Hemal Badiani is hyper-focused on the North and South Carolina markets. Hemal and his team believe being experts in the markets they invest in gives them an advantage when considering which deals to pursue. They focus on long-term relationships with their clients, rather than completing transactions. This allows them to better understand the needs of their clients and provide a higher quality of service. Hemal is looking to build something beyond himself and is building the company for future generations. He wants to leave a lasting impact in both the North and South Carolina markets. He understands that in order to do this, he must provide value for his clients today that goes beyond just real estate investments. Relationships are key to his success. Listen and learn!

Table of Contents:

• Where To Listen To The Podcast
• A Multifamily Conference in North and South Carolina
• Running the Ship as Operators in North and South Carolina
• Building a Long-Term Integrity for Your Brand
• Creating a Moat of Contingency in North and South Carolina
• An Interesting Exposure
• How to Reach Hemal Badiani

A Multifamily Conference in North and South Carolina

Darin: Hemal Badiani came to the US from India and now calls Charlotte his home. He believes in diversification and offers investors the ability to invest in multiple asset classes such as multifamily, storage, new construction, land, and now even looking at hotels. I love his relationship and long-term focus.

Hemal: Thank you for inviting me here. I'm super excited to have a conversation on things that we both love, multifamily and real estate in general.

Darin: So, just a little bit on how we know each other. We were both down in a multifamily conference in the Carolinas in Charlotte and were just walking from the conference to a networking function. Next thing you know, we were just chatting away, walking down the sidewalk. I'm like, "This guy is doing some great stuff." So, I asked him to come on the show. The first thing I ask is, how many properties and units are you invested in?

Hemal: We own on the multifamily side existing acquisitions close to a thousand units. We'll probably buy 400 to 500 more by the end of this year, and then we have several other divisions of the business. Our company is structured a little differently than what you would see in a conventional multifamily syndication operator type of company.

Darin: How is it set up differently?

Hemal: Our theory is that one has to hyper-focus in a market but diversify in terms of your investments to create a nice portfolio. As everyone can see over the last couple of years, things have gone so differently and so radical.

Change of Strategy

Hermal: Every six months, one has to change its strategy in terms of what we are trying to do. Case in point, 2020. Things are scary and distressed. 2021 came, exuberance came, injection of capital, et cetera. Now, 2022, interest rates and all the new stuff that we are feeling.

Our company has three divisions right now. We’re going into multiple, more mainly focused on existing acquisitions, new construction, and land mostly around the Charlotte area. Our focus is a three-hour circle around Charlotte. It gives us eight beautiful markets from Greenville, South Carolina down to Raleigh, Durham, North Carolina, and anything in between.

The market in our backyard is pretty awesome. We are also vertically integrated. We're bringing property management in-house. We are trying to hire for construction management, and then we're expanding into other asset classes such as hotels, self-storage, dental offices, etc.

Darin: What did you do before you got into real estate? When did you get into real estate?

Hemal: It's been an incredible journey. So, I started in the management consulting realm for about 15 years. I was traveling across three continents and worked with everybody from Disney theme parks to the Vatican. It was an incredible journey, me standing even in my 20s in front of CEOs and CFOs of Fortune hundred companies and giving them advice, which is something, and them paying me for that.

Darin: Paying the company, and they were paying you well.

Hemal: They're like, "How do I take this from 600 million to 700 million?" It was interesting stuff that was happening there. We learned a lot from very smart people in terms of innovation, mergers, and acquisitions, how to run companies, inspire people, build teams, and what bureaucracy and organizational inertia looks like.

Twin Events Concept in the North and South Carolina Market

Hermal: I had a twin events concept, our twin babies. You might be able to hear them in the background here.

Darin: How old are they now?

Hemal: Seven. They keep us on our toes. Completely energetic at this stage. I wanted to redefine my work-life balance, so to speak. I took a boring, lower-stress job as the senior vice-president at a bank, which came very cushy, assistant in hand, small team. I was still doing strategic stuff internally for the company, but not 80-hour weeks, traveling every week type of deal. It allowed me to stay home and introspect about what I wanted to do in life. That led to finding my competency.

I figured out that I'm not a new-ideas guy, but if I can find an idea that somebody has done before and makes sense to me, I can scale it pretty easily. So that's what led to, first, an outsourcing company, a private lending firm, then a residential real estate firm. All of them, I exited. Right in the heart of COVID, we started the commercial arm of the business. Over the last 20, 21 months, we grew it to about 10 people, and just been an incredible journey so far.

Darin: You said you're not an idea guy, but you know how to scale. I want listeners to hear that because you don't have to reinvent the wheel. We're going to talk mainly about real estate, but even if the listeners want to start their own deal, there are plenty of companies out there that just did it better. They just had better service, did it faster, and had a better product.

The Commercial Real Estate

Darin: You don't have to recreate the wheel. You saw real estate as being an avenue that you can get involved with and that you could scale.

Hemal: It is. Commercial real estate especially gives me to talk with the level of sophistication that I had in my corporate world with investors, pretty sophisticated people who deal in it. Also, it allows us to scale in a Fortune hundred type of manner. That's the whole essence of how we want to build the company building a brand. We're not doing transactional two, three deals a year type of deal. I don't want to retire in Hawaii and sit with my laptop. That's not just me.

Darin: What do you want? What is that vision?

Hemal: I wanted something that lasts beyond me. I just want to see how far I can take it very ethically with the right discipline, inspiring team members, building people who'd want to work with us, people who want to move families with us. I'll tell you all the stories about how we've built the team so far, but the magic happens when you have the right people surrounding you.

Darin: What's the name of your company?

Hemal: Our brand is Exponential Equity.

Darin: You have a lot of confidence. Just talking to you, you're confident that you can take knowledge from one industry, and then pass it along to a different industry. How are you so confident that you can scale it?

Hemal: It boils down to fundamental principles.

One, always do things for the long-term, not the short-term. Relationships before transactions, and that pays off in the end. Second, build people first. Hire drill sergeants, driven, relentless with high integrity and loyalty, and loyalty comes through inspiration.

Processes and Systems in North and South Carolina

Hemal: They see what I do, the way I work, and the way I take small decisions. How you do anything is how you do everything, and then institute those processes and systems.

A lot of people talk about systems and processes. It doesn't have to be tools all the time or overengineered stuff. It has to be driven around the action you're trying to take and make it repeatable. What I mean by that is building something that's simple enough for anybody to use, bringing them on board, and allowing it to be repeatable from a work perspective.

It could be a spreadsheet, it could be a meeting, cadence, or a conversation, but drilling it into the ethos and the culture of the company is what we try to do. That's what I've done for other companies, and it really helped really smart people. When I decided to do it for my own brand, it just comes naturally to have that.

Darin: Let's take a piece of the multifamily syndication business and break it down just to hear how you went about it. So, sourcing deals and underwriting deals. How do you take that and make that process efficient?

Hemal: We did two things to make it efficient. First, hire someone that brought 20-plus years of competency in that space. Initially, when we started, obviously, we didn't have the salaried position to provide. But again, through conversations about where I wanted to bring the company, the individual was inspired enough to move his entire family from Raleigh to Charlotte about three and a half hours away. Shift his family schools, buy a new house, and for the first six months, I didn't pay him a dime. That's that.

Looking at Deals in the Night in North and South Carolina

Hemal: Super grateful. That was one thing, and the second thing was we have a three-stage process. The acquisitions director, Casey, is the yes guy. He would do the initial underwriting and pass on the deal, but his job is to internally sell the deal to us, all of us. So, he puts on his sales coat, and we have Monday evening meetings from 9:00 to 12:00. We're looking at deals in the night and really looking at what we can do there. That's one part of the process.

His job is not to cut every deal out and kill every deal, kill some deals, his job is to make sure he takes the brokers out for relationships. He spends the money on steakhouses and cigar lounges and does what a business development or a salesperson has to do. So, that's defined.

My COO, Yomesh, is the no guy. His job coming into that Monday meeting is to basically kill the deal. If he cannot kill the deal, that's the deal we go after by asking, "What's happening to real estate taxes? What's happening to insurance? Why are they selling right now? What are they hiding or not telling us as a seller? And what things we have received or have not received?" Basically, he's the no guy.

I stay away from it because I want to own everything that's coming my way. I know that, so I don't want to be part of that process. I’m removing myself to a point where I don't speak up in that decision-making and trust that both of them will do the job that they are supposed to do.

Running the Ship as Operators in North and South Carolina

Hemal: The third wheel is Jamie Grubb, our director of asset management, who's going to run the show. He comes from the debt side, so he worked with Lument, the lending firm before he joined us full-time. His job is to structure the debt and understand what this could look like.

Also, when we are running the ship because we are operators, we're not just raising capital for anyone else. We operate our own deal. His job is to understand how this would look when we say we're going to raise rents by 200. Is it realistic? How many leases we'll have to cancel? He's looking at it from that angle.

Allowing that triumvirate from a process standpoint along with investing thousands of dollars in underwriting, models, and things that would make it efficient for us, more automated for us. We have an outsourced team for underwriting that allows us to quickly turn around what are the last five leases and the next five leases.

There's a whole ton of work that goes behind it. Essentially, it comes down to creating the three points that would allow us to have checks and balances, staying away from those three points in terms of decision-making, and trusting them with what their job is. Yes. No. Can this work from a debt and asset management perspective? That's what makes the magic happens.

Darin: Now, are you in the room when these guys are having these discussions?

Hemal: Absolutely.

Darin: But you just sit there quiet?

Hemal: I try to stir the pot now and again, but they shut me down.

Darin: Of those three, who's got a stronger hand?

The Basic Philosophy

Hemal: The no guy. We'd rather not do a deal and pass on opportunities that we've missed than lose a dime of investors' money. That's the basic philosophy for us.

Darin: If you are an investor listening to this right now, that is music to your ears. You want to invest with a guy that you feel comfortable, who is looking out over your shoulder and over your hard earned money.

Hemal: Our average investor is with us for five deals now. That's pretty amazing.

Darin: How many deals have you guys done?

Hemal: We've done 12 transactions so far.

Darin: Why Charlotte, or North and South Carolina?

Hemal: Our leadership team lives here, so we know the sub-market. If people on the West Coast or your investors in the North East or the South East, they would've heard Charlotte and the MSA surrounding it. It's not like Texas where there are four or five big pockets that are expanding in their own way.

Just like I mentioned, in a three-hour circle or around Charlotte, you get eight or nine cities that are essentially over the next decade or so going to merge through corridors that are building. Through the expansions of suburbs and small towns that are around, it still has an affordability component compared to cap rates and pricing, especially in Charlotte, Greensboro, and stuff around Charlotte. I'm not talking about Charleston, which is a crazy market.

It still comes under the three-hour vicinity and allows a level of affordability. When you're thinking about the market cycle of real estate, the upturn, and the downturn, the downturns get more cushion. If you're buying stuff at two caps, three caps, 50 times earnings, essentially, it's harder to survive.

The Leadership Team in North and South Carolina

Hemal: If you're going over a long period of time, that's fine. But if you're going over a shorter period of time, it's harder to survive. That's one thing macroeconomically. Charlotte itself has 250 people moving every day. Plenty of jobs coming in. 32 of the Global 2000 are headquartered here. It's pretty small compared to like a Dallas or a Houston where it's just growing by leaps and bounds, and the land is there. So, that's one thing.

The second thing I mentioned is the leadership team is here. We have 10 people in the firm, and we have people who came from 30-plus years of experience in the economic development region of Charlotte. They were planning and utility directors of different counties that handle our land rezoning aspect of things, and that allows us to have a pulse. We go into business alliances meetings and we meet with the senators and the local council people.

So, we know the pulse of where the path of progress is in the city. That allows us to place bets where the bigger developers are now looking at pieces of land or construction and saying, "This is the area we're now going to turn into the next five years into something amazing." That's where you can buy things that X and make them 5X. More importantly, the debts you're placing are disciplined enough that you won't lose your shirt if any sort of downturn happens just because of what else is happening around the area. That's what we like about it.

Darin: That step is an extra step that not everybody focuses on. Looking at the cities and the counties, where are they investing for the future?

Funding Sources

Darin: Where are they putting their county dollars and their city dollars? Then, if you can follow that, it's just smart. What about funding sources? Do you guys typically fund with high-net-worth individuals, or do you get institutional money? How do you fund the deals?

Hemal: So far, 11 out of 12 transactions we've had with retail investors. We have a great Rolodex of existing investors and word-of-mouth investors through our friends and family. People who invested with us said, "These guys are good guys." They spread the word around again.

Darin: In 20 months, how do you build that trust in such a short time? I mean, a lot of people tell me, "Okay, well, I did a deal and went full cycle," and then they went and told their brothers, and mothers, and sisters, and brothers. But 20 months, you're not doing that? How do you build that trust?

Hemal: It's accessibility when they are having the conversation, right? Everything, every tough question that you can ask, every bit of radical transparency that you can imagine.

Our monthly newsletters in our projects have a big challenges section. We don't paint a rosy picture; we paint a realistic picture. This is a business. We are doing sweat work to get some of these projects to the next level where we have projected, and not everything gets hunky-dory every month.

People don't pay up. Things go wrong in the supply chain, things go wrong with the council or compliance. We really list that down. Initially, it was friends and family, obviously, but as they started talking to other people, other people started looking at our projects. They're like, "Everybody is buying things at 150 a door."

Distressed Projects in North and South Carolina

Hemal: "You guys are buying things at 70 a door. That's a good basis in the first place. You're not going to lose my money with 70 a door."

Darin: How are you doing that?

Hemal: Usually, we did that because it was 2020. In the last hundred days, we bought 600 units of 2020 because there were distressed projects, and sellers were scared. In 2021, as cap rates started compressing, we expanded into the development division. I got a residential developer here. So, I started speaking with him. He got inspired by the vision I had for the company. He's like, "I'm going to sell my company and join you as the head of new development." We made a very tough decision in 2021 and said, "Cap rates are super low."

Darin: You must be feeding these people some serious Kool-Aid. All these people are moving, quitting, their jobs, and selling their companies.

Hemal: They know where to live. Again, very grateful for that type of vibe that I can project and have that people want to work, partner, believe, and trust in me from all ends. Super grateful for that. But yes, in 2021, we made a conscious decision that "We're not playing this bidding war game." Even though most of the stuff we bought in 2020 was a hundred plus units, we'll start buying some smaller portfolio, 70 units, 80 units at a time.

The same vintage, the same street, a hundred plus unit would be 140 a door, 80 units would be 70 a door. It allows us, because we are so close in the vicinity of the three-hour circle, to really stitch together an assemblage of that portfolio that we can effectively scale management into.

Fewer Players Are Coming in the North and South Carolina

Hemal: That's what we did in the 2021 period of time. Now, we're switching back as less players are coming in. We're now low-balling offers at least an 18% discount to the whisper price right now. It might even go lower than that if you can, and things are sticking. We just bought or got under contract, for example, 97 vintages for 113 a door, a 100% occupied unit with 80 people on the waiting list. That would be one of the best, smoothest properties that we've managed because we've managed elbow grease as well.

Darin: You talked about that newsletter, and you talked about the challenges section. Think of a challenge that you guys went through and how'd you come out the other end?

Hemal: The biggest challenge or failure we had was last year, we got into a very huge, $45 million deal. We went under contract, paid for due diligence, and not an insignificant amount for due diligence money and earnest money. Then we found out that the seller was cooking the books. We had to make the tough decision of terminating the contract and losing, effectively, our earnest money. Then, we had to walk away from it, so we had to call in the lawyers. It wasn’t an easy process, but that was a big challenge for us.

People don't understand the number of deals you have to go through as due diligence. The numbers pencil in, and the tough decisions one has to make of buying into something that you don't know or no longer believe in, knowing that at the other end, you will have subpar returns for your investors or walk away.

Building a Long-Term Integrity for Your Brand

Hemal: Personally, losing money, again, for the long-term integrity of your brand and the name. Knowing that every deal that you bring to the investors would be a unicorn, at least from our vantage point, fully vetted out. There's a lot that goes, as you know, into checking a project before it goes to the investors for raising the equity.

Darin: Did you just allow the funds to be released through the title company? I've heard from certain title companies that hard money, although it's hard if the other side of the transaction does not authorize the release of the funds, that could get tied up.

Hemal: It gets tied up. It has to go through a whole process for mediation, and then you figure out a good split. You pay lawyers on both sides tens of thousands of dollars. It's not great though.

Darin: They're the ones that win.

Hemal: Yes, but it has to be done because we know we are right. We know we are right in making that decision as well. But we cannot, with an ounce of honesty, pursue a transaction that we know that's not as good as it sounds. So, we had to make that decision.

Darin: For the benefit of some of the listeners, some passives don't understand that process. The lead sponsors, the general partners that put the deal under contract, you front a lot of money. You front the non-refundable deposit, the application fee, the appraiser fee, the due diligence, and people to come on site and do due diligence. All of that money is fronted, and then, assuming you close the deal, it gets refunded on the day of closing.

A Lot of Money at Risk

Darin: In your instance that you're talking about right now, that's just money that's gone from the general partners. The passives don't have liability on that. I think that it's important for passives to understand because some just think, "The general partners are coming out, and they have these deals. They're going to make so much money, and they have all these fees." Well, they're not going to put a deal out there that they don't think very highly that they're going to be able to raise the money, otherwise, they have a lot of money at risk.

Hemal: This is an extreme scenario that doesn't happen many times, but we've gone to deals. We've looked at it where we haven't paid the EMD yet, but we get early access agreements in place. Look at the diligence, and invest our team's time and effort, spend a couple of days touring the property, and it doesn't work out. They would've said, "Yes. It's a light renovation," and then there things down to the studs. You're like, "Oh, that doesn't make sense anymore." There's a lot of investment of time, a lot of investment of effort, and money. I work seven days a week. This is full-time for me.

Darin: You got two seven-year-old boys that have a lot of energy. You got to get them out.

Hemal: I do, but that doesn't mean I don't do something every day. A lot of people depend on me from my team's perspective. Not for the growth, or bumping shoulders or chest, or anything to say, "We are here. We want to be a billion dollars," or anything of that sort.

Why Investors Should Look at North and South Carolina

Hemal: It's the people that I just mentioned, people who moved families, people who sold their companies, and my investors. They depend on me. I carry that burden and responsibility on my shoulders pretty nicely, and I want to make sure that every day, I give into some of that.

Darin: Texas gets a lot of promotion. A lot of people moving to Texas. Arizona also. If people want to diversify, why should they look at North and South Carolina?

Hemal: It's the same story as Texas with a little bit more affordability, and less variation in property taxes, especially in North Carolina where the assessment is done every four years.

Darin: Talk about that. The assessment is done every four years. So, you know when the assessment was done? Say you're buying it in year two. Do you know that the property tax is not going to go up?

Hemal: Not for three years.

Darin: That's attractive because in Texas, property taxes are such a big part of the deal, and it's unknown. Each county is a little different in how aggressive they get in terms of pushing the envelope and valuation, so that's a nice thing to have.

Hemal: That's only for North Carolina. South Carolina is similar to Texas where it gets assessed at the point of sale. But again, not as crazy as Texas in terms of where things are in terms of affordability. My viewpoint and this is what Warren Buffett says about moat or contingency, is the law of diminishing returns. Whatever you want to call it.

When to Bet on Texas Versus North and South Carolina

Hemal: If you have something where rents are 2,000 or 4,000 already, to make it 8,000, it's harder than where rents are 1,200 for a similar vantage or 1,500 to make it 3,000. In Texas, there are just so many players, so much happening. I would bet on Texas if I was living there. There’s just so much happening, so much wealth going in, and so many people moving in. We'll see where the political environment would take things, but that's where things are.

North Carolina is purple in the state, so the governors and the political environment are in the middle, which seems relative nowadays. It allows for longer-term budget-passing and decision-making, that is still conducive to great business movement. It was ranked number one by CNBC in terms of business states in the United States very recently. I think a week or two back. It's bringing a lot of attention. Less number of projects happening, less number of players here, and more affordability, and we are here. That's the other magic.

Darin: I just heard this term the other day, and I'm thinking it applies to you guys, too. It was really talking more about Tennessee, but I'm thinking it falls in your camp too. Halfbacks, have you ever heard of that term?

Hemal: No.

Darin: People that move from the Northeast down to Florida, but then they don't want to be in Florida. They don't want to go all the way back up to the Northeast, so they come halfway back. I thought that was interesting. Where is the migration path? The people that are moving in, where are they coming from?

When North and South Carolina Changed Their Trajectory

Hemal: Mostly Northeast and California. A lot of cash buyers from California and a lot of money from the Northeast are coming in because these are newer towns just like Dallas, San Antonio, or others are. Charlotte didn't have anything. It was always the second largest banking center before 2008 with Bank of America, Wells Fargo, BB&T, and all these institutions there.

But it really changed its trajectory with the 2008 crisis to bring insurance companies, and manufacturing, like the makers of bubble wrap. Their global headquarter is in Charlotte. You wouldn't believe that. There are companies here that are more sustainable from a diversification standpoint in terms of manufacturing plants, EV factories, and all those healthcare jobs. All of that is coming in this three-hour vicinity, and it's really merging into one town, which is what we really like.

Darin: I had the thought that Charlotte was the banking city. It's great to hear that there are other industries coming in. Houston was always thought of as being like the oil town. But they're becoming more diversified as well. You talked about your employees. Do you guys partner with anybody, or is everything within your company?

Hemal: We have a general contractor as a partner for our new construction projects. We do have a small Rolodex of capital partners. So, we typically raise the first 50%, and 60% easily within the first 12 hours or so with our database of investors, and then we press the easy button. We are operators. We're not great at marketing as we should be. We should be touting our horn a lot more on social media, but we don't do a good job of that.

Allowing Good Partners

Hemal: So, allowing good partners, again, them knowing us, our way of working, and enjoying it has allowed us to build that relationship. Where we can send an email to five or six of those partners and say, "This is the project. Would you be interested?" and a couple of them signing up, and it's done.

That's what we like, and then finally, we have just joint ventured with a fund for a build-to-rent community. We're building a $30 million build-to-rent, a hundred plus houses here in the Charlotte MSA that we'll build, refinance, and keep for the long term. We did a joint venture with this fund that's bringing pretty much 100% of the equity, and we've been doing a joint venture with them. They're also signing the loan with us, so that's an exciting one.

Darin: You've only been in it for 20 months. Over the last two or three years, I've seen syndicators shift focus from B, C space to the A-minus, B-plus space, and then some that are getting into ground-up development. You guys opened a ground-up development arm. What do you think is the reasoning for that shift of people wanting newer assets versus the traditional value-add play?

Hemal: The ground-up development is big because of replacement costs. With all the supply chain macroeconomic issues that we foresee and would happen, A construction projects allow you to build something with similar replacement costs at least six months, eight months back to what B class properties were selling at.

Darin: You're saying that you could ground up develop a brand-new complex for the same price per unit as a B?

Creating a Moat of Contingency in North and South Carolina

Hemal: Yes, it was. The spread between a B class and a ground-up was very, very thin. Last year, we built something at a little less than 200 a door all in, and that's a completely brand-new apartment building. You would buy something similar in a B class area or a B class asset in an A class area, 20 years old or 30 years old with all the maintenance issues that for the next 10 years on a ground-up newly built. You're not looking at roofs for 20 years. You are not looking at AC for 5, or 10 years. The maintenance piece becomes easier.

That was the big thing. The second thing for us, because we also have a land division, allows us to buy raw land really cheap. Do the rezoning and permitting process that not only significantly raises the value of the land should we choose to not keep it three to five X many times, but also allows us to sell it to ourselves at a discount. Again, creating that moat of contingency where our cost basis is lower when we start.

With all mistakes and any delays that you can foresee in the development space because it's a risky space, things can go wrong when you're digging the ground. When you're building stuff, and you forget stuff, and that's why it's there. But returns have been exceeding expectations as compared to value-add for ground-up for several years for our investors. Our investors would typically look at 25% to 30% average annual returns versus the 18% to 20% on the cash-on-cash for a value-add project. That was the other thing.

Workforce Housing

Hemal: Then, just macroeconomically, unless you're in affordable housing, LIHTC. Again, going into a little bit of the political environment, we don't know what the November elections would bring and what would drive policy in terms of the House or Senate. But if the net for workforce housing, not only development, which is through LIHTC, which is the largest government affordable housing program in the country and has been. But also, any sort of Section 8 or other programs that would be funded, the squeeze of inflation has been seen the most for people who cannot afford those rents.

Even though the rents are cheaper, A, your delinquency could be higher, B, your push for rents, which is your profitability measure. If you're assuming to be 3% to 8% a year, whatever you're assuming for the next several years goes out of the window. Affordability is not there, versus someone who's or has a $100,000 job or $120,000 job and is living in a nice place with a coffee house at the bottom and a luxury apartment. They don't want to move and change their lifestyle so much.

They'd reduce some of the discretionary expenses of eating out or going into luxury hotels versus budget hotels or driving versus flying. But they typically don't want to move from a nice place they're living where they're inviting friends and family. So those places, A-minus, B-plus, and A properties in our vantage point would have less of that squeeze and would ride through this market cycle better than a C-class property.

Darin: We saw that in COVID. I'm relatively new in the space like four years, although you're only 20 months.

Hemal: You're a vet.

Comparing the A, B, and C Properties in North and South Carolina

Darin: I'm a veteran, but the syndicators that I talked to, I was like, "Okay. When a recession comes up, what should happen?" The consensus that I was getting was, that in a typical recession, everybody is trying to tighten their belt. You'd see the bottom 20% of As flow into B properties to save money, and the bottom 20% of Bs flow into Cs. That would bode well for both Bs and Cs, but in COVID, Bs and As tend to do much better than the Cs because those were the people that got impacted the most.

They’re the people that were working in restaurants, as bus drivers, and working in retail, and they couldn't afford their rent. Also, in the Cs, what I didn't realize was that the approvals are one-third. But you get into the As, and it's more like one-sixth of their income. They have more cushion to be able to withstand a downturn.

Hemal: Yes, and wage inflation has kept up a little bit compared to all the other inflationary aspects. People say wages have gone up a little, and if you're at that $100,000 mark, 10% is $10,000 extra a year versus if you're at a $25,000, $30,000, 10% is only 3 grand extra. There's that cushion as well that allows you to have more discretionary spending power even in this environment compared to a C-class property tenant.

Darin: What about this? You can't build a B or C, they are just unaffordable. Buy the land and build it. So everything that's being built are As?

Hemal: Yes.

The Lease-Up Process

Darin: Is there a worry, a concern that, when the music stops, whoever is in the lease-up process could get stuck holding the bag?

Hemal: A-plus, super luxury housing could get that issue. That's why what we're trying to build are two things. One, building a place where housing is in shortage, so you have less. Again, with all the mistakes that you can make, you have less to worry about because the macroeconomic environment would carry you forward in a downturn. Places like Charlotte, Dallas, or any other place that you would think of are in the top 10 housing markets.

B, create something that's A from a vintage standpoint, but it's not uber luxurious. It's good two bedrooms, three bedrooms, one bedroom mix, but beyond a pool, and a playhouse, and a dog park, or something like that. We don't try to put crazy valet services or anything of that sort. That's what you have to figure out an ROI for in some fashion either through property management fees or additional fees that you're to charge. That is where the discretionary piece starts hammering in for your tenants. We try to stay in that.

We're trying to build an A vintage with a B-plus type of community and keep our cost bases low because we're building it low. Even with any sort of rent changes that might happen where we might have hit a maximum ceiling at some point, we still are into a profitability measure. That's our philosophy.

Darin: Basically, within the A vintage, there are different levels of A. You're not going after the top, top, top?

Creative Ways of Getting Cheaper Capital

Hemal: No, that's not for us. If I had capital, cheap capital at 2%, 3% expectation of IRR, or pension fund, or anything of that sort, I could squeeze that out. It's a game of what price you're buying it at. I refuse to buy something that's overpriced just for the future. B, what sort of debt and equity capital that you have? We're trying to come up with creative ways of getting cheaper capital into our stack that allow us to be a little bit more aggressive.

At the end of the day, the investors have fulfillment in their capital. Expected returns projector are given to them, they're happy. Now, my retail investors are at 15% to 18%, 18% to 20% and new deals are at 25% to 30%. But if I find a bigger joint venture fund like this that's a lower capital stack, that's a win-win situation for us.

Darin: Talk about when you're putting together deals and you're looking to fund and grow. What is important to your investors? Is it just purely the return, or is it your experience and capital preservation plus a good return?

Hemal: It's both. It's having accessibility. Every investor of ours has my cellphone, and I tell them very clearly, very transparent. Every one of them can text or call me at any point, and we have 400 of them. That's the accessibility we have kept. Now, once we hire our investor relations person, and slowly, they'll take over the communication, they'll have it. But someone from the leadership team can always reach out.

The Best Operators Versus the Worst Operators in North and South Carolina

Hemal: The answer I give them is, "You may all have your say, but you may all not have your day. So, I'll listen to you. You're not part of the decision-making. If there's any question about how the progress is, I'm happy to send you videos or whatever ad hoc. You don't have to wait for the monthly newsletters." That builds transparency. They know they can reach out to me anytime.

They can understand if something has gone from a challenging standpoint, if they read something like, "You have to change property management. What happened?" "Well, let me tell you what happened. They sucked, and we'd rather change them than keep them. We want to bring something in-house." Our experience is, that we can manage things better because we can keep a tab on the OpEx, and that's the play.

Again, in this environment, the best operators would win hands down over mediocre operators. People who can keep the bottom line through OpEx, and operational expenditures, better by keeping a good eye on what's happening in your property. Spending real time rather than the weekly calls with the property management company. Those are the ones that would really have a level of profitability that not many people would see. So that's what we do, and they understand that.

Darin: Did you wait till you got to a certain level? What was the line in the sand for bringing in property management in-house?

Hemal: It was about that thousand door mark.

Darin: Consistently, I've heard that from a lot of different syndicators. Once they get over a thousand doors, then that's the consideration is to bring it in-house. That was very similar.

Hemal Growing Up

Darin: Going back to when you were a child, did you know that you were going to be successful?

Hemal: No.

Darin: Were you that confident back then also, or when did that switch?

Hemal: I was confident. I was raised in a very different exposure. That’s what made my experience unique. I grew up in India, first of all.

Darin: Where in India?

Hemal: I grew up in a state called Gujarat, which is the western tip of India. A lot of entrepreneurs came from there. Probably the top five richest dudes in India are from Gujarat, including the Prime Minister.

Darin: Are they part of that 400?

Hemal: No, they're not. Not yet someday. I grew up in a business environment. My grandfather started a company that we still have. We manufacture chemicals, and so we learned lean and mean processing, the way to treat employees by being super lean on the OpEx side, no fancy furniture, or nothing to do. That was what I learned.

Second thing, my granddad was very global in his exposure, and he spoke 11 languages. He used to love to bring philosophers, and poets, and politicians to the house and debate for hours and hours, which we get to listen to. It was important to learn both sides of the story, putting yourself in someone else's shoes. That was a very unique exposure.

Darin: I don't know if it did or not, but that process sounds similar to how you set up your three guys internally to debate with each other.

Hemal: Exactly. That's mind-blowing now that you mentioned it. I might have learned from him unconsciously.

An Interesting Exposure

Hemal: Then I grew up going to school from kindergarten to my 12th grade in a convent school. It was run by a Catholic institution, and so the assembly line in the morning when all the students in uniform would stand.

Growing up as a Hindu, we had the prayer for eternal God, the creator of all. We celebrated Christmas, we still do in our family here. Big time. All the Catholic festivals got imbibed along with my language, and all the texts were in English. The teachers were all Catholic nuns and priests. It was an interesting exposure there as well. Little did I know back then, it was just a great school that my parents decided to put me into, but it was interesting, more global than a typical child would have in terms of exposure.

Darin: Did you come over for college by yourself, or did your family move here before?

Hemal: No, I did. I was living as a prince back then. Yes, four or five servants.

Darin: Living as a prince?

Hemal: Yes, because I never cut an onion in my life for the first 20 years, never ironed a shirt. One day, when my naive self told my dad, "I need to go to the US," this one friend of mine who was my best friend at that time from 10th grade, moved to this town called Charlotte, North Carolina. He's got some uncles here, and he's going to live there. My dad was like, "Yes, whatever. You pass the exam; you should come to talk to me." I gave him my SATs, and the only university I applied for was Charlotte. Two months before, I was supposed to move here, and my friend moved back.

Early Life in North and South Carolina

Darin: He was the reason why you were going, but then he turned around and came back? Why did he come back?

Hemal: He took over his dad's development business back in India. He's crushing it there, but I didn't know that. When I landed here, I didn't know anyone. It was quite a bit of experience. My first job was in Chick-fil-A, filleting chicken, and frozen chicken with gloves in the back in the freezer. That was quite a shock from where I came from.

Darin: Can you say for sure that you're here for good?

Hemal: This is home. Charlotte is home. My kids were born here. Half my life or more than half now has been outside of India, and most of it has been in Charlotte.

Darin: You've done a ton in 20 months. What's the next big stretch goal? You've done 12 transactions, and 1,000 units. What are the total assets under management?

Hemal: Right now, it's about $135, $140 million.

Darin: What is the next big stretch goal?

Hemal: We'll be a billion-dollar business at some point. That's the goal, but more importantly, we want to be completely vertically integrated. That's the main goal. So, construction management. There's no reason why we shouldn't be building roads or schools in Charlotte. We want to bring that division in-house. We want to bring a fund division in-house. We're exploring software for underwriting that we're building, and really, build into it from a 10-people company to a 250-people company. That's the goal.

Darin: That's huge.

Hemal: It's easy when you have property management and construction management stuff.

Fun Adventures in North and South Carolina

Darin: You could get a lot of employees quickly by hiring people for sure. What do you like to do outside of work for fun?

Hemal: I love golf as a sport, and I love traveling for unique adventures by myself. Case in point, last year, I don't know if you know of Wim Hof, The Iceman.

Darin: Yes. You went and met him?

Hemal: I spent five days with him up in the Pyrenees Mountain. I flew out four hours from Barcelona. Five days of summer camp with him and did ice baths, meditation, canyoning, jumping off cliffs, and cold water. It was a tremendous experience for five days. I did that, and we'll go back

Darin: Wim Hof, I've seen him on social media. He's an older guy, I'm 52.

Hemal: He's 62. He still does one-handstands. He's tough.

Darin: You'll see him out in the freezing cold with snow everywhere, he's wearing shorts and no shirt, and he's about to jump in freezing cold water. He just seems like a nut. What attracted you to want to hang out with him?

Hemal: That's how I make decisions. This is the story, February of 2021, right in the middle of COVID, I was listening to Tom Bilyeu's podcast. Wim Hof came into the podcast and was talking about health, happiness, his personal tragedy, and how the cold helps him meditate. Shortcut to meditation, and he's climbed Mount Everest in shorts. He's just crazy.

So, I listened to him. I'm like, "All right. Let me check his website," and so I go into his website. It says, "Events," and "Spain," in summer, like June, or July, and I didn't know if COVID would allow me to go, but I just booked it. I didn't know anyone there, but I just showed up. There were 60 people from Australia to California, 19 to 65 years of age, each seeking their own journey, trying to do something there. It was an incredible five-day experience. We are all still friends.

A Unique Bonding Experience

Darin: All the people that went are still friends?

Hemal: Yes. We have a little group going on and we meet each other.

Darin: What a unique bonding experience. That’s so different almost from anybody that I've talked to. Seriously, I've asked people like, "How do you get uncomfortable?" I don't even want to ask that. That just says it right there. How do people get a hold of you if they want to get to know you or the company better? What's the best way for them to reach out?

Hemal: Our company name is Exponential Equity, exponential-equity.com. I am trying to remove the dash in some fashion, but my email address is Hemal@exponential-equity.com. I’m happy to leave my cellphone number with you as well and happy to get connected. I love talking about real estate and enabling people in their journeys. If they're looking for passive or active investments, talk about anything that they might be facing an uphill battle on, and see if I can assist.

Darin: I’m putting my name into that hat of yours to see what deals you guys have. The returns are spectacular, and these people that are moving and working for you for six months without any pay, I'm like, "How does that happen?" In any event, I appreciate you sharing. I'm thankful that we got to meet each other at the conference. Listeners, I hope you enjoyed that one. Till next week. Signing off.

How to Reach Hemal Badiani

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