Buy Real Estate in a Down Market: How to Upgrade Assets and Build Wealth

Gary Jonas (00:00)
The first is the counterintuitive thing is this. You want to sell.

If you’re upgrading assets, so you’re selling a million dollar asset, you’re buying a $10 million asset, you want to sell and buy in a down market. So the example that we give is you sell the million dollar property, the market’s down, you know, let’s just call it 10%. So you’re selling your million dollar property, it’s lost $100,000 in value, but you’re going to buy a $10 million property that’s down 10 % in value.

Scott Bursey (02:03)
Welcome back to the Real Estate Pros Podcast powered by Investor Fuel. I’m your host Scott Bursey and today we’re bringing in the heat. We’ve got a heavyweight joining us who is dropping some serious fuel on how to dominate one of the most competitive markets out there, Philadelphia.

Gary Jonas of The HOW Group isn’t just surviving in Philly, he’s setting the pace in one of the toughest urban markets. Get ready to tap into that high octane knowledge because we’re about to ignite your strategy. Gary, welcome to the show.

Gary Jonas (02:37)
Thank you for having me, Scott. I love your enthusiasm. So excited to be here.

Scott Bursey (02:42)
We’re really pumped to have you and what really caught my attention about you was the way that you’ve been able to systematically scale The HOW Groups operations and build a deep granular understanding of the diverse micro markets within Philadelphia That kind of local dominance is pure gold

Gary Jonas (03:01)
Well, thank you. It’s so interesting that you say trying to dominate certain markets because I one of the things that we realize in hindsight is we should have stayed in two or three markets versus kind of expanding out the way we did. And now as we move forward, we’re starting to try and consolidate the three neighborhoods we’ve had the most success in. So the point you’re making makes a lot of sense.

Scott Bursey (03:24)
For our listeners who may not be familiar with your journey, please tell us how did your career begin and what is your main focus now?

Gary Jonas (03:32)
Sure, so my career began in the mortgage business.

So I got out of college and by accident got into the mortgage business, which led me and a couple of my friends to start our own mortgage company after a couple of years. And as we were doing that, we were running this mortgage company. We sent one of our partners out and said, Hey, know, we’re self-employed. We don’t have any retirement plan. Why don’t you start trying to buy some real estate for us? So my one partner went out. This is early 2000s. He’s trying to buy some real estate. They don’t make any money at that time, Scott, but

But that’s a huge appreciation time. So everybody’s assuming values of properties are going to go up over time, which obviously they do. So he’s doing that. Then the financial crisis comes around around 2006, 2008, and somebody comes to us and says, hey, look, even though your business is perfect, 715 credit score, 15 % down purchase money mortgages, the space itself.

is just fractured and you’re going to be out of business if you can’t bring a couple extra million dollars in in the next two weeks. Well, we didn’t have a couple million dollars, so we thought, well, what do we have? And we realized what we had was great underwriting. Our underwriting was better than bank level underwriting. So we were able to go to a couple of banks and say, hey, would you guys allow us to underwrite for you and bring our deals in-house? The bank said yes to us, which was wonderful, but that meant myself who was running the

company, they didn’t need me anymore. The bank was going to do all that stuff. So my partners and I, instead of looking at that as a half empty situation, looked at it as a half full situation said, Hey, we think we make just as much money and we have one less person that we need to work in the business. Why don’t you go out and start trying to buy us real estate? So at that point, now there’s two of us. One, my partner Andy, who seems to be pretty decent in construction and me who brings

a decent finance background to the equation. We get into the market at the absolute bottom of the market and every mistake we make, doesn’t really matter because interest rates are going down and rents are going up. And we just have this fabulous run of buying real estate and going from essentially nothing to, you know, 1500 units that we own and manage in Philadelphia now.

Scott Bursey (06:42)
That’s an incredible path, Gary. I appreciate you sharing that foundation with our listeners. Now let’s pivot to the deep waters. Gary, what is the single biggest operational strength of The HOW Group right now?

Gary Jonas (06:59)
Our biggest strength really is in our ability to figure out how to finance deals properly, how to underwrite them properly and take as much risk out of the equation as possible.

Scott Bursey (07:15)
spot on, know, leveraging a streamlined process is what allows true scaling.

Gary Jonas (07:24)
That’s right. And let me let me just say this. Like you heard that we came from a mortgage background where we were lending money out and we had to underwrite those deals to make sure that we felt that that was an appropriate risk. So we took that same lens when we started buying and said, OK, well, is this an appropriate level risk? And so when we think about that and we think about where is risk in real estate development, there’s a couple areas where it comes up. The biggest to us

is interest rate risk. How do we protect ourselves against interest rate risk? And then second is how do we protect ourselves against construction increases and stuff going over budget? And then third, did we underwrite the rents properly? And if we can really account for those three things, well then we feel like we can take most of the risk out of the real estate deal.

Scott Bursey (08:18)
broken down so excellently. I’d love to get under the hood of what specific challenge in the Philadelphia regulatory environment slows down your deals the most.

Gary Jonas (08:30)
Yeah, I’m happy to answer that question. Scott, I’d love to step back one second if I could and give some practical examples of how we do those three things, which is protecting interest rate risk, protecting construction risk, and protecting, you know, risk of rents being underwritten properly, if it’s okay with you.

Scott Bursey (08:51)
absolutely. Yes, absolutely.

Gary Jonas (08:55)
Okay, so hopefully for listeners this will resonate or make you think of some things that maybe you haven’t thought of before. So, on the interest rate risk calculation, the one thing that we always did when we were doing smaller deals, we tried to go to banks and say, hey, give us a fixed rate construction to permanent law.

versus it floating during the construction period and not locking into afterwards. And that worked for a couple years until interest rates became more volatile and then the bank said, well, look, I don’t want to take that risk anymore. So we’re saying, hey, we still want to develop. We need to figure out another way to do that. And what we found out is there’s a product out there called a Swaptions

Okay, and a Swaptions just is essentially a bet on interest rates. It’s like, hey, do you think interest rates are going to go up? And if so, how much right? So the way we would do it is we would underwrite our deal and let’s say rates at the time were 5 % and we’re like, well, look, this deal works up to 6%. We would go out and buy an interest rate hedge on 6 % because we knew our deal still worked.

and that would cost us a couple hundred thousand dollars on you know a five or a ten million dollar deal but we knew that the interest rate risk was out of the equation so we bought them on every deal we’ve done that we couldn’t get a fixed rate from the bank we bought a Swaption totally take interest rate risk out of the equation so

If people are interested, we can provide information on the company chat and financial that we buy those through. But, if you’re you’ve to be over a million dollars in your loan amount. But if you are generally that’s going to be a great way to protect interest rate risk It’s so great, Scott, I mean, really, really can de-risk a deal.

From the construction side, think we mentioned earlier that obviously we have our own construction company. So inherently that gives us a little bit more protection. But even with our own construction company, I am still putting a 10 % contingency on all the construction work.

Okay, so now I got a 10 % contingency on all the construction work. Generally, I make 3 % in profit. So if something went poorly, I wouldn’t make any profit. So now I got a 13%, you know, contingency. And then if I get one or 2 % for a development fee, let’s call it, now I’m at a 15 % contingency.

for that job, which generally should, you know, if you’ve underwritten the job properly from the beginning, that should be enough. Even if, think about it like when material costs went up by 30%, well materials of the total construction job are 30 or 40%. So if they go up by 30%, that contingency that we had is still enough to cover them.

So now we’ve taken two pieces out of the equation and then the third is ⁓ rents. And there we try and say, look, we have to underwrite today’s rents and we’ve got to be able to live with 5 % below what the rents are today. And if we can live there and we’ve underwritten our deal to a 130 debt service ratio, now we’ve got plenty of runway if things don’t go exactly as planned. So by implementing those three things,

in

probably the last five years, which I would consider the worst five years in my time in the business, you know, to be developing. We’ve had deals that haven’t made as much money as we’ve expected, but we haven’t had any deals that we’ve had to give back to the bank. We haven’t had any deals where we’ve had to make capital calls where it wasn’t just our own money that we were funding things with. So we were able to really navigate, which was a difficult time in real estate and come back out the other day and other

into what I think is now the best time to buy in real estate since 2006 to 2008.

Scott Bursey (13:40)
That was a masterful breakdown for our listeners. Thank you, Gary.

Gary Jonas (13:47)
My pleasure.

Scott Bursey (13:48)
And if you could pull back the curtain on which emerging Philly neighborhood holds the most potential for growth in the next 18 months in your view.

Gary Jonas (13:58)
So Scott, think that there’s two neighborhoods, really three neighborhoods that we love in Philadelphia and we want to buy everything we can in those three neighborhoods. One is Fishtown. Two is University City and three is Mount Airy-Chestnut Hill. Those are the three areas that we think have the greatest potential, but maybe not for the reason that you think. Meaning.

I’m not expecting a tremendous amount of growth in those neighborhoods. What I’m expecting is that there’s properties that have been built that maybe aren’t managed 100 % properly or maybe over leveraged a little bit, and there’s going to be opportunities to buy into the best neighborhoods in the city of Philadelphia with very little risk. And so for that reason, we’re going to buy everything we can in those three neighborhoods that we think are the best well located neighborhoods from

multifamily in the city. ⁓

Scott Bursey (14:57)
great tip for our pros to look into.

Spotting those shifts early is the key for massive returns.

Gary Jonas (15:07)
Well, as they say, Scott, and everybody says it, right? You don’t make your money on the sale. You make your money when you buy it. Right? So the opportunity in Philadelphia now is it costs $285,000 to $300,000 a unit to build.

and the properties that you can buy that are well located, you can still buy below $250,000 a unit. So I’m no longer taking the risk to build and all that comes with that, I’m buying for less than people were building for three to five years ago. Tremendous opportunity.

Scott Bursey (16:19)
Gary, if you could set the table for us on this. Beyond interest rates, what external economic factor poses the greatest threat to Philly real estate investors today?

Gary Jonas (16:32)
So Scott, think this is the same whether in Philadelphia or any other market job growth, right? You need job and population growth in order to sustain ⁓ real estate. So there are markets like in Austin or Houston or some parts of Florida where you can just kind of build whatever you want. Right. And so in those markets, there is more risk of overbuilding. ⁓ Most Northeast markets and places like that, they have some constraint.

to get through the permitting process. It’s a little harder to build up here. So that creates some natural benefit to us because the people that have already built are in a pretty good position as long as the population and the income of the area grows. So when we talk about it from a trade organization standpoint, everybody that I talked to, that’s what we’re looking at. Is job growth happening and is income growth happening? Because then you can afford

forward increases in rent.

Scott Bursey (17:36)
That’s a sharp insight right there listeners. And Gary, what’s the toughest challenge when sourcing off market deals in such a dense established city like Philly?

Gary Jonas (17:49)
So I have been trying to crack the code on off-market deals for my entire career. And so one of the things I always do is go back and look at, where are our deals coming from?

And then what made those deals successful? And when I look at that, and this should be encouraging to most people, because what I’ve seen is we don’t have this access to all these off-market deals. And we’ve been in the industry long enough and we get deals that nobody else gets. That’s not true. Our deals come from two places. One, the brokerage community and two other developers who might want our ability to manage the property afterwards or want our ability to do the

Construction on it. So they’ll bring us deals and they’ll partner with us so Just by being involved in the market and having things that people find valuable which is construction and property management We get some deals. We also get deals from brokers but when I look back at the deals we got from brokers and I say well how do we make these work if they were on the market and Everybody had access to them and they just came to us

Something’s got to be there, right? Something’s got to be different. And when I went back and looked at it, we bought seven properties in 2025. They fell into a couple of categories. One was out-sale new construction. So even though we’re a multifamily company, when there’s a lack of out-sale product in the market, you got to take advantage of that, right? So we’re doing some out-sales for homeowners that are entry-level homeowners.

that feels really good, that’s a profitable spot to be. The second thing that we realized is we bought three properties that had land attached to them that we could create value by utilizing that land and it wasn’t given any value in the transaction. Okay, so you know we we had talked about an example you know when we were prepping for this call about a property that we bought that had a fire in it. It was an old grand building built

the early 1900s. couldn’t duplicate it today if we wanted. And that building, when it had the fire in it, prior to that had 109 units. The 109 units were an average of 400 square feet. Well, we looked at it and we said, the 109 units at 400 square feet, they’re not really practical. But because this building had a fire, we now have a blank slate inside. We felt we could only fit 89 units inside the existing building that would be functional.

built in today’s market. But when we looked at the property, it came with a parking lot behind it that wasn’t utilized. And we thought, well, there’s a 109 unit approval here. We can only fit 89 functionally in the building. What if we built an addition off the back of this building, new construction, and kept it at 109 units, but made them way more functional? And what that did for us is it, you know, our ability to build and do new construction and our ability to really think through the market

zoning showed us something different with the property than other people saw.

Scott Bursey (21:02)
A strong network and consistent effort are the only ways to win in competitive off-market plays.

Gary Jonas (21:10)
That’s right. It’s not like people are just handing you deals that are great deals. If you can’t see things that other people don’t see, then you probably shouldn’t be in the business because you gotta squeeze that value out of it yourself.

Scott Bursey (21:26)
Gary, you’ve dropped some excellent tactical fuel here today. Now we’re shifting gears for the money question. This is where you supply the high octane fuel for our listeners.

Gary, given your deep multi-year experience managing large-scale projects in the Philadelphia area, what is the one counterintuitive piece of advice you would give to an investor looking to transition from small-scale residential flips to developing multi-unit buildings in a dense urban market?

Gary Jonas (21:58)
Scott, I’m going to take a liberty and try and give you two if I can. OK, so here we go.

The first is the counterintuitive thing is this. You want to sell.

If you’re upgrading assets, so you’re selling a million dollar asset, you’re buying a $10 million asset, you want to sell and buy in a down market. So the example that we give is you sell the million dollar property, the market’s down, you know, let’s just call it 10%. So you’re selling your million dollar property, it’s lost $100,000 in value, but you’re going to buy a $10 million property that’s down 10 % in value.

They lost a million dollars. So just by

trading those assets during that period of time you created a $900,000 arbitrage for yourself. So selling and buying in a down market is the perfect time to do it. That’s the first one and then practically I want you to think about this second one. One of the metrics that we spend a tremendous amount of time looking at is what is the equity in our properties earning us?

And what you’ll find is if you’ve owned an asset for a while and it’s gone up a ton in value, all this equity sitting in the property and the return on it is probably three to 5 % on the equity. Okay. So I’ll give you an example. We bought probably the best asset we own is 110 unit building in that Chestnut Hill, Mount Airy section of Philadelphia. We think it’s worth close to $30 million now.

It has $12 million in debt on it and that debt is a 2.95 % 40-year fixed rate HUD loan. Right? So your first reaction would be you should never sell that property. You’ve got great debt. You’ve got all this equity in there. Why would you ever consider selling? Well, here’s why. When I look at it and I say, OK, well, 12 million minus 30 million.

I don’t know. We can do that math real quick. That’s $18 million, right? And value in there. And then I look at how much the building’s making in cashflow. And you say, okay, well, I get this 18 million in equity in there and the building’s making, you know, $700,000 in cashflow.

Okay, after I paid the debt, all that stuff. So you do that math and you say, okay, well, wait a second. I got $700,000 in cashflow divided by $18 million in equity while making 4 % all my money. And then you say, well, wait a second. If I could buy a building.

that’s making 6 % or 7 % today, I can get a huge increase in my return. So if I think it’s a down market, I’m only making 3 or 4 % of my money, it’s a great time to sell that $30 million asset and buy a $60 million asset that’s creating more cash flow. Right? So that’s the second piece of it. You’ve got to look at your assets. You’ve got to understand what your equity versus cash flow is.

can I upgrade that in another building? And if you can, then it’s the right time to do that if you’re not creating additional risk.

Scott Bursey (25:20)
Gary, this has been pure gold. Before we sign off, I know our pros are going to want to connect with you. If our listeners want to follow your journey or collaborate with you, what is the best way for them to reach you?

Gary Jonas (25:33)
Yeah, so the best way to reach me is just Gary G-A-R-Y @ how group dot com [email protected] and I leave you Scott with how we came up with the name to how group because you’ll love this one as one on the way out the door to just reinforce why us real estate investors do what we do. I saw a sign in a conference room and it said the answer is yes. Let’s figure out how and I thought.

That’s what we do every day, right? We got to go in with this optimism that yes, we can accomplish this. And then we got to step back and figure out how we’re going to do it after the fact. And that’s what makes great real estate developers.

Scott Bursey (26:15)
Gary Jonas everybody. Gary thank you so much for joining us today.

Gary Jonas (26:21)
My pleasure.

Scott Bursey (26:23)
And to our listeners, we appreciate each and every one of you. If you got value from today’s episode, please subscribe. We’ve got a lineup of exceptional guests, just like Gary, who are making huge moves in the market. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.