In today's episode, we delve into the fascinating world of multigenerational living with our special guest, Scott Choppin. He reveals the strategies he uses to navigate through California's complex entitlement process, serving as a gateway to his real estate successes in urban infill and family-oriented properties. From highlighting the compelling demand for five-bedroom homes to discussing the pressing need for affordable housing for middle-income families in California, Scott peppers invaluable insights throughout. He also introduces us to the concept of economic sharing and how Urban Townhome housing thrives during economic downturns. Stay tuned as Scott Choppin takes you on a riveting journey through the ins and outs of the real estate market!
- 00:02:04 Middle-income multigenerational housing filling market gap.
- 00:07:21 Housing affordability and amenities in California and Texas.
- 00:11:49 Invisible working-class families sharing housing and expenses.
- 00:17:01 Niche market for single-family detached homes. Huge demand.
- 00:20:29 Co-living: High-end rentals, curated roommates. Prop tech.
- 00:25:12 Difference between underwriting apartments and developing land.
- 00:29:20 Investors interested in development face longer time exposure and potential risks. It's important to understand the market and demand before proceeding. Building innovation requires both production and testing.
- 00:35:28 Rehab process has become easier with time.
- 00:37:29 Entitlement risk in California drives away investors.
- 00:43:55 Three ways to think about real estate development: land investment, merchant build model, and long-term holding. Merchant build model is the most common. Land investment is rare due to entitlement risks. Land development can have high returns but also higher risk. The author is currently focused on high net worth and family office investors for long-term holdings. They specialize in five-bedroom urban infill family-oriented properties. There is a growing demand for such properties, and competition is minimal. Other developers may start integrating five-bedroom properties into their projects. Serving families is an important aspect of their work. They serve both tenants and investors.
- 00:51:28 Resilient housing during recession forms strong communities.
Episode Table of Contents
- Navigating Entitlement Risks in Real Estate Development
- The Entitlement Process as a Moat
- Scott's Three Approaches to Land Development
- Underwriting Apartments vs. Development Operations
- The Appeal of Development Deals
- Urban Townhome Housing for Middle-Income Families
- Gap in the Market: Middle-Income Families and Affordable Housing
Navigating Entitlement Risks and Multigenerational Living in Real Estate Development
Understanding the Entitlement Process: Austin, Texas
The entitlement process in Austin involves navigating city zoning regulations and securing permits before a development project can proceed. Factors like traffic studies, environmental reviews, and neighborhood input can impact timelines. Experienced developers invest time upfront to understand entitlement risks and work closely with the city throughout the process. Patience and local relationships are key to successfully entitling projects in Austin.
Understanding the Entitlement Process: California
Entitlements in California can involve complex regulations at the state and local level. Scott notes investors are often apprehensive about the risks. Navigating uncertain timelines and political considerations takes specialized expertise. His company focuses on assessing and mitigating risks through detailed due diligence. Working with experienced land use attorneys to analyze legal and regulatory issues is a key part of their strategy in California. Leveraging local experience and relationships helps them successfully entitle development projects.
California Entitlements: "When you're done with it and you deliver that building into a market that everybody else is constrained the same way. You're, like, printing money."— Scott Choppin
The Entitlement Process as a Moat
California's Complex Regulatory Environment
California has a complex and extensive regulatory environment for real estate development projects. Navigating zoning laws, environmental regulations, and approval processes at the local, county, and state levels requires expertise and experience. For out-of-state investors unfamiliar with California's system, the entitlement process can seem opaque and risky.
Deterring Less Prepared Investors
As Scott discusses, these complexities essentially create barriers to entry that prevent or deter less prepared investors. The expertise needed to successfully entitle development projects acts as a "moat" that protects those experienced with the system. Investors unwilling or unable to navigate the intricacies and risks involved often avoid opportunities in California.
Leveraging Regulatory Knowledge as a Competitive Advantage
Scott's company has developed specialized knowledge and experience with California's real estate regulatory environment. This allows them to accurately assess political risks associated with entitlements. By deeply understanding the system, they can pursue projects other investors may shy away from. Their expertise in successfully obtaining approvals grants them unique access to deals and locations.
Scott's Three Approaches to Land Development and Multigenerational Living
Land Investment and Selling to Another Developer
Scott mentions that some developers will buy land and later sell it to another developer, though this approach is rare because many investors are uncomfortable with the entitlement risk involved. With this strategy, the original developer handles obtaining permits, zoning approvals, and other entitlements required for the land before selling it to a developer who will build and operate the project. The original developer is taking on risk to get the land "development-ready" but may profit from the increased land value once entitlements are secured.
The Challenges and Rewards of Real Estate Development: "So as an example, one of the things that people are surprised by is that on a development deal, if it takes 2 years to get that building up and rented and stabilized. That's 2 years that there's no cash flow."— Scott Choppin
The Merchant Build Model
According to Scott, the merchant-build model is the most common approach, especially among institutions and high-net-worth individuals seeking shorter investment windows and higher returns. With this model, the developer purchases the land, handles entitlement and development, leases up the property, and then sells the stabilized asset, typically within 3-5 years. The quick turnaround allows the developer to capitalize on value creation during the development phase.
Holding the Asset Long-Term
The third option Scott outlines is holding the developed asset for a longer period, which appeals to investors focused on steady income over time rather than short-term returns. The developer owns and operates the property for 10+ years, collecting rental income and benefiting from potential appreciation. While returns may be lower in the short term, the long-hold strategy can produce strong risk-adjusted returns over an extended period.
Underwriting Apartments vs. Development Operations
Underwriting Financial Viability
Scott outlines a three-bucket framework for analyzing apartment investments. The first bucket focuses on underwriting the financial viability of a potential apartment acquisition. This involves projecting rents, occupancy, unit mix, operating expenses, and net operating income to determine if the property will generate adequate risk-adjusted returns. Key factors considered include market rents, demand drivers, comparable properties, and management capabilities. Underwriting provides the core feasibility analysis for an apartment investment.
The Difference between Underwriting Apartments and Development: "Development is really the ultimate form of value add. Instead of taking apartments and upgrading them, We're taking empty land and upgrading it to apartments. It's just a more extreme version of that."— Scott Choppin
The second bucket involves the development operations process for new construction on vacant land. This includes activities like design, entitlements, permitting, construction draws, and management. Building new apartments from the ground up requires coordinating architects, contractors, lenders, and other parties to successfully deliver the completed project. Development operations carry distinct challenges and risks compared to acquiring existing properties.
Valuation After Completion
The third bucket focuses on valuing the apartment project after completion, through appraisal or potential sale. This compares the total development costs to the as-built value to calculate developer profit and investor returns. Valuation provides the bookend analysis to the initial underwriting, verifying whether projections matched actual performance. The completion valuation validates the success of the development and investment.
The Appeal of Development Deals and Multigenerational Living
Higher Returns but Higher Risks
Development deals offer higher returns compared to value-add deals, but they also come with higher risks. Development deals typically have no cash flow for the first two years, while value-add deals often provide some occupancy and cash flow from the start. The lack of cash flow in the early stages increases the risks for developers.
Multigenerational Housing: "We identified an interesting niche in the marketplace that we didn't see anybody really working on, and that was middle income family housing… There's no real housing in the middle… we're building Five bedroom for bathroom townhouse units… one of those bedrooms and bathrooms out of the five four is on the ground floor… So that sort of facilitates the lifestyle of this family in an apartment unit that they don't normally have. There's nothing in the marketplace that's new Multifamily bedrooms, 2 car garage."— Scott Choppin
Attracted by Potential Higher Returns Through Multigenerational Living
Some real estate investors are attracted to development deals because of the potential for higher returns compared to other types of real estate investing. Since developers are creating completely new properties, they have the opportunity to potentially generate larger profits if there is sufficient demand for the units when completed. The tradeoff is taking on greater risks and having a longer waiting period before cash flow begins.
Opportunity to Fulfill Specific Market Demand in Multigenerational Living
Developers have the opportunity to design and deliver the exact unit types that are needed in specific neighborhoods. By conducting thorough market analysis, they can identify gaps in the supply of certain property types and unmet demand from tenants. If developers are able to fulfill this demand with well-designed and located projects, they are more likely to lease up quickly and profitably. The key is understanding the market demand and competition before deciding on unit mix and sizes.
Conducting Market Analysis Is Vital
Scott emphasizes that it is vital for developers to conduct a thorough market analysis to understand demand and competition before determining the property types and unit mix. His company targets urban infill projects to meet the demand for larger family-oriented properties. By carefully evaluating the market and tailoring projects to serve unmet needs, developers can mitigate risks and increase their chances for sustainable success.
Urban Townhome Housing for Multigenerational Living
Providing Suitable Housing for Multigenerational Living Families
Scott recognized the demand for affordable housing options for middle-income families in California. His company developed an urban townhome (UTH) housing type specifically designed for these families. The UTHs feature five bedrooms and four bathrooms, with one bedroom and bathroom on the ground floor to accommodate mobility-impaired relatives.
The UTH housing provides a unique offering in the market. It caters to multigenerational families with two or more related generations living together. Scott highlights that this housing type addresses a gap between luxury and affordable options. It targets middle-income families who would otherwise struggle to find suitable and affordable housing in California.
The UTH housing caters to the needs of multigenerational families living together. Having one bedroom and bathroom on the ground floor accommodates mobility-impaired older relatives. This allows multiple generations to live together comfortably in the same home.
Scott recognized that many middle-income families in California consist of multigenerational households. Providing housing suitable for these family structures addresses an important need. The UTH model provides an affordable option so extended families can live together.
Bridging the Gap Between Luxury and Affordable Multigenerational Living Houses
The UTH housing aims to bridge a gap in California's housing market. Luxury housing options are often unaffordable for middle-income families. Affordable housing may not provide suitable amenities for larger families.
Scott highlights that the UTH model specifically targets middle-income families in this gap. It provides an affordable option with amenities to comfortably suit multigenerational families. This fills an important niche for families who struggle to find housing that is both affordable and livable.
Recession Resilient Housing: "When a recession comes forward, the idea of coming together as a family grew in a larger way… We're the recombination of families that were living apart or roommates coming together… When recessions come, these people come back together."— Scott Choppin
Gap in the Market: Multigenerational Living Families and Affordable Housing
The Affordability Gap
Scott points out that there is a major gap between housing costs and wages for middle-income families, especially in major metropolitan areas like California. With high home prices, it is very difficult for these families to save enough for a down payment and qualify for a mortgage. As a result, many middle-income families are unable to purchase homes in the current housing market. This lack of affordable options prevents these families from achieving homeownership.
Providing Affordable Options
Scott's company aims to address this gap by developing affordable housing tailored to middle-income families. By building units for-sale that are priced under the median home value, they enable more families to achieve homeownership. Their units also include amenities like private garages, central HVAC, and laundry rooms to provide a higher quality of life. This model offers much-needed affordable housing options that provide stability for middle-income families seeking to buy their first home.