Ground-Up Development vs. Value-Add, With Joel Fine

Ground-up development and value-add projects can both present exciting opportunities for passive multifamily investors. Still, there are key differences to consider when evaluating these types of deals.

Joel Fine, Managing Partner at Lakeline Properties joins the show to discuss.

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Episode Highlights

  • What key factors passive investors should consider when evaluating ground-up multifamily projects vs. value-add.
  • Why Texas, and Austin specifically, is such an attractive market for multifamily real estate.
  • How ground-up development and value-add projects present sponsors with different challenges.
  • The impact of inflation and rising interest rates on multifamily real estate deals.
  • An overview of Joel’s multifamily strategy, and his thoughts on current trends in multifamily.

Featured On This Episode

Today’s Guest: Joel Fine, Lakeline Properties

About The Multifamily Investor Podcast

The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses passive investment offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.

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Show Transcript

Scott: Hello, and welcome back to, the podcast. Scott with you here, once again, and really looking forward to today’s episode, because we’re going to be talking about ground-up developments versus already existing assets, talking multifamily and so much more. And joining me to offer his insights is Joel Fine who is the Managing Partner at Lakeline Properties. Joel, welcome to the show.

Joel: Thanks so much. I appreciate you having me on, Scott.

Scott: Well, absolutely. Thank you for being here. As I said, today, we want to talk about a lot of different things with multifamily. But to kick things off, I like, sort of, a high level question. So what’s your overall multifamily strategy? What do you look for in projects?

Joel: Yeah, so I do, actually, a mix of value-add multifamily and development from the ground up. So on the value-add side, I’ve done six deals now, all in Texas, about two-thirds in Austin, one-third in Houston. And most of my stuff is what you might call Class B-minus to C-plus assets.

So a little bit older, say 1970s to ’80s products. I like to find opportunities to create value in those properties. Meaning, I like properties that have some problems, some issues, whether that’s outdated decor or management problems, maybe some delinquent tenants that the current ownership hasn’t gotten around to evicting.

You know, some kind of issue that we can solve, and thereby create value and increase the performance of the property. On the development side, most of what I’m doing is around the Austin area. I’m not doing much…I’m not really doing any projects inside of Austin itself, but more of the path of progress. So I’ve got one apartment build that’s a little bit east of Austin, one subdivision I’m working on that’s south of Austin, another townhome project, about 200 townhomes, little further south of Austin, I’ve got something going in Waco now.

And there, what I like to look for is, again, just opportunities to create value. You know, the projects we’re working on, the land, unimproved is relatively inexpensive to what we can make it worth by improving it. by putting structures on it, mostly multifamily, but also some single family and some other things going on.

So, you know, when we acquire a piece of property, we would try to figure out what’s the highest and best use, looking at the neighborhood, looking at the area. And from there, we determine what we’re going to do with it.

Scott: Absolutely. And I want to dial in on this because I just find it so interesting that you sort of have this, you know, you have value-add, but then you also have development projects. And for our listeners who are, you know, passive, high net worth investors, evaluating potential deals, I’m curious, your perspective, on maybe, you know, some of the key elements that passive investors should consider when they’re looking at something that’s a development versus that value-add.

Maybe, what are the different considerations there?

Joel: Yeah, so specific to that decision of development versus value-add, development, I think, is a little bit riskier in the sense that the potential outcomes can vary more than with value-add multifamily. Value-add multifamily, you can do a lot of very detailed analysis that can hone in on the likely performance of the property.

The property already exists, it’s already getting rents.

Scott: Right, you’ve got rent rolls already, you’ve got a lot of infrastructure already, right?

Joel: Yeah. During your due diligence, you can see exactly what the condition of the property is. You can also look at the comparable properties in the neighborhood. Let’s say you’re going to do a particular kind of upgrade to get the property into better shape, there’s a good chance that another property nearby is going to look a lot like what you’re planning to turn your property into.

And so you can look at that property nearby and say, okay, that’s getting so much in rents, therefore, when I improve my property, I can get this much in rent. So there’s a lot about what value-add multifamily that’s relatively predictable. With development, there’s a lot more variables at work that can really change the outcome. For example, you get entitlement risk. When I buy a piece of bare dirt, I may want to put multifamily on it, but if I’m in a jurisdiction that is not interested in multifamily, if it’s not zoned for multifamily, I may have a problem on my hands, I may not be able to use it for that purpose.

And I may have to come up with some other use for the property. So that’s what I mean by the outcomes can vary. And then of course, even if I get the approval of the relevant authorities, there’s other fundamental questions. For example, getting utilities to the property. Power, water, and sewer are the three key ones.

I need to make sure that I get those utilities and I get them in sufficient volume and quantity to support the usage I’ve got in mind. Construction. Timeline in construction can vary a lot. We may aim for a two-year build on something. But if we’ve got supply chain issues or if we have trouble getting the right contractor in place at the right time, that timeline can stretch out considerably.

And during that time, I’m not collecting any rent on the property, there’s no renters, there’s no tenants on the property until I’m done building. Again, very different from value-add multifamily, where, let’s say, if you’ve got a 200-unit, you’re renovating 10 units, the other 190, presumably, are still available and rented with maybe some level of vacancy.

But by and large, you’ve got a pretty reasonable cash flow coming in to cover the debt payments, the expenses while you’re renovating that handful of units that’s vacant. Again, with development, you just don’t have that, you don’t have the support of an ongoing stream of cash flow to cover any issues or incidentals or delays on the project. So again, it’s a little bit higher risk.

Now, on the flip side, development projects tend to pay better.

Scott: Right.

Joel: By and large, my value-add multifamily will aim for about 14% to 17% IRR, internal rate of return. That’s about what our limited partners can expect on a typical value-add. On development, I’m usually in the 18% to 21% range. And of course, you know, with both kinds of projects, if things go well, you can exceed those returns. But for the most part, you know, 18% to 21% is what we target.

And so, we’re rewarding our investors for being willing to take on that extra risk, for being willing to forego the cash flow that comes with the value-add multifamily. So, you know, for an investor, investor has to decide what their tolerance for risk is, where they want to be on that risk-return spectrum.

And especially, it can be a good diversification play for investors who have the wherewithal to invest in multiple projects. You know, I would encourage people to consider not investing all in one or the other, value-add versus development, but maybe spread it across those two categories. And that way, with the diversification, you can get a mix and reduce your risk a little bit while boosting the returns.

Scott: Right. Is that kind of your strategy? Because your portfolio does have, you know, both value-add and the development. So, when you’re eyeing projects, are you kind of always evaluating, “Okay, how will this change the overall risk of my portfolio?”

Joel: Oh, absolutely. I do that constantly. And in fact, I do it for more than just the projects that I sponsor. I do a lot of passive investing myself in other people’s deals. And I use that passive investing to diversify myself in ways that I maybe can’t do on those deals that I sponsor.

So, for example, pretty much everything I do on the sponsorship side is in Texas. So I do a lot of passive investing outside of Texas where I have less expertise, but I can rely on other sponsors who do have knowledge of those markets. So, I think my passive investments are now in 13 different states.

Scott: Oh, wow. Nice.

Joel: And across different asset classes that I don’t participate in. I’ve got some storage, I’ve got some industrial service facilities, I’ve got senior housing, that’s all in my passive portfolio. I haven’t sponsored any deals like that. And I may or may not sponsor a deal in those asset classes at some point in the future. But for me, that’s a really good way to diversify.

So if one of the geographies that I’m in has trouble or one of the asset classes that I’m in stumbles, again, I’ve diversified and I’ve reduced my risk as a result.

Scott: Right. Right. That makes so much sense. I’m actually curious because we are talking about markets. Are there any markets, maybe Texas is one, that you particularly like, and what do you like about them?

Joel: Yeah, so I like the markets that are business-friendly, that are landlord-friendly, that understand how and why capital gravitates to a particular location. You know, if an area for region allows the market to provide incentives for people to build, develop, and improve properties, for me, that’s a real…

I guess you’d call it a green flag. It’s what I look for in a market. And those markets, by and large, at least currently, are attracting net in migration. So Texas and Florida are really the two examples that most people look to. There’s other states as well. But Texas and Florida, in particular, are fairly business-friendly.

And there are just floods of people coming in from places that are a little more hostile to business profit landlords. I’m based in Austin, Texas, and we’re just getting a ton of people from California, you know, New York, Illinois, these places that just make it a little more difficult to do business, they’re very high cost of living, high taxes, expensive properties.

So that net in migration provides a really nice tailwind for our projects, in the sense that there’s this boost to demand. So, at the moment, at least, we’ve got this imbalance of supply and demand, where the supply just isn’t quite keeping up with demand.

And as a result, prices are increasing, rents are increasing. And, you know, that’s difficult for tenants, difficult for people who want to buy, but it’s a great opportunity. And it’s a fantastic price signal to people like me to build more. And so that’s what we’re doing is we’re satisfying that demand with the developments we’re doing.

Scott: Right. And it’s true that really, across the country, we have a housing shortage, we need more housing. So that’s where I think there’s that great… sort of that philosophy of do well by doing good. And so adding that housing, which is so desperately needed and filling that need, and then of course, there’s the opportunity there, right?

Joel: Yep, absolutely. I mean, it’s all about the free market. You know, the free market will solve this problem, if given enough time. Just allow people like me to continue to satisfy the demand, and we’ll get there.

Scott: Absolutely. Can you tell me a bit more about your capital base? You know, who are your investors? And what do their goals tend to be when they decide, you know, “Hey, I want to hitch my wagon to Joel and what he’s doing?”

Joel: Yeah, so initially, when I started out syndicating most of my investors, really all of them were friends and family, people I knew. I had a long career in high tech and knew a lot of professionals, you know, engineers, managers, executives, few entrepreneurs. And so when I started sharing with them what I was doing with my real estate journey, they were interested.

A lot of them reached out to me and said, “Hey, I have often thought about investing in real estate, never really knew how.” And so after conversations with them, they decided that the projects I’m working on were good targets for their investment strategy. So that’s how it started out. Since then, there’s been a lot of referrals, a lot of other folks that I’ve met along the way. Syndications, in general, tend to be fairly what you might call a retail business, in the sense that it’s very individual, one-on-one relationship-based, you know, based on people that you know directly.

For people to invest passively in a syndication, like the one I run, there needs to be a very high degree of trust. Passive investors need to trust the syndicator to do the right thing, to find good properties, to analyze them well, and then, of course, to execute on the business plan, whether that’s a development or a renovation.

And so, because of the need for that high level of trust, it really is based on those individual relationships. So, I moved from California to Austin about two years ago. A lot of my investors are back in California where I lived before. But I’ve got a lot of new people that I’ve met over the course of my time in Texas that are now investing with me.

And I’ve worked hard to build those relationships. So, I go to a lot of coffees with people just, you know, to talk with them one-on-one about their investing strategy and how…you know, whether their investing strategy is a good match for what I do. I actually run a Meetup here in Austin. Once a month, we get together and educate people on multifamily. I do that mostly just to provide value to the community, to give education, but also to help develop those relationships, and for people to see me and know me and, sort of, recognize my knowledge and my authority in this space.

So the Meetup has been going really well. We get, you know, 60 to 80 people every month, gathering in a restaurant, and we’re all just learning about multifamily investing. So that’s been a fantastic source of new relationships for me. So it’s kind of a long answer to your question, but the nut of it is, you know, my investors tend to be people that I know and have individual relationships with.

Scott: Right. And that makes so much sense too, because that communication aspect is also so critical from, you know, the GP side and for the investors as well, in kind of understanding, you know, how… you know, I always say do your due diligence. And if you’re going to be talking to someone who’s running a deal, making sure that they’re there to answer those questions and kind of really lay it all out, right?

Joel: Oh, absolutely, yeah. And for most investors, the key decision point is going to be that the trust that they have for the syndicator, for the sponsor. The phrase that I’ve heard many, many times is bet on the jockey, not the horse. You know, investors know and understand and trust the sponsor, they may or may not have anywhere near that level of understanding of the assets or the business plan.

So if I present, let’s say, a particular apartment complex, and I say, “Hey, this is the condition of the complex, this is what we’re going to do with it. And these are the numbers that we think we can get out of it,” investors, you know… some of my investors kind of gloss over that. They don’t really dig into the numbers very deep. They just know, “Hey, it’s a project Joel is doing. I trust Joel. I’m going to be in that one.”

So, again, that’s really essential is just to make sure that the communication is there and the trust is there.

Scott: Right. Absolutely. And that makes sense too, especially when, you know, we were talking about developments, where maybe there’s a little more risk there, kind of just being able to trust that, “Yep, there’s a little more risk here, but, you know, we may be happier by the end,” and trusting you to sort of navigate all of that. When you look at the multifamily landscape currently, what are some compelling trends you’re seeing, when you look across the projects you have and what you’ve seen from others?

Joel: Yeah, so I think there’s really, I think, two big global trends at the moment. One is this mass migration of people, generally from the coastal and northern states to the interior and southern states. And of course, Florida is an exception to the interior.

But really, you know, between Texas and Florida, there’s just so much net in migration that’s really driving a lot of the elements of the business now. Rents are rising, prices are rising. And there’s a lot of folks who are working their way towards providing more housing and more options for people.

And it’s really driven by this migration pattern that’s happening. And I think, if anything, the era of COVID, which, you know, hopefully is kind of coming to a close now, but that really accelerated it, because there’s just all these thousands of people who suddenly became remote teleworkers that weren’t before. And so, they went from having to be local and nearby the office that they worked in to their location being completely irrelevant to their job.

And so that loosened a lot of people. You know, it broke one of the connections that they had to their region. Of course, not everybody…you know, lots of people still had other connections, relationships, family, friends, and so forth. But without that constraint of having to be near work, that changed a lot of people’s trade-offs when deciding where to live.

And so that’s one of the things that’s been driving this net migration into Texas and Florida. The other thing I’m noticing, and this is a little bit more recent, is that the era of inflation and rising interest rates seems to be really upon us now. I don’t even know if I’d call it creeping up anymore.

Scott: Yeah, it feels like it’s here.

Joel: It does. And that’s, I think, going to have a… it’s beginning to have an impact. And it’s going to have an ongoing and profound impact on everything, and especially on real estate. You know, the interest rate for debt is one of the most important numbers that goes into any analysis of a project.

And so, as the interest rate changes, if it changes, let’s say, from 3% debt to a 4% or 5% debt, that can really fundamentally change the equation, change the payoff, and therefore the value that a potential buyer can ascribe to a particular property. So, that’s going to really change how people do their underwriting and what kind of numbers they come up with, and probably will affect the supply-demand curve in pretty significant ways.

On the flip side, accompanying that rise in interest rates, so really driving the rise in interest rates is inflation. And inflation is also, kind of, behind a lot of the changes we’re seeing. So, for example, on the development side, we’re seeing much higher prices on all the raw materials we use, lumber, steel, and so forth, as well as the labor that we depend on.

And, you know, that’s creating some issues. But on the flip side, that’s also going to drive, I think, higher rents, which will be a nice offsetting parameter for our analyses. So we’re going have, on the one side, higher costs of doing business, on the other side, higher revenue.

And it’s hard to see…it’s hard to predict where that’s going to shake out. On balance, maybe it’ll end up even. Maybe the, you know, rents will rise at about this rate that the costs are rising. But because of… That creates uncertainty that wasn’t there before, where, you know, lumber might jump 20% in a week, we can’t adjust rents that quickly.

Scott: You can’t just say, well… Lumber is more expensive, so we’re just going to adjust this one week.

Joel: Exactly, yeah, people have one-year leases, people have jobs, and so, they can’t necessarily, you know, afford a rent increase that matches the price of lumber. And so, what this means is that prices of different things are going to move at different paces. So even if rents and costs rise in parallel, in similar fashion, and it all shakes out in the wash, in the meantime, there’s going to be some disruption because of the relative imbalance and the different pace at which these prices can change.

Besides just the general increase in prices and interest rates, it’s introducing a new set of risks and uncertainties in every project.

Scott: Do you find that this current landscape may impact either development or value-add projects more than the other? Or does it all just kind of…they’re all just various challenges that need to be navigated? Or does it take perhaps the development risk profile and raise it more significantly than maybe a value-add project?

Joel: Really hard to tell. I mean, it could affect development more significantly than value-add, or it might not. Again, it’s going to depend on where prices rise and how quickly and, you know, in what sequence. If my cost of raw materials rises a lot faster than rents rise, then that’s going to have more of an impact on development.

On the other hand, at the moment, rents, at least in the areas that I’m building, in the Greater Austin area, are really jumping through the roof, they’re going up very quickly. And so, you know, maybe that’ll cover the cost differential. So, hard to predict, you know, which will be more profoundly impacted.

Scott: Absolutely. If there’s a would-be passive investor in multifamily who’s sitting on the sidelines, maybe they’re unsure, they’re concerned about risks, you know, maybe they’re concerned of, “Oh, is there going to be, you know, another downturn in the housing market,” whatever, I’m curious, what might you say to them, to encourage them to really consider multifamily real estate as part of their portfolio and really consider maybe having some conversations and exploring it?

Joel: So I guess the first thing I would point out is just the only time you’re ever going to get certainty is in the rearview mirror. You’re only going to be able to be confident of what will happen is after it’s already happened. There’s no time ever where one could have said, “Hey, times are not uncertain now, I know for a fact, things are about to get better.”

You know, you have to just accept the fact that there is risk, there’s uncertainty. And so the decision to be made is, is this an asset class… is this a type of investment that matches the sort of risk return profile that you’d like to take on? You know, lots of folks have money in the stock market. And I would encourage them to consider real estate as a way to diversify their portfolio and have exposure to a kind of investment that may move in a way that’s unrelated to the stock market so that, you know, if one kind of asset class struggles, the other kind can make up for it in their returns, in their portfolios.

So, you know, there’s a few things I like to encourage my investors and potential investors to consider. One, we’ve talked about a lot already is the risk. There are definitely risks in any of the projects I do, and especially in the development projects. So, I like to be transparent and share those risks and make sure people understand that if they invest in one of my projects, it’s not risk-free, even though we do everything we can to mitigate those risks.

The other thing I like to make sure people understand is that the timeline is fairly significant. You know, most of my projects are in the range of three to five years. And so, if people invest with me in one of my projects, they have to be investing money that they can afford to see locked up for three to five years.

Now, hopefully, at the end of that period of time, they’ll get a really nice return out of that. That’s the whole point of my business and my business plan. But they have to understand, you know, if this is grocery money, if it’s money that they think they’ll need for, let’s say, a major purchase in six months or a year, it’s not appropriate for this kind of investment. This is more for really long-term wealth building.

And, you know, sometimes even retirement money, you know, people who are putting money into 401(k)s and self-directed IRAs can redirect that money into projects like the one I do. And for me, that’s kind of… that’s the perfect kind of money because somebody who’s, let’s say, in their 30s or 40s, if they’re saving money for their retirement, that’s money that they shouldn’t be expecting to touch for 20, 30 years.

And so, a three to five-year time horizon on any given investment, no big deal. The other thing I like to make sure people understand is the control aspect. When I take on limited partners, they are passive investors. I try to keep them informed, but they really don’t have any decision authority. You know, as a sponsor, I’m doing the work, but I’m also making the decisions about the property.

And the decisions range from, you know, the day to day, what do we do with rents in a particular property, which units are we going to renovate and at what level, to the really impactful, like, “Hey, are we going to sell this asset this month? Are we going to wait for six months and see what happens with the market? Or maybe we refi and hold on to the asset for a while longer.”

So those kinds of decisions, those are really the domain of the sponsor, the sponsor is going to make those decisions. And so, any of my investors have to understand that they’re in it for the ride, a little bit like a stock. You know, if somebody buys stock in Facebook or Google, they’re not going to be in a position to, you know, call the president of one of those companies and say, “Hey, [crosstalk]…”

Scott: They can’t call Mark Zuckerberg.

Joel: Exactly. They can’t call those guys and give them advice on their business strategy. They can call me and give me advice, but, you know, I may or may not take that advice. And so, they just need to understand that it’s passive, just the same way as stock is passive.

Scott: Right. And I think that also ties into what you were talking about earlier, is that trust, that if folks are investing with you, there has to be that trust that you will choose the best path and the best projects and you’ll draw on your experience and your knowledge to deliver them the returns they’re looking for, right?

Joel: Absolutely. Yeah. And, you know, I try to stay in touch with my investors as much as I can. You know, I send them updates on the properties every month or two. I welcome, you know, their phone calls or questions. They can set up a Zoom with me or grab coffee, if they’re local, and talk about it, which is definitely a major advantage over, let’s say, they’re investing in the stock market where, as we just discussed, you’re not likely to be able to get Zuckerberg on the line.

But I’m happy to engage in conversations with my investors and hear them out and answer their concerns.

Scott: Absolutely. And to that end, since we’ve kind of reached the end of this discussion here, if folks do want to find out more about what you’re doing, connect with you, where can they do that? Where should they go?

Joel: Yeah. So I’d be happy to talk with folks. They can go to my website,, L-A-K-E-L-I-N-E, Or they can send me an email, [email protected], and I’m happy to chat with folks.

Scott: Fantastic. Thanks again so much for joining me, Joel, and really offering some great insights, especially when we’re talking about development versus value-add. Really appreciate it.

Joel: My pleasure. Thanks for having me on, Scott.