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Real Estate Investing School Podcast
217. The Journey from Single-Family to Multifamily with Harry Arsene
00:52:36
Welcome back to the Real Estate Investing School Podcast! In this episode, host Joe Jensen sits down with Harry Arsene, co-founder and manager of Arsene Construction, a Seattle-based real estate development and construction company. Harry brings a...
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- [00:00]
Harry Arsene
We went from remodels to single family new construction to townhouse development to multifamily development and now we're looking at like multi family value add. We like to try everything.
- [00:15]
Joe Jensen
Welcome to the real estate investing school podcast. I'm your host, Joe Jensen. Our guest today is Harry Arsene. Harry's the co founder and manager of Arcene Construction, Seattle based real estate development and general construction company. He has a BS in mechanical engineering and Ms. In product development engineering. So it brings a strong technical background to his role. What he's done there are scene is they built a diverse portfolio of projects including, you know, luxury townhomes, single family, multifamily residential buildings. The company's wrapping up its largest project to date, a 50 unit, 50,000 square foot multifamily building in the Seattle area that's already under contract to sell upon completion, which is awesome. They'll be breaking ground on their third multifamily site later this year. So welcome to the show, Harry. Excited to hear about your journey.
- [01:08]
Harry Arsene
Hey Joe, thank you for having me.
- [01:11]
Joe Jensen
Yeah, man, that's quite the bio, you know, quite a bit of history. And I didn't even mention that, you know, for 13 years before that you were in the aerospace industry, is that right?
- [01:24]
Harry Arsene
Right. It was concurrent with starting our business. I was in engineering for about three years. We moved up to Seattle. My wife and I did. We took a, A friend of ours told us about a real estate seminar. We took the class, I moved up here for work, we took the class and then my wife said, hey, why don't we give this a shot? So she, she basically worked it full time while I, I worked in my engineering job for a few years and then we built up the business to a point where I came into it full time.
- [01:57]
Joe Jensen
Okay, that's awesome. So you, you were doing it with your wife is how you got started.
- [02:01]
Harry Arsene
Yeah, exactly.
- [02:02]
Joe Jensen
And so tell me a little bit about that. I always love origin stories. Right. I don't know. I think it's so interesting. Tell me a little bit about that seminar. Did you guys go together or is it one of you trying to like guide the other person into it after. And what about it kind of caught your eye to, to kind of go forward with.
- [02:21]
Harry Arsene
Was both of us, we were both interested. So we went to the seminar together and went to several classes. Had to do with flipping and wholesaling and, and we said hey, my, my wife's background is architecture, so.
- [02:36]
Joe Jensen
Oh, okay.
- [02:37]
Harry Arsene
She graduated with an architecture degree, did some work for some firms throughout college. But Then when we moved up here, she was going to look for a full time job. But then after taking the seminars, we said, well, why don't we try to do this while I hold down the, the fort with the full time job.
- [02:55]
Joe Jensen
So perfect way to do it.
- [02:57]
Harry Arsene
Kind of how we kicked it off and kind of muddled through it for a couple years and, and then grew organically over the, the last 17 years.
- [03:06]
Joe Jensen
So, so what did your first deals look like? Was it a flip? Was it a wholesale? What was it the very beginning, you know, what was the first deal?
- [03:15]
Harry Arsene
Yeah, the first deal was a flip. It actually ended up, and ended up being our first rental too because we were, we bought the flip at the peak of 07 and we all know how that story ends. So we put it on the market, kept dropping the price, and the market kept going down as we were dropping the price. So we said, well, it doesn't make sense to sell it at this point, so why don't we refinance it and hold it? And so our first flip became our first rental. And so we learned a lot about landlording and what to do and what not to do with, you know, tenant selection. And so yeah, it was a really, it was a really good experience. It was kind of a, we stumbled into it and, you know, made mistakes. But then 10 years later we sold that property, you know, after having done multiple deals, but 10 years down the road, we finally sold it for a profit and, and had been cash flowing along the way. So.
- [04:16]
Joe Jensen
That's cool. That's cool. So yeah, it sounds like it was almost an accidental burr. Were you able to refinance and get, were you able to get most your money out or just a portion or all of it or how did that look?
- [04:27]
Harry Arsene
Yeah, we got some of it out. I think it's a little while back now, but maybe about half of it out.
- [04:34]
Joe Jensen
Okay.
- [04:35]
Harry Arsene
But yeah, we, yeah, we did pretty good. And it was cash flowing and uh, so yeah, it was, it ended up, the mistake ended up being a great, great project. And that's actually one of the things I love about real estate is you've got multiple exits. When things don't go your way, you, you can always pivot.
- [04:54]
Joe Jensen
So yeah, it's so cool. And then like, especially if you can play the long tank, long game, you know, it's like you're gonna win eventually, you know, and, and you're. That wasn't the plan. It sounds like you're planning on just flipping it that year, but you know, 10 years later you, you finally Made your money on it. But, but you made money all along the way too. And, and so what was your take when you went from making having, oh, I'm going to make a little bit of money on a flip to oh, I'm making money every month for a decade. You know, where do you balance your perspective on the active income of real estate sales and development like that versus building a portfolio of like, of wealth building? Give us some of your thoughts on that.
- [05:37]
Harry Arsene
Yeah, sure. In the beginning it was, you know, flips are fun and you know, kind of high profile. Like you're, you know, you're, you're moving and shaking and like doing deals. But in the long, in the long term, honestly, the less you do, the better. So if you're, if you're taking a deal and holding it, it's, you know, it can be kind of boring in that regard. But yeah, you know, you're, that's oftentimes the best thing to do. So we found, I think it was in 2010, 2011, the numbers really made sense for rentals where we were basically buying a property that we remodel and then we do a cash out refi at the end of the project and then hold it and cash flow. And one of the best projects we had, which was one of our smaller ones, we ended up netting, I think it was like 20 grand, like positive cash out of the CA refi. And then it was cash flowing like 4 or 500 bucks a month. This was like 12, 13 years ago. And then so we did those when that made sense. But then you also need that short term money to keep the, the business operating. So I honestly, my take is the more you can, if you can afford to hold it, you should just because with depreciation, cash flow, you know, offsetting or deferring taxes and doing exchanges into future projects or properties, that, that's definitely the way to go.
- [07:13]
Joe Jensen
Yeah, sometimes you kind of have to give up some, some luxury, you know, you're not making as much money as quick. You got to get a little more creative. But if you find a way to keep it, like I said, I've done a lot of these interviews and no one's ever said, man, I just wish I had sold more properties, you know, instead of holding on to all of these, you know.
- [07:32]
Harry Arsene
Yeah.
- [07:33]
Joe Jensen
But the opposite has been very true and said amongst every real estate investor I've ever talked to is like, ah, wish I hadn't sold that, you know.
- [07:41]
Harry Arsene
Yeah. Yep.
- [07:42]
Joe Jensen
So, so how. So that's cool. So you guys got into it you go to seminar, learn about, hey, you can make money in real estate, you start doing it. How long did it take you to make that transition from these, you know, single family rentals burning, maybe some flips if it may, if you can, to multifamily. I think that's something a lot of people are very interested in, but that jump feels insurmountable to a lot of them.
- [08:09]
Harry Arsene
Yeah, honestly, we kind of stumbled into our first multifamily. We went from single family projects to townhouse developments and we had bought a site to do a townhouse development and then the zoning allowed for multifamily. So we considered doing our first smaller apartment building. So we're tossing around that idea, but within, within a month of buying that property, the neighboring property came on, came available. So we actually ended up buying two properties next door to each other. We assembled them together and did our first multifamily deal. At that point when we had the two parcels together, it made sense to, to give it a shot at that point because we ended up building a 32 unit building with 32 below grade parking stalls. And we took it from basically raw land to design entitlements. Building it ourselves, we general contracted it, which we learned a lot doing that as well. And then refine, stabilizing it, getting at least up and then refinancing and holding it. And that's, that's in our rental portfolio currently.
- [09:21]
Joe Jensen
So you guys built it from the ground up. So what's your thought on that? Love like building. That's the ultimate flip, right? Talk about value add. You have raw land, you know, and then you make something really nice out of it as opposed to hey, here's something that's already there and I'm going to, you know, fix the kitchen. But you know, but what's your thoughts on building like that versus buying an existing asset and just kind of reworking the numbers or maybe, you know, doing some fix ups. Because a lot of people it's like, oh well if it's brand new, there's no value add in it, you know, so it's like you're not really getting a deal, but obviously you built it, but it was also brand new. So anyway, give us some thoughts on, on just buying used or building new.
- [10:07]
Harry Arsene
Yeah, and to be honest, we haven't done any multi family value add deals. We're actually looking to get into that now and we've just done ground up multifamily and there's definitely time is time works with you on a value add because you're, you've already got a building there. You know, you're, you're working with a structure, right? And you're trying to improve that structure. When you're starting with raw land, you've got to go through a two to three year entitlement process. At least that's what it is in Seattle. And so you got to have some really deep margins for it to make sense or to jump into that game. It's a completely different beast. So I would say a lot higher risks, also a lot higher rewards in ground up multifamily. But you can turn deals faster in a value add scenario, but your margins may not be as, as large.
- [11:09]
Joe Jensen
So you, that's interesting. So when, when you're building it out, how are you funding this and how are you able to hold on to it? Because you said you've kept this in your portfolio. I feel like a lot of times builders, it's like they build, you know, maybe a small development, 10, 20 homes or whatever, and then they sell off 11 or whatever of them and keep one or two themselves. But like how do you fund a whole 32 unit, 48,000 square foot apartment building and how are you able to like hold on to it and not have to sell it to, to pay for the development in the years of everything you're just describing?
- [11:48]
Harry Arsene
Yeah, sure. Either you've got the capital to bring in the down payment for a property acquisition and you get a loan for the, the balance, or you bring in an equity partner or you bring in like a, like a debt partner that's willing to carry a second mortgage on the property and assuming your lender is okay with having a second behind them. But those are, those are the ways that we did it. We had, we put in our initial capital for the purchase, we funded the entitlement process, so we paid for the permitting and architecture consultants, you know, engineering surveys, all that geotech. And then when we got to the construction phase, actually almost no lenders wanted to fund our deal because we had never done a multi family deal. So we, one of our debt investors that's invested in a lot of our other deals prior to that one, he came in and funded the initial construction and when we got to finished concrete, essentially, because that's essentially the, the riskiest part of multifamily development, if you ask me, is getting from dirt to fully finished concrete foundation.
- [13:07]
Joe Jensen
Okay.
- [13:08]
Harry Arsene
And this particular one had an elevated post tension deck which is a lot more complicated. So there's a lot, a lot more room for error once we Got to that point we were able to bring in a larger construction lender to fund the, the vertical part of our project. And we kept that debt investor in there as the capital to, to fund the, the difference between our debt financing and, and our private investor. And then when we got to the tail end of the project we and stabilize the property. So stabilized means you've leased it up and you've gotten to usually 90 plus percent occupancy on your building and you've got the money coming in, then you can talk to lenders about refinancing and getting lower interest, long term debt on the project. So that's what we did and we ended up actually getting some cash out of that deal. Not, not all of our equity, but we got some of the money that we had initially put in as capital back out of it and then had some really good cash flow.
- [14:11]
Joe Jensen
That's awesome. And so you, you just, this debt investor, you know, you're just giving him a return. Are you paying him monthly? And on these construction loans, are you paying these monthly like you're having to keep it afloat yourself over multiple years of development?
- [14:28]
Harry Arsene
Yeah, there are a lot of cases it's monthly. When you get into the construction financing, they usually have an interest reserve. So they'll build in a 12 or 18 month interest reserve. But if you go past that, you.
- [14:42]
Joe Jensen
Want to expand on an interest reserve, does that mean they'll wait and you can make the payments later when it's done or what is an interest reserve?
- [14:49]
Harry Arsene
Sorry, thanks for pointing that out. They'll basically roll it into the loan amount. So say you've got a million dollar loan and you've got $100,000 in anticipated interest expenses. They'll give you a $1.1 million loan.
- [15:05]
Joe Jensen
And then you're not making payments along the way. They just wrap it all into the end.
- [15:09]
Harry Arsene
It'll be like in a credit account that they hold and you'll whittle that down every month. But once that interest reserve runs down to zero, then you've got to start coming out of pocket. Okay, so you really want to get the project done or refinanced before you, you run out of your, your reserve.
- [15:26]
Joe Jensen
But that reserve makes it so you're not having to self fund payments while you're doing the construction. Making it easier to keep everything afloat and just get to the finish line.
- [15:37]
Harry Arsene
Exactly. Yeah. It definitely helps with cash flow because those payments can get pretty significant. Especially when you get to the last quarter of a project and your, your loan is Basically fully funded. So you're, you're paying like the top, you know, you're paying a ton of money at the, the most money at the end. So.
- [15:55]
Joe Jensen
And there's no cash flow, right? Because it's not, there's no tenants in it when you're building it, you know, so it's like, you know, who cares how much the payment is? If you have enough, you know, cash flow to cover it, then you're, you're good. But when the payment's big, you know, 50 unit, 32 unit and, and there's no tenants paying any rent, that, that's not very sustainable for too long. So. Oh yeah, be careful.
- [16:17]
Harry Arsene
Yeah, you're, it's, it's a race to the finish at that point.
- [16:19]
Joe Jensen
So that's interesting. So, so you were able to do all that. Once you put the long term debt on it, you're able to pay back your, you know, you paid off the, the debt investor, you know, so he got his, you know, payments and he got his full return that he wanted. You were able to pay yourselves back for some of the, the engineering, development costs and everything like that. And then you still, I mean it was virtually again like a big burr where you're able to get all your money back and still own the asset in cash flow. This just happened to be a 32 unit apartment building. What would she say the value of that apartment building was when you, I mean how much debt did you put on it when you were done stabilizing it?
- [17:00]
Harry Arsene
When we're done stabilizing it, we put 8.7 million in debt on it and it's worth somewhere in the mid 12s probably right now.
- [17:11]
Joe Jensen
That's awesome.
- [17:12]
Harry Arsene
Yeah, and that's you know, after, after the multi family correction. So yeah, there's decent equity there. It's cash flowing really strong. So we're, we're really happy on that project.
- [17:26]
Joe Jensen
That's cool. How long ago was that, that when you guys put the debt on was.
- [17:31]
Harry Arsene
We stabilized it late 21, 2021. And then we refinanced into long term debt. I think it was March or April of 2022.
- [17:43]
Joe Jensen
Okay. So on these, these the kind of lending you'll get on a unit like this is it, I mean are we talking like a, an adjustable rate mortgage in five years from now or you know, is it long term secured or like what kind of loan is that looking like and how's that going to shift in the future?
- [18:01]
Harry Arsene
Yeah, it really depends on the lender. But I, on the commercial side, multifamily loans. You typically don't see lenders go more than 10 years on a loan before it needs, before it matures. Ours is a five year with three years of interest only payments. So we're still within that three year period. So we're getting really good cash flow.
- [18:22]
Joe Jensen
Right.
- [18:22]
Harry Arsene
And then the last two years it'll go fully amortized and then after that year five, the, the rate, the rate floats.
- [18:33]
Joe Jensen
So are you nerv, like what are your thoughts on that? Because obviously 2021, you know, rates are a lot better than they are today. Your pin interest only. So right now it's awesome. Like what's your thoughts on when it, when it comes and it adjusts to new market higher rates? Is it like, is it all built in or is that is, do you exit at that time or what's your thoughts there?
- [18:55]
Harry Arsene
Yeah, good question. We have a couple of options. We can exit or we can refi and just hold it. We're still, I think it's about two and a half years out from, from it floating. So we still have plenty of time. I feel really good about the multifamily market from here on out. This, this year has been rough. Values definitely took a hit with the, the Fed raising rates over the last couple years but now, now they're backing off of it and the multi family development pipeline has essentially dried up over the last 18 months. So what you're seeing is this like wave of new supply getting completed over, over the course of this year and maybe trickling into early next year. But once all that supply gets absorbed, there's almost nothing new coming to market. So you've got this like big, essentially a cliff of like lack of supply coming. It's, it's affecting, it's affecting you know, absorption and rental rates now. But from what I've been reading and what I've been seeing in the market, I think late 25 and into 2026, we're going to see some strong rental growth in Seattle and probably a lot of the big markets that have essentially put the brakes on new development and.
- [20:20]
Joe Jensen
It'S got to be such a slow moving ship that even if people see that and they're oh well let's start building again, things are more stabilized. It's like, you know, you're turning the Titanic there. You know, it's still going to take years before it can even catch up and start affecting inventory, I would assume.
- [20:38]
Harry Arsene
Oh yeah, and that's the thing, like if you haven't started permitting a project, you're two years before, you know, getting to break ground. So maybe you're close to four years before you're stabilized. So there's going to be like a really kind of dry spell of no new supply in the market. There are some multifamily developers that are getting out there and getting ahead of it. Like one of our latest projects we got under contract late last year, so late 2023, and we had it under contract for about 10 months and we closed on it a month or two. And that was a project that we bought with permits and that we're breaking ground on now when basically there's almost nothing new breaking ground. So that when we're done in about 15 to 18 months from now, we're going to be in a time when there's like nothing new coming to market. So we think that project's going to do really well.
- [21:33]
Joe Jensen
That's cool. So I mean, I guess maybe this wouldn't. Because you guys, you kind of are in a unique space where it's like you're building it from scratch. So you do it a little differently than a lot of the, you know, multifamily acquisition companies. So I want to ask you, like, what would you say to the average investor that's doing what you did? You know, they, you know, doing single family, you know, maybe a duplex here or there, you know, they're kind of building their portfolio but they really want to get into that multi unit, you know, 20, 30, 50 unit space. Like how do you bridge that gap? But you know, and short of building an entire construction company and, and doing everything from square one.
- [22:18]
Harry Arsene
Yeah, that's a good question. I think there's a couple ways. One would be to find a property that already has an asset on it that you, is not the highest and best use for that project or for that site. So like if you got a single story commercial building that can bring in some rental income to offset your holding costs while you get through permitting, that would be a great place to start. That way you're, you're offsetting your holding costs and you're, you're essentially you're, you're hedging yourself a little bit. If anything goes wrong, you still have an improved property with an asset on it that still can generate income.
- [22:57]
Joe Jensen
So you're saying if you're going to go build a multifamily, if there's already something on there to kind of rent out while you build.
- [23:05]
Harry Arsene
Yeah, exactly. That would be option one. Option two would be if you found a shovel ready site so you're you're essentially taking out the entitlement timeline, which is probably not the riskiest, but it's definitely a risky part of the, the process because you don't know where you're going to end up on density and design and timeline until you get to the end of that process. So if you're buying an entitled project, a permitted project from somebody else, that's, that's another opportunity.
- [23:40]
Joe Jensen
Can we dive into that? I. Sorry, sorry to keep interrupting you. I was just, you know, I feel like you have so much knowledge I want to pick your brain on can we dive into entitlements and what that means and like, and what that process and the risk is? Because I think that's something a lot of people aren't super familiar with because like, say most these podcasts and stories, it's like, hey, you buy this building, make it a little better, you fix noi or whatnot, you know, just like, hey, manage it better, improve the asset. But when you're talking about truly ground up, you know, it's not as simple. Just buy the land and go build something, you know. So can you dive into what entitlements are, what that process is, where the risk is and, and where the security is, and how you can protect yourself as you do something like that?
- [24:27]
Harry Arsene
Sure, there's a few questions there. I'll try to.
- [24:30]
Joe Jensen
Yeah, let's just start with like, what even is an entitlement? Like, what does that even mean to the average person, even the most investors? I don't think they even really understand what that means.
- [24:39]
Harry Arsene
Yeah, it essentially means you've got a permit ready, ready to break ground project. So it's a fancy way of saying you've got, you've got approved permits to go build something. But there's a lot of stuff that goes in, you know, it goes on behind the scenes, especially on multifamily. But that's essentially what it is in a nutshell.
- [25:02]
Joe Jensen
So you can buy some land and if it's not entitled yet, basically you don't have the permission from the government to build on it yet or build what you want on it yet.
- [25:13]
Harry Arsene
You don't have an approved design to go build.
- [25:16]
Joe Jensen
So the entitlement process is you buy that raw land. Now, what's the difference between entitlement and zoning? Because how does that work, work together?
- [25:25]
Harry Arsene
Zoning affects what you can build and how much of something you can build. So it affects your density and your type of development. So if you're trying to build multi family in a commercially zoned area, you may have some restrictions that you wouldn't normally have if you were developing in a residential higher density zone. That's not to say you can't. There are some things you strictly can't do in certain zones. But, but that's essentially what zoning is. It's telling you your density and the type of development you can do, whether it's like retail, commercial, residential, industrial, that, that sort of thing.
- [26:07]
Joe Jensen
Cool. So if you don't. So entitlement's almost like, you could just say like, like the go ahead. It's like permission, it's like approval. Like you're entitled to go ahead and do this thing you said. And if you're trying to build something that's not, it's not zoned for, you'll never get entitled, you'll never reach entitlement. I don't know if I'm using the phra.
- [26:25]
Harry Arsene
Basically, you won't get to a fully approved permit that allows you to build whatever it is that you want to build on the site.
- [26:31]
Joe Jensen
And that's what the entitlement process is, is getting to that fully approved permit.
- [26:36]
Harry Arsene
Right? Yeah. And then even after you do that in Seattle, and I'm sure a lot of markets you have, you get your building permit approved and there's a whole set of drawings that you have to develop after building permit approval that you typically don't do on a residential project. So we, you have to go get fully engineered electrical drawings, plumbing drawings, fire alarm system, fire sprinklers, elevator, gets their own shop drawings and approval. But all of those things happen after you've got your building permit approved.
- [27:11]
Joe Jensen
So. Okay, here's your building permit. Yeah, you can do what you say you're going to do now. Prove that you're going to do it. Right. And then we'll approve again that you're allowed to do it and we'll prove that you're allowed to do it. Right.
- [27:22]
Harry Arsene
Exactly. Or show us exactly how you're going to do it and that it meets all the codes. And then there's stuff you can run into in that regard too, because you might have a building permit that says you can build something, say a 50 unit building, but then you start getting into the shop drawings and there are things that are restricting you from doing it a certain way. So there's a risk in that as well.
- [27:47]
Joe Jensen
Okay, cool. And, and this process can take years, it sounds like, to get these permits. It's not like you jump online, apply for a permit and pay 20 bucks. What is the cost of these entitlements and a permit approvals.
- [28:00]
Harry Arsene
It really depends on the market. I can tell you. For Seattle, they've implemented a mandatory housing affordability fee which adds a significant cost to the front end of a project. I think we spent around, on our 50 unit building. I think we spent about 400,000 on design and development fees and then another maybe 350,000 in MHA fees. Mandatory housing affordability fees. It's essentially they've got an affordable housing initiative. They've got a bucket of money that they're storing up and they're going to use it for something someday, but that's, that ends up being a cost to the front end of the project. So you. Every market's different. I know there's markets that have much lower permitting or impact fees and much shorter timelines as well. I talked to somebody that was complaining about a seven month permit timeline and I said that like that's how long it takes if you're lucky to get a single family, you know, project approved in Seattle. But, but yeah, it's, it's really market dependent, to answer your question. But that's that those are kind of the numbers that we, that we dealt with on our, on our 50 unit in Seattle.
- [29:20]
Joe Jensen
Well, and it's funny because I feel like the, you know, because someone could be like, oh, and why do it there if it's such a headache? You know, But I feel like the greater the barrier to entry, the less competition and the greater the reward. Because people don't want it. Because you're solving bigger problems. Right. If you're in a market where it's quick and easy, it'll be, you know, you'll probably have a lot more people doing it, which kind of waters down the, the value that you're providing to that area. But if no one wants to touch it because it's so hairy, it's like if you get through that finish line, like, you know, you're, you're a hero.
- [29:54]
Harry Arsene
Yeah, I, I completely agree with you there. It's a blessing and a curse, right? Because you can. It takes you forever to get through it, but then you're one of the few people that's getting through it. So you're probably providing a product that not everybody can provide.
- [30:10]
Joe Jensen
Yeah, well, I bought, I've bought some rental property in New York State. And when I tell other investors out there, like, what are you crazy? Like New York? You know, But I'm like, but the thing is the fact that everybody says that and yeah, I don't have to compete for these properties like, there's no competition. No one wants them. So I'm getting them at very low prices with very little competition, you know, and so it's like, I went on this side, but then I do have to deal with this, the taxes and logistics and the landlord laws on the other side. But when I weigh it all out, I'm like, it makes sense to do it then, going somewhere where everybody wants to go and there's no headaches and there's no government interference and all that, that annoyance. But then I've got to pay top dollar for it and compete with 50 other investors and. And you know, and then the asset costs more. So it's. It's just a balancing act. Like you said, it's a blessing and a curse. You just got to look at them overall. Is this going to make more sense, you know?
- [31:11]
Harry Arsene
Yeah, I completely agree with you. Yeah, it's. It's the, the headache factor versus the profit factor. So if those balance out well, then you go for it.
- [31:20]
Joe Jensen
When I always say it's like there's no, there's no market that's not good, or is there. Is this people, is it a good time to buy or is it a good time to build or what area? It's like, well, you just gotta do it appropriately for the time and for the area. And that. That'll be different, you know, 10 years ago, like you said, than it would be today. You just. It's how you buy and how you do it, not where or when. That. Those just determine the how and, you know, your approach.
- [31:51]
Harry Arsene
Yeah, yeah, exactly.
- [31:53]
Joe Jensen
And you live in the Seattle area. What made you. Is that why you picked that market? Is it just. It's your backyard? It's what, you know, or why that market?
- [32:02]
Harry Arsene
Yeah, exactly. We. We moved up in 2007. I got a job at Boeing and Engineering. So that's. That's what brought us to the area. I'm originally from California, but I call Seattle my home now. We've been here for 17 years, and we wanted to focus on an area that obviously we have. You know, it's right in front of us. We can see it every day and work in the market. And we've gotten very familiar with the Seattle market. And yeah, we do pretty much all our projects in Seattle. There's a city just north of Seattle called Shoreline, and we're starting to look on the east side as well, which is the Bellevue area. And they're all within like 10, 10 miles of each other. It's a very compact area that's Cool.
- [32:50]
Joe Jensen
So before we go into like some of our final questions stuff, because I want to, I don't want them to be a fire round. I want you to answer them thoroughly. So I give you some time to do that. But multifamily development versus you know, buying an existing asset. I know, I've kind of, we've kind of touched on that a little bit. You mentioned that you're wanting to, to buy an existing asset as opposed to just a development one. You have that in the, the works already or is it just kind of on the radar?
- [33:18]
Harry Arsene
We, we have put offers out on, on value add projects. We're probably being a lot more conservative than some of the people that are already in the game. But yeah, we're, we're actively looking. What we like about that is the shorter timeline. We're still doing development. Like I said, we bought another project that we're breaking ground on or we broke ground on this year and then we're selling the, the 50 unit and we're, we'll be actively looking for another multi family development deal probably the second quarter of next year. But yeah, it's kind of getting a variety. I mean we've, we went from remodels to single family new construction to townhouse development to multifamily development and now we're looking at like multi family value add. It's, I guess we, we like to try everything or we like to do, do a little bit of everything.
- [34:14]
Joe Jensen
And what I'm hearing is your attraction to the value add isn't so much like, oh, I think it'll be a big better asset and better numbers or it'll just work better. It's just like we can do it while we're waiting for this as opposed to just chilling for three years. Yeah, you know, we can do this but also be doing these other things. Even if it's not like, oh, I want it more, the numbers are so much better. It's more attractive. It's just like it's doable. And so we want to not be spinning our wheels and wasting our times because you've got all the resources and the teams and the people to, to tackle it.
- [34:47]
Harry Arsene
Yeah, that's right. You're, you're basically filling your pipeline and then having a varying timeline, essentially.
- [34:56]
Joe Jensen
That's cool. Yeah, that makes a lot of sense because I was going to ask you and obviously haven't done that yet. So, you know, you know, why one versus the other. Which one do you prefer? But when you just look at straight timelines, it really Makes sense to, to do both if you know, if you can. Um, regardless if from what you know about it, do you think you would prefer one over the other? If we remove the timeline aspect.
- [35:22]
Harry Arsene
Yeah, I honestly I, I love multi family development. Yeah. Apart from the profit side of it, it's. I love seeing a building go up from nothing to concept to being realized as like a completed project where people are living and you know, it's, it's, it's a pretty cool thing.
- [35:45]
Joe Jensen
It seems so to me. Like, and again I'm probably pretty ignorant on this specifically but like for the money to be there with today's interest rates. Building brand new, you know, if I look at go, if I go build a brand new house, again I'm just comparing to single family. You know, if I go build a brand new house and try to rent that out compared to buying an old house, even if I don't touch the thing, I don't even have to flip it or rehab it. If I just go buy an old house, I'll get such a cheaper price point that I can rent it out and make it cash flow. But if I go build brand new, not to mention the timeline and I'm in way more capital, way more risk and then the mortgage is going to be so much more because it's such a more, it's worth so much more. I'm not going to cash flow. That's where my brain goes. Tell me how that's what I'm missing. Doing that at scale at a 50 unit where it's not. You're going to be left with this thing that's so expensive that you're not going to make money on it.
- [36:45]
Harry Arsene
Well, that you're starting with deeper margins on a multi family development deal. But I agree with you on the single family side. You can't go and build something from the ground up and make it cash flow. At least not in the Seattle market. Unless you're doing detached dwelling units or attached use which is you get like.
- [37:04]
Joe Jensen
The land for free kind of thing almost.
- [37:06]
Harry Arsene
Yeah. It's. Which is really popular in Seattle. So you can do it. You know, you can sell off maybe the main house and keep the two or three ADUs that you build and, and have a cash flow, positive cash flow and get a good return on your, on your capital.
- [37:21]
Joe Jensen
But with the multifamily the margins are just bigger. There's just more to go around and so you can make it work.
- [37:27]
Harry Arsene
Yeah. And it's a risk too. So if you're, you know, when you're starting, you're in one market. When you're ending, you're, you could be in a completely different market. You have to consider that as well.
- [37:39]
Joe Jensen
So, and you just calculate that all in like, how do you stomach that when you're putting millions of dollars on the line in a volatile environment? Like, who knows, you know, it'll be a different president by the time you're done refinancing this. You know what I mean? It's like how, how do you stomach that? And is it just, you just run the numbers, you have good calculations, you, you project on and you just, that you just send it.
- [38:05]
Harry Arsene
I, I like to run rents at mark like today's market and not, I don't look at like where it's going to be in two or three years. So that's, that's a big factor. And typically rents go up, but also like cost of construction goes up, so you can end up in the same place as far as the, the margins go.
- [38:27]
Joe Jensen
Right.
- [38:29]
Harry Arsene
But yeah, that's, that's how I do it. I don't like to project rent growth on the development side. I like to use today's market, today's costs. And you'll see like the costs will go up, but so will the rental rates.
- [38:42]
Joe Jensen
So this 50 unit one you guys are building, you've already sold it or you already have a buyer lined up, which is pretty cool. Why sell it as opposed to hold on to it? If we go back to our original.
- [38:55]
Harry Arsene
Sentiments of yeah, sure, so like, like I said earlier, we, you can start in one market and you can end up in a completely different market. With the, the fed funds rates being going up over the last two years at the pace and intensity that they did. We, it would be very difficult for us to cash flow the deal without putting more money into the deal. And we've already got so much capital in the deal that it makes more sense to just sell it. Our going in position was to keep it. Okay, so, and that's again touching on another part of real estate that I really like is the, the multiple exits.
- [39:36]
Joe Jensen
Love that.
- [39:37]
Harry Arsene
So we're, yeah, we're positioned to sell for a profit and get our capital back and take on a couple new multifamily deals that now in today's market, if you're underwriting in today's market, you're going to look like a hero in like two to four years because for the most part the sentiment is that rates are not going to go any higher. But there's a pretty good chance that they're going to go a lot lower over the next two years. So if you're underwriting to today's rates, you're going to end up in a really good spot in two to four years.
- [40:13]
Joe Jensen
So if it makes sense for the buyer, why wouldn't it make sense for you? Like if, if the market, the numbers he's dealing with the same environment, the same interest rates, the same loans, how's it going to make sense to this buyer to hold it as opposed to you guys holding it?
- [40:29]
Harry Arsene
Yeah, that's a great question. In this market on the multifamily side, there's been a big push for affordable housing and non profit buyers. So the people that have been looking at our project are non profits and they, you know, it's, they understand that the process is a lot is risky and long for them to go do this from scratch. Yeah, some of them do do it from scratch, but you've got some that want to come in, they want an empty building that they can put their own tenants in. So there's a smaller pool of properties to choose from at that point because you're, you're only looking at new development, you're only looking at vacant buildings. So there's a, there, there is a market for it here and that's, that's essentially who our buyer is for this particular one.
- [41:25]
Joe Jensen
And it sounds like they're probably playing by different rules in a sense where they've got different funds and programs and you know, incentives that the average investor that you personally wouldn't have if they're these non profit doing low, you know, assist, you know, they're probably getting financial support from government agencies and all sorts of stuff, I assume.
- [41:45]
Harry Arsene
Yeah, they have access to lower, lower rate of capital as well.
- [41:49]
Joe Jensen
Yeah, yeah, yeah.
- [41:50]
Harry Arsene
They have access to some to grant, some of them have access to grants. Amazon has a big housing equity fund that they, they're looking to place a bunch of money every year. So they're, they have access to that. I love it.
- [42:03]
Joe Jensen
That's so interesting. That's one thing I love about real estate because you know, I always ask myself that question like, well, if it makes sense for them to buy, why does it make sense for me to keep? But everybody's situation's so different. Their access to debt is different, you know what I mean? And some people are just willing to take a, you know, if you get these big institutional buyers like Blackstone or whatever, you know, they'll be like, okay, we'll take a, a 4% or a 2% when it you know, a small group of investors, we want 20, 30% on our money. You know what I mean? So people just have different priorities and different resources and different capital costs. And it's like every situation so different. It can really be a win, win, win. And it's not like, oh, we trick them. Now they're the ones getting screwed, not me. Which in other industries it kind of almost feels that way. But. But in real estate, it's just, that's not the reality. There's so many moving parts.
- [42:55]
Harry Arsene
Yeah. And that's exactly it. Everyone's got different criteria, so. And some people just want to find a place to park their money. They don't want to keep it in the bank, they don't want to keep it in a treasury. And they figure real estate's a great, well, apart from the, the cash flow. You've got your depreciation, so you're essentially getting a net, you know, zero taxable income from your, from your rental cash flow. So.
- [43:19]
Joe Jensen
Yeah, and finding like say a brand new unit, you don't have to deal with any headache. You can put all nice clean tenants in there. An empty, brand new units. Like you're not going to get something more solid of just like, than that, you know.
- [43:33]
Harry Arsene
Yeah, exactly.
- [43:33]
Joe Jensen
I'm sure that that looks very attractive to the right buyer.
- [43:37]
Harry Arsene
Yeah. Especially for nonprofits and for market rate buyers. They're going to want the property to be stabilized or at least start the leasing activity so that they can see the, the rent projections and there's a path to stabilization. But, but yeah, there's. Everyone's got different criteria.
- [43:55]
Joe Jensen
I love that. Super interesting. All right, let's roll into our final four, man. Real quick though, before we do that, what is the best way for people to keep in touch with you if they want to follow your journey? Pick your brain, you know, maybe partner with you if you raise money. I don't know if you do or not, but what's the best way for people to keep in touch with you?
- [44:13]
Harry Arsene
Yeah, yeah. And we do raise, we do raise capital. We're actively raising for a project now. Arseneconstruction.com or I'm on LinkedIn. Harry Arcene, if you want to reach out that way. And my email is my first and last name at Gmail. Harry arcenemail.com so those are all. And if I don't respond, hit me again because I get a lot of email and messages, so I get buried a lot.
- [44:41]
Joe Jensen
Yeah. Awesome. And our scene is Arsene for anybody listening. So.
- [44:46]
Harry Arsene
Yep. And then Harry H A, R, R Y.
- [44:48]
Joe Jensen
Perfect. Sweet, man. All right, well, we'll roll into this then. So, Final four, question number one. Harry, if you could send a text bomb to the world, you're going to send a message out. Everybody's phone's going to go off. They're vibrating, they're lighting up, they're ringing, they look down. What is Harry's text message gonna say?
- [45:07]
Harry Arsene
Oh, man.
- [45:08]
Joe Jensen
No pressure.
- [45:12]
Harry Arsene
I guess. Enjoy the journey, not the destination. Because that's something that it's been hard for me to do, and I've worked on it over the last few years, is even when things, when things are going great, it's easy to enjoy the journey, but when things don't go the way you planned, you really need to take a step back and just appreciate the moment because it's a learning opportunity. And I've been doing that more and more, and it's. It just. If you see everything as a learning opportunity, it makes life a lot better.
- [45:45]
Joe Jensen
I love that. I love that. All right, what's a book or podcast recommendation you'd have for the listeners?
- [45:54]
Harry Arsene
One that I've gone to back several times over the years is the Seven Habits of Highly Effective People.
- [46:02]
Joe Jensen
Love that one.
- [46:02]
Harry Arsene
Stephen Covey. It's like a basic book, but if you're honestly, it hits all the foundational stuff. If you feel overwhelmed with what you've got going on, you've got too much going on, you don't know how to handle it. That's a really great book to set priorities and focus on what matters.
- [46:24]
Joe Jensen
That's one of my foundational books that I always recommend. That was life changing for me. When you're first, like I said, it's a great. When you're getting overwhelmed trying to prioritize, it's a great reread. When you're in it 10 years, 20 years. But it's also such a good, like, if you don't even know, like, how do I live effectively? Like, you know, it's like, here's the principles. Like, it's a powerhouse book. I. It makes me want to go back and read it again. It's such a good one.
- [46:50]
Harry Arsene
Yeah.
- [46:51]
Joe Jensen
Okay.
- [46:52]
Harry Arsene
What.
- [46:52]
Joe Jensen
What's one of the most expensive or interesting mistakes that you've made in real estate investing?
- [47:02]
Harry Arsene
I guess the. We talked about it earlier, but my first deal was probably the. The best mistake, going from trying to flip it to holding it as a rental, because we didn't. We went in with rosy colored glasses starting our real estate venture. So when we got hit with something that didn't go our way. It made us realize we needed to be a lot more conservative and flexible in our plan. So that was a great mistake, especially on our first deal, because if you hit a home run on your first deal, you start thinking like, oh, I can hit a home run on every deal. So when we stumbled on the first one, it really helped us kind of reset our expectations and reset our criteria essentially. So I'd say that was probably one of the best mistakes.
- [47:54]
Joe Jensen
Hey, I like that. Make us money, you know. That's awesome. Have you ever lost money on a deal?
- [48:04]
Harry Arsene
Yeah, I've lost. I can think of one flip. We lost like 25 grand on. We just got into it, spent way too much money and we didn't come out where we thought we were going to on the, on the back end. So yeah, we ended up losing money on that deal.
- [48:23]
Joe Jensen
But none of the big ones have ever gone south or the market changed so much that you're out fire selling, losing hundreds of thousands or millions of dollars.
- [48:32]
Harry Arsene
No, no, no, no, we haven't. We've actually done a couple of other multifamily entitlements that we ended up selling to a third party buyer. So all the multifamily stuff has done well.
- [48:46]
Joe Jensen
Even if you're like, oh, we don't want to take this to the finish line for various reasons, again, you find someone else whose situation's different, that they're just grateful to take what's already been done, that's take that headache off their plate and then they acquire it early. So you kind of exit a little earlier than you're planning. What's some of the reasons you would do that and why they would want it and you wouldn't.
- [49:09]
Harry Arsene
Yeah, in our case, we, we got an offer that made more sense to get the money now and not have to take the risk of continuing through the full development of the project. So some people might find that hard to understand, especially if you're just starting out. Because I, I remember a time when somebody said something similar where they developed or entitled a project and then they ended up just selling it. That's like, well, you're going to make the most money when you build it and stabilize it or build it and sell it after that. But that's not always the case. You don't know where you're going to end up. So if you're getting a great offer now and you're happy with it, why not exit and just move on to the next deal? Yeah, and it really depends on circumstances. I think it was a good time for us to sell, and it was a great price, so it made it aligned. And we had other deals that maybe were taking longer at the time, you know, the stars align, but in the end we got a great price. And I was like, yeah, let's totally exit this deal now.
- [50:15]
Joe Jensen
How far in the process were you. Had you got the entitlements done, just no foundational work?
- [50:20]
Harry Arsene
Yeah, one of them, we essentially were like a month or two away from getting fully entitled. And another one was probably. There was maybe five or six months left in the process, and there was another builder that really wanted that land. And so they. They paid us more than what we thought it was worth. And so we, We. We ended up exiting.
- [50:44]
Joe Jensen
That's cool. Yeah, that's interesting. All right, so last question, Harry. What is a one word or short phrase to encapsulate why you love real estate investing?
- [51:00]
Harry Arsene
That's a tough one. It's one word or phrase, I guess, going back to what I was saying earlier. I don't know if I could put it in a word or phrase, but watching something. Watching something go from concept to reality on such a big scale. So, yeah, I guess realization, if I have to pick a word, like realizing a project from concept to completion, that's cool.
- [51:31]
Joe Jensen
And. Yeah, and then projects, you're doing these big multi families, you know, that's got to be so rewarding. So cool. Like I said, I can only imagine, like seeing that asset there when before it was just dirt that wasn't even allowed to be built on, you know, and now it's like, look at this thing.
- [51:47]
Harry Arsene
Yeah, it's pretty sweet.
- [51:49]
Joe Jensen
That's cool. I'm sure you love being able to drive around and like, I did that, you know, it's pretty sick. Awesome, man. Well, this is super cool. Any final thoughts for us before we let you go?
- [52:03]
Harry Arsene
No, I just want to say thank you for having me on, on your podcast. I really appreciate the time.
- [52:08]
Joe Jensen
Yeah, absolutely. Really grateful for your. Your input and your expertise in such a, you know, unique area of develop. I don't know if I've interviewed any somebody that builds ground up multifamily, so this was really cool for me. So I appreciate your time.
- [52:22]
Harry Arsene
Yeah, thank you.
- [52:24]
Joe Jensen
This is Joe Jensen signing off for the Real Estate Investor school podcast, reminding you to go build something great.