Pillars of Wealth Creation Podcast | Guest Scott Choppin

Scott is the Founder of the Urban Pacific Group of Companies. He oversees all operations of the Urban Pacific family of companies, including business development, capital acquisition, and strategic planning. Prior to forming Urban Pacific, Scott was Director of Land Acquisition for the Multi-Family Development Division of Irvine-based Sares-Regis Group. In that position, he was responsible for all land acquisition activities for the development of luxury, market rate and senior rental communities throughout California, Colorado, and Arizona.

“We see workforce housing as a defensive model, meaning we have a stable sticky tenant base. We know in recession that values will decline. But if incomes stay stable, rents stay stable, and then life stays stable.” – Scott Choppin

3 Pillars

1. Competitive learning

2. Build a powerful network

3. Build a powerful business organization

For full transcript click here Expand POWC #236 – Real Estate Development with Scott Choppin
Host: Todd Dexheimer
Guest: Scott Choppin
Duration: 1:08:02

Introduction: Technologies are already you know moving into the marketplace so we have to be focused on innovations in order to continue to remain competitive and produce value for our ambassadors that’s better than our competitors, right.

Todd Dexheimer: Hello, and welcome to pillars wealth creation, where we talk about creating financial success with a special focus on business and real estate. I’m your host, Todd Dexheimer. Now, let’s get to it.

Infomercial: Hey, our sponsor for the show today is Pine Financial Group, the leader in hard money lending in Colorado and Minnesota, and they were recently approved to offer their investment publicly. This investment offers only for investors in Colorado, Minnesota, and is only made through their investment prospects. Get your copy today simply visit www.pineinvestments.com and click to get started. Look, there’s a reason why some of the wealthiest people in history, invest in loans backed by real estate. Learn more about the risks and returns at www.pineinvestments.com.

Todd Dexheimer: Hello, welcome back to pillars of wealth creation. I’m your host, Todd excimer with me today. I’m excited to have Scott Choppin. Scott, how are you doing today?

Scott Choppin: Todd? I’m doing great. Yeah, Thanks for the invite and glad to join you.

Todd Dexheimer: Yeah, definitely appreciate having you on and a little bit about Scott. He is the founder of the urban Pacific group of companies and Long Beach, California based real estate development company, founded in 2000 focuses exclusively on urban infill and affordable housing communities throughout California in the western US. Over the last 18 years, the company has developed nearly 1700 units of unique to mark to market urban housing community throughout the western US. Currently, Urban Pacific has created a new housing innovation called UTH, which provides middle income, multi-generational housing urban families while producing market superior yields on invested equity. I’m going to let Scott explain more about that because that’s a mouthful. So I’m going to let you kind of explain what you guys are doing, maybe a little bit about your background and fill us in on the details that I haven’t covered so far.

Scott Choppin: Sure, yeah. No, I appreciate that introduction, so, you know, as that introduction, said, we are a real estate developer. So I see that being differentiated from an investor, for me, I always thought of those as you know, generally synonymous, but I’m in my close to 40th year in this business, I’ve really come to the conclusion that they’re very different offers and that’s great. I mean, they’re, they’re both good offers like you and I spoke about before. So family background or real estate development, my family’s been building and developing n Southern California since 1960, I came into the business in the in the mid-90s. Started work for a company called Kaufman and Broad Multi-Housing Group which is a national home building company everybody now knows is KB Home and there I work for a division that syndicated and develop the apartment projects and new construction ground-up apartment deals was there for a number of years, leaving ultimately as their most Senior Project Manager with generally profit loss responsibility for the groups of deals that I worked on. I left there to go to a company called Sares-Regis Group in Orange County, another regional developer of apartment communities, and I was their Land Acquisition Director on the multifamily market right side. So again, ground-up development of apartment assets, you’ll see a continuing theme here.
And then, in 2000, I started Urban Pacific and at the time, the idea of urban infill and that’s basically building new communities in already built-out neighborhoods on underutilized or vacant parcels was not a mainstream direction that real estate developers to but a couple of folks that I know a guy named Bob, Bob Gardener at a company called Robert Charles Lester was very positive on the future growth of cities and particularly residential housing product in those already built out neighborhoods that would be attractive to future demographics. So we founded the company, I founded the company in 2000 to pursue that product type and we’ve been doing that now will be on our 20th year of operation next year. And so fast forward to today, we’ve built probably close to 30 projects, all of them urban infill, different food groups is the way think of it Todd so I’ve done affordable housing, tax credit, new construction. We’ve done condo, high density, urban infill and but most importantly, we’ve done or the vast majority of our projects have been basically market-rate multifamily. And so about two and a half years ago, we noted a flat spot in the market in Southern California. And what I mean by that is both lenders and equity at the time, were sort of pulling back from the high-density complex studio, one-bedroom mix type of apartment projects. And so that gave us the opportunity to, you know, poke our heads up and start looking around what was the marketplace generally, what was supply and demand characteristics, and it really brought home for us the fact that there was a lot of supply coming online now there’s a lot of demand in Southern California. I’d say we’re the most undersupplied marketplace the United States, but nonetheless, we don’t want to compete where everybody else is competing if we can choose to do something different and so that had us create this new UTH model that you referenced in your introduction, and that stands for urban townhouse.
And basically, urban townhouse is a purposely designed and built rental housing model that it builds at a townhouse density of about twenty-five to the acre. But most importantly, we’re designed a unit type that provides a five-bedroom four-bath three-story townhome model and our demographic concentration is on working moderate-income families in the same urban infill communities that we’ve always built, but really serving this vast middle group of family groups that are larger, moderate-income working families, who don’t have the opportunity to generally rent a new housing that will fit their lifestyle in other words, if you have a large family group, you know, six to eight people, a studio unit and the high rise, new construction, you know, apartment deal doesn’t make any sense you would never choose it and the rents are very high. So you UTH was was created, we created it and designed it to be multigenerational fit large family groups, and we’re on our fifth, sixth and seventh projects right now. And that business plan, the first four were a demonstration phase and then the rest of them so far larger projects and what we’re now calling our production phase.

Todd Dexheimer: Interesting and so, I’m trying to picture like where these would be and when you say urban infill, are they in the heart of the city? Are they within the suburbs? like where’s something like this kind of…

Scott Choppin: Where is this great question. So we’re not in the central business district, think highrise financial district, we’re not there lands too expensive and densities are wanting to be higher in those markets places, we generally will focus on peripheral neighborhoods from the central business district. So in Southern California, we’re building an estate called Fullerton, which is it’s not suburban, but it’s not that central core and Orange County doesn’t really have much in the way of Central quarters anyways, but you get the point where we’re one or two neighborhoods out from the central business district. We’re usually in low and moderate-income neighborhoods because that’s where the family groups that we rent to that demographic of large working families, that’s where they live. And importantly, these projects are going to be close to Job Centers, but in neighborhoods that are going to generally be more affordable. We just then happen to deliver a new housing type to those neighborhoods, where we’re supplying these five-bedroom, four-bath units, which in every neighborhood that we’re building in now, either, there’s been 30 or 40-year gap since new housings produced Fullerton, I think it’s 40 plus years since a new project in that particular neighborhood. And then we’re delivering these five-bedroom units into a marketplace where these families already live. So we’re just really creating a new product and introducing it into the market where these families already exist and we’ve had a huge positive reaction to the family groups that are renting our projects presently.

Todd Dexheimer: No, I might be wrong on this, but typically, when there’s a forty (40) year gap, thirty (30) year gap in building, it’s typically because building just financially doesn’t make much sense anymore.

Scott Choppin: Agreed.

Todd Dexheimer: Or there’s just no demand there. Maybe the population is gone down whatever it is, but it financially just doesn’t make sense. So what are you doing in order for it to financially make sense? Are you getting, you know, credits or anything like that? How are you making it make sense?

Scott Choppin: Well, so I’ll add a third way of thinking it’s too wide there’s no new housing and Calif it’s a California story and it’s really an urban story. But in a lot of cities in California, we don’t have appropriate zoning for a higher density product. So exactly as an example, you’ll have vast areas of major cities in California that are zoned R1. And for the most part, you will never build anything in an R1 zone and so you’re physically just unable to build a product that is financially feasible. So that does tie into that financial feasibility question. Right, so you’re right there, but it’s really enforced by zoning. And so what we’re doing is we’re going into neighborhoods that are basically sort of off the beaten path. These would be a lower-income neighborhood in Fullerton, use that as an example or in West Fullerton. It’s a blue-collar neighborhood predominantly older houses and older apartment projects, nothing newer than the 60s or 70s.

Todd Dexheimer: Yeah.

Scott Choppin: And as zoned in a way that didn’t allow anything higher density to go there. So if you were to do a four or five-story podium project, you couldn’t do it there. Right, and that’s generally what’s working today. So we’ve found this interesting, you know, intersection of all the sites that we buy are already zoned correctly for three-story, townhouse twenty-five (25) dwelling units to the acre product, we’re just finding it neighborhoods that have sort of been passed over because they’re not the right income categories for a new housing type. There are other people in California that do three-story predominantly condo product for sale, they won’t go into these neighborhoods because the incomes of the neighborhood don’t support the housing prices that they need to sell out, and people wouldn’t buy that right even if they were going to import. So this is a sort of passed over low and moderate-income neighborhood story, this is a zoning story. And then really for us, the secret of this model is that by producing these five-bedroom units were able to generate rent in a different way than was done. You know previously, the way we call it, Todd is it’s a density of bedroom count, not necessarily density of units. And so they achieve the same thing.

Scott Choppin: But the zoning we can fit into existing zoning a little bit more easily while producing more revenue per unit. So as an example Long Beach, where we’re based, I’m looking at a site that’s will allow a restricted number of units, right, let’s say it’s a thirty (30) unit project, but there’s no restriction on how many bedrooms I can put in that. And so as long as I can comply with the setbacks and the footprint and the parking, particularly as one of the constraints, then I’m unlimited on the number of bedrooms I can produce in that project and therefore rents can be higher. So ultimately, in our projects, that generates a higher whole dollar read. Right now we’re, most of our projects are running between three and $4000.00 a month. For a 1700 and 50 square foot unit, which is basically the size of a house, you know, if you were to build something new, it has an attached apartment with a garage on the ground floor. But it fits in this sort of missing middle income, middle-density category very nicely.

Todd Dexheimer: Interesting. I got a question, this is not really related to what we’ve been talking about so far. But I got to ask it because it’s on my mind. California has this like, investor flight, I would say is so many investors, I know they’re from California, live in California, are not investing in California.

Scott Choppin: Right.

Todd Dexheimer: They want to invest anywhere, but where else…

Scott Choppin: Everywhere, right.

Todd Dexheimer: It is funny because I invest both in Minnesota, which where I live and outside of Minnesota, and when I call Brokers and I talked to him I make sure I mentioned I’m not from California.

Scott Choppin: Good. Definitely not from there. Right? I love it.

Todd Dexheimer: They don’t want to deal with California. Anyway.

Scott Choppin: Yeah.

Todd Dexheimer: So my question is, you’re in California, you’re building in California, there’s opportunity to in California. Do you have an idea of why people are running from California?

Scott Choppin: Yeah, I actually do and as we spoke about earlier, value add is the most powerful offer in the marketplace right now for investors to invest in a multifamily product. It has a different risk profile than development, the existing assets already got occupancy and cash flow. And, for a lot of folks, that’s invaluable or they would never choose a deal that didn’t have that and I, you know, but I accept, right. Well, we do the same thing when we buy existing, but, we’re focused on development. The reason people are leaving California is because it’s become so expensive. I mean, we are by different measures the highest priced and most sought after multifamily marketplace in the United States for capital that may be overseas or institutional capital sources that want to be in markets with exceptionally high demand and low supply right if you can get into the marketplace appropriately at a certain price then the other characteristics of the market undersupply and high demand are very powerful attractive force right. But California investors having either owned historically and watch the rise in price and our net sellers in that marketplace because they can get very high values.
Then when you sell you go okay now what do I do, I can’t rebuy in California because I’m going to be buying at the price that I sold. That doesn’t make sense, so then you start to look outside of California for better cap rates, you know, better per unit better. us even if the rent and supply stories are different, and we’ve done the same researcher so, I think it’s just that very high-value purchase market, the lack of deals, certainly lack of deals that are priced appropriately to be defensive, right. I mean, we, I think we’re all tracking it. But we’re all of the mind that a recessions come in at some point. And to me, if you were going to go into an existing asset at a very, very high value, low cap rate, a very thin margin for a change in economic cycle, or interest rate changes. It’s just it’s a weak position to be in. And again, not saying the value is weak, I’m just saying overprice value add is weak, right. And so our development model, allows people to buy into deals and although our values are high also, we’re raising capital long term hold basis that allows our investors to come into our deals. buying it at maybe a six to a seven cap rate. In other words, that’s the value that we raise capital in order for when we, get done with the deal and rent it up, analyze cost is six to seven, eight in a market that’s easily four cap or sub-four cap rate on a regular basis, even in great marginal neighborhoods. And so, you know, that’s part of the reason our offer we think has value, but California is just a, it’s a tough market, right? So high values, but if you can get in restricted supply and high demand, right, so that’s a good story, but it’s got to make sense economically, as you’d expect.

Todd Dexheimer: Well, and maybe tough zoning, and permitting and all that.

Scott Choppin: Well, that’s yeah, that’s part of the undersupply store right now, if you’re, if that’s part of the reason it’s so expensive, right. There’s just not enough new supply. So in a restricted supply situation, it’s interesting listening to the, you know, political voices in California both state and local governments who are like now under a mandate to produce more housing, but then when you find the neighborhoods where new housings wanting to be produced, you know, like, oh, no, we got enough, right, you know, like an MB approach. And you go, “well, no, because, look at the economics right? restrict supply, and, of course, equal demand or higher demand and prices can only go up both in valuations and rents”. So this is a weird dichotomy of thinking of, oh, let’s restrict supply, and therefore I’ll make it more affordable and, you know, everybody’s sort of forgetting their economic one on one lessons.

Todd Dexheimer: So I got a couple of questions that came out of there. First of all, are you guys keeping your assets long term or is that certain hold period?

Scott Choppin: So in the early parts of the demonstration phase, we did this first four projects, our intention was just to prove the model up, we want to be disciplined in our approach, and, make sure nobody’s built at scale, five-bedroom four bath unit. So we wanted to make sure it was a viable model. And we’ve done that we’ve now completed the sale first three assets that we developed. But here’s where we go with it. So two things drive us changing now to a long term hold, basically, position in our capital raises, which long term hold generally for us means ten years plus, and I’m of the philosophy that if I can keep as a company, hold on to them forever. That’s, you know, that’s where I want to be. So that’s…

Todd Dexheimer: If you hold them on, hold on to them for forever, forever. Are you getting your investors out of those deals somehow or they always stay in him?

Scott Choppin: Yeah, well we’re seeking people that would like to be in them forever. And so we have a few family offices that are oriented that way, but you know, as you would expect, the marketplace generally is looking for a fixed period of time to invest forevers today, and rightly so, you know, so we got to be going on with that. So generally we’re setting a time period of ten years. Of course, any capital raise has to have some provision for if an investor needs to exit for like emergency purposes or some other, you know, will give a certain percentage of redemption capability within the LLC structure. And then we are raising literally around a 10-year hold, but then we’ll also put in mechanisms in the LLC agreements, that at ten years, we say, “Hey, we want to hold you guys will buy you out”, so think of it like a put and call option. So it’s a mechanical, legal characteristic of the LLC agreement that allows us to have produced a yield for them, because, at the end of the day, they’re investing to make money and, you know, we need to hold that concern, first and foremost, and we do. So we need to have a mechanism that occurs allows us to create the value that they need allow them to exit, but allow us to hold on to it. Now, it could be that they decide to stay in great, we could both decide to sell in ten years because the markets great, we’ve come through a recession.
Part of the reason why we do ten years is that we’re up the mind, and we’re vigilant about a recession coming, right? I think everybody’s expecting it, does it come in twelve months does it come in two years, it’s unknown. But we’ve switched to a long term hold model because we make the assessment that if we have a recession, anywhere from two to four years from now to start, and it’s, you know, two to four years long than a ten-year-old period is has some comfort level, that we ride through the recession and come out the other side, and that we’re not forced to sell in year five when we’re in the depth of whatever downturn hits us. So that a allows us to be patient, because we all saw 2008/2009 that, at least in California, a lot of the apartment projects that were transacting at that time, were actually cash flowing very, very stable a right, no reduction in a major way of rental rates. But values were off, right, because the economy was off and cap rates and demand characteristics for purchase of apartments disappeared for a period of time almost entirely.
But if you looked at the income and the NOI, they were like, really stable. And so if we move that thinking forward, and particularly related to our stable tenant base of working families who tend to stick around because they have strong social networks, we’re at the mind that we’re going to have a relatively stable renter population stable NOI, but we want to be defensive against valuation reductions, which we interpret will come but that we’ve seen 2008/2009 values return even exceeding you know those pre-recession values to great degree in some cases, we can’t know that that will be the case for our projects in 10 years. But we know the undersupply story is not going away for probably decades, right, we are not never going to catch up in any short term period of time. And so, we look at this undersupply the fence of stable, you know, renter base and protected time periods to not have to sell in five years during recession, as our best chance to produce value in the 10th year for these investors when we exit.

Todd Dexheimer: You talk about recession, obviously, is you said, we don’t know if it’s coming in 12 months or four years. But doing development, you have an occupied building while you’re in the development phase, you have a piece of dirt that you have before you even start the development phase. So you have some risk there, [cross-talking 23:59] now you doing to hedge against that rest of mitigate some of that risk factor that you have with the development?

Scott Choppin: Yeah.

Todd Dexheimer: Maybe you wouldn’t have if you just did a regular value add.

Scott Choppin: Right. Yeah, no, it’s a great question. And so the first answer is what we just talked about of having capital timing coherent with that eventuality. So that’s the first one, second is, the second two risks are a build-out risk, meaning, what’s our construction completion risk and, and, in fact, in a recessionary environment, I’m encouraged that construction costs may modifier moderate to some degree, I don’t know that they’ll go down but at least the pressure ever upwards that we’ve been experiencing for the last decade will slow down or plateau, right. So that’s a little bit of a defensive mechanism. But the main thing is that we go are our biggest unknown is that we have that we’ve finished the project with empty units. And now we need to go to lease right now we’re now in a recession. Like that’s the scenario I think about most. And so you have this market risk of lease-up. And then you could add a fourth one, which would be financing risk, which you know, you say you get to the end of the day, and you can’t find any permanent loan to take out the construction loan. So those are the last two. So on the rental risk, this is one of the interesting things. So our tenant base is very sticky. You heard me describe that before and that’s basically strong social networks and so this is one of the protective mechanisms of that this particular demographic because differentiating from like say millennial or Gen Z runner, which is the predominance of new housing is serving those demographics and appropriately so given how large that demographic cohort is. But millennials and Gen Z are much more mobile right. If the job situation changes, their economy changes and their jobs are lost, they can move home.
I joke with our leasing staff that, you know, those folks can move to Austin yesterday, right. And so, that’s coherent with their lifestyle, right, they’re mobile, they’re young, they don’t have any, thing to tie them down, it’s perfectly appropriate for their age group. But we just say we don’t want to rent to those folks we want to rent to a demographic or a type of runner profile that is going to stick around so that’s our UTH, middle income working families so their kids are in school locally, their churches down the road other extended family is close by and as importantly, that these families generally will choose their housing that’s co-located to where they work, and in other words, these are not super commuter families that drive two hours each way to live in Antelope Valley and work in the base and in LA. They basically so, one of our projects in Long Beach was about two miles from the Port of Long Beach.
And our profile that like our, the renter avatar was a man who drove a truck at the port, right short-haul trucking was not going to commute in from a far distance but would choose housing that got him in and out of that job location as close as possible. Plus these families are, you know, have multiple wage earners in the family. So our typical way we think of it as six to eight people in the family group two to four wage earners, say mom and dad, adult child or two, maybe grandmother, we do build multi generationally with the ground floor bedroom bathroom. And so, what we can look forward to is that we continue to offer units to families that are sticking around so we’re in new rental situation empty units. So we have that availability of tenant base that they’re not leaving town generally right? And so we can look forward to having available fans families to rent these units. But here’s an added benefit. We have found through our research that in fact, our market rents are generally very close to section eight FMR rents because our units are so big we are very close, maybe slightly above or below section eight FMR rents.
And so I’ll give you an example. We’re looking at a project right now up in the Bay Area. We’re thinking of renting these units at 4500 a month for the same five-bedroom unit 1750 square feet and that section A FMR is 4523. And so, at the end of the day, we wouldn’t net 45 we have to take out the utility allowance, but in the defensive situation that we’re describing here, down market, we would open up more of our units to section eight families which vast undersupply in that market as well. We don’t intend to rent these hundred percent to section eight families. That’s not our model, but we can certainly adjust that very easily to expand it to those marketplaces. So, again, none of this is bulletproof, but what we do say is we’re looking at it a downturn scenario does our underwriting and projections have the highest likelihood to succeed and be defensive in that environment? And everything that we do really is to bottle and present a financial capital and renter structure that can make us defensive in that downturn scenario.

Todd Dexheimer: I like to answer and I’m very good, and I can tell you have really thought it out. And that’s what’s really important when we’re looking at our investment strategy and I don’t care what part of the cycle you’re in, I can tell you, I’ve been in real estate for eleven, almost twelve years and every, every year I’ve been into it. We’re either entering a recession, going to see a double-dip recession, going to see interest rates skyrocket. We’ve got some sort of sky is falling scenario that every.

Scott Choppin: Right.

Todd Dexheimer: As, if you prepare for and understand that we will shift the market will change will eventually be recession and you have all thought out, you’re mitigating your risk is and that’s really all you can do is take it, take those risk factors and go okay what are the checks that we can put in place to, to kind of secure that to really protect our investors money and you’ve done that and you’re it’s really well thought out.

Scott Choppin: I appreciate that, I that…

Todd Dexheimer: Your strategy works for California works for where you’re at and…

Scott Choppin: Right.

Todd Dexheimer: Necessarily work in Minneapolis, but it works for where you’re at.

Scott Choppin: Yeah, the assessment we make is this like we have underwritten you know, almost all the major urban Metro markets on the West Coast and Denver and then this model works and all those marketplaces but absolutely and middle America and even parts of California any other inland like Riverside County just doesn’t work. And, we’re not like upset by that we just realize our metric is when housing costs come down enough that renter rental houses when people rent single-family houses, those prices drop enough to intersect with the sexual sector, the market that we want to be in, then that’s a market we don’t go in, right. And we can even sort of model it from concentrically from the LA basin, and get to a few miles outside of the LA County border and it stops working. So we’re very particular in fact, I tell brokers, you know, they said, you know, the opposite I have with brokers I go, I actually don’t want the high-end neighborhoods. I want the low and moderate-income neighborhoods because land prices are more efficient and Sony, it’s a little easier to find more available sites. But, again, that’s where our demographic already lives.

Todd Dexheimer: Well, and that’s what I was going to say in two is you’ve got the demographic you’ve already caught on onto you understand them, you understand what when they’re moving, why they’re moving, and that they’re probably not going to move the recession comes. These people want to cling on to their, their house

Scott Choppin: That is right.

Todd Dexheimer: And the last thing they’re going to do is try to move because that’s expensive for them. And…

Scott Choppin: Well, I mean…

Todd Dexheimer: Being homeless if they…

Scott Choppin: Right, well, I mean just the nature of just basic fact of having kids in school, as I know, for me, I have kids, they’re, they’re not between 12 and 18 years old, I wouldn’t dream of moving them now, not that necessarily, am I comparable for this demographic, but I think all parents have that concern, right. So I go, if we understand it from that standpoint, then we say that’s a factor that they consider just the same as when people buy homes, they want to be in the best possible School District, it’s the same sort of metric that they use, and just, in this case, these families go like, I want to be close to our jobs and remember it’s multiple jobs right mom and dad and adult kid and Aunt Jane, they’re all working different jobs and they need to be close to all those jobs or at least as central as they can be. So that’s a pretty powerful motivator to stick around.

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Todd Dexheimer: Scott, let’s talk a little bit about the business and the structure and things you guys have done to be successful. So maybe you maybe give us three key success tips that our listeners can take from you on what’s worked well in your business. What have you guys done really to move that needle forward to be able to get the 1700 units built and…

Scott Choppin: Right.

Todd Dexheimer: And you know, to establish a good business.

Scott Choppin: So one of the first ones, I think, just in thinking about this question, Todd is it’s something you said a little bit ago, which is sort of being protective about a downturn. Now, none of us can sit around, like worrying about the sky going to fall tomorrow, because then we’d never do business. So the mood I use the descriptions, I call it vigilant, right. I’m watchful, I’m prudent, I, you know, we go continue to do business because we believe in the model, and we believe in these marketplaces, but vigilance includes a certain amount of prudence, which is just being careful and where that shows up is an underwriting. And in fact, I’ve been telling my teams as, as project managers, I basically teach them how to underwrite deals and run our performers and that kind of thing. Is that when I was younger, and you know, both working corporately and in the early years of running my own company, I was much more aggressive and how I assumed you know, the future would look on various things, rants, operating expenses, things we worry about in the multifamily business costs of construction, which is unique to development and then interest rates.
And so I’m really the joke I make is when I was younger every deal could work like there’s no deal I looked at that I couldn’t figure out a way to problem solve and be creative and make it work. And now I’m of the mind it’s the opposite almost every deal is going to die, very quickly as we can underwrite it and you know, move past it. But I think it’s just being oriented around a conservative underwriting. Now, I say that it sounds just like so obvious, but I think anybody who’s new to the multifamily investment business and is hungry for deals, it affects how you look at your underwriting and I think if somebody becomes more season putting somebody like yourself after while you go, nope, you know, Canada you know, the broker says, you can achieve Two Hundred a month rent increase if you change the to your specifications, and you go maybe, and then you test and you go, No, it’s really like fifty to a hundred I’m making this numbers up, of course, being…

Todd Dexheimer: Yes.

Scott Choppin: If you can make any pro forma work, if you change enough of the right assumptions to make it work, right, I’ve done it a million times. And so now I just I can and I’ll probably do this for that’s my cry, just look at somebody go, nope, that doesn’t work, you know, and if that change and underwriting makes the deal die, then, unfortunately, that’s what happens and you just own that and move on to the next one. It’s, you know, there’s plenty of deals in the marketplace and you should never be beholden to any particular deal so much, that you’re willing to sort of, you know, use weaker assumptions on your underwriting So, call it powerful underwriting, you know, conservative underwriting, however you want to describe it that would be in this business and that applies to any deal business. Right, whether it be development or value add, so that’s one. So the other one I really focused on a lot from my own career is continuous competitive learning. So, I’m oriented around and work with a particular group that focuses on, you know, learning new and cutting edge, strategic knowledge, right. So think of things that help us run our business more effectively.
And I don’t mean tactically, so not how to do different accounting practices or what software to use I don’t mean that when I meaning is ways to be in the marketplace, both as a company like how we present to the marketplace, what our identity is, but also me personally is the person who is the CEO and founder of the company. So the strategic knowledge, in this case, would things about you know, holding, building and maintaining trust right, now, everybody speech trust in business. I think everybody uses it commonly and there’s nothing wrong with that, right? It’s a perfectly appropriate way to do it. But I’m oriented around how do you actually maintain and build trust like truly not, you know, not BS. And so, I personally spend a lot of time and I work in networks people who learn this continuously and we’re dealing with new technologies you know, in the development business modular housings, a very new hot growing sector. 3D printed housing is an even newer technology and those things are on their way those technologies are already moving into the marketplace.
So we have to be focused on innovations in order to continue to remain competitive and produce value for our ambassadors that’s better than our competitors, right. Ultimately, we’re always competing, and I think it’s just you know, the orientation around continuous learning competitive practices to maintain that innovation. And that new thinking and then the last one is as I look back and when I found it or Pacific I was 32 years old and you know if you look at statistically that’s when most people be, you know, start to get that if they’re going to be entrepreneurial, that’s sort of the time in their life statistically that they decide to launch. And I don’t know that there’s anything magic about that. But I, as I look back on it now, I would really as if I was a new entrepreneur, I would think very seriously about even staying in the corporate world or whatever, job you’re in, if it’s appropriate for what you want to be an entrepreneur for the future and really spend a lot of time at building networks. hat and networking is again a term that people use a lot. And the way I think of it is not networking in the sense of going to meetings and handing out cards, although that’s one version of it, but really about building powerful networks of people who know you and you know them, you’ve built trust with them, you have an identity with them, think capital sources right for multifamily investment or development. And so when you do eventually launch and say you do instead of at thirty-two, you do it at thirty-seven, that by the time you’re thirty-seven, these capital sources have seen you in a more senior executive role at a court in a corporate role. They’ve watched you do battle and you know, and problem solve and be creative, even probably seen some failures and some recovery from those failures. And so then when you launch you have a deeper and broader set of people that now believe in you. And so I think it will make for a more powerful launch. I didn’t do it that way and I spent really the first five to 10 years of my entrepreneurial career doing just that. Getting no paycheck, I mean, we made a lot of money during that time period, but I thought about how much more could I have made? How much further could I have grown, if I had done it a little bit differently, and I don’t suffer over this having done it different historically. I mean, I wouldn’t trade it for a million. But I do go, is there a different, more powerful, strategic, effective and competitive way to do it? And that’s where I land is building powerful networks as aggressively as soon and as you know, powerfully as you can.

Todd Dexheimer: Yeah, I mean, it. I tell that to a lot of people. I mean, there’s a lot of value in maintaining your job for a while. I mean, not only have a steady income while you’re building your business, but you’re building those networks as well. It kind of depends on what type of job you’re in. I was a teacher.

Scott Choppin: Yeah.

Todd Dexheimer: High school teacher. So where my networks can be that strong. No, but you know, what could I do?

Scott Choppin: You could have kept the job and like, been attentional about trying to build networks in the real estate business because that’s where you…

Todd Dexheimer: Yeah.

Scott Choppin: That right?

Todd Dexheimer: Yeah, or I could have or I could have got a different type of job that would have allowed me to really learn some of the things that if you want to be an entrepreneur, you want to do this thing. You can be really intentional while you’re at your job.

Scott Choppin: Absolutely.

Todd Dexheimer: And the processes and the systems, networking with people, building those relationships, getting throughout just not only your own company but throughout the industry.

Scott Choppin: Yeah.

Todd Dexheimer: And really learning and being intentional. And yeah, I mean, I quit teaching when I was maybe twenty-seven, and I struggle a lot early on with building those networks.

Scott Choppin: Yeah, yeah. Same here.

Todd Dexheimer: A challenge.

Scott Choppin: Yeah. Yeah, no, I agree and in fact, I wrote an article if people want to go on our website, which I’ll get to later, but I wrote an article at six ways to build your real estate development career. And one of them was “get a mentor and do internships”. Now, it’s not necessarily a job per se in the way that we’re talking about here, but the whole point of it was to get an education from people who already do it at the highest levels. And, in this instance, you could get a job as a System PM or an Analyst, or whatever the job would be for how to underwrite and put multifamily deals together. And that is so much more valuable than doing it, try to do it on your own, or me do it on my own. And you can read all the books, but I’ve had mentoring relationships, and I advise people, you know, to continue to seek out and again, mentors are a different form of network, but back to that building networks thing, mentors are part of that. You can read every book, I mean, there are podcasts like yours and tons and tons of info out there, and then I tell people look if you want to be a multi-family Investors go underwrite a hundred deals, to begin with.
Don’t even try to do the deals. I mean, if you find something that’s so brilliantly under-priced and you’ll find investors for it, right? But go under right a hundred and knowing you’re not going to do the deal you’ll know rents, you’ll know your market, you’ll have seen a bunch of product, you know, the brokers, right, you built your own pro forma. You’ve asked the brokers ten million questions and figured all the right ones and wrong ones to ask, right? And you get done with a hundred and you’ll be probably better than most right and that takes no money takes time and energy. And but you can do it no money, no risk, right? What a beautiful way to do it. And then when you come out and you do actually want to take some risk now your season much more than most people do. I think people like you know, you probably talked to people as I have. Everybody wants to launch and get into their first deal as soon as they can. And I get it right, the entrepreneurial drive and wanting to make things happen as you know, usually, it’s built into people and I, I’m the same. But you and I haven’t done this, you know, a lot you got off, but there’s a different, more powerful way to do it. So, you know, hopefully, people listen to these pop your podcast and other podcasts and come out of that with a more powerful way to start.

Todd Dexheimer: Yeah, and I don’t think you’re saying don’t just don’t do it. Don’t get started yet. But you’re saying, look, I mean, this is a long game.

Scott Choppin: Yeah.

Todd Dexheimer: For the long term, be patient and do it, educate yourself, get mentors, surround yourself with the right people, and do it the right way, you’re going to be a lot more successful.

Scott Choppin: Yeah.

Todd Dexheimer: Than if you just rush into it, and think it’s going to be a get rich kind of thing.

Scott Choppin: Plus, I mean that resources that are available today. I mean, when I started my real estate I mean, I knew I wanted to be a real estate doctor at the time was eighteen, which is a long time ago now. There was no YouTube, there were no podcasts. I mean, there was a few books around which I read everything I could, I took every real estate, you know, course I could take in college. But at the end of the day, you know, it comes from interpersonal relations with people learning from people, learning from deal makers, watching deals to happen. And so you’re just, yes, it’s more time. Yes, you have to be patient, I totally agree with your assessment there by the way, but when you do your first deal, it will be so much better and I just you can’t know that right. You can’t know what a good deal and a bad deal is when you’re new, right? Because you’re new right, nothing wrong with that, but being oriented around learning first and executing later. I mean, your first deal after you’ve learned and looked at a hundred deals, will make you probably ten times the money you could have made had you launched you know, prematurely and or hey, by the way, you missed the opportunity to lose a lot of money in the…

Todd Dexheimer: Early deals.

Scott Choppin: Right, what’s the saying of observing others and learning from their mistakes and not necessarily having to make those same mistakes yourself. Right? Something along those lines.

Todd Dexheimer: Make mistakes and other people’s backs.

Scott Choppin: Yeah.

Todd Dexheimer: So, with that, what’s a, what’s a mistake that you’ve made? And how have you learned from it improved from it?

Scott Choppin: Yeah. So, the main one I go to Todd is just being mindful and observant and vigilant about economic cycles and, and applying it to yourself, like literally saying the act, I am not immune to the economic cycle. So that same philosophy that I described earlier, when I was young, I could make every deal work. Well, at the same time is, oh, well the recession. Well, get me and I didn’t say those little words, but something to that effect. And if you know, fact that a lot of the social media output and our mailing list output as about the tools that we’re using to track the economic cycle, what our observations are, things that we saw in the 2008 recession that we might look for, to the signs of the next recession and the next one will be different. Even just having the knowledge of every economic cycle is different. To not be, to listening to all the wrong people too much mainstream media is awful about economic, tea read tea, you know, tea leaf reading, economic.

Todd Dexheimer: It’s all about ratings for them. They…

Scott Choppin: Right.

Todd Dexheimer: I mean, no, it’s an agenda. I mean…

Scott Choppin: Right.

Todd Dexheimer: Just how many people can watch their show.

Scott Choppin: That’s right and so, yeah, agreed. And then in fact, what I’ve done is I have a small group of channels that I call channels but you know blog post social media accounts, people on YouTube so as an example I follow a guy named Bill McBride who has a blog called “Calculated Risk blog”, look it up on Google, you can find it and he’s got a housing centric view of the world. He’s an ex-Fortune 500 Executive started writing about real estate and economic cycles and recessions prior to 2008 in fact, he made the call for the recession also made the call for bottom of this cycle in 2010/2011and great graph, so he graphs lots of housing statistics so you can see visually, how we stack up today versus past economic cycles. I also follow a website called econ pi, that’s www.econpi.com, and they have something that a how can I put it? It’s an economic cycle tracker. And it’s a grid system where they calculate multiple economic variables. And I don’t remember the count, but it’s something like twenty or twenty-five different economic variables, and then they graph them in a way that basically represents where we are in the economic cycle, are we expanding our contract? And are we moving towards expansion towards retraction and it gives a real-time basically weekly, twice, or every two weeks update. And that, to me, has been a very powerful way to look at it. We’re tracking other you know, economic and recessionary indicators.
Obviously, the yield curve has been you know, on everybody’s mind lately, although people are suggesting that maybe because of all the money that came in from the Fed in the last recession that we may be have tweaked the cycle in a way that invert, inverted yield curve isn’t a good indicator anymore, but also looking for things like oh, it’s different This time, right? Remember, I don’t know if you remember that the internet bust in 99/ 2000. I remember people saying at the time, oh, it’s different this time, you know, companies don’t need to make money, economic principles are suspended or something along those lines. And I really, at the time I didn’t listen to that because everybody was caught up in that frothiness of everybody wanted to work for an internet company or own internet stock and then it all came crashing down.

Todd Dexheimer: Reality.

Scott Choppin: You know, and that should have been lessons learned for a way but then, you know, you know, the internet’s not real estate Real Estate’s not the internet. So it’s different, right? I remember in 2006, there’s a stat fact that kept the article, I still have it in a book that have all the clippings I made from people talking about economic cycles, and it was something to the effect of, again, a headline of, oh, housing prices have gone up, haven’t gone down for like the last since 1930. They had some graph that I don’t know how they made the graph work, but you look down you go, Oh yeah, I could see that. And then you sort of buy into that, you know, silliness. And that’s just one data point in a very, very noisy background. So now our jobs are to sort of, like read through everything that we see and hear and, you know, see on the internet and try to make an assessment about what is this person, what’s their objective view? Like he said that they want to get ratings, Paul Krugman, you know, as a well-known guy, he’s been bearish for, somebody’s job the last eight, less than eight out of five recessions. He’s been bearish, right. He’s got a he’s got an agenda. So I’m looking for people like Bill McBride, who writes calculated risk. He’s gotten a dog in the hunt, he’s retired, he’s made his money, he has a skill set to read statistics, read reports. And report it neutrally, right? He’s got no, like agenda. I mean, he’s got a blog that probably, serves him well to generate revenues for retirement. But you can just, I’ve been following him for several years and I just know from how he’s approached things and watching him be successful in his assessments to know, okay, he’s, you know, he’s a neutral, he wants to present what’s the truth, at least as he sees it from his standpoint and has no other agenda that I can tell now, I will only rely on him I want at least three to five good, different sector economic cycle opinions or economic cycle tracking tools like the econpi website.
And then at the end of the day, we all have to make our own assessment as to whether a recession is coming and even then you don’t know what the time it is, you know, the Yoker was inverted a few months back, people Assess 12 to 18 months generally historically, for the recession that hit after the yield curve inverted, but the two years and the three months one inverted one did not that has never happened before. So clearly we’re in a different era for yield curve, but nonetheless, it’s just, you know, one signal amongst multiple that we have to track and then you compare it and then you pair that up with a conservative underwriting that we talked about before. I mean, that’s all you can do is just try to have deals that are relatively defensive that if a recession comes you’re not crushed, you may have to manage it closely for several years so you don’t lose money. Right, but you’re not wiped out, which is what we saw were a lot of people got wiped out in the LA recession.

Todd Dexheimer: Is your philosophy to pull back when you see recession coming or is it to just continue on because what you’ve put emplace is sound, and you want to continue to grow?

Scott Choppin: Yeah. So that’s a great question. I think that the for if you talk to most investors, they would say, and you’ll see a lot of people that just go Look, I stopped building, you know, they just, you know, they don’t do any more new projects and that’s certainly one way to do it. For us, if we were only a merchant build model, which is build it, rent it, sell it immediately, then absolutely, that’s the thing to do is you just, soon as you think there’s any inkling, you just you don’t do any more new products, right.

Todd Dexheimer: Yeah.

Scott Choppin: Here’s the interesting thing that I found and again, being very, like cautious and vigilant about the cycle is I’m actually encouraged by these long term hold models that we’re now in for capital races because if I can say there’s a story around being defensive in a downturn, and I can have a model that’s relatively stable and I say relatively because again, there’s no guarantee we don’t sit here saying we’re bulletproof and gosh, we got this you know, dial then we’ll never have a bad day, we’re just against statistically we have the best chance to survive and recover quickly. Right, but actually worse, we’re looking forward to construction costs moderating, like I talked about before looking forward to land becoming potentially more inexpensive, although, in my experience, land sellers are always the first to jump on an upward trend and last jump off of a downward trend. You know, capital will moderate, interest rates will moderate. So, we have to be cautious, I wouldn’t go out and start 30 projects tomorrow, but I would start you know, three to five and in fact, we are starting that many where we have a story that if it does change that we can be defensive and that’s the way to be prudent which is take a risk but having it well researched and conservative under conservatively under it.

Todd Dexheimer: Yeah. Good answer. Alright, so we got to wrap up here, I got a couple last questions for you. What’s a book that you recommend to our listeners? Real Estate,

Scott Choppin: Yeah.

Todd Dexheimer: Business mindset, what was one of your favorite books?

Scott Choppin: So, it’s a great question. I won’t necessarily, quote any real estate books because I think that those are pretty commonly known. So I go out of the real estate domain a little bit. So I’m a follower of a guy named Grant Cardone, which you’ve heard about Grant, I love his TEDx rule book. I think in this business of real estate, we’re always trying to balance you know, going crazy and doing too much, but I also find that if I look at myself over the years, assuming I now prudently underwrite deals, that I need to be setting my goals for the long run much higher than that I have. In fact, I’m in that process, too, in that right now. The other one, I, we’ve been spending a lot of time right now. So we’re actually building out a whole investor acquisition system or what we call IAS. And that would be a platform, that we have a platform. We website, email marketing, social media channels, and we do a lot of that work, but this would all be cohesively designed to get our name and identity and product type out in the marketplace as broadly as possible. And, so, that has us basically really spent a lot of time in the marketing domain, and digital content production.
If anybody goes and searches me on Google, you’ll see a lot of our channels Twitter and Instagram and LinkedIn were pretty broadly out there in the marketplace, but Gary Vaynerchuk is a guy I follow as well. And he has a book called “Crushing It “or really any of his books but his philosophy is the one I think about answering this question which he basically says in this day and age of the Internet, and technology and digital content marketing and this is applicable to any business if the stodgy old real estate business is that every company is now a media company and needs to be in the marketplace to do their business effectively and competitively, right, as a real estate investor or a real estate sponsor, you now need to be out in the marketplace like a media company is and would be in a way to remain competitive because all your competitors but the sponsors or investors are doing the same thing.
So now we’re developer sponsor, so we’re out in the marketplace in that format, raising capital from investors, but the whole crowdfunding domain, a lot I see family offices getting into digital content marketing to get their names out there. I had a phone call yesterday with a group who basically isn’t a crowdfunding platform but they’ve built a whole digital content marketing platform for to raise capital for their business, which is like a Fund Manager Intermediary. And then they talked to us as potentially putting that capital into our deals. And so everybody’s making that move and to remain competitive, you’re in that space, you got to continue to make that move. I would also say for anybody who’s trying to get you know, is in the space of trying to find more deals via land via deals acquires value add, you need to be doing that they’re also right. I mean, what a powerful mechanism that if you want to try to find as many off-market deals as you can that’s our mandate, both as developers and acquires a value add deals. Why would you not be doing that fact? I assess that if you’re not doing that you’re already behind, from a competitive standpoint.

Todd Dexheimer: Interesting. Yeah, good, good point, sir.

Scott Choppin: Thank you.

Todd Dexheimer: So last question, before I wrap up, what are your three pillars of wealth creation?

Scott Choppin: So I’m going to go back a little bit to what I talked about before about strategic knowledge, but basically continuous learning, Competitive learning and what I say competitive learning is learning about new things, new technologies, new ways to do business better than your competitors, right and whatever way that means in your industry. So seek out people who are performing at the highest levels in any domain, but obviously, we’re talking about real estate, but even this digital content marketing world that we talked about, and seek out those high performers and learn with that become part of their networks and a learning capacity, right. So acquisition of strategic knowledge is my main pillar for that. The second one we talked about before is building powerful networks. I continue to come back time and time again, Time sure you find the same thing that I met that new person I met that new company and all the sudden they expand my capacity and capabilities to do more deals, bigger deals, do deals more profitably. And I, One day, I think I will get over this but I’m just continuously surprised I got off, that was so great to meet that new person and have them be part of my network. They’re the right person. They’re powerful in their own way and their own offer, their after learning themselves. And then transacting with them, and I don’t mean like in a mercenary way, but trading, hey, let me help you. And I could use this help and return that capital. That could be networks that could be resume that could be resources deals, right. And in fact, my oldest son is a freshman at USC, and I basically coaching him, I said, “look, you’re going to a great school, and that has a network. That’s part of the reason we picked it. But you have to work and build your network in that school like you cannot do that and’’…

Todd Dexheimer: It does not come to you.

Scott Choppin: It doesn’t, right. I mean, even at a place like that. And in any environment, you have to be intentional and have that be your objective and not just build any network but build a powerful network right now. You know, if you have the top five, you know, most, valuable people in the world and your network the Warren Buffett’s and the Bill Gates and the Elon Musk’s of the world and you have those people in your network, how what level could you perform at? I mean, it would just be mind-blowing, you know, some of us, none of us may ever meet those people in the way that I described. But if you go just a few notches above you where you’re at, or several ten notches above you, I mean, that’s the people you need to connect with and learn from, and they will they’ll be like rocket fuel. And then at the end of the day, I think both the strategic knowledge and powerful networks ultimately end up helping you to build powerful teams, powerful business organizations, right.
And again, that’s networks, right? So I have a group of people around me, vendors, architects, people who operate in the construction world property, managers, brokers, capital sources, people that IJV deals with, right, if we want to trade risk in a deal, landowners. So, all these people as you build into a powerful big business organization become sort of a flywheel of benefit and positive growth. And it’s I think the three pillars even work together first, you get the knowledge, then you build the networks, then you build the powerful business organization. And in fact, they sort of go in that order the way I think of it. And at the end of the day, I mean, people assess you in the real estate business, I mean, even stuff as silly as like, hey, what kind of office space do you have? Or do you not have that space? And I’m not saying there’s a right or the wrong answer. But if you want to be the most powerful operator, sponsor or investor in the marketplace, and these are the sorts of things that you got to think about, and anyone of these three can help that but when you put them all together, they become much more effective and strategic way to operate.

Todd Dexheimer: Yeah, good stuff, Scott, I really appreciate it. The time you’ve been able to spend with us and I learned a lot took a lot from this episode and really just the thought that you put into your business and the answers that you’ve given have really provided our listeners a lot of value. Last thing I got to ask from you is how can our listeners get in contact with you?

Scott Choppin: Yeah, appreciate that, so best way is to go to our website, which is triple www.urban pacific.com. There’s a contact box at the bottom of our website and we monitor that continuously, anybody is welcome to email me. It’s my last name Choppin@urbanpacific.com is the email. And I keep that open. I’m on social media, so if somebody wants to send me direct messages on Twitter or Instagram or LinkedIn, Linkedin I use quite a bit. So those are all good channels and we are I have a team of people who monitor them and I’m looking at him almost daily myself. So that’s those are great ways to reach out.

Todd Dexheimer: Awesome. Awesome. Well, Scott, you have a fantastic rest of the day.

Scott Choppin: Alright, Todd, thank you for the time.

Todd Dexheimer: Yeah. Likewise. Hey, thanks for listening to the show. Couple things before we go again, go on to our Facebook page pillars of wealth. We’d love to have you on there. Go on to iTunes, give us a rating and review and subscribe to the show. Also, you know, don’t forget to reach out to me if you want any help with potentially growing your business and reach out to John Styles to help you buy or sell real estate. Thanks for listening, we appreciate it. Have a fantastic the rest of the day and as I say make every day Saturday.
End of the Podcast Interview

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