Podcast Summary: Real Estate Investing School Podcast – Episode 217: The Journey from Single-Family to Multifamily with Harry Arsene

Introduction

In Episode 217 of the Real Estate Investing School Podcast, host Joe Jensen welcomes Harry Arsene, the co-founder and manager of Arcene Construction, a Seattle-based real estate development and general construction company. With a strong technical background holding a BS in Mechanical Engineering and an MS in Product Development Engineering, Harry brings a unique perspective to real estate investing. The episode delves into Harry's transition from the aerospace industry to real estate, his experiences in various property types, and his strategies for multifamily development.

Harry's Journey: From Aerospace to Real Estate

Harry Arsene began his professional career in the aerospace industry, working as an engineer for approximately three years. Concurrently, he and his wife attended real estate seminars, which ignited their interest in property investing.

[00:14] Harry Arsene: "We went from remodels to single family new construction to townhouse development to multifamily development and now we're looking at like multifamily value add. We like to try everything."

Joe Jensen highlights Harry’s diverse background and the significant projects Arcene Construction has undertaken, including a notable 50-unit multifamily building in Seattle.

[01:23] Harry Arsene: "Yes, it was concurrent with starting our business. We moved up to Seattle. My wife and I took a real estate seminar, and she decided to pursue it full-time while I continued in engineering for a few years."

First Deals and Lessons Learned

Harry recounts their inaugural real estate deal, which was intended as a flip but inadvertently became their first rental property due to the market downturn in 2007.

[03:14] Harry Arsene: "Our first flip ended up being our first rental because the market kept going down. We decided to refinance and hold it, which became a valuable learning experience in landlording and tenant selection."

This pivotal experience taught them the importance of flexibility and long-term planning in real estate investing.

Balancing Active Income and Portfolio Building

The discussion transitions to balancing the excitement of active real estate deals, like flips, with the stability of long-term investments.

[05:37] Harry Arsene: "In the long term, honestly, the less you do, the better. Holding a property can be boring, but it's often the best strategy."

Harry emphasizes the benefits of long-term rentals, including cash flow, tax advantages through depreciation, and the ability to leverage equity through refinancing.

Transitioning to Multifamily Development

Harry details the strategic shift from single-family homes to multifamily developments, highlighting how zoning changes enabled this transition.

[08:09] Harry Arsene: "We bought a site for townhouse development, and the zoning allowed for multifamily. Within a month, we acquired an adjacent property, assembled them, and launched our first multifamily project."

Their first multifamily project was a 32-unit building, constructed from raw land to stabilization, showcasing their capability to manage large-scale developments.

Building vs. Value-Add Multifamily

A significant portion of the conversation explores the differences between building multifamily properties from scratch versus acquiring and enhancing existing assets.

[10:06] Harry Arsene: "We've primarily done ground-up multifamily projects. Value-add deals involve improving existing structures, which can be less risky and faster to execute but may offer smaller margins."

Harry expresses interest in entering the multifamily value-add space to diversify their portfolio and optimize project timelines.

Financing Multifamily Projects

Harry provides an in-depth look at financing strategies for multifamily developments, including the use of equity partners and debt investors.

[11:48] Harry Arsene: "We funded the entitlement process and construction through a combination of our initial capital, equity partners, and debt investors. Once construction reached a critical phase, we secured larger construction loans."

He explains the concept of interest reserves in construction loans, which help manage cash flow during the development phase.

[14:27] Harry Arsene: "Interest reserves are rolled into the loan amount, allowing you to cover interest payments during construction without self-funding."

Seattle Market and Entitlement Process

The Seattle market presents unique challenges, particularly with the entitlement process, which involves obtaining necessary permits and approvals for development.

[24:39] Harry Arsene: "Entitlement means having approved permits to build a project. In Seattle, this process can be lengthy and costly, often involving significant design and development fees."

Harry discusses the mandatory housing affordability fees in Seattle, which add substantial costs to projects but are essential for securing approvals.

[28:00] Harry Arsene: "For our 50-unit building, we spent approximately $400,000 on design and development fees and an additional $350,000 in mandatory housing affordability fees."

Navigating Multitasking: Development and Value-Add

To optimize timelines, Harry explains how Arcene Construction engages in both development and value-add projects simultaneously.

[34:14] Harry Arsene: "We're actively looking into multifamily value-add projects alongside new developments to ensure a steady pipeline and mitigate risks associated with longer development timelines."

This approach allows them to maintain cash flow and continue growing their portfolio without being stalled by the lengthy entitlement processes.

Selling vs. Holding Properties

Harry shares insights into strategic decisions about when to sell a property versus holding it for long-term gains.

[38:05] Harry Arsene: "With our 50-unit building, rising interest rates made it challenging to cash flow without additional investment. Selling at that point allowed us to recover our capital and move forward with new projects."

He underscores the importance of multiple exit strategies in real estate investing, enabling flexibility based on market conditions.

Market Insights and Future Outlook

Harry offers a forward-looking perspective on the Seattle multifamily market, anticipating rental growth and reduced new supply in the coming years.

[20:20] Harry Arsene: "We're expecting strong rental growth in Seattle by late 2025 and into 2026, especially as the current development pipeline diminishes."

He predicts a "dry spell" in new supply, which could enhance rental rates and property values, making it an opportune time for existing multifamily properties.

Advice for Aspiring Multifamily Investors

When asked about bridging the gap from single-family to multifamily investing, Harry provides actionable strategies:

1. Utilize Existing Assets: Acquire properties with existing income streams, such as single-story commercial buildings, to offset holding costs.
2. Shovel-Ready Sites: Invest in projects that already have permits, reducing the entitlement timeline and associated risks.

[22:57] Harry Arsene: "Finding a shovel-ready site allows you to bypass the lengthy entitlement process, making the investment more manageable and less risky."

Final Thoughts and Recommendations

In the concluding segment, Harry shares personal insights and recommendations:

• Text Bomb Message:

  [45:08] Harry Arsene: "Enjoy the journey, not the destination. Embrace every moment as a learning opportunity."

• Book Recommendation:

  [45:53] Harry Arsene: "The Seven Habits of Highly Effective People by Stephen Covey. It's foundational for setting priorities and focusing on what matters."

• Most Expensive Mistake:

  [47:02] Harry Arsene: "Our first deal turned from a flip into a rental was a valuable mistake. It taught us to be more conservative and flexible."

• One Word to Encapsulate Real Estate Investing:

  [50:59] Harry Arsene: "Realization – watching a project evolve from concept to completion is incredibly rewarding."

Harry also emphasizes the importance of adapting to market conditions and maintaining a diversified approach to real estate investing.

Conclusion

Episode 217 of the Real Estate Investing School Podcast offers a comprehensive exploration of the complexities and rewards of transitioning from single-family to multifamily real estate investing. Harry Arsene’s experiences provide valuable lessons on flexibility, strategic financing, navigating market-specific challenges, and the significance of long-term planning. His insights serve as an invaluable resource for both novice and seasoned investors aiming to expand their portfolios into multifamily properties.

Connect with Harry Arsene:

• Website: arseneconstruction.com
• LinkedIn: Harry Arsene
• Email: harryarsene@gmail.com

This detailed summary captures the essence of Episode 217, highlighting key discussions, insights, and actionable advice shared by Harry Arsene.