Big Fat Real Estate Checks Ep 170: Multifamily Case Study: What You Can Learn From JP Morgan Chase’s $60 Million Loss

Please enjoy this transcript, but please note that it may contain a few typos. With many episodes lasting over 2 hours, it can be challenging to catch minor errors. Enjoy!

Marco Kozlowski: Hey, everyone, welcome to big fat real estate checks. I hope you’re doing phenomenal. Everyday above the ground is a great day, least in my book, and today we’re going to be discussing with the guy but he yelled out a fish, how to make money in real estates commercial, residential, your own home, and pretty much anything else that we want to shoot the shit about. If you’re new to be fat, real estate checks, we’re all about giving you as much value as possible. We believe it’s your God given right to be wealthy through the service of others, just before we were shooting, this podcast, was discussing some properties that they were picking up on our side and what he’s looking for in his side, and the opportunities that are available. And some news where big institutions are selling their, their assets at huge losses. And very interesting how many people even banks don’t buy assets at the right number. They’re not necessarily looking into the future. And we don’t want that for you. So the two main things that we do is a make you as much money as possible and to full time give you as much time as possible. So you’re not wasting time and getting the best result for the time that you put into something. And yep, so let’s, let’s get this ball rolling. So we were talking about a property in Chicago, that Chase just offloaded for an $80 million

Gabriel Araish: 60 million $60 million $60

Marco Kozlowski: billion loss. Although for Chase, it’s not a big deal. 60 million right there. They’re they’re massive, massive institutions. So they can definitely take it on the chin. Maybe they needed the last. Most likely not nobody likes to lose money.

Gabriel Araish: But rule of investing don’t lose money. Well,

Marco Kozlowski: the first rule of investing is buy the stock at the right price, right, you gotta buy, we’re looking to buy value, right? And if you’re not in the value business, you’re going to be in a very dangerous business. We’re looking at properties and how people are acquiring some of these multifamily is all over the country just a few years ago at a 3% return 4% return 2% return and expecting to improve the rents since and refinance investors out and how will you ever be able to do that if your return is at 5%? And money cost six? Like it’s impossible, like you’re really, really in a pickle. So well, will I know where the winds gonna take us? I know Gabe, you’re looking for a property of your own where you live now you were living in Canada and moved your family down to us in a very nice and for your kids. So they could be in the right. Environment. Right right environment with the right coaches for, you know, for for the activities that they do. Very dedicated dad, which is why I love you so much. And yeah, so you’re buying things correctly, is really how to make money in real estate is if you don’t buy it right. You’re, you’re, you’re fucked. So let’s talk about that.

Gabriel Araish: All right, what you want to start with, we’re gonna start with the JPMorgan Chase.

Marco Kozlowski: Yes. Talk about that, like how many units?

Gabriel Araish: It’s so JP Morgan. It’s JP Morgan. Asset Management, okay, because I know that there’s maybe some listeners out there that are maybe more sophisticated like JP Morgan doesn’t buy real estate. You’re right. JP Morgan, asset management will buy the real estate and they bought a building in 2016. In downtown Chicago. For $140 million. It’s 198 unit multifamily. And, yeah, they just one more time. That’s a big number 198 units, and they paid $140 million in 2016. So remember, 2016 was pre 2020, obviously, and 2021 when the pandemic hit, you know, we all know what happened to interest, not interest rates, but the rental rates and the values of properties, everything inflated big time both the price of rent and the price of property in general. And and this is multifamily. This isn’t an office building that you expect to come down or whatnot, this is multifamily. So I think we want to maybe unpack a little bit more than just letting them know what the current average rental rate in the year is. I don’t know if you still have those figures in front of you Marco.

Marco Kozlowski: Yeah, so a actually don’t but let me pull it up. So I’m not knock it out of my derriere here have on the second. And these are current rents. So we’re going to if we look at the return that they’ve paid based on our loosey goosey calculations on the asset, you’re looking at around for one bedroom, in this building, let’s let’s call it 2500 bucks a month, for a one bedroom, a two bedroom would be going for approximately 3500 bucks a month. These are luxury, luxury assets, and a three bedroom on average about $5,500 a month. And there’s a handful of those. So if you take 35, two bedroom plus 323, and four, I’m sorry, one, two, and three, actually, there’s probably one bedrooms as well. So let me pull that up. I don’t think I did that one. Those are harder to rent but also about 220 100 and Scott 2000. Go in the lower side. So 220 530 550 500 It’s amazing how that extra bedroom really does make a difference. Obviously, you have to have a lot more space. Add those three together. And do a mean of that an average or four together do an average of that. You’re probably looking at what 3500 or so. Let me say for

Gabriel Araish: 4035 30 3400. Yeah,

Marco Kozlowski: let’s just, yeah,

Gabriel Araish: it’s 35 oranges to make.

Marco Kozlowski: Maybe some extra. Yeah, there’s the there’s retail space also in in the base of that. So

Gabriel Araish: I would add Oh, there is for this building. It wasn’t clear. Okay. Fair enough. So yeah, let me check out the family. All right. Yeah. So $3,500 a unit, there’s 198 units. That’s $693,000 a month, not about 8.3 million a year. This is if it’s 100%. Occupied. So maybe we do we want to actually act as if it is 100% occupied just to show that

Marco Kozlowski: No, no, no, let’s, let’s call it 92% 92%. It’s

Gabriel Araish: $7.65 million in gross rent. Okay, so we’re gonna assume what that 40% Expense Ratio?

Marco Kozlowski: Sure. Yeah, let’s do that. Let’s see what Yep. Ah, yeah. They probably are doing, it’s, there’s gonna be a lot more. Who knows? Let’s, let’s give them the benefit of the doubt.

Gabriel Araish: Sure. So 60% of netting of gross income, you’re, I mean, they’re keeping 4.5 9 million call it $4.6 million as net operating income, which is basically what you’re keeping in your pocket before you have to pay for any financing costs, mortgages, Depreciation Amortization.

Marco Kozlowski: There’s no, you’re right. There’s no retail space at the bottom of that right now. So

Gabriel Araish: it’s, so it’s 4.6 million. Before financing. Now, let’s assume JP Morgan paid a cash. So they’re keeping 4.6 million, and they paid $140 million, but they paid $140,000,000.20. This is a 3.28 cap rate. 3.29 call it at 3.3 cap rate today, but the rentals that we’ve discussed are rentals of 2024. They are not the rentals at 2026. So presumably they were much lower when they picked it up. And also the value of the property in theory should have gone up. Because we haven’t mentioned what these guys just sold us for.

Marco Kozlowski: I’m looking at right now the rent increase from 2018 to 2024. And just to play the game on that. See if I can find that very quickly. Yeah, I’m going to be I’m sorry. It’s going to say something really smart. While I’m doing this. There’s a reason that we’re doing this, right?

Gabriel Araish: Yes, yes. We just want to show you even the even some of the major players in real estate don’t necessarily always do the right thing. And buying right. Is any buying wrong was oh, it’s not that it was okay. It looked okay because of an inflationary market. So if you bought something in 2000 and 567 and you overpaid for it, chances are you still look like a genius when you sold it in 2020. But if you bought something horrifically wrong, and then the market shifted, where interest rates go up, our rent rates come down or rent rates start stabilizing. All of a sudden your only opportunity You’re gonna make money, which was the value of the building going up, that gets removed from the equation and all of a sudden, you’re stuck with this thorn in your side. And this is what happened that, you know, I still don’t know, I can’t tell you this is what happened. But I can tell you that this is what seems to have happened, where they bought something for 100 and $40 million in 2016. And just offloaded it in 2024, for $80 million. So they took a $60 million loss, that’s insane on the asset, that’s, that’s, it’s more than insane. It’s now we don’t know what’s going on there. Maybe, you know, this is a company shift where they’re no longer keeping real estate or real estate in certain sectors or whatnot, there’s always, you know, there’s, there’s always certain reasons why companies do things, and they’re willing to take the hit, because it’s a one time hit that they can, you know, probably survive, but it’s just an example of how even a large, well known, you know, well funded company can make mistakes. And I mean, because even if they were going away from real estate this year, if they had bought this for what it was worth really worth at the time, they would have still been able to divest, but make money in the process rather than lose money. And I’m pretty sure that they would have preferred that. So nothing changes. It’s just that’s that’s, you know, we keep harping on this, the buying right is important. And yet, there’s all these examples of major players, whether it’s JP Morgan, asset management, whether it’s your, you know, local fund manager, or you know, the some of some of your friends who are syndicators, people that have been doing deals for 10 years, they’re still, like I said, it’s not because they did well, that they’re gonna continue doing well, unless, when they did well, they did it the right way, which is buying right and made money not just off. I mean, there was appreciation for everyone. So if they made a money off appreciation, that’s great. But if there were other things that they made money off, which is the basically the equity that they’ve walked into when they bought it, those that are real professional investors, but the ones that basically made money because they held long enough, that’s, that’s probably not going to be the case continuing forward.

Marco Kozlowski: So the it’s nuts, how many people in the game, institutional investors, classes, seminars, YouTube videos, smoking signals, you name it. They all go through the mechanics of the acquisition, right? How to raise money, syndications investors, and you know, taking care of the investors. But no matter how good your intention is, if you buy it incorrectly, you’re gonna be fucked. And it’s really interesting. As you said, Gabe, we don’t know what the intention is behind behind things. If you need if you need capital, to take care of an opportunity that’s going to make you more money, you don’t care about the loss, right? There are reasons why as you said, we all do things, if I have an opportunity where I’m going to make 300%, or have a chance to get in on the ground on an opportunity that I know is going to be a game changer. I just need that amount of money. And I need to divest from whatever I have. And it who cares, you get a capital loss right? Now. I did a I did on on two sites, I got two different numbers. And I’m going to do the average of that it’s $2,600 on average for a $3,500 rent. So it’s just under 20. Just $2,500 difference. So 2600, right? So it’s it’s, it’s $1,000 difference. It’s actually $900 times, if you wanted to do the math again, that’s probably easier. But it’d be

Gabriel Araish: 2625 is the 26 is the there

Marco Kozlowski: was one that was 24. There was one that’s 2028

Gabriel Araish: and 20 698 units, times 12 times point 92 will take the same vacancy of 8% divided by oh sorry, times 40% expense ratio. So they bought this, it was making about $3.4 million. Again, we’re reverse engineering, this is probably not exact numbers, but it’s gonna give us a good indication. So $3.4 million, is what they were making annually. And they decided to pay him. Yeah. So that’s a 2.45% cap

Marco Kozlowski: rate. But remember at that time, I’m not sure if the interest rates are low right? Or whatever, right now, here’s the interesting thing is if JP Morgan management, underwrites a loan on that, and then they obviously sell that loan, put that loan in a bundle and actually make money on the sale of that loan. If you watch The Big Short, there’s an explanation on how that works. But yeah, there’s money in bundling mortgages and They most likely made some money, some point on that, right? So, at the end of the day I don’t know how much money they’re going to lose, but they’re going to show for sure a capital loss, right? So at times the opportunity and the capital loss, meaning a break on taxes is actually worth it. And so, again, we don’t know what’s going on behind the scenes. But it’s very interesting that very large companies from a consumer perspective how we don’t understand why would anyone sell something for an 80 million $60 million loss, that’s insane. But I’m sure there was a strategic move around it. And I’m sure that there’s always a reason behind that thing that so as you get as you, everyone has money problems, just, I want to talk about that for a second, you either have not enough money, or you have too much money, right? There’s, it’s one or the other. And if you have a lot of money, then there’s capital preservation, where you’re buying assets just to preserve capital, meaning that you don’t care that it makes money or not, you’re parking your cash. And as long as it’s beating inflation, your money is protected with inflation. So you’re basically buying and holding into assets that are stable, like multifamily might even

Gabriel Araish: if it’s even if it’s not beating inflation, again, like let’s look at international investors. So you live in China, and there’s, you know, politically is it’s unstable. And you feel that your money is not safe there. Because they can come and take your property, whenever you decide to, and you decide to hey, you know what, the US is more stable, let me go buy a building over there, park my money there, whether you lose money or not a little bit left and right. It’s not what it’s about. It’s about capital preservation, whereby if you decide to leave the country, and then move to the US, you already have an asset, and you have access to capital, which is something you may not have had. So again, the reason the reason behind why you’re buying something is not going to be the same as anyone else. And but you still have to make the best decision based on your investment objective. And it’s not necessarily an investment, right, it could be just a purchase, even if it’s real estate.

Marco Kozlowski: I know in Canada, they imposed a tax in Vancouver, specifically, because real estate was really inflating, inflating, because of all the money from Asia that was coming in to buy these, these assets. And if they vacant, they would buy exactly what you’re speaking about is I want to move the capital in a way where if you’re buying a property, it’s allowed, right? So there’s a lot of money that was transferred over. And these things are not being rented, and really,

Gabriel Araish: super lading very

Marco Kozlowski: quickly, right, they put a $25,000 tax, or it was it was or 25%, maybe I can’t remember is a while ago, but you might know more, I don’t buy many properties in Canada, so actually, don’t buy that many at all. So even if the government imposes a tax, or you have to live there, or has to be your primary residence, and you do have to move money, you know, there’s a reason to invest has to be aligned with the objective that you’re trying to reach. Right. So if your objective is to buy an asset for capital preservation, moving capital, in a way where you’re going to also preserve your capital, but just out of the country, so it’s you know, you have some an asset there without worrying about moving moving capital where you’re maybe where you are is unstable. We also buy at first you just want to buy a something so you have proof of concept, right? Remember, you just want to buy your first deal period, right? You remember that game? And you got things wrong as well, right? 100% I’m, I guess I’m lucky in that didn’t have money, your credit. So I wasn’t allowed to buy things wrong, because I didn’t have money and I didn’t have credit and I had to rely on sources that made me buy property at the you know, the box that I was putting with those boundaries. So then you want you go to cash and then once you have cash, you’re like, Well wait, now I don’t like cash anymore because as soon as you have cash, it disappears. It’s feast and famine, feast and famine, feast and famine. Then you want to focus on cash flow. And then as you start building your assets and cash flow now you have a new money problem, which is taxes and it just there’s always an issue with something as we go down the road. And real estate is a vehicle where you can even if you if you overpaid on purpose for a reason to get a capital loss later, which I know doesn’t make any sense if you’re if you’re struggling paycheck to paycheck and like why would anyone do that? Well if you have a if you have a a, for example a partner that you want to pay off at and you want to show a, a capital loss, there’s a strategy there where you can actually take care of your partner and get a capital loss by buying through different assets. So different LLC. So I don’t want to get too deep down the rabbit hole. And I think I’m just going to remove that, because I’m just going to confuse people with that process. So I’m just gonna go like this and remove that completely. So understanding your reason, or your your objective is going to be very important. Because when it comes to your own personal residence, you can actually break all the rules, because this is where you live, right? This is where you’re going to nest. Within reason, at least for me, like, I can’t buy anything retail, like, it’s almost against my religion, right? I just, I can’t, I find it very difficult to buy an asset that’s, like a piece of real estate, a car, something that is negotiable, right? I want to get value, because A penny saved is a penny earned. Right? And it’s a lot easier to spend money in most cases than to make money. So Gabe and I were were discussing how, how should we approach you know, buying your own property? Should you pay retail? Is it okay to pay retail? Should you not pay retail and not have a place to live? Like there’s there’s a sacrifice that has to be made somewhere based on your objective, right, so we can dip our toe into into that pond for a minute? Sure, yeah.

Gabriel Araish: I mean, we could use my example I’m looking for home, I mean, I’m, I’m educated enough now that I like to get a, you know, I like to get into equity or step into equity in any real estate deal I make, including my home. But you know, where I live right now, a lot of the, a lot of the homes are, you know, have inflated, like everywhere else, but they’re not deflating at the speed that they’re deflating in other parts of Florida. And for the most part, you know, a large percentage of people who buy homes in my area also buy everything in cash. So having a debt in place that I might want to step into, which is, you know, one of the strategies that we’ve, we’ve spoken about where if you know, if someone has a 3% loan, because they bought the house in 2021, and you want to keep that in place, and just give them the cash difference between their mortgage then and what the value of the house is, or what the agreed upon purchase price is. Now, that would make sense, because I’d have a payment of 3%. And I can just pay them in cash for the difference. But even that is getting harder and harder to find. And I get in my zip code, for example, just because most people are buying their homes cash. And you know, there’s been an influx of people coming in from New York Post pandemic, they’re selling their condos, you know, 2000 square foot condo for like, whatever, five $6 million. Yeah, and then they’re coming in here and getting five 6000 square feet of, you know, big 111 floor home for $2.53 million. You know, they’re buying everything in cash, they don’t, they don’t care. And they’re actually they don’t care about overpaying for something because they’re buying based on what they need, which is I want to live here, and I want to live here now. And if you have the money, God bless you, you know, nobody’s gonna tell you’re doing the wrong thing. But that also inflates prices. And when these people want to sell, they don’t necessarily want to take a loss, they feel like they should get at least what they paid for. And so you know, I’m always in this dilemma. And you know, Mark when I speak a lot about this, but this is my home, this is where I want to raise my children, this is where my wife and I are gonna make memories. This is, you know, it’s an emotional purchase as much as it is an investment and, um, you know, the idea is to stay here 20 plus years. So whether I pay retail, below retail or above retail, in the end, I have no access to capital, because it’s going to be stuck there for a while. I may, eventually if there’s no mortgage on it kind of refinance, and cash out a little bit of it. But I’m just saying in the first five years, six years where we normally would refi a property when you buy it right and get most of your money out, that’s not going to happen in this situation. And so, you know, I think I’m at the point where I kind of understand that if I want to go down the road of, you know, waiting to create a deal in my area in this environment, either may wait very long, or it may never happen, I don’t know. But if if I want to make sure that things the happy at the house, then you know, I may have to move a little bit faster and kind of pay closer to retail on something, we’ll have a happy wife happy life, right. 100% agree that things couldn’t be truer right.

Marco Kozlowski: Now. The beauty of I think we already have a podcast on this, but maybe we’ll have to do another one is if you find a $3 million property with a $2.5 million loan and they want $100,000 to bail for example. All right. So you have $100,000 downpayment on a $3.6 million property. $3 million property, right? And they’re just, that’s not a huge discount least in our world, right? So that’s nothing close to retail, to me that’s overpaying. But if it’s your own home, that’s fine. All right, just different experiences, different perspective. And if I really wanted the home, and they, if they didn’t get $3 million, they would tell me to, you know, screw myself, and I loved it, I probably have to do it, because it was something that I want to live in, right. And it would be based on an emotional decision. But at the end of the day, if that it’s there’s a big difference on the payment that has to be made versus the value of the home itself, because there is value in taking over a cheap mortgage. Because if you’re, if you’re stepping into a 2 million, a two and a half million dollar loan at one and a half percent, which we see all the time, or you’re stepping into what we saw today at a 10 and a half percent mortgage, that’s a completely different payment. Right? If you’re overpaying at 2%, and you’re paying 20%, off at 11 or 12%. Which one would you prefer? If it’s your own home, right. And cashflow is king, but also cash out go is what you really have to look at at the end of the day, not necessarily what you’re paying, right. So I have no problem paying $10 million for something that’s actually worth $3 million. If there’s no payments for 100 years, right? Who cares? Yeah. Right. It’s how do I monetize the situation? Because at the end of the day, it’s not the gross that matters. It’s the net. Right? And yeah, so should you can you overpay for your property? Well, it depends on your wife or spouse, right? Is it something that you can afford? You don’t want to necessarily go into something that’s going to necessarily hurt you either, but don’t necessarily look at the purchase price? Yeah, I think the payment is really something that you also have to look at, but be careful, because that’s how car dealerships get, you know, cars, a depreciating asset, it’s not the same thing, right? I was, this actually is gonna be a different podcast, because if he’s quite interesting, and that you are asked, what what payment Do you want to pay, they give you this low payment, but you actually owe more on the car later than it’s worth. And you’re upside down, right? Very, very interesting. And how actually, Canadians are really screwed on, on mortgages on that. But that’s it. Oh, my God, it’s a conversation for another day. So to wrap this up game, my ADHD is going bananas. So I’m really glad you’re here. So to wrap this up, give us three, three points to remember, based on what we’ve what we’ve discussed.

Gabriel Araish: All right. Well, one, if you’re buying an investment property, and your objective is to make money, you know, buying the property at the right price, which is generally at a at a at a fair discount, I want to see at least 20 to 30% off is is going to be the way to go. That’s I think it’s non negotiable, at least when we’re investing to, you know, make this and other things, you might make sure you know what your exit strategy is when you’re investing. So if you’re going to sell a property or refinance it, whatever. What and when I say exit, I mean, how are you going to get the money back that you’ve invested, whether it’s your money, whether it’s investor money, whether it’s, you know, money or mortgage money? How are you going to get that back? But you have to, you have to Yeah, you have to figure that out before you actually buy the property.

Marco Kozlowski: Know your guess and know your exits before you get enter. Like firemen won’t go into a burning building unless they know there’s another exit, like more than you know how to get out. Yeah, they know how to get out before they get in. And that’s the same thing. And a lot of people got in and have no idea how they’re gonna get out, which is nuts.

Gabriel Araish: Well, and that’s it. And maybe they didn’t know how to get out of the time. But then she hit the fan, and but they only had one exit. So maybe it’s understand if there’s multiple exits that theater thing, right, but she

Marco Kozlowski: didn’t hit the fan. It’s just the cycle that everyone like. It’s so funny how we have such short memories. Everybody knows every eight to 12 years, there’s a crash, right? It just yeah, all the time. And we’re do that’s it. And you’re so focused on it’s not going to happen, and it always does. And that’s the difference, I guess in what we do is if you buy it right, if there’s a shared amount are fine, because we already bought it right. Right. Everyone’s fine. That’s that’s the point. Anyway, sorry. Sorry to interrupt

Gabriel Araish: you. And the third point is, you know, when you’re buying residential, for yourself as a home, then paying retail or above retail even could be a possibility. The one thing you need to make sure is that you can afford the payments, it’s not going to hurt you. So don’t basically if you can, if you make $10,000 a month as a family, and this house is going to cost you $8,000 a month, then you know that’s your first signal that maybe it’s not the right the right house at doesn’t matter even if you’re getting at a major discount, you can’t afford this house because $2,000 to feed your family and then you know, be able to have some sort of lifestyle is not going to happen. So understand what you what you can pay for a home and then work with that payment, if you will. But, you know, just be careful, but it’s one of those places where yes, you when you’re buying something, or things other than an investment, whether it’s emotional, whether it’s because it’s a family home, whether whatever other reason, then, you know, yes, I guess you could pay retail, but it’s always better to get a discount, like everything else, or

Marco Kozlowski: get a discount on a discount in some way, meaning either taking over an existing mortgage that is discounted, because that counts, right? Yeah, yeah. So and if you’re overpaying. Again, make sure that your whatever you’re purchasing is adding value to your lifestyle. I think that’s the real message at the end of the day, is it adding value to the direction that you want to take? So is there value in putting money in if you have a lot of cash to put it into here and know you might lose money if something happens? And if there’s value to that for you, then that’s the right direction? Is there value in taking over this mortgage? If you don’t, didn’t know this, but all mortgages can be taken over if you know what you’re doing, right? All mortgages, legally, morally, ethically. So if that is adding value to cash flow, or adding value as a tax deduction, adding value as a capital preservation, whatever, whatever your investor, you know, investor returns, whatever. If there’s value there, then good. And if you’re not stepping into value, you got to pay attention to why you’re doing it to begin with, are you getting a deal just to get a deal? Because that doesn’t, that’s an ego. That’s an ego by not a value by. And if you don’t have a value by you’re gonna go by by very quickly. Oh, yeah. Yeah. And it’s, it’s sad how many people are not buying value, they’re just trying to add value without buying into value, which is you have to, there’s gotta be some value there. So there you go. So Gabe, thanks very much for your insight. Sorry, listener at ADHD today a little bit. So and but you know what, we’re here because we really want to serve you as a listener. And we really want to help give you some insight, there might be one little thing that we say that’s that sparks, the, the spark that you need to really propulse yourself and your family into a direction that really, completely changes the trajectory of your financial future in life. That’s how things work. You have an idea, it grows, it grows roots, and suddenly you have an oak tree. And that’s what we’re here for. So really appreciate you very much. And like us love us shares, make sure you subscribe. And if you’re starting at this episode, go back to Episode One. And really, you know, really great content throughout and I’m really excited to have you listening into what we do and how we do it and can’t wait to see on the next episode, like so much. And just love life. Thanks, guys. Appreciate you. See you next time.