Real estate is continuously evolving, and one area that is prime for innovation is construction.
In this episode, Mike Angelo discusses what they are doing to usher change and challenge the status quo in the development world. Mike is the founder of NK Development Group which focuses on large multifamily (apartments) and ground-up development. He gives the nitty-gritty on industrialized and prefabricated construction and the challenges and opportunities in the sector. He also shares his journey as an investor and how he's able to grow his business.
[00:01 - 09:27] Exiting Corporate America and Entering Multifamily
- Becoming an investor after being let go of the company he's working for
- Mike talks about his first deal
- How they were able to raise capital
- Breaking down the deal structure
- Hitting their business and personal financial goals
[09:28 - 19:31] Bringing Innovation to Development
- What Mike and his team are doing to build better properties
- What are industrialized and prefabricated construction?
- Balancing quality and affordability
- The importance of speed to market
- Why vertical integration is key
- Navigating local codes and regulations
- Mike discusses the projects they're working on right now
- Lessons Mike learned in his journey
[19:32 - 20:40] Closing Segment
Tweetable Quotes
"We're trying to break the rules here and do things differently. We've had traditional home builders doing stick frame building forever. And it's an antiquated process." - Mike Angelo
"We have so much technology around us, but construction really hasn't innovated. And so we're trying to push those boundaries." - Mike Angelo
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Want to read the full show notes of the episode? Check it out below:
[00:00:00] Mike Angelo: in order to break the mold, you got to challenge the status quo and the reason we should challenge it is the profitability. Once you build some of these projects, you're in single digit margins, which is highly risky, especially going into the volatile world where we're now shifting into. How do you increase those margins and also build maybe a lower cost product because the affordability factor is also a challenge.
[00:00:32] Sam Wilson: Mike Angelo's a full-time real estate investor focused on value add multifamily and ground up development across the Southwestern United States. Mike, welcome to the show.
[00:00:41] Mike Angelo: Hey, thanks for having me, man. Super excited.
[00:00:43] Sam Wilson: Pleasure's mine. There's three questions I ask every guest who comes in the show: in 90 seconds or less: can you tell me, where did you start? Where are you now? And how did you get there?
[00:00:50] Mike Angelo: Awesome, man. Started in corporate America. I was an executive sales leader for the last 20 years. Basically we worked for the construction supply world, so working on selling stuff to contractors, I love the job. I love the people, but it was brutal and I was trying to find a way out.
[00:01:03] Mike Angelo: And my, my exit came in 2019. I got the pink slip and, and a severance package and I said, okay, what do I do now? And I knew for sure it wasn't going to be another corporate job. So, I had been researching real estate multifamily specifically jumped right in convinced my wife to support us for the next couple years until I figured it out.
[00:01:19] Mike Angelo: And today we are I don't know, about 50, 50 plus million in assets, under management, couple of projects that we've closed. Now, couple more projects in the works as we speak, including a ground up development deal. And it's been fun, definitely wouldn't go back, but it's definitely been challenging at the same time. So, we love the space. We love trying to provide housing, but yeah, it's not easy. It's competitive out there.
[00:01:41] Sam Wilson: Jumped right in. I mean, it's one thing to be like, Hey, by the way, you're fired. And then you said, I just jumped right into multifamily as if there were a pool of water there waiting, you know, for you to leap into what can you, what does that mean? And how did you jump right in?
[00:01:55] Mike Angelo: I think the biggest thing was listening to podcasts like yours and there's a, there's a group out there. Life Bridge Capital, Whitney Sewell. If you heard of him, I'd been listening to him. And I had, it was just eye opening to go, you know, my real estate experience was consistent of two flips in 2007.
[00:02:09] Mike Angelo: It's all I had. And, and he's talking about buying apartment buildings with, you know, syndication process, pulling, you know, investors together and being able to do this. And it's such a, I always thought the country club guys, or the big corporate America or, or who own apartment building. And so once I realized that, one, it was possible, two, you know, I could do this.
[00:02:26] Mike Angelo: It's not rocket science. What, what do I need to do? And it was just go, go for that. The numbers made a ton of sense instead of, you know, buying a duplex or a triplex and just trying to move my way up. I said, I have to find the quickest path to replacing my corporate income and it wasn't going to be through small projects. It had to be, you know, 50, 60, 70 units at a time.
[00:02:43] Sam Wilson: How did you find and acquire your first property?
[00:02:46] Mike Angelo: Lots of digging around. It was actually kind of by accident, to be honest with you. We, we were under contract on a deal in Albuquerque in New Mexico and another city's called Las Cruces, a couple of hours south of there.
[00:02:56] Mike Angelo: And I just didn't know anything about the market other than I had been there a little bit. And I just randomly found a broker on LoopNet, which is the worst place to find deals, by the way ,but great place to find brokers. And I saw his name and I just called him cold call and said, Hey, I'm, I'm going to be in town.
[00:03:10] Mike Angelo: Do you have anything that's coming up? He's like, yeah, I'm getting ready to list a 60 unit deal. And great. Send me some info, would love to take a look at, underwrote it, said, ah, it looks interesting, but I'm going to focus on my energy on the other one. The other one fell through, unfortunately. And then I circled back to him about a month later.
[00:03:23] Mike Angelo: I said, Hey, is this still available? He said, we're getting some traction, but, you know, put an offer in. Put an offer in, got it accepted. And it took us four months to close it, just working through the nuances of our first raise and all that kind of good stuff. But yeah, we got that done in May of '21. So just a, a little over a year ago.
[00:03:38] Sam Wilson: Man, that's awesome. That is absolutely awesome. You know, tell me about this. I mean, going through your first capital raise, I mean, that's the two things and I, and I say this over and over play a broken record on this show, but you probably don't know that. You know, the two things we need this business are money and deals.
[00:03:52] Mike Angelo: That's right.
[00:03:53] Sam Wilson: You found the deal. How did you solve the money side of it?
[00:03:56] Mike Angelo: So fortunately, through, I did get some education in multifamily by the way. So I didn't just listened to podcasts. I went and got formerly educated and I found a couple of folks to help us get the deal done. So one, Michael, my partner, he had some ability to access capital and, you know, the rest of it was us hustling.
[00:04:10] Mike Angelo: It was him and I calling our friends and family and, fortunately, it wasn't the first time, you know, our folks had heard about us doing real estate, but this was our first deal. So everyone's always like, Hey, when you have a deal, call me. And so sure enough, if that list is a hundred people, they're like, ah, I can't I'm I'm tied up right now.
[00:04:26] Mike Angelo: Or, or there was always some excuse. It's always the first one, right? It's a challenge. So, it was a struggle, but we got it done. We raised just enough money to, to get our CapEx deal, our fees and all that kind of good stuff, but a sprint to the end call it. But definitely not easy. And fortunately through that same network, and I think the network is everything in this business.
[00:04:43] Mike Angelo: You know, we found our key principal to help us sign on the note, 'cause not only do you need the money, but you got to have liquidity, net worth, experience. You know, we got a, a Fannie Mae loan and Fannie just doesn't loan to anybody that wants, you know, to buy an apartment building.
[00:04:56] Sam Wilson: Right, right. And so it was through, it was through your network that you had joined. It's not like you joined a mentorship group, which there's lots of 'em out there, but where, you know, lots of people putting their heads together and saying, Hey, you know, we can find the key principal here that can help you sign on the loan. We can have the experience, you know, check box, check by this person coming on as a, as a KP in the deal. How much deal equity do you feel like you gave away? Or what did you give away in order to make sure that all of those right people were on the right seats in the bus in order to get the deal done?
[00:05:26] Mike Angelo: So our first deal, we were just like, we got to do whatever we can to get it done. I think, as I've talked to other folks that have gone through my shoes, you know, they've given 50, 60% of the deal away to, to get it done.
[00:05:35] Mike Angelo: We were very blessed that we didn't need to do that. It was in the thirties, but we did all the other work. So the person that was on our, you know, our key principle for the note liquidity. 30%, everything else we did. And so it's an awesome deal. Our investors are, are super happy right now. The one thing I will say is, man, we structured that deal for, to be very investor friendly.
[00:05:54] Mike Angelo: And now that it's crushing it, we're like, man, we'd love to get a little bit more of that on our side. That's okay. It's good. It's a good story to tell because our investors are, are now repeat investors, right? And that's what you want.
[00:06:03] Sam Wilson: Right. Tell me about the the way you structured that deal. Can you, can you give us the specifics on the structure of it and how you maybe want to do it differently next time?
[00:06:10] Mike Angelo: In the syndication world, you usually hear kind of 70, 30. The limited partner gets 70% of the deal. 30% goes to the house. We did a preferred return of 7% and basically we didn't do any IRR hurdles or any of the stuff. I didn't even know what the hell IRR hurdle was when we were first doing it. So, you know, this thing is cash flowing at like 9% or 10% now. So we're getting a little bit of the scraps, but it's all good. And we've been able to hit our, you know, three year business targets in year one, we just did our first year.
[00:06:37] Mike Angelo: And so, you know, the market has definitely helped . So everyone looks to be a hero at this point, but we've been able to find a deal that was under market from a rent standpoint and push it. So, yeah. And we'll do the same, I think, on the rest of the future deals, it's similar. We're just putting in a few more hurdles. So once we hit like a 19 or 20 IRR, then the split changes a little bit. But it's very nuanced buy deal.
[00:06:57] Sam Wilson: Right, no. Understood. Understood. I just, you know, I've, I've had people come on the show that, you know, had given away 90%, they're doing 90 10 splits on their first deal, just 'cause they're like, man, I don't care if I don't make a dollar on this or maybe I that's all I make is a dollar. I just need to get the first one done. And then, you know, we'll worry about, you know, making profit later on. We just want to take care of our investors and get a deal done.
[00:07:19] Mike Angelo: I challenge that model by the way. Because here's the thing. If an investor's giving you money, they expect you to work for that. That, that is how you're also getting paid. And so you're, you're now you have to be a fiduciary for these guys, and if you're only getting a dollar, how motivated are you to go work on this deal? You have to, it has to be equitable for everybody. And we're very transparent about that. And, and our investors are good.
[00:07:42] Mike Angelo: You know, they're good with it, you know. Do they love our three and half percent AC fee? No, but Hey, here's what you're getting for that. And, and I think that's critical 'cause everyone needs to make a good amount of money to support the 'cause it's a lot of work. This is not like, Hey, we bought a building, the PM now does everything. We do nothing. No, that's absolutely opposite.
[00:07:58] Sam Wilson: Right, absolutely. On the topic of money, one of the things that you set out to do in the multifamily space was to replace obviously the income that you had before. Have you been able to achieve that yet?
[00:08:10] Mike Angelo: This year, we will. I will hit that target. So it took two and a half years, two and a half years. So it wasn't pretty, it wasn't pretty along the way. My wife has a full-time W2. Thank goodness. And, and I think I mentioned, I had a little bit of a severance package and I followed the Dave Ramsey method. So we had some cash in the bank for that rainy day fund and it worked, you know, thank goodness.
[00:08:29] Mike Angelo: So you know, we've depleted through a lot of that and you know, this business takes working capital. So there's a lot of that, you know, get it in, get it in, and then you got to wait till, you know, the deal closes and get it back out and then return it. So this year, we'll hit that number. So we're halfway through 2022 and I'm happy to say I was hoping to hit that target last year, but, you know, we didn't close enough deals.
[00:08:49] Sam Wilson: Right. No, man. The reason I bring that up is because, you know, a lot of people either have unrealistic expectations, you know, when they jump in and some people do. I mean, certainly we've had the people come on the show that are like, Hey man, a year ago, you know, I got fired from my job and now, you know, I'm making seven figures a year and you're like, wow, good for you.
[00:09:06] Sam Wilson: Like, you know, it can happen. But that's the exception that proves the rules, is that the right way to say that? I don't know. Anyway, you get the point where it's like, Hey, this is a, get rich, slow game, and it takes time to build your nest egg, to build your team, to build your properties.
[00:09:19] Sam Wilson: It's something that, you know, I like to talk about that because it gives some realistic expectations for people that are looking to get in and grow that this takes a lot of time. So, you know, thank you for being willing to share that. We talked a little bit off air about development and development deals. Tell us what you guys are doing on the development front, how you finding opportunity there and why development.
[00:09:39] Mike Angelo: Great. Awesome. So, when I left the corporate world, the first thing I wanted, I always wanted to be a developer. I just had no business doing it 'cause I didn't know anything about it other than, you know, they need stuff to build it.
[00:09:48] Mike Angelo: So, you know, we, we said, Hey, let's do multifamily value add first. Let's build a cashflow, let's build a resume. And let's pivot into development 'cause as we, you know, being in Phoenix and is one of the hottest markets in the country, you buying value add deals, there's a kind of per unit cost and that those are trading for, and those are 1970s, 1960s even properties.
[00:10:06] Mike Angelo: Here trading for about two 50 a door, right? Yeah. Yeah. So, you know, when you look at the replacement costs and you look at, you know, ground up construction, Those are similar costs per square foot per unit however you want to look at it. And so then the math, you kind of scratch your head, go, I can build something brand new, rent it for at least a few hundred dollars above value add deal.
[00:10:26] Mike Angelo: Yes, it takes me two years, two and a half years to build it, but that makes a lot more sense. And the yield is, you know, very good. And so it's just a different way to look at the same problem, which is we don't have enough good housing. And so that was our kind of mantra. Say, we got to figure that out.
[00:10:40] Mike Angelo: And then I'm trying to break the rules here and do things differently. We've had traditional, you know, home builders doing stick frame, building forever. And it's an antiquated process. You know, we have so much technology around us, but construction really hasn't innovated. And so we're trying to push those boundaries and there's lots of guys doing those modular solutions and finding ways to, to build better 'cause we have a labor shortage. We have housing shortage. We can't produce quickly enough. So we're trying to figure that out. And we found a great partner. We found, you know, some developer experience and contractors locally that are willing to help us and, and also break the mold of the traditional, Hey, we're going to do it this way.
[00:11:13] Mike Angelo: And so it's early on in the phase. We bought the land last year and we're in the entitlement phase. So that's improving the property on paper essentially. And working to get that green light so we can reach up already in the next 60 days, hopefully.
[00:11:25] Sam Wilson: What will you be doing to break the mold, as you say?
[00:11:30] Mike Angelo: It's finding this network that we talked about. It's called industrialized construction. So think of, you know, Tesla building houses and factories. Now you got to, when you think modular, most people go to mobile homes and that's not what we're doing, right? We're building a high quality product, just in a factory environment. Finding the network, right now, I think 5% or less of all construction projects are built in industrial fashion, industrial modular fashion. So that, you know, pre-fabricated method. So in order to break the mold, you got to challenge the status quo and the reason we should challenge it is the profitability.
[00:12:02] Mike Angelo: Once you build some of these projects, you're in single digit margins, which is highly risky, especially going into the volatile world where we're now shifting into. How do you increase those margins and also build maybe a lower cost product because the affordability factor is also a challenge.
[00:12:17] Mike Angelo: You know, we have a huge middle market America that can't afford $1,900 rent for a one bedroom. So can we charge $1500 or $1400? Well, you can't if it costs you so many dollars per unit to build. So that's the problem we're trying to solve is how do we build it for lower cost? And the only way to do that is to make it more efficient and use smarter products and, and then try to solve the problem the other way. So, that's the why.
[00:12:39] Sam Wilson: Tell me about that a little bit more, you know, industrialized construction. Have you guys settled, assuming you get the property entitled, have you settled on a particular, Hey, this is how we're going to build this product. This is how we're going to put it together. This is going to be the supplier. This is going to be the timeline. I mean, have you solved all of those factors yet?
[00:12:56] Mike Angelo: No. I'd love to say yes. And we had, we thought we had it solved from a complete, again, build the entire unit in a factory. The challenge is an uphill battle with majority of America and even local contractors are like, dude, you're crazy. Don't do that. And so what we're going to do is something in the middle. It's pre-fabricated cold form steel. So instead of building out a wood, we're building out a light steel studs. And you still get that fabricated panel. So you got a floor. You get walls. Assembly is, is almost as quick as building it in the factory.
[00:13:24] Mike Angelo: And then you have your finishing crews, your mechanical electrical guys coming in and, and putting the rest in. So there's still labor on site. I would love to get to a point where I have an complete, you know, wall exterior, interior, plumbed. And then it gets assembled. That's where I'd like to get to. We're not there yet.
[00:13:38] Mike Angelo: I think it's, again, that, enforcing people to think about, you know, even robotics, if you think of a factory, instead of having labor there, you have robots doing this stuff. It sounds super high tech, but that's where we're going.
[00:13:50] Sam Wilson: Is where a speed to implementation advantage?
[00:13:53] Mike Angelo: Usually you could save between 30 and 40% of time. A multifamily, call it a three story, you know, boring, a hundred unit deal. Wood frame will take you 18 months, 24 months. You might be able to do that in 12 to 15. So speed to market is one of the main reasons, but that comes with a cost. And so folks get hung up on, well, it's going to cost me more on paper.
[00:14:13] Mike Angelo: Well, it might cost you a little bit more front, but now you don't have punch list stuff. You're saving holding costs, holding costs are incredibly expensive. We haven't got it all figured out. We're getting there slowly. First project, right?
[00:14:24] Sam Wilson: No. Absolutely. And again, these are things, I know you don't, you don't necessarily have all of your ducks in a row on this yet, but I think it's, it's a great time for us to chat about it 'cause you get to see the inside view of kind of the problems you're trying to figure out and solve as you go through this. So maybe you don't have all the answers, but it's like, Hey, here's a way that this could work. You know, if, if we had it in the ideal world. I guess one of the other things I would think about in this, in this kind of pre-fabricated, you know, development space is that you probably have a much more consistent product would be one of the things I bet you would get out of something like that.
[00:14:55] Mike Angelo: Yeah. Quality, consistency. And so the other, I would say the other piece of challenge is a red tape amongst municipalities and inspections and, you know, Hey, you're building something in factory.
[00:15:05] Mike Angelo: I can't inspect it on site like I've been doing for 50 years. Okay. Yeah. We'll come to the factory, let me show you what we're doing and we're building a better product. So it, it will get there. And I'm telling you, there's probably, I think, a dozen or less firms working to solve this problem. We are the tiniest, tiniest little guy on the development front.
[00:15:20] Mike Angelo: I think the solution is vertically integrate. So you're the developer. You need to have access to a manufacturer, whether that's your partner or you're doing it yourself. And that way, those products just flow through. And there's a couple big companies doing that right now. So we're looking to align with them and, and understand how they're doing it.
[00:15:36] Mike Angelo: And again, not reinvent the wheel. We'll probably just partner with them and say, put us on your list, 'cause we need, you know, 1500 units in the next two years.
[00:15:43] Sam Wilson: My next question is, is about codes on that, like dealing with codes, dealing with your local municipalities. I mean, that's, it's one thing to find a cool product that may be the perfect fit, but getting it through your local zoning and building ordinance departments may be a nightmare. How are you guys navigating that?
[00:16:00] Mike Angelo: So all of these manufacturers are building to international building code, IBC, right? The latest building code. So they're better products than anything that's being built on site. The challenge is a local municipality, like you just said, so it's getting them aligned early.
[00:16:12] Mike Angelo: You know, those fire marshals, the, the city inspectors say, Hey, this is why we're doing it this way. And the groups that have been successful thus far, they align very early on and they partner with that developer to, you know, say, Hey, you know, we're going to build six of these. The first one's going to be the hardest, 'cause that'll be the one, the trial project.
[00:16:29] Mike Angelo: But once that municipality buys in on it, then now you're building within that county or that city, then you're rubber stamping from a production standpoint and that approval process becomes easier. The other challenge is the subs. If you're an electrician and you've been doing it traditionally forever on site, and you got to hire 50 guys to do this, but you might only need three guys now on site because all the work's being done in factory. So that's a mind shift as well, you know, change on how you staff it.
[00:16:54] Sam Wilson: Right. Yeah. I can only imagine. Getting your subs educated, getting everybody in your team built around this. But I think, you know, the long term play is what, what you're in it for here in that once you get the kind of kinks worked out, it will become a much smoother process.
[00:17:09] Sam Wilson: I look forward to tracking with you on that. You do have two developments, I think you said, underway. Are both of those in the kind of prefab construction space or are those, any of those going just traditional build?
[00:17:20] Mike Angelo: So we have one multifamily project that's we started earlier and then this month we're closing on another piece of land that wasn't on our radar. And, and we already had a lot on our plate, but it was such a cool project. So I'm in Phoenix desert, but we have an area called Pinetop. It's up in the mountains. That's like 6,000 feet. And so we're buying some acreage up there for single family development. A couple of modular builders, because again, it's the same problem.
[00:17:42] Mike Angelo: How do we build it faster, quicker? And so we'll, we're taking on a single family development. Again, our developer that we partner with or is helping us navigate the complexity of that. But that'll start hopefully in the next couple months as well. And so, yeah, we're taking on a lot of things, but it's, it's fun to try to solve problems, you know?
[00:17:59] Mike Angelo: Absolutely. As you review the last two years of your multifamily and commercial real estate experience, is there anything that you would do differently that would either speed up, save time, you know, shave some learning curve off? Is there anything that you would do a little bit differently if you could do it over?
[00:18:17] Mike Angelo: I think I spent a lot of time underwriting 'cause, you know, I didn't have a ton of net worth, I didn't have a lot of liquidity, so I passively invested a few deals, but I was like, how do I bring value to a, if you just talk about the multifamily space, you know, again, you need key principals, experience liquidity and you got to find the deal.
[00:18:33] Mike Angelo: My goal was I'm going to go find a deal and then I'm going to go find partners to bring in and, and they'll sign on the note for me. And that was kind of the education that they teach you, by the way. And so I just spent a ton of time looking for deals and not enough time finding partners, good partners, vetting them.
[00:18:45] Mike Angelo: And that key principal would've made life a little bit easier on, Hey, you know, we need this much cash for hard money, earnest money. We need, you know, this much for, and we need to have an investor base other than, you know, friends and family. And so I would say if I did it again, I would go back and spend a little more energy vetting those partners earlier.
[00:19:02] Mike Angelo: It took me like almost a year to kind of figure that out. I had partners come and go. And would I change it? Maybe. What I learned in the process is, man, I can underwrite really well in the conditions that I look at. And now, fortunately, I have a team that can help us do that and they, they do the majority of the underwriting.
[00:19:18] Mike Angelo: So delegation and maybe doing more of that for getting out of the weeds. Actually, I told you, I spent, I was up till midnight doing a, a YouTube video for our investment webinar. I need a marketing person, right? I shouldn't be doing that, but it's what you got to do when you're, when you're early in the process.
[00:19:32] Sam Wilson: That's absolutely you're right, Mike, I appreciate you taking the time to come on today and share with us your story. You know, how you have grown to where you guys are today. What your thoughts are surrounding development and solving the housing shortage problem and doing that in a, in a very creative way. Thank you for taking the time again to come on and share today. Certainly appreciate it. If our listeners want to get in touch with you or learn more about you, what is the best way to do that?
[00:19:53] Mike Angelo: Yeah. Awesome, man. Thanks for having me on the show. I'm on LinkedIn. It's Mike Ashish Angelo. You can email me if you want. It's [email protected]. Love to reach out. I always challenge folks on podcasts. Call me if you, if you're in the same, you know, struggles, let's set up a call. And I'd be happy to talk to anybody and, and try to help 'em through the process.
[00:20:09] Sam Wilson: Awesome. Mike, thank you again for your time. Certainly appreciate it. Have a great rest of your day.
[00:20:13] Mike Angelo: Thanks man. Take care. Cheers.
