As a podcast host, I recently had the pleasure of welcoming Ray Heimann, co-founder of Terra Capital, onto my show. Ray is an investor who has made a name for himself by focusing on strategies that drive strong risk-adjusted returns. He has helped build an investment engine that transforms small, outdated residential real estate assets into larger, modern portfolios of 100+ units across the US.
The Journey to Real Estate Investment
Ray’s journey into real estate investment began with his entrepreneurial parents. His mother owned an architecture and construction firm, which gave him his first taste of real estate. After moving to New York and attending Columbia University, he met his business partner, Tom Higgins, a developer. Together, they started buying smaller multifamily properties in New York City, opening Ray’s eyes to the opportunities in the mini multifamily space.
The Appeal of Mini Multifamily Properties
When asked about his preference for mini multifamily properties, Ray explained that these properties are too big for flippers and too small for developers, giving them a competitive advantage. They can buy these properties at extremely low prices per unit and later sell them as a portfolio for higher prices per unit. Ray mentioned that they focus on value-add multifamily investments and have achieved a 23x net return on capital for their investors.
Overcoming Operational Challenges
Operating at scale in the mini multifamily space is challenging, but Ray and his team have found ways to overcome these hurdles. They employ strict processes, utilize technology, and hire skilled management personnel to handle maintenance, leasing, and other operational tasks. Technology plays a crucial role in their operations, streamlining the process of renting units and automating the move-in and move-out inspection process.
The Role of Technology in Real Estate Management
Ray discussed the streamlined process they have implemented for renting units. Prospective tenants are required to submit their ID and undergo a preliminary background check before they can proceed with renting a unit. This initial step helps filter out less serious applicants. The team’s involvement in the process is minimal, with their main focus being on ensuring the listing looks good on platforms like Zillow. The actual virtual tours with prospective tenants take only 5 to 10 minutes, allowing for flexibility in scheduling and catering to those who prefer contactless interactions.
Selecting Recession-Resistant Markets
When it comes to selecting markets, Ray explained that they focus on recession-resistant markets that performed well during the 2007-2008 financial crisis. They target areas with job bases in healthcare, education, business services, and technology, as these industries tend to be more resilient.
The Cost of Renovations and Pricing Properties
Ray discussed the cost of renovations and the pricing of their properties. Their renovations typically cost between $100 to $120 per square foot at the entry level, but by the time they are finished, the cost increases to $150 to $170 per square foot. However, when they sell the properties as a portfolio, they are able to price them at $240 to $270 per square foot, with some properties reaching the high two hundreds or low three hundreds, depending on the market.
Offering Near-Luxury Finishes at Affordable Prices
Ray explained that the reason for the higher pricing is because they aim to produce a product with near-luxury finishes that appeals to the upper end of the workforce housing market. Their properties have amenities such as washer-dryers, white subway tiles, and hardwood flooring, similar to those found in large-scale multifamily developments. However, they offer these properties at a 35% discount in rent, making them more affordable for tenants.
Building a Reputation in New Markets
Ray acknowledged that one of their challenging experiences was building a reputation in markets where they were new. However, they have managed to overcome this challenge and have even hosted an appreciation event for their local network in one of their midwestern markets, showcasing the success they had achieved by bringing together the right people with the right strategy in the right place.
A Mutual Appreciation
At the end of our conversation, Ray expressed his gratitude for the opportunity to be a part of the podcast and his eagerness to stay in touch and continue the conversation. I assured him that we would indeed stay connected and continue discussing these topics. This exchange reflects the mutual appreciation between us and our shared interest in maintaining a connection and further exploring the subjects discussed during the podcast.
In conclusion, my conversation with Ray Heimann provided valuable insights into the world of real estate investment, particularly in the mini multifamily space. His strategies, use of technology, and focus on recession-resistant markets offer a unique perspective on how to succeed in this industry. I look forward to continuing our conversation and learning more about his innovative approach to real estate investment.
P.S. Don’t forget to subscribe to Multifamily AP360 podcast and leave us a review if you enjoy this episode. Your feedback means the world to us and helps us bring you more valuable content. Stay motivated and keep striving for greatness!