From Novice to Expert: Thriving in Midwest Real Estate

Stephen Schmidt (00:03.011)
Welcome back to the show where we interview the nation’s leading real estate entrepreneurs It’s your host Stephen Schmidt back at it again And I got Carter Olles in the house today and we’re gonna be talking about some high-level stuff Carter is the co-founder managing partner of Nautilus, which is a private realist private equity firm Excuse me, which they acquire existing quality multifamily properties throughout the Midwest So we’re gonna go into a conversation today about

Several different topics in relation to that, his background and why right now multifamily is a great thing to invest in. So just remember before we get started at Investor Fuel, we help real estate providers, service, real estate entrepreneurs, service providers and real estate professionals, two to five X their businesses so they can build the businesses they’ve always wanted in order to live the lives they’ve always dreamed of. That being said, Carter, welcome to the show today.

Carter Olles (00:55.362)
Thank you. Thank you for having me. It’s good to be on.

Stephen Schmidt (00:58.165)
Yeah, thanks for being here, Carter. I’m glad we’re able to have this conversation. Tell us just a little bit for our listeners sake so we can kind of get a background, set the tone for the show here. How’d you get started in the space and what made you decide to found Nautilus and get rocking and rolling with that?

Carter Olles (01:16.502)
Yeah, yeah, to take it to take it way back here. So I grew up in a family who’s, you know, traditionally worked at W-2 and they built and both their grandparents and parents made money in an operating business, you know, W-2 income, pushed it into real estate and built good wealth doing that. in exploring a career always knew that that was a, you know, wealth building solution. That was the, you know, the way that the family made their money and built their wealth. And I said, Hey, why don’t we just do this full time? Why don’t, why don’t we focus?

on that. And so I got into real estate, was fortunate to work with a large real estate private equity firm.

acquiring real estate in the Midwest, most recently ran direct acquisitions for them in the Midwest, bought about $850 million of real estate with them during my time there. So it was very active, largely multifamily, but also a little bit of industrial and retail. And about three months ago here left that role on really great terms to co-found Nautilus. We saw kind of a very unique opportunity. thought from a market timing perspective, also frankly, a career timing perspective for most

both me and my partner and we were able to put together kind of an initial group to help to get us going out there and do frankly a lot of the same of what I was previously doing which is acquiring know high quality multifamily throughout the Midwest. All existing projects we feel we can talk a little bit about why we were focused on those existing projects versus new development or doing the development ourselves but do it you know in a very similar way leverage those relationships connections to do it on behalf of a new equity source.

And so we officially launched, like I said, Nautilus about three months ago. The market reception has been just fantastic. We’ve had a lot of demand on all fronts, which is awesome, and focused on buying those high quality multi-family deals throughout the Midwest.

Stephen Schmidt (03:10.338)
So that’s actually really good. It’s almost like you popped through the screen and read my first question that I kind of came up with and wrote down here, but what gap in the market were you aiming to fill with Nautilus?

Carter Olles (03:24.544)
Yeah, so it’s twofold. felt from some of our relationships and some of our partners that they weren’t served with a quality real estate product and an opportunity to invest in quality institutional real estate. So I think from that perspective, on the equity side, that’s really the gap we filled is bringing our folks and the people we’re working with with an option, bringing them high quality and

investments targeting really nicer, newer, better located assets where we feel the best risk-adjusted returns are. So that’s the gap we’re solving on that side. And then on the acquisition side and the deal sourcing side, really focused on…

being active in our markets, having, know, leveraging the relationships that we built over, you know, a number of years here to, to source and identify, you know, high quality opportunities and, and, you know, match those opportunities up with, you know, proper exits and good valuations for the, you know, the sellers and, see if we can come, you know, come find some deals. we, we, we offer on a lot of opportunities. We’re very active. I, our target is to submit about 150 fully underwritten offers a year, on multifamily properties and by the

us one to two, maybe three opportunities out of that mix every year. So be very selective in what we’re looking at.

Stephen Schmidt (04:49.41)
So what makes the Midwest like a really attractive region for the multifamily investments?

Carter Olles (04:54.902)
Yeah, a couple things I think make the Midwest particularly attractive, especially right now.

We have seen real estate values just generally saw a really significant ramp up and guess compression of cap rates that I would say peaked in early 2022. And I think most aggressively you saw that happen in Sunbelt, coastal markets, et cetera. We didn’t see quite as much of that compression in cap rates in the Midwest. So think one, just on a high level, it’s a more transactable marketplace right now. I think valuation expectations

are more in line. aren’t as many folks that bought ridiculously low cap rates. There’s still plenty of that out there. But I think from a transaction perspective, like the cap rates. Frankly, the Midwest is still trading at relative to those Sunbelt and coastal markets. So we like that. We think on a current yield basis, that’s attractive. But on a fundamental basis, the Midwest tends to, in our opinion, just be more of a steady eddy type region. We see it sees a little bit of less

of the boom and bust, the ups and downs, the big peaks in supply most recently in this most recent cycle here. When we look at the coming supply picture, we see a really dramatic drop off in new deliveries and multifamily across the nation, but then specifically in the Midwest as well. And so when we look at the supply demand picture, some of our coastal and Sunbelt markets are actually, know, peer markets are seeing actually negative rent growth right now. The Midwest at large is not seeing that. It’s actually seeing, you know, some of the top rent

growth in the country. And that’s the benefit that folks like myself and our partners have always known about the Midwest is it might not be the sexiest market. It might not see the biggest flashiest. It might not always be the flashy, but it kind of consistently plugs away and does very well. So two reasons we like it. I mean, we could talk a little bit about the employment that’s coming to the region, right? I think there’s been a lot of policy that’s driving employment to the region, which is great.

Carter Olles (07:01.784)
There’s also just freshwater access, climate. There’s a lot of really nice factors that we think the Midwest, make the Midwest a good spot to invest right now.

Stephen Schmidt (07:11.298)
Yeah, that’s really good. there, you know, the Midwest is a really large…

place I think most people don’t realize that some people when they talk about the Midwest they’re referring to Ohio but they could also quite literally be referring to Kansas and there’s a huge landmass difference between those two places. So like when you talk about the Midwest are there any specific portions of the Midwest that you’ve had really great success in in the past that you see are starting to get tapped out in terms of supply or

Like what are some of those challenges that you’re seeing on the horizon for that region right now?

Carter Olles (07:48.908)
Yeah, there’s not. mean, there are certainly select pockets within the Midwest that have seen, you know, they’ve seen they’ve been more aggressive. They’ve seen more supply. But at large, part of the reason why we like the Midwest is that there isn’t as much of that. There’s a lot less of that where you’ve got a lot. Supply and demand is much more in balance. know, our target markets we’re looking at when you think of, you know, the likes of Kansas City, Columbus, Des Moines.

you

While they might see some vacancy pops and some increases in vacancy, generally speaking, occupancies are pretty tight and there hasn’t been kind of that big glut of supply as we might’ve seen in other markets. But you’re absolutely right that the Midwest is a larger region. There’s definitely some markets that are benefiting and seeing more growth that we’re certainly more focused on than others. But we’re also a firm believer as a firm here that there’s opportunities in any market.

And you can find pockets of different cities where people are still wanting to move to and grow to.

So yeah, that’s probably how I would think about it. And yeah, like you said, we’re focused on, when we say the Midwest, the Midwest to us is 11 total states. I think technically Pennsylvania comes in the Midwest on a census side, or at least Pittsburgh does. But we cut Pittsburgh out and we replace it with Lexington and Louisville and Kentucky. We’ve got some good experience down there and like those markets.

Stephen Schmidt (09:23.458)
So what’s the long term? mean, I know this is a, you know, not a new industry for you, but a new venture for you. What does the long term look like? What would make this a screaming success for you, do you think?

Carter Olles (09:38.382)
Yeah, that’s a great question and one frankly that’s really fun to think about.

When we look further out, really we’re focused on building an investor first platform that above all else does right and does best by our investors. When we look at it, we look at kind of our family experience and background. My business partner and I are second and third generation real estate folks respectively. And so we look at how they’ve benefited over the years. We look at our peers in the industry, what they’ve seen, what they’ve

Stephen Schmidt (09:51.49)
Hmm.

Carter Olles (10:14.64)
how they’ve done well, how they might have not done well. We really see that owning high quality real estate and doing,

the absolute prioritizing, maximizing returns, risk adjusted and a modest risk profile does best and grow. So that’s really our focus and our core focus is doing those high quality deals, a company around things like, for example, we look at management and when we look at the difference between self-managing or hiring a third party manager, we look at it and at the end of the day, almost all the time,

fee is being charged, whether or not you’re self-managing and taking that fee in-house or you’re hiring a third-party manager. And when we can go to a market where we currently have zero assets in the market, we’re not looking to fee grab and take the management fee ourselves. We’re going to hire the best manager in the market because we think that does best by our investors and also ultimately builds a strong track record and builds wealth for them. So it’s really about building that platform out.

to succeeding for our investors, doing high quality multifamily deals, we’re pretty focused on staying within, I think, the multifamily space for the foreseeable future and really kind of keeping those blinders, and in the Midwest as well, really kind of keeping those blinders on, and being not a niche provider for our clients, but a very focused provider for our clients and bringing them high quality investment opportunities in whatever form that may persist.

Stephen Schmidt (11:51.596)
How do you define a high quality multifamily investment?

Carter Olles (11:55.884)
Yes, I mean when you look at

I will take that and redirect that question into the negatives, which I think you eliminate, you control for the negatives, and then you by default are then in the high quality. And when we look at reasons why at large investors projects don’t do well, it’s really three, you boil it down to three reasons in our opinion, which is capex issues. Whether it’s just unplanned capex issues or vintage related capex issues, it’s debt related.

issues either via too high of leverage, floating rate term, not enough term, etc. And then there’s just business plan failure, which is, we think we can come in here and push rents 30 % and our business plan entirely relies upon that. Assuming you can execute on it too quickly. And so when we control for those factors, what that means is that we’re buying nicer, newer property. So generally, we’re technically targeting 80s and newer with washer dryers.

unit, we’re really focused more on 90s and newer. We’re focused on properties where the incomes in the area can support the median incomes in a, three mile radius, can support and cover rents, not just in place today, but also if we’re doing any sort of value add or rent improvement. We still want to make sure we’re within that. We’re looking at, like I said, the newer vintage to control for capex. We’re also, frankly, funding a little bit more than maybe

other groups are in my opinion into initial capex reserves and working capital reserves because at the end of the day well that might be a slight drag on IRR. It’s in the best interest of our investors and it protects them from any sort of unforeseen capex issues that may come up because the reality is is something always comes up if it’s small or large and just having that that reserve is of critical importance. We’ve seen a lot of groups maybe not do that and get burned by that. And then you know on the debt piece right we’re looking at

Carter Olles (13:58.88)
at modest leverage, we’re looking at, you know, we’re a 65 % leverage borrower, which I think kind of I would define as modest leverage, moderate.

where all fixed rate products or fixed rate equivalents, whether it’s through a swap or in the money caps, et cetera. And then borrowing with sufficient term as well. Because in the event things come up, maybe a new project is delivered next to you that you might not be aware of. We look at that and we say, hey, term is really your friend. And again, you might be able to sneak out a little bit of a higher return if you had a shorter term on

debt and you can avoid a prepayment penalty, but we would rather have that prepayment penalty out there, kind of swallow that in the event that we want to take a quicker win because on the downside basis, just doesn’t… We don’t feel that really the extra 50 to 100 basis points you might get on an IRR is worth it for the risk that you’re taking.

Stephen Schmidt (14:59.947)
What so with let’s kind of move towards like an actual question about like acquisitions. What are some of the like most common red flags you look for during like acquisition due diligence?

Carter Olles (15:11.884)
Yeah, that’s a great question. We have a really long and robust checklist of things we’re looking for. And there’s not always, I can give a few examples of ideas or things that I may or may not have dealt with in the past or come across in the past. Sure, sure, and not speaking to any specific property, of course, but.

Stephen Schmidt (15:33.949)
Allegedly.

Stephen Schmidt (15:40.458)
You

Carter Olles (15:40.588)
You know, at the end of the day, you need to be on a high level to just back up. Do diligence.

And when you’re acquiring a multifamily property, by the time you negotiate a PSA, maybe you put together some legal documents on investment perspective, you hire third parties, you’re incurring significant costs. In our world, that’s a $50,000 $100,000 cost. By the time our attorneys, our third parties, et cetera, at the end of the day, due diligence process and period is in there because if the deal is not what you thought it was going to be, you need to walk. And there’s a lot of responsibility on us to make sure we do

our diligence before we get to that phase, right? Because we don’t want to be, you we have a strong reputation to hold up in the marketplace. I’ve never walked from a deal without, you know, due cause on it.

and we have a reputation that we do what we’re going to say we’re going to do. And so on a high level, right? One, you have to be willing to walk. When we look at, when we start getting into the specifics of things we’re doing on that is we’re not afraid to spend, frankly, a little bit of extra money or time in hiring an extra inspector. In our world, we have property condition assessments, right? They’re done by a third party engineering firm. They’re doing phase ones, but

We might hire a builder or a local contractor to come out and take a look at things because it just doesn’t feel right. We want somebody with a real, you know, practical experience. And I’ll tell you, we uncovered, you know, I did that once and we uncovered a pretty substantial what we felt to be issue that ultimately led us to not pursue an acquisition. And I think that’s in the best interest, right? It was a, you know, we incurred that cost. We stomach that cost. That was our cost and our cost alone because we walked away from the deal, but it was well worth it.

Carter Olles (17:28.592)
versus deploying 10, 20, 30 million dollars of equity into a deal which could have potentially had some real significant issues. So we’re always very quick to bring the experts out and bring extra experts out that are tactically, they’re day in, day out doing all these things. Because they can just frankly identify things that the naked eye might not see or the untrained eye might not see despite how much training we have.

Stephen Schmidt (17:35.798)
Right.

Carter Olles (17:53.614)
You know, we walk every single unit we acquire with almost no exception, right? If somebody’s locks aren’t, you know, if somebody, if the property doesn’t have keys to the lock, you know, we’ll drill the lock if we have to. Within the rights of the lease, right? And, you know, that’s the property manager doing that. That’s not us, but we’ll ask for that lock to be drilled because we want to see in that unit. Because that, you know, if you’re buying a 200 unit property, it’s pretty low chance that’s the case. But say if you’re on a unit 199, that might be the unit that you identify a real

problem. Something happening in the building, somebody doing something in the building they’re not supposed to be that could cause real issues down the line. So walking every unit, we audit every lease, right? We’re looking at that, you know, to make sure they’ve got the appropriate income data on file. They actually screen their tenants, right? We’ve experienced, I’ve experienced that where the screening process may have been subpar. And now all of a sudden you might have tenants in your property that are actually not qualified to pay the rent. And of course this is all within, you know, the standard, you know, fair housing

Stephen Schmidt (18:30.198)
Right.

Stephen Schmidt (18:49.163)
Sure.

Carter Olles (18:53.488)
laws, things of that nature. the property managers make sure we’re in compliance there. On a tactical perspective, other problems that we’ve identified that we’ve walked from or at least caused for concern are ponds are sneaky. Ponds are a real… If you own or are responsible for maintenance on the pond, because sometimes you don’t always own them, but there’s some sort of maintenance agreement on that.

Stephen Schmidt (18:54.805)
Right.

Stephen Schmidt (19:22.292)
Right.

Carter Olles (19:22.988)
you really, you know, it’s really worth doing some real diligence, especially if it’s a property that’s been around a little while or a pond that’s been around a little while. Typically, I see that there’s some pretty, you know, there’s requirements in terms of how you maintain those ponds that.

folks aren’t always in compliance with. It’s pretty easy, I think, for some folks to fall out of compliance with those. so, right, a sale might trigger somebody to start thinking about, hey, are these guys in compliance? And you as the buyer don’t want to be responsible for that. And then also sediment buildup as well. You know, is the pond, talk about compliance, right? Sometimes you’re required to have, or just need to have for the pond to function properly, say an appropriate depth. And there’s different ways that they measure it. I’ve seen some pretty interesting things, but

Sometimes if you’ve got a lot of trees around the pond especially, the leaves are coming in there and over course of 10, 20, 30 years, you might not be in compliance anymore. That’s a pretty expensive, these are not cheap expenses. So that’s maybe a more interesting example. Ponds are scary. They need to be dilligenced.

Stephen Schmidt (20:29.408)
That is definitely one of the more interesting things that I’ve ever heard actually on this show, that a pond could throw an entire deal off potentially. Well, right, but.

Carter Olles (20:37.07)
Thank

Carter Olles (20:41.294)
And it’s not going throw a deal off, I would say, right? If you’re buying a $70 million property and it’s not going to kill the deal, but you might be looking at a $200,000 plus expenditure that you get that, maybe something else comes up. All of a sudden, you just spent an extra half a million dollars that you didn’t think you were going to spend. And that obviously is not in the best interest of your investors.

Stephen Schmidt (21:03.487)
Right.

Now you threw a number out there like for a 70 million dollar property I mean what’s that running 250 300 units in the Midwest probably or higher?

Carter Olles (21:16.948)
little little bit higher it’s i mean

Stephen Schmidt (21:19.104)
I’m gonna say that sounds like a big property. How many of those are actually out? I’m in the Midwest. I’m like, man, I can’t even think of a property that we’ve got in my area that’s that big.

Carter Olles (21:28.736)
Yeah, it’s, it’s, there’s quite a few, man. There’s quite a few.

Stephen Schmidt (21:32.544)
Are they really?

Carter Olles (21:36.674)
I’m sorry, what was that? Yeah, no, I mean…

Stephen Schmidt (21:37.792)
No, go ahead, sorry, I just, I was just bantering. Yeah, I said, there really? Like, wow.

Carter Olles (21:42.99)
There’s quite a few. I just was talking with a broker yesterday on a $120 million plus property. It’s a market that that starts to get a little bit large for. You have to be cognizant of who your buyer is. We think a lot about that, frankly. You can have a property. You can have a strategy on it. You can execute a business plan against this asset, buy it at what seems to be a good price,

Stephen Schmidt (21:58.219)
Sure.

Carter Olles (22:12.944)
to get a business plan and on a cap rate basis perhaps.

It seems in line, but sometimes, especially on the large side, you can get out of whack on a buyer side, right? I you got to think about to what your next buyer is doing, assuming you want to sell. And even if you don’t intend not to sell, you should still be thinking about it and re underwriting as if you’re continually re buying the asset effectively. You know, sometimes if you spend too much money in an asset and you raise rents too much on an older asset, you might, you look at your exit basis on a per unit and you say, I don’t really know that I love that. I don’t know who buys that.

Or conversely, if you’re a smaller market and you’re buying a property for say $75 million and you’re executing a little bit of a value out against that asset and you anticipate over a five-year hold you’re going to grow that value north of $100 million, who’s your buyer on the back end? That’s a big check that somebody’s got to write. That’s a $40-plus-million check, roughly. Probably write around $40 on a $100 million asset if you’re modest leverage.

The air is thinner up there for in terms of who can write that check. So those are interesting things to think about. But yeah, our sweet spot, mean, for us, our sweet spot’s about, you know, our target acquisition range in Nautilus is 10 to $60 million without a partner. We could partner with somebody and do larger. But there’s plenty of opportunities in that, you particularly in that like 30 to 50, 30 to $60 million space. That’s really where we see a lot of opportunities for us at least.

Stephen Schmidt (23:44.288)
Absolutely. Carter, let me ask you this. Last question before we kind of wrap things up. What’s a question that no one’s asked you that you wish somebody had asked you when you’ve done a podcast or even been in conversation about this space?

Carter Olles (23:57.582)
Hmm, I gotta think about that.

Carter Olles (24:08.494)
It’s something nobody’s asked me that I wish somebody would ask me. I spend a lot of time thinking about downside risk and you’ve heard that right in our conversation. We’ve barely talked about the positives. We’ve talked about all the ways that we try and avoid the downside, right? Because that’s so much of the battle and that’s so much of what we’re focused on is…

Stephen Schmidt (24:27.081)
Right.

Carter Olles (24:32.48)
We want to execute for our investors, but the first thing we need to do is preserve capital before we can actually grow that capital, right? And that’s something that folks don’t always think about. So when I think about things that I think should be talked about more, think that’s probably principally it, which is, I think focusing on limiting that downside and testing and doing sensitivity analyses in your models, also doing the diligence, I think is really important.

I really enjoy talking about that because it’s, you

A lot of folks, you look at an opportunity and you can slice and dice things a lot of different ways and you say, I think this is going to be a good opportunity, right? But what if not? What does that look like? What if supply moves against you in the market? What if somebody builds a property right next door to you that you didn’t expect? Are you going to still swim on that or is that going to put you in a tough spot? So I like to think about downside. One thing I think that’s not always, I mean, you probably talk about it a lot. The tax benefits of real estate are fantastic.

You know, even it depends partially on your tax picture. Of course, I’m not a CPA. would say, you know, consult with your CPA and your specific tax situation or, you but on a high level, you know, many say, and I would agree with them that real estate is the most tax advantage asset class out there in terms of an investment. And I don’t think folks always think about that and talk about that as much as they do on you know, after tax, you know, after tax basis comparing real estate to other forms of investment. We think real estate is a really

great spot to be. So those are kind of a few little things that I think about a lot, guess. I don’t know that they’re, you know, they’re probably discussed well enough,

Stephen Schmidt (26:17.311)
I I’ll be honest with you, man. I relate to that a lot because I had a mentor of mine, longstanding mentor of mine who’s been in my life in sort of an active role, sometimes a passive role. And he recently, I had a conversation with him, I want to say was eight or nine months ago. And he looked at me and he goes, dude, Steven, you are the most…

pessimistic optimist I’ve ever met in my life. Or something like that, like you’re the most negative optimist I’ve ever met. And it’s like, look man, it’s just how my brain thinks is minimize liabilities, raise assets and income. Like that’s just how I operate. It’s not something that like I’m sitting here thinking that the worst case scenario is gonna happen, but if it does, I’m prepared for it.

Carter Olles (26:58.828)
Yep, yep.

Carter Olles (27:10.218)
And yeah, I mean to build on that when you look at any sort of real estate deal you’re doing, whether it’s your first deal, small deal, right? My first deal, I bought $134,000 home, single family home. That was my first foray into real estate investing. Obviously doing a lot larger transaction sense. But at any event, it’s a fairly significant form of capital, whether it’s just generally speaking or to yourself personally. And there’s risk with the loans you’re signing on, right? That’s a personal risk.

or if you’re taking investor capital, I there’s a high degree of responsibility there. And I personally have been really incredibly fortunate to work with some really fantastic investors and really get to be involved and meet their families, spend time with them, build friendships with these folks.

whether it’s a $100,000 check or it’s a 10 plus million dollar check, the responsibility that you’re taking on, especially when you’re taking outside capital is, in my opinion, something not to be taken lightly. And so that’s what keeps me up at night is preventing ways that their capital could be impaired or it could be put at risk, right? Because that’s my job is to…

limit downside risk and maximize upside risk or upside opportunity I should say.

Stephen Schmidt (28:35.934)
Well Carter, thanks for joining us. Appreciate you coming on here and giving us half hour of your time for the show. If people want to connect with you for more, where should they go for that?

Carter Olles (28:37.784)
Yeah.

Carter Olles (28:45.58)
Yeah, I think LinkedIn is probably the best spot or our website. So you just find me on LinkedIn, Carter Ollis, O-L-L-E-S. Otherwise you can find our website. It’s Nautilus, N-A-U-T-I-L-U-S-R-E-I dot com. You search Nautilus real estate investments, probably find it that way as well. But would absolutely love to get connected with anybody who’s interested in what we’re doing or wants to talk more, talk some, you know, how to limit risk on a pond, whatever the case may be, man.

Stephen Schmidt (29:13.823)
You bet.

Carter Olles (29:15.665)
I’ll nerd out with you here as long as I can do it for hours. So it’s been a pleasure to be on and hopefully we’ll get back on with you here soon.

Stephen Schmidt (29:25.063)
There you go, folks. We’ll go show them some love from the real estate pros in the Investor Fuel family. Hope you got as much out of this episode as I did. We’ll see you in the next one. Thanks so much.

Carter Olles (29:34.124)
Thanks all.