buildings or do syndications, a real estate syndication is when you pool together capital and you buy a piece of real estate with a number of investors. Okay, ideally you buy a larger building. So a lot of people poll together capital and buy real estate and it’s called a real estate syndicate. But what separates us from other syndicators is that we manage everything in-house, with our own management company, which allows us to have much better control of the property. Therefore, get much better returns from the property.

Also, we really just focused on the North Jersey market. About a 20, 30 square mile area here in North Jersey that plays off the Manhattan market and the demand to live around Manhattan. But we do not invest in Manhattan or the boroughs, we focused on North Jersey areas that allow you to commute to Manhattan. So, yeah, it’s a nice little mixture where investors can kind of invest locally here where a lot of other syndicators are going out to the Carolinas or Florida or Texas and investing way out of state and hiring third-party management companies, which has its inherited risks.

Thomas Young:

Yeah, absolutely. I always love the syndicators who sort of keep it to what they really know because I mean, we all know that there are opportunities all over the country, but just because there’s an opportunity in another state, it doesn’t mean that you’re necessarily the best investor for that property or the most tasked to manage that property. There’s a lot of complication that comes from managing property from literally thousands of miles away. So I like you guys’ focus on one specific area.

Aaron Fragnito:

Sure. The reason we do that is actually by necessity. So we had a pretty bad experience with management companies. So we had hired two management companies before we developed our own. The first one we hired was a very reputable nationwide management company, and they promised the world, and just under-delivered. They kept our building at around 75% collections, which is just unacceptable. So then we hired a small mom and pop management company, family-owned, it seemed like really good. We interviewed a lot of management companies. We picked one, I thought was a really good fit, and they would actually end up meeting a tenant at the property in the morning for a vacant unit, collecting the first month’s rent, security deposit, pocketing the money, meeting another tenant there in the afternoon, pocketing the first month’s rent, security deposit, and maybe do it again with a third tenant in the evening.

They would collect the money and security deposit and first month’s rent from one unit, ran out like three groups on the same day, and run off with the money. So, obviously, it’s a very nontrustworthy management company and they actually were stealing from us. So we actually had to take them to court. We won and we got the money back they took from us, but we realized through this process that the syndication business is a pretty interesting business where you’re essentially putting your reputation on the line, borrowing people’s hard-earned capital and putting it into buildings, which a lot of syndicators are just handing off to third party management companies and hoping that whatever weekly update they give him is an accurate, meaningful, weekly update. We quickly recognize that that’s a bad model. That’s a risky model.

So what we did is we developed our own management company in house here in Berkeley Heights, New Jersey. We focused on the New Jersey market. All of our buildings are within about an hour or less of this office here in North Jersey. Not only does it just allow us to invest in a really high demand place, in North Jersey, where you can commute into Manhattan in less than an hour, and the rents are super high and all those pros. But also allows us to actually really control the assets, really keep collections at around 95%. Even in these tough times, our collections are strong, which is to the strength of our management company.

So when you go looking for places to park your hard-earned IRA, your hard-earned capital, self-direct your IRA in real estate, you got to recognize that 90% of these syndicators are pulling together your hard-earned capital, putting it into a building five, six states away and hiring a third party management company that they interviewed for a few hours over the phone to run the entire asset, run the entire business. That’s really a flawed model that most indicators execute. So we improved upon that model by developing our own management company.

Thomas Young:

Yeah. I love that. It’s always some of the best businesses come out of necessity and having two bad experiences is a quick way to realize that you can do it better. I mean, it’s almost kind of how Rocket Dollar was born, is, I was watching people have bad experiences and we thought we could do it better. So that’s another shameless plug, but so does your property management company only manage your property, or do you guys help other syndicators or owners or operators manage their properties?

Aaron Fragnito:

Help the competition? No. Wait, no, no. We just focused on managing our own real estate and a lot of people do ask us to manage their properties because our collections are phenomenal, for inner-city properties too. I’m not talking about like fancy class A real estate rented out to like people earning a quarter-million dollars a year. I’m talking about like the middle of the road, some section eight real estate, other blue-collar, white-collar, class B, class C real estate. The types of investments that really earn your money, not the fancy class A real estate, which in the long run, looks good, but actually isn’t the most profitable.

So by focusing on that middle of the road real estate and managing it with high collections, that’s better. So no, we don’t manage for anyone else. We really crack the code here on taking a mismanaged property and making it a better performing asset. Right? So if you go knock on a management company door, and you say, "Hey, I want to buy a 30 unit property. I have 10 friends together. We’re all going to put in a hundred thousand dollars, and you guys are going to manage it. We’re going to own it. I want you to report back to me every week." "Great, okay, excellent, we’re going to charge you 6%, 8% and we’re going to do this and that. Then here’s the deal." Then you go ahead and manage it.

Well, at that point, you’re clearly at the mercy of the management company. You may have found a good building, you may have bought it for below market value. Maybe the rent has room to increase. Those are all good things. That’s what we look for. But if your management company doesn’t execute on the value-added strategy, then you’re a duck out of water. You’re just sitting there, and if the building could be in a great spot, but if it’s not managed right, then it will not make those returns you’re projecting.

So we recognized, actually the most important thing, is the management of the real estate, not the location, not the type, not the size. Those are all important things. Bigger is better. Do you want high demand locations? Do you want multifamily? Fine. Those are all good suggestions. But the truth is you can make money in a lot of different areas, but if your management isn’t spot on, you are not going to cash flow. We learned that the hard way. So that’s why we developed this management company. Plus I’m going to borrow your hard-earned capital, put my name on the line, and then have another company manage that business? No way. I’m going to manage that business. I put my name on the line. I’m going to make sure that works out.

Thomas Young:

Right. It’s almost ... I mean, to me it sounds like finding the property, the financing, everything is like going to the grocery store, buying fantastic ingredients and then getting home and burning everything, and the cooking is ...

Aaron Fragnito:

That’s a great analogy actually, that’s really spot on. Right?

Thomas Young:

Then you put ketchup on it.

Aaron Fragnito:

That sounds like my cooking man. That is basically how I cook.

Thomas Young:

But no, I see that ... I mean a lot of people put so much work into the ... I mean, and rightfully so, right? Into identifying the properties, the financing, making sure that the terms are right. Everything. Then the management seems to be like the follow-through, right? That’s where you actually start making the real money. No, I love that that’s your focus because it just makes so much sense. It’s very simple. It’s very clear.

Aaron Fragnito:

The other side of it, if you go to a management company and you knock on their door and you say, "Hey, this building is bad with collections. Rents are below market value. There are people on the payroll I need you to kick off and get people in there for lesser prices, and I need you to do this for a discounted management fee. By the way, you need at least everything out for top dollar as quickly as possible. Keep our renovations below budget and on schedule, and I expect you to do this all really for a great price." The management company is going to be like, "All right, thanks. But no thanks."

So when you actually reposition a building, right? You take a mismanaged building where the landlord forgot to raise the rents for five years, there’s an opportunity to put storage in the basement, but he never put it in. Laundry in the basement, maybe you could charge for parking. There are all these sorts of ways you can make more income on the property that the landlord is not taking advantage of. Maybe his brother’s on the payroll for $30,000 a year to take out the garbage. Just expenses you can wipe out as well, and all that adds to the bottom line.

Now, if you ask a regular old management company to reposition on an apartment building, which is what I just explained, taking a mismanaged building and making it better by physically improving it, but also really better management of it. Then the management company is going to be like, "No, we just like to buy turnkey buildings where we collect the rent when it’s due. We call a plumber when a pipe leaks, and we’ll send you a monthly update in an email." That’s what management companies do. Going above and beyond or repositioning a building is not what most management companies want to do. So we developed a repositioning management company, which is what we focus on.

Thomas Young:

Right. That’s fantastic. I’m curious, do you guys primarily invest in multifamily? Or do you guys do anything else? Do you guys do flips? Or is it mostly just multifamily buildings?

Aaron Fragnito:

Yeah, so our commercial branch does focus on multifamily. We stick to what we know. We buy class B and class C apartment buildings between 10 to 50 units in North Jersey here that allow you to commute into Manhattan within an hour. That’s it. We focus strictly on that. We know a few cities very, very well. We have really great connections to get off-market deals here. Discounted prices. We know a lot of landlords that are getting to the point where they’ll start to unload a lot of their portfolio to us off-market. That’s how you get those steals out there in this high demand market. But yeah, it’s definitely taken a long time to develop those relationships here in this market.

Thomas Young:

Right. That’s another super important part about investing locally, investing sort of where you know, is that network because if you’re looking for a building five states away, you’re not going to get that off-market deal because you don’t know anybody over there, or you don’t know the right people. So just the fact that you focus, like you said, on that 20, 30 square mile area means that people know you guys and they know your work and they’ll bring deals to you instead of you having to go out and hunt for them.

Aaron Fragnito:

Right. Exactly. Exactly. That’s what it’s all about. I mean, we talk all the time about emerging markets. We know there are areas where the income is more than the cost of housing, right? So what a lot of gurus teach you to focus on the next emerging market. I’m not saying this is a right or wrong strategy. Like there’s a lot of science behind this and you can do well in emerging markets, right? The idea is you find cities and areas where the income is higher than the cost of living. So the Carolinas would fall in that category, maybe Buffalo, maybe Cincinnati, parts of Arizona, right? So there’s all these little kind of sub markets that might have those numbers where people are earning more than the cost of housing.

Now you look in New Jersey, the cost of housing was pretty high, the income is high as well, but people would argue, "Well housing’s not going to grow in New Jersey because it’s tapped out with the amount of income people make." Well, the truth is, the demand to live in New Jersey, the demand to live around Manhattan, even with this going on is still strong. Even with the pandemic going on, we’re still leasing strongly. We’re still increasing rents. We’re actually even collecting rents very nicely as well.

We have another half of our company that flips houses and that’s great. That makes money when the sun shines. We made over a million dollars one year flipping and wholesaling houses. That was in 2017. That was a great time to do that. Then the market kind of softened up, and it was hard to find deals, and now it’s hard for the buyers to close. So we have a handful of flips and they’re sitting on the market and maybe some buyers are trying to buy them and different things, but the flipping business is hit or miss, right? We made a million dollars one year and maybe we’ll make a quarter-million dollars this year. So it’s not a reliable, sustainable form of income that’s kind of ... You can project it.

Now apartment buildings are more projectable, they’re more sustainable, they’re more consistent. We have over 90% collections on a lot of our buildings right now, in the middle of a pandemic, where we’re actually still getting cashflow checks. That’s really a testament, as the stock market goes up and down, up and down that we’re still getting cash for coming in, and the value of our building is still there. So you want to have your other flips and stuff going on. To run a small business, it’s good to have cash coming in with the flips, but it’s not a long term strategy. Flipping houses is a risky way to make money. It’s not a longterm ... It’s a lot of work. A lot of things can go wrong. So apartment buildings are more forgiving. Office space is soft. Storefronts are soft. You want to stay away from all that. But multifamily housing, middle of the road, class B, class C apartments in high demand markets are generally always a good bet in my opinion.

Thomas Young:

Yeah, I totally agree. You touched on it a little bit, I’m sure it’s two-sided with this pandemic, right? On one side, it’s hard for people to pay rent and there’s a lot of unemployment and all of that going on right now. Then there’s talk about this flight to the suburbs. What are you guys sort of thinking about what New York looks like in the next five to 10 years? I mean, do you see a recovery and then it continues to be sort of the center of the world, in a way? Manhattan? Or do you think that there’ll be even more interest in Jersey as people maybe don’t want to live in that much density in New York?

Aaron Fragnito:

Yeah. I think you’re going to have people that are living in Manhattan, or the boroughs of Manhattan, that are saying, "This is ridiculous. I’m spending $4,000 for a 400 square foot apartment. I step outside and it’s not even really a safe environment," or I can move an hour out, get three times the real estate. You have a commute into the city that’s almost the same as commuting from Brooklyn or something. Like if you live in Brooklyn and you need to commute into downtown, it can still be a 45-minute commute.

Now, if you live in downtown Newark, you can get on the light rail and be in downtown Manhattan in a half an hour. Do you know? So it’s a no brainer. You’re going to get twice the apartment in Newark. Now, fine. When you go on your Instagram, you have to write, "I live in Newark." You can write to you live in Brooklyn. I get it, and fine, it’s not as cool. But if you are willing to swallow your pride a little bit and just be financially smart, then you can save a lot of money by moving over to Jersey. A lot of people are seeing that. Years ago, people said, "Don’t invest in Newark, New Jersey." Are you familiar with the market here in Jersey at all?

Thomas Young:

I personally am not very familiar with it.

Aaron Fragnito:

Okay. Well, Newark, New Jersey is a city that has a lot of crime. Okay, if you Googled Newark, you see a lot of mixed reviews on it. I’m sure you’ve heard of Newark, right? So it’s not far from New York, but Newark, New Jersey has been in the news for a lot of things, good and bad. It’s always had its struggles. It has high crime and kind of poor schools. It’s definitely an inner-city area with a lot of struggling areas.

But then you have the downtown area, you have the Ironbound section, you have these little pockets of Newark, the University Heights area, that have just boom in the last 10 years, and 10 years ago Prudential was coming in and building skyscrapers. Rutgers was coming in and developing their campus. The light rail was going in and people were still sitting there saying, "Why are you guys investing in Newark? Newark’s a bad city with high crime and poor schools, look at the statistics, look at this news article." And we say, "Yeah. Okay, fine."

But our investments in those areas of Newark have doubled or tripled in value without us even really renovating the real estate, just maintaining the real estate, and because we bought in the right areas at the right time, and we did not listen to the naysayers who buy the most expensive, the fanciest real estate in the highest demand area. They might not even cash flow on it, but they are confident that the value is going to be strong and grow over time. That’s one strategy, but quite frankly, it’s not the right strategy in my opinion.

The best way to make money in real estate is to buy middle of the road properties. You don’t buy the biggest fanciest skyscraper for the highest price or whatever it is, class A on the beachfront. Maybe that’s your strategy, fine. But if you want to really make a good ROI, return on investment, you really want to build that IRA like 10, 12% a year or stronger, cash on cash return, then you need to be in the middle of the road real estate that’s well-managed, which we focused on.

Thomas Young:

Right. Frankly, I mean, as a syndicator, where most of your investors are never going to see a property in person that you purchase, they don’t care if you buy class A or class C as they care about the ROI on their money, that’s why they’re giving it to you. It’s not so that they can say, "Hey, I invested in that beautiful building that makes me no money." Like no one cares.

Aaron Fragnito:

Right. Most ... You’d be surprised. I mean, most investors are focused on the ROI. A lot of them are like, "Oh, I would never invest in Newark." Do you know? I’m sure there are lots of reasons for that. We don’t need to go into it, but it depends. So it’s interesting. But I do see that people inherently have to be explained why invest in Newark over say a high-end area like Hoboken, right? Which is super expensive and super fancy. It doesn’t always make sense because a lot of times they say, "Oh, Newark equals more risk, more risk because I wouldn’t be comfortable going in there collecting the rents at 11 o’clock at night." Right, the investor thinks, and I get that.

That inherently makes you think, "Oh therefore it’s not as good an investment. Therefore it’s more risk." It’s actually, well, not true. If you buy the property, in the right area, for a discounted price, and the area starts to really come alive. That’s how you make your millions in real estate. You buy before it’s on the headline before it’s on CNBC, you buy. Now you go on CNBC, you type in Newark, like "Oh, invest in Newark." Guess what? It’s too late now. You should have invested 10 years ago with People Capital Group.

Thomas Young:

Right. That’s where the real experience comes in because if I’m thinking of investing, for example, I live in Austin. So, anybody that’s looking to invest in Austin, they should have done it 15, 20 years ago. Yeah, the house that’s next to me that’s on sale for $800,000, I live in an apartment, not in a house next to a house that’s worth that much. Like that house was worth 50 grand in the ’80s and ’90s. It’s just, it’s ridiculous. But Austin is now ... It’s too late, right? Now the sort of en vogue thing to invest in is surrounding cities, San Marcus, Georgetown, Round Rock. Those are cities where people are being ... You know, you get priced out of Austin, but there’s some great, great apartments, great opportunities for investment within 30, 45 minutes, same as what you guys are working on. It just so happens that you guys are 30, 45 minutes from New York City, which is much more attractive.

Aaron Fragnito:

Well, I think it’s the same idea. You have a huge hub where a lot of people need to live around or want to live around, or maybe their families or their whatever. So one of your past questions was, "Do you think the demand to live in New Jersey is going to stay strong with this whole pandemic going on?" Let’s keep in mind too, human beings are funny, our brains are funny, our media is funny. Things come and go very quickly. So we are in the middle of a pandemic. What is it in June now? If we’re having this conversation a year from now, the coronavirus might not even be a topic, right? It might be just such old news, or, you could argue, there’ll be another pandemic. Then we’ll recognize, "Wow, this is a flow of issues."

But I think overall there are a lot of indications people are moving into cities more, but there are also indications people are moving out of cities more. The truth is there are so many people doing so many things. When I was 23, I lived in Hoboken in a three-bedroom apartment with my buddies. We had an awesome bachelor pad. But after a few years of paying $5,000 a year to park my car, I got a little tired of it. Eventually, I met a good woman and got married and didn’t really need to live in a bachelor pad anymore, so moved out of Hoboken. That’s kind of how life goes.

So there’s always a demand to live in a certain area as that generation, or that demographic needs to live there. So people tend to kind of retire out of New Jersey. So you could say, "Oh my gosh, look at all the people moving out in New Jersey down to Florida." All right, fine. But if you really looked into it, that’s the demographic of people generally retiring, and then look at the number of people that need to live and work in New Jersey, or around Austin, whatever the sample is, and I think that’s going to stay strong. I don’t think we’re all going to move out to the middle of nowhere. I don’t know if you’ve ever lived really far out in the country, but most people that live in the city aren’t going to be able to actually move out to the country. It’s just not going to be their cup of tea.

Thomas Young:

Right. One of the things that I like to remember is regardless of whether people are moving into cities, out of cities, what have you, our population is still growing and growing and growing. So just because there’s a trend in these five years, doesn’t mean it’s going to be the same in the next five years, in the next 10 years. That’s the beautiful thing about real estate. You find good cash flowing property that you don’t have to do anything with it for a while unless you want to. So that’s something that I like to keep in mind as well. The need for housing is not going away regardless of where it is.

Aaron Fragnito:

The other thing is, there’s such a shortage of housing in New Jersey, too. They really haven’t been building all that much. There’s not a whole lot of space. I think in Texas, it’s a little easier to sprawl out. Do you know? "Okay, I’m going to put 50 single-family homes this one town over because there’s a ton of space." In New Jersey, it’s tight. You want to build 50 single families... Good luck. Good luck getting a town who prove that, and then the cost of the land and everything. So the development in New Jersey has slowed down a lot. There’s a lot of old housing, like outdated, so built in the 1900s that need to be redone.

So take a city like Newark. There was a time where 500,000 people live there and then in the ’60s, the riots happened and there was a mass exodus from Newark. So now, about a quarter-million people live there. So about half, the city moved out over a period over about a generation. That means there’s a lot of real estate sitting there. That’s just falling apart, vacant, a lot of owned by the city, which, if you want to talk about something frustrating, try dealing with the city in Newark and buying the dilapidated real estate that just sits there and runs down the neighborhood. You think they’d be motivated to sell it to you, but you’d be wrong. That’s a different topic. Basically, it’s just frustrating.

So you see these cities where there was so much real estate, and it’s all dilapidated, and run down. It just takes a little cooperation from the city and to move those assets into the right investors, where we can turn those buildings around, turn those whole blocks around. Buy a whole block, a whole neighborhood, turn it around and make it a nice, attractive, safe neighborhood and not filled with abandoned properties, which lead to a lot of problems. So a city like Newark has a lot of opportunities there. I think you’ll see as time goes on, the right investors, in the right place, are going to do quite well with a city like Newark.

Thomas Young:

Yeah, I agree. If there’s one thing that we can be sure of, is that there will be opportunities in the coming months and years in Jersey, in New York, in Texas, I mean all over the place there’s opportunity. It just depends on where you are in the market that you know. But Aaron, before we wrap up, I want people to be able to know how to get in touch with you. If they enjoyed hearing about what you’re working on and want to learn more about investing with you guys, what’s the best way to get ahold of you guys?

Aaron Fragnito:

Sure. So our website is peoplescapitalgroup.com. Our company name is Peoples Capital Group. So we have a podcast on our website. We also have an ebook you can download to learn about these New Jersey markets. We talk a lot about Paterson in the ebook, which is a great emerging market right next to Newark here that we’re investing in. So whether you’re in-state or out of state, I hope some of your listeners may recognize these cities I’m saying, others may not.

But the bottom line is I think you understand, we work off that New Jersey market. But we do try to bring our investors an opportunity every four months or so. So it’s really hard to find a good opportunity. We actually have more investors lined up than we can bring opportunities to, which is a good problem for us to have, but it means that you do want to go to our website peoplescapitalgroup.com.

You could put in your information, maybe sign up for a webinar we have coming up. We do three webinars a month. Maybe download that ebook. Or you could even fill out a qualification form to see if you do qualify to invest passively. That’s the first step to getting qualified, to start investing your IRA, which you could self-direct into an apartment building with Peoples Capital Group to build that IRA a lot stronger.

Thomas Young:

Fantastic. Yet, Aaron, thank you so much. I thoroughly enjoyed our conversation and really learned a lot. I’m sure we’ll be in touch as this plays out. I want to hear about how you guys are doing and maybe do a follow up later this year, or early next year, to see how everything’s going. But thank you for your time and thank you for sharing your expertise with us.

Aaron Fragnito:

Yeah. Thanks for having me. Maybe I’ll have you guys on the Passive Cashflow podcast one of these days, that’s my podcast. So I’ll talk to Dan and we’ll see what we can put together.

Thomas Young:

Absolutely. Thank you.

Aaron Fragnito:

Thanks, Tom. Have a good day.