Ep #631 – Making Millions through Multifamily Development

Nick Earls and Eric DiNicola are high school friends who partnered later in life to live out a childhood dream. Nick is the author of the book “Making Millions through Multi-Family Development.” Eric, with a decade of experience in the financial industry, joined forces with Nick in 2015 to create Winterspring Capital, a real estate development firm.

Here’s some of the topics we covered:

Multiple exit strategies for this economy
Government RFPs
Office conversions to multifamily
Development fees
Path to progress
Gateway cities
The value of vision
Dealing with the community

Full Transcript Below:

Rod
Welcome to another edition of “How to Build Lifetime Cash Flow Through Real Estate Investing”. I’m Rod Khleif, and I’m thrilled that you’re here. I’m actually interviewing two guys today, two super knowledgeable guys in the development space. Their names are Nick Earls and Eric DiNicola, and their company is Winter-Spring Capital, and they’ve got lots of experience in commercial development. In fact, Nick wrote a book called “Making Millions Through Multifamily Development”. They’ve got a lot of projects on the table right now, and I’m super excited to dig in. Welcome, guys.

Nick & Eric
Hey, thank you so much for having us.

Rod
Absolutely. So maybe you could each take turns. Just kind of talking a little bit about how you got into this business, how you got started, how you got to where you are now. And maybe, Nick, you go ahead and start and then Eric. And then we’ll get into some questions.

Nick
Sure. Yeah. So Eric and I have been friends almost 20 years now, met each other in high school, always kind of thought we didn’t want to work for someone else. You know, we had, like, a little rebellious streak in us from a young age, played football together, played video games together, a lot of team-oriented stuff growing up. And we just had this idea you know, we’ll do a business someday. Went our separate ways in College. And I got my real estate license in 2011, and I was selling kind of smaller apartment buildings in Massachusetts and Connecticut. And I said to Eric, hey, this might be the avenue, like getting into real estate investing. And we originally had the plan of just buying you know, a smaller rental and just kind of getting, you know, the traditional way most people do it. But as I was you know, getting more and more into being a real estate agent, I saw an opportunity in condominium development in Boston, huge supply shortage, and a lot of demand. And we did our first project in 2015. Been doing condo development ever since.

Rod
Nice. Now you said you got your real estate license. Were you doing anything else? You seem very analytical, just the way you communicate. You don’t seem like a salesperson, and that is any sort of a judgmental. It’s just an observation. So were you doing anything else besides the real estate at that time?

Nick
No, just real estate, only a couple of sales a year. But you know, selling apartment buildings. I was living with my parents to save money in my early 20s and just trying to save up as much money as I could. And on the commercial side, I agree. I’m not a salesman, I was always kind of a path to making some money, and getting into real estate in another way was how I viewed it.

Rod
If you’re doing commercial, then you know, that’s a lot of analysis. So now I get it. In my head, I was thinking residential, so I wouldn’t have asked the question if I’d have realized that you were doing a commercial. Got it. Now I totally got it. You know, and guys in the commercial real estate space, obviously, brokers have to do a proforma on our deal. They have to analyze the deal. They have to you know, analyze it to the point where they can properly put evaluation on it, for example, and things of that nature. So now I get it. All right. Super. How about you, Eric?

Eric
Yeah. So you know, as Nick said back since high school, we met each other. We had this idea. We went our separate ways. I was– after College, I worked in New York City. I did a little public equity. Then I worked for a company to deal with private equity firms. So I was kind of jumping all over the finance world. That’s what I ended up going to school for. I had to move back up here at one point. And I met with Nick. You know, we are still you know, great friends, talking all the time. And he said, look, I think I kind of found something here. He’d been in it for a little while. Found this early project. Once he kind of discovered that Boston had this kind of condo development play where people are very interested in condos. The price per square foot on the sell outside was continuing to rise nowhere near what it is now, even six or seven years ago. And he found this property that was a two-family. This is all was originally two families owned for three. Figured out. Okay. We could actually add a unit here, sell it as three individual condos. And he convinced me. We saved up a bit, bought that first property, and kind of continued to roll it from there. You know, I was kind of you know, his love at first sight. Once he convinced me of the project.

Rod
I love it. You know, I was just in Boston two weeks ago with my wife, and we did the whole Faneuil Hall thing.

Eric
Oh. Nice.

Rod
You know, and all that. And we drove up to Maine and spent a couple of days up there and love Boston. My dad used to live there in Wusta.

Eric
Oh, really?

Rod
Anyway. I was pointing out that you know, you guys call them two families up there. Here, you know, they’re duplexes everywhere else. But you call them two families and three families. And I was showing them to her, how they’re stacked right on top of each other. And I remember my dad lived in three families at one point where literally each floor has a different family. And you don’t see that at really much else other than the Northeast. You know, that’s just kind of funny when you said two families triggered that we were just there and I was pointing them out to her. But anyway, okay. So you started small. You found a little one. I know you said you’re doing your biggest one now, but I was going to dig into whether or not that was an infill situation. So you scraped it and just put up three units, then that is what you did. Yes?

Nick
Yes. So that was kind of a dilapidated two-family and zoning code by right. Allowed us to add a third unit, saw the opportunity there just dove in. For a lot of projects we do, we actually have to get special permission during the entitlement process for that first one, we didn’t.

Rod
Fantastic. Fantastic. Did either of you have any general contracting experience, or was it like, did you hire a GC? Did you become a GC? How did you handle that piece of it?

Nick
Yeah. My brother is actually a Carpenter. And so he was a partner with us on the project, and he got his GC license specifically to do this project for the test and everything.

Rod
Fantastic. Yeah. That’s not an easy test. And you’ve got to have some experience and everything else associated with it. So it’s not the easiest thing to do if you haven’t planned for it and prepared for it. Okay. And so you did that one. And then did you do a few of those two to three family conversions? Did you kind of start a model, or did you go bigger right away? Talk about your progression a little bit.

Eric
Yeah. We tried to double that size. We ended up doing a few other ones in the area, like seven units. You know, the building wasn’t too much larger, maybe two to three times the size. But we squeezed in seven units, tried to fit it in with the neighborhood. That’s sort of a strategy that we’ll work with on our architect, just because you get a lot of pushback. If you don’t do that, you still get pushback from the neighborhood. But you try to do what you can. So we did. We tried to jump up to that simultaneously, we did another what ended up being two large townhouse units in a city right outside Boston, which was sort of a big fight. We can kind of get into that later. But that was a large project, even though it ended up being two units, there are several thousand square feet apiece, so they’re you know, well over a million dollars each. And actually, an investor ended up buying those and renting them into their condos. So in the beginning, we tried to roll everything in ourselves and maybe then take on two projects at once and three. But at that stage, it was still kind of our own money, our own capital. We had to wait really until one was done to jump into the next. So that was kind of how it started early on.

Rod
Got you. Well, you know, before we started recording, you told me you know, all the different things that you guys have going right now, which was pretty impressive. I think you mentioned a 32 unit. Why don’t you speak to that rather than me repeating what you told me? Why don’t you talk about these different projects that you have going right now? So start with the 32 unit. At what stage is that one?

Nick
So that one we’re closing on it next week, actually.

Rod
Oh, wow.

Nick
So it’s 32 residential units. They’ll be luxury condos. It’s in a neighborhood of Boston called Brighton, right outside of Cambridge, five minutes from Harvard and MIT. The Life Sciences industry is huge there. Lots of new development going on, billions of dollars in that area. So that project is a very top-of-the-market price per square foot sell-out sort of project. We’ll be getting anywhere from $900 to $1,000 a foot when we’re selling those units on the other end.

Rod
Let me ask you a question in light of what you just said. Do you have multiple exit strategies or is it the only exit strategy sale? And the reason I’m asking is I went through the crash in 2008. I lost $50 million, and the people that got hurt the most were the ones that were doing the high-end development when the music stopped, and now some of them you know, survived. Like some of the players in Miami, you know, they just rented the condos until they could pull it back out. Is that viable for you guys, or do these have to sell? Because you know, I don’t know about you, but I feel like we’re frothing a little bit right now and you know, this current administration in the White House, God bless them. Oh, my God. Some of the moves they’re making just make the hair on the back of my neck stand up. And I think it’s inevitable that it’s going to impact the economy. We’re certainly inflation, which of course, helps us as renters. I mean, as landlords, but doesn’t help anybody else. But you know, if things aren’t selling and financing dries up, which in ’08, ’09, it was like a light switch went off. I tried to sell my portfolio at about $0.35 on the dollar and I couldn’t sell it. So my question again is, do you have any– what’s your thoughts on that? Just speak to that a little bit. And you may completely disagree with me. And that’s great. If you do, it’s fine. Okay.

Eric
No, we do agree with you on that. And we want to have an additional exit strategy. A lot of the guys we’ve been working with as far as financing this project, they want that as well. Probably similar background. They understand you know, what happened 10, 15 years ago. So we’ve had to model the building as rentals. There are very high-end rentals in the area that can really achieve a good price per square foot on a rental basis, $4 or $5 afoot. So in that building, we figured out you know, what the NOI could be at that level if that were to happen. What the value of the building would be based on the current cap rates. But as we know, they’re pretty low, especially right there you’re talking just under four, you know.

Rod
They’ll change.

Eric
So we kind of modeled it as in case cap rates expand a bit. And if we had to rent it, could it still work? And it’s not quite as attractive as it would be as a proforma with the condos, but it can work. So, we have that as a backup.

Rod
But it breaks even. Listen. All you got to do is break even. Guys, that’s it. Okay. Well, that’s really good to hear. I hated to ask the question because I was afraid I might be backing you into a corner, but I had to just because you know, it was that demographic or that type of construction that really got their asses handed to them in 2008, ’09, and ’10. So I’m really pleased to hear that. That’s the 32 unit. That sounds super exciting. Congratulations on it. That sounds like a lot of fun. So now you’re also doing some affordable housing. Please speak to that.

Nick
Yeah. Actually, right before the interview, we were on the horn with the city talking about the project. So that is a smaller job. Seven units. It’s funded through city funds, and they’re going to be homeownership units similar to the condos we sell. A lot of people are used to affordable housing with Litech and rentals. There are not as many funds available for homeownership on an affordable basis, but the city of Boston is very proactive with this part of its policy. So they have these funds they’ll put out what is called RFPs request for proposal, and you just kind of say, hey, I can do this with the lot. Or maybe they already have plans, and you just give them, hey, I can do it for X amount. You know, this is my budget, and then they’ll select you based on your background and your team. So we were selected for this project. The first one we’ve done, we’re still in the permitting phase. But since we’re working with the city, that’s obviously a lot smoother than when you’re doing–

Rod
Sure. And they want it so bad. There’s such a huge need. What are the margins like, though? Can you make some money? Obviously, you’re not in this to be completely altruistic. What does that look like? You don’t have to give me detail, but does it look like the deals will make sense and you’ll make a decent profit on them as well.

Eric
So actually, how it works with this program is what you’re allowed to sell them for at the end is actually less than the maximum you could sell for is less than what it costs to build. So you would take a massive loss at that rate. But the subsidy makes up that difference. And then you take a developer fee based on the percentage of that. So that’s where you, as a development firm, make the capital.

Rod
So you take your development fee. Okay. It’s not like a flip or anything like that where you’ve got some extra margin in there. So it’s good work. Guys, talk about needed. It’s absolutely neat, especially in Boston. Good guy. Okay. Well, that’s awesome. Well, the one I’m super excited to hear about is this conversion. Talk about that. This office building to apartments, because you know, I get asked that all the time. What if I buy a hotel and convert it or buy an office building convert it? And I’ve got you know, an ex-partner that’s doing an office building conversion right now. A big one in Cleveland. But talk about that a little bit.

Nick
Yeah. So this is kind of a new strategy for us, but we’ve been slowly building up kind of a rental portfolio with our own money. Now, we have an investor base we build up from our development jobs, and we thought, why don’t we tackle some of these Massachusetts and the Northeast in general, used to be kind of manufacturing hubs in the late 1800’s. A lot of old office space. In addition to that, you have a lot of outdated zoning codes where you’ll have kind of a major corridor of a city with a lot of vacant office space that would be much better suited as mixed-use residential with retail on the first floor. So that’s what I just described as what we’re pursuing here. It’s a smaller office building just to kind of–

Rod
How many square feet?

Nick
Do you know off the top of your head, Eric?

Eric
Yeah, it’s about 50,000 if you include the basement, which he has 10.

Rod
So you put retail on the first floor. That’s a fantastic successful model. Retail on the first floor and then the apartments above. Any idea of how many units you’ll be able to get in? Have you modeled that out yet?

Nick
We’re working through it with our architect right now. We are actually speaking with him this morning, but it’s looking like somewhere around you know, 20 to 30 units residential, possibly some office tenants on the second floor, depending on how we could configure the building, because there’s just you know, a lot of nuances, like one side of the building, is directly abutting another building so you can’t have window spaces there, which is a no go for residential. So we got to work through all these things, but, yeah, it’s an exciting project, and I think it’s just a way that we feel our skills could you know, usefully add value, and then we could hold these things for the long term.

Rod
Well, it’d be a lot of fun just to play around with it. Look at it. You know, what could we put in that space? That would be cool, you know. And, you know, we’ll throw some Amazon lockers there, and maybe we’ll put something on the roof where you know, they can sunbathe or whatever. I can see the fun in doing a project like that and really you know, playing around with you know, figuring out how to maximize that space. That’s got a black you know, a wall right there and how to you know, turn that into an asset as it were so you’re able to put your creative hat on. And that sounds like a lot of fun, frankly. So you wrote your book “Making Millions Through Multifamily Development” Nick, talk about the book for a minute.

Nick
So the book just goes through exactly how we get those condo buildings permitted, financed, built, and sold. The whole process. One thing I should mention is in a lot of these cities, like Boston or New York City, or San Francisco, where condos are a viable strategy to make some good money in condo space. There’s a lot of red tapes which you know, supply and demand. There’s a supply shortage because of the red tape. If you’re able to scale those barriers, you can make some money. So, I go through how we’ve worked through some really hard permitting processes in Boston. Probably one of the more difficult cities in the country.

Rod
Oh, sure. Boston, New York, and San Francisco. You just named the three toughest cities. Respectfully, I won’t invest in a blue state. Okay, it’s just too painful. Too much red tape. It’s not a political thing. It’s a brain damage thing for me. You know, you just name the three really worst ones, in my opinion. If you can do it there, you can freaking do it anywhere, right. And that’s the plus side of that. No, that sounds like a hell of a resource. So those of you interested in doing some development, you know, that sounds like a hell of a resource. What’s next for you guys? Are you thinking of continuing to go– you want to build to hold, which is obviously my podcast is “Lifetime Cash Flow”. You know, anyone that– we were talking about my first interview with Albert Barras and how I forgot to hit the record button. And I remember he said something to me, and I’ve heard that from a lot of other super successful investors like him is they regret every deal they ever sold. And so, you know, you guys have been in the buy and sell mode now, you’re thinking buy and rent and develop some cash flow. Yes?

Eric
That’s right. Yeah, that’s actually exactly what we’re thinking. Because of that reason you know, we’re still younger guys, we don’t have a ton of background to say we sold all these buildings, but it’s nice we make a great return in a short period of time on these condos, but it would be nice to add to our strategy, which we’re doing here something where we can hold on to. It’s tough in Boston with all the red tapes, prices, you know.

Rod
Oh, I know. I’ve got a student, a super successful student there that just retired from his really high-paying W-2 job that owned a bunch of two and three families in Boston. Now he’s done thousands of units syndicating. I know the market. You know, again, I told you guys, my dad lived in Worcester and somewhere else in Boston as well in that three families that we’re somewhere else in Boston. It wasn’t a Worcester, but yeah, no, it’s a tough market, but it can be very lucrative. Obviously, you guys have done really well with it. So is the plan– I’m sorry. I kind of didn’t ask the question. I tried to ask it, and then I kept talking. What is the plan? Is the plan to go larger? Is the plan to continue to do some of these you know, medium-sized projects like this 30 unit or just whatever comes along, you’re all over it. What are your thoughts? Maybe more office buildings? I’m just curious.

Eric
We really want to focus on these office conversions. If we can build the hold right outside Boston, where there’s a demand for it, and focus on these office buildings, because the city we’re working in outside Boston for this office conversion, they welcome developers. They want you to come in, fix these buildings, whereas, in Boston, it’s almost like they fight you at every turn. You have to you know, claw to really get your building up.

Rod
No, that makes such a huge difference. If the city’s onboard or the counties on board, you know, it’s so much easier. You know, and I know entitlement is such a pain, and you know, you’re dealing with the neighbors and so on and so forth. And if there’s a decent inventory of these old office buildings, you know, you guys could do this model for years and super successfully. So I was hoping that you’d say that because that absolutely makes good sense. Now, is there a path of progress? Are you seeing renovations happening? Because, you know, like gentrification, for example, because I’ll give you an example. I own a lot of property in Denver back in the day. This is you know, 40 years ago, and there were blocks that I could buy for $20,000 a house. And now there are a million a house. Okay. And so, you know, I don’t know if any of that’s happening. Maybe you can speak to that. Can you see things improving and you want to be on the other side of it? You want to be in that zone that’s still a little sketchy, but it’s headed in that direction. Just speak to that if you would.

Nick
That’s pretty much what we’re going for. We’re looking at Massachusetts what they’re called gateway cities, former manufacturing hubs. A lot of them in previous decades got really rough, and some of them are still pretty rough, and some of them have, through you know, good governance, recovered quite a bit. This particular office conversion we’re looking at is in a city like that, where they’ve dropped their crime rates by 50% since the 90s. So they’re now, like, actually a pretty safe community. But they still kind of have that reputation, a little bit of a discount on the price, higher cap rates. But we see that it’s right outside Boston. It’s in the major area, has commuter rail access, which is a big thing with the traffic here. Transit-oriented. So we do see it as definitely in the path of progress, and prices are rising of course.

Rod
Nice. Nice. Well, you know, when you start seeing the artists come in, you see the coffee shops. You see all the eclectic, you know, those kinds of things coming in. That’s a really positive sign. I tell this story about this house in Denver that I flipped. I paid 56, sold it for 76. It’s in the late 80s, and the market crashed. Bought that same house back for 18. Okay. Sold it a few years later for 160. Then it gentrified. This is an old 1800s built home. It’s worth a million now. It’s insane. 30th Avenue. Off of Federal and Denver. Yeah. Anyway, crazy. Well, how exciting, guys, what you’re doing really gets my juices going because of the creativity involved, you know, they’re really looking at something and seeing what it can be–you know, my business isn’t that. This is why it’s kind of exciting to have this conversation. My business is to buy some existing, add value, you know, and we kick ass with that, obviously. But it doesn’t have the level of creativity that you can have when you’re really molding an asset like you guys are doing. So that’s very cool. Well, listen, so let’s say somebody wants to get into this. And they want to develop. They want to build. Obviously, they should get your book for those condo conversions. But you know, what advice would you give someone that maybe has a little bit of background? They’ve done some real estate. Maybe they’ve done some construction work, they own some property, and they feel like they want to start in this business. What would you say to them?

Eric
I would say– we kind of always say, you got to take the leap if you get stuck in kind of an analysis paralysis mode, we were known to do this at the beginning. We’d look at a deal 100 times and you want to be careful. You don’t want to just jump into something because, oh, here’s the first one. Let’s jump into it. But we notice a lot of people we have worked with that we’ve almost kind of surpassed in terms of the size projects we’re doing. They’re still doing smaller ones and say, well, you know, we just haven’t found the right one. We think, well, there’s a lot of opportunities out there. Sometimes you can’t really learn or see that until you do it. And, yeah, that’s a risk. But I think you have to take a few risks at that stage. It will teach you how to do it, and you’ll begin to feel more comfortable. You won’t analyze this level of paralysis anymore. And you’ll see the fruits of your labor all of a sudden.

Rod
And you got to put that creative hat on. You’ve got to see the vision as well, which is you know, maybe a little harder for an analytical person. I don’t know, because I’m not analytical, but I think maybe it would be. Oh, God. I was going to say something about that, and I lost it. Darn it. It’s never pretty when you lose your mind. Oh, that’s right. So what are some pitfalls that they should watch out for? What are some things–you know, I’m sure you’ve got some failures that set you up for future success. We all do. We fail our way to success. What are some you know, bloody noses that either you got or you could suggest that they pay attention to so they don’t make some mistakes? What are some thoughts there?

Nick
Yeah, I think with development, especially when you’re building those red tapes, high-priced cities. Be very careful about the neighbors in the neighborhood and what the city wants, regardless of the losses. So we had a project in a densely populated, affluent city right outside of Boston called Somerville, and the project that we were pursuing should have been allowed as of right by the zoning code. We don’t need any special permission. We just needed to go through a historical review process on the property. And even if they deem it to be historical, it was just what’s called a demolition delay. You have to wait a few months, work through potential options. Maybe someone will truck it off-site. The neighbors were very anti-development, and that historical board for some reason, just whoever wrote the laws wrote it strangely, they have a lot of power. Randomly. Maybe I don’t even think that was intended, but they do. And we should have known early on when we’re getting into that, how much resistance there was, even though the law said one thing, all these people against us, we just kind of were blissfully ignorant going into it. What they ended up doing is they actually changed the zoning code. They rallied the neighborhood and changed just that street that we were on, which is actually illegal. It’s called spot zoning. So we would have had to sue the city. And obviously, we’re not capable of doing that. We were actually able to sell this project. We brought in a former politician, a zoning attorney working with, and a lot of projects. We were able to get a smaller project built. But, be very careful. If the neighbors have power. If random historical boards, for some reason have all this power, be careful. Listen to what they’re saying. Listen to–look at the places where they allow development. Don’t just go you know, don’t try to swim upstream.

Rod
Yeah, that’s really good advice. Listen, you guys had a tremendous value. Is there any area of your business that you want to touch on? Because again, it’s not something I’ve done so I can’t speak too intelligently about it. I know entitlement is a pain in the ass but is there any other part of the business– here’s one, how are you dealing with the construction price of materials? You know, what’s happening there? And how has that impacted what you’re doing? Please speak to that for a moment, because that’s a big one.

Eric
That’s a good question. Very relevant, obviously, to us and other builders over the last year, year and a half. One thing you know, lumber, for example, is a massive component of anything you build. It’s really the largest component. So we’ve kind of walked out that we had some orders in and started construction on some of the current projects almost before that was taking off, and then it started to come back to Earth. At least recently. We’ve locked in some prices that are more expensive than they’ve been, but we still found a way to make them work within the project. We used a little more last year, a little more metal in some areas and sort of you know, steel, which now, coincidentally, that’s now going up and that’s up. So we’re trying to now limit that. So there are ways around it. But like you know, Nick was talking about supply and demand at the beginning, it has its effects. In the end, prices are going to go up on some of these units. Prices are you know, continuing to go up everywhere, though, as we talked about, maybe we’re kind of frothing a bit, but it does affect the endgame. It affects how much we could sell these units for. It affects the margin a bit. We’re fortunate enough that we’ve been able to make it work, but it’s certainly been a struggle.

Rod
Yeah. You know, you see these memes of a little pile of scrap wood on the side of the road as a treasure found and you know, funny stuff because the wood has been soaked or I forgot there was one meme where somebody’s in Home Depot and oh, God, and I’m going to botch it, but it’s hilarious about you know, the cost of wood right now. Well, listen, I appreciate you guys coming on. It’s been a real treat. And it’s been a whole lot different conversation than we normally have on this podcast. And so, you know, if you guys want to learn more about development, get Nick’s book “Making Millions Through Multifamily Development”. Nick, Eric, I appreciate you guys being honest. A pleasure to meet you. And thanks for being here.

Nick
Likewise. Thanks for having us.

Eric
Thank you, Rod. Very exciting,