Buy Multifamily Real Estate When Others Panic: Aaron Fragnito’s Market Strategy

Aaron Fragnito (00:00)
The deal I’m buying right now.

brand new building for 30 % off replacement costs. It’s like going to a car dealership and getting a brand new car for 30 % less than it cost them to build it one year ago, right off the lot. That’s what that’s like. That’s what this is. That’s the market we’re in. So right now is the time to get great deals, not going to last forever.

Michelle Kesil (01:51)
Hey everybody, welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil. Today I’m joined by someone I’m looking forward to chatting with, Aaron Fragnito of the People’s Capital Group who acquires apartment buildings in the New Jersey area. So excited to have you here today, Aaron.

Aaron Fragnito (02:13)
Thank you, Michelle, for letting me be here.

Michelle Kesil (02:15)
Awesome, let’s dive in. First off, for those not familiar with you and your work, can you share about your main focuses?

Aaron Fragnito (02:23)
Sure, so we are strictly New Jersey focused. We help family offices and high net worth individuals build and preserve their wealth through New Jersey apartment buildings. We’re vertically integrated. We’ve been doing this over 13 years. My business partner Seth and I have completed almost 300 transactions together. We have over 100 investors and 83 % reinvestment rate. So we just try to find great deals at discounted prices and reposition them with our in-house property management company and get the best returns for our investors that we can.

Michelle Kesil (02:54)
Awesome. And so how are you working with investors and collaborating with them?

Aaron Fragnito (03:03)
Well, we have a group called New Jersey Real Estate Network with about 5,000 members in it. And we help investors learn about the process of real estate, real estate repositioning, real estate investment, tax benefits, cash flow, so on. So we don’t sell education, but we do keep our investors quite well educated. ⁓ We send out monthly updates explaining exactly what’s going on with their investments. So they’re kept abreast to ⁓ any updates, changes, solutions, problems that arise in the buildings they’re invested in.

We just try to really come to our investors with solutions not problems, you know, anytime you’re repositioning an older building or even For example the brand new class a building we’re buying right now for a huge discount There’s challenges to every transaction every project So we try to come to our investors not with the challenges but the solutions and we try to fix them very efficiently with our in-house management company Just been doing this long time. So we’ve kind of figured out how to work this market very well Strictly New Jersey focused and that helps us have our good boots on the

and be able really source some great deals as well. So think that’s what our investors really like about us.

Michelle Kesil (04:11)
Yeah, amazing. And so are you the one sourcing the deals and how are you finding the best deals?

Aaron Fragnito (04:21)
Yeah, we’re vertically integrated. So we underwrite deals. We find our own opportunities. We know a lot of wholesalers, landlords, realtors, ⁓ mortgage brokers, attorneys.

property management companies, we’re sourcing deals from all these sources. also ⁓ do some advertising as well, direct mail and so on, ⁓ cold calling now to ⁓ try to find motivated sellers. We have an underwriting team that does institutional level underwriting. They actually used to work for UBS, so they’re really high level underwriters. We put together very in-depth Excel models and try to really bring well vetted opportunities to our investors. So we’ll underwrite about 100 deals to find one

and we’ll submit

about 20 LOIs out of those 100 we’re underwriting and then maybe one LOI will actually end up at the closing table.

Michelle Kesil (06:00)
Yeah, amazing. And so is most of your lead generation organic?

Aaron Fragnito (06:06)
Yeah, it is. mean, right now for bigger deals, anything we’re buying that’s generally over 40 units, we’re sourcing generally through realtors. They have good opportunities. We are on the A list for many brokers, so we get pocket listings. That means the broker hasn’t put it out to anyone else. They have their list of maybe top four five buyers they work with. They want to bring those buyers in, get the ⁓ bids from them first before they kind of go to market. So we try to come in very quickly on these opportunities and make

a strong bid quickly, underwrite quickly as well. So those are called pocket listings and really no one else knows about them. The other thing we do is we buy deals to receivership companies. These are management companies that are managing buildings in foreclosure. They’re not foreclosed on yet, but we’re negotiating directly with the lender through the receivership company and buying distressed assets at discounted prices. The reason I like that is because when a bank has a property in foreclosure, they’re not really airing their dirty laundry. They’re not going to market it out to

million buyers and put it on the internet because they don’t really want a lot of people to know they brought in a borrower that can’t pay their mortgage and now they have a delinquent note.

So ⁓ those deals tend to be kind of whisper listings or pocket listing. It’s off-market deals we can get for discounted prices. You know, the way you buy real estate for discounted prices, there’s no one else bidding on it, or there’s maybe one or two other bidders. Anytime I’ve ever overpaid for real estate, it’s because there’s like 14 or 15 other buyers in the room bidding on the deal, right? So it’s better to be ⁓ the only buyer, maybe one of three, putting off an amount of deal. That’s how you get it at a good price, and that’s how try to focus.

Michelle Kesil (07:47)
What have been some of the main keys that have allowed your business to grow and run successfully?

Aaron Fragnito (07:57)
Well,

I ⁓

repositioning

older assets or just.

really turning over a building that’s not performing. Improved management is the most important part of that often. Keeping your expenses low, your contractors on budget and on schedule. So we really have worked many years at perfecting the art of repositioning apartment buildings here New Jersey, understanding the market dynamics, having a good team of contractors and other service providers, and just managing efficiently. We kind of have a very lean and mean team, not a lot of overhead. We keep our costs low and that allows us to then

give more back to investors so they can earn better returns. In addition to that, tenants are very important too. know, a happy tenant equals a happy investor. So we create good communities and good environments for our tenants and good well-run buildings. That means tenants pay their rent on time, are more likely to be a good quality tenant and take care of the place, and agree to rent increases over time as well as they come due.

Michelle Kesil (09:24)
Yeah, definitely. And how is the New Jersey market looking right now?

Aaron Fragnito (09:33)
New Jersey market is ⁓ strong. There is ⁓ not a lot of over inventory coming to market like we’ve seen in some other markets like Austin, Dallas, Fort Worth, Florida, Carolinas, Phoenix. These markets are very saturated. They are red states where it’s easy to build.

Well, here’s the benefit of a blue state. There’s more red tape. That means it’s harder to build, harder to develop. Develops get off the ground slower and they’re less likely to get off the ground at all.

So we focus on ⁓ New Jersey market here where there’s an insatiable demand for housing, generally within an hour commute to Manhattan. And there’s just a line out the door to want to live in this area. So we’re finding that there’s a very strong demand here, not over inventory, either not too much supply. So we were not one of the markets that

got oversupplied in the housing boom. Now we did have an increase of supply over the last few years from the COVID boom, but it wasn’t like some of the red states where you saw an overbuilding going on. I’d say our supply and demand is about equal right now and the supply last year was about 7,000 new units. This year will be about four to five thousand new units. So it’s slowing down and we expect that slowdown to continue as interest rates remain high.

Michelle Kesil (11:23)
Yeah, absolutely. And so are most of the investors that you work with local to the area or are you also partner with out of state investors?

Aaron Fragnito (11:33)
Yeah, about 75 % of our investors are local in the tri-state area, most of them New Jersey. And if they’re not, we have investors all around the country, but most of them in some way or another have some connection to Jersey. They lived here, they worked here, they went to school here, they have family here, something like that. And since we are very locally focused, we’re kind of a New Jersey brand here, a lot of our investors love the fact they can drive by the properties or they saw what happened in Newark, New Jersey over the last 10 years and the Renaissance going on or Jersey City over last 20 years or

Hoboken over last 30 years and they want to get in on these opportunities, in on these cities where there’s such a boom going on. The cost of housing is extremely high here in New Jersey. There’s not enough housing. We’re about 225,000 units short here in New Jersey on housing units. So there’s just more demand than there is supply. And investors like that, they know that’s an insurance policy on the value of real estate likely going up over time, and rent continuing to grow.

So yeah, most of our investors are local and they like the fact they can invest in local opportunities because quite frankly, most syndicators are going to bring your money six, seven states away, hire some third party management company, hope for the best. And we don’t like that strategy. We like to manage our assets here in-house, keep tight control over our buildings and be close them so we can drive by and know these markets and make sure the projects are going on point and our contractors are doing what they’re supposed to be doing.

Michelle Kesil (12:59)
Yeah, absolutely. And are you guys focusing mostly on already developed apartments or you’re developing new ones? What does that mix look like?

Aaron Fragnito (13:11)
yeah we buy existing assets between forty to one hundred forty units within the north jersey market here generally within an hour commute to manhattan ⁓ class a b and c

Obviously you want to make your money when you buy. We’re looking for deals we could buy at a discounted price with value-add rents below market either through deferred maintenance, deferred management or both often. We’re buying a building right now in Newark, New Jersey that was just built. We’re getting it for 30 % below replacement costs. It was literally finished last year. It’s a Class A building, brand new building in the lease up stage, about 60 to 70 % leased up. So the management is not good on it. We’re going to come in, buy it for a very discounted price directly from the lender.

improve the management of the asset, get the building stabilized, refinance over 18 to 24 months and then sell ⁓ in the three to four years.

Michelle Kesil (14:02)
And what are you most focusing on solving or scaling to next?

Aaron Fragnito (14:09)
Well, right now we’re building our investor base. We’re working with more and more family offices. So we love working with family offices. ⁓ As we buy bigger and bigger buildings, you know, it’s easier to raise the capital with family offices. We have a lot of high net worth individuals. We love working with them, but quite frankly, if you want to scale up, you’re either going to have to bring in a lot more ⁓ smaller investors or bring on some big anchor investors. And that’s what we’re focused on right now. So we have a number of single family offices we work with and some multifamily offices as well.

⁓ And we’re talking to fund to funds and small institutional groups in addition to that to work out programmatic joint ventures. So that’s kind of the next step for us.

Michelle Kesil (14:51)
Awesome. And any opportunities you’re excited about that are coming up for you.

Aaron Fragnito (14:57)
Yeah, I’d say this building we’re buying right now from the lender for a huge discount is we’re very excited about that beautiful class a building brand new.

I mean, right now I just toward another building 140 units in East Orange, a ⁓ big two to building portfolio. We’re seeing you know discounted prices right now, ⁓ increased cap rates. mean real estate is on sale prices have come down 20 to 25 % across the market. So right now is a great time to buy real estate. You know, I got into this this business in 2010.

And everyone said, what the heck you do and get into real estate in the biggest down cycle in generations. So that’s the best time to get in. Right. And it’s a shame. Now a lot of investors are scared, scared to invest in real estate because they got maybe burned on some deals in the past. But right now is the best time to be buying real estate. You know, we’re going to have a new fed chairman coming in May. He’s going to be bullish on dropping rents rates. That’s probably going to lead to rate drops over the next one to two years, which is going to put ⁓ upward pressure on prices.

downward pressure on cap rates. So therefore prices are expected to increase in the next two years or so. Also supply has fallen off a cliff. So we had a ton of supply kind of come to the market and that’s dropping off now. Like I said 7,000 units last year, 4 to 5,000 this year and that’s expected to keep dropping. So as supply drops and interest rates lower, we’re going to see an increase in property pricing.

Okay, a decrease in cap rates. So that’s going to make the market more competitive and equity is going to start coming off the sidelines and coming in the market, especially institutional equity, which tends to be a little late to the game. So institutional equity comes in as more cash comes in to buy real estate, supply drops, rates drop. That’s all going to put upward pressure on prices. So right now is this window where I think for the next year we’ll have a chance to buy properties at great prices. I saw this in 2011.

like 2016 and then prices started growing. We had the COVID boom. So after you live through a few cycles of real estate, you realize, hey, you know, when other people are scared, you got to be greedy. Everyone’s running away from real estate right now. But actually, right now is a great time to get into deals. 20-30 % off. It’s like

deal I’m buying right now.

brand new building for 30 % off replacement costs. It’s like going to a car dealership and getting a brand new car for 30 % less than it cost them to build it one year ago, right off the lot. That’s what that’s like. That’s what this is. That’s the market we’re in. So right now is the time to get great deals, not going to last forever.

So ⁓ man, if you’ve been burned on a real estate investment or you’re just not sure about it, now is a good time. Work with the right operator who understands this market and has their infrastructure in place. And you could do well, not just

in the Jersey market but many markets out there have decreased prices.

Michelle Kesil (18:28)
Yeah, amazing. Thank you for sharing that perspective.

And so what does it look like when investors want to partner with you?

Aaron Fragnito (18:40)
So we have a very easy process. You do have to be an accredited investor, meaning a net worth of $1 million, not including your primary residence, or an income of $200,000 individually, or an income of $300,000, including your spouse. ⁓ That would mean you’re an accredited investor. So you do have to be an accredited investor. Our minimum investment amount is $50,000, with higher, more advantageous share classes available for larger investments. ⁓ so everything’s done right online for us. ⁓

will call on our website peoplescapitalgroup.com. can connect with our client relations manager, Patrick Williams. We also have tons of content there. I have the Passive Cash Flow podcast. You can catch that on Spotify, iTunes, all the major platforms and learn more about our business and our strategy here on our mission statement. But our website, People’s Capital Group, is a great place to kind look at our portfolio, our past performance, connect with our team.

And then the qualification process is done right through our investor portal, which you can also get access to through our website, peoplescapitalgroup.com. And ⁓ that allows you to get qualified. You can do it right through our portal and connect with our team, answer any questions you have. The opportunity we’re buying right now, we have a couple spots left, although we do have a family office that’s likely going to fill up the remaining spots pretty soon. So if you do want to get in on the current deal, which is this discounted Class A deal, I go to peoplescapitalgroup.com.

Pretty soon check out our information there click the link. You’ll see a link at the top It says like join the waiting list or you know preview our next investment opportunity that’ll bring you to our investor portal where you create an account completely free and Within minutes you can start getting qualifies and a credit investor. That’s done through a third-party service Once you’re qualified which takes about a one to two business days. You can complete the edox wire and funds So with us, it’s pretty easy. You can do 1031 exchange investments to do that You’re gonna want to connect with our team

before doing that’s a little more complicated or self-directed IRA. About 30 % of our investors use a self-directed IRA. If you don’t know how to do that, it’s very simple. You work with an IRA custodian, create an account, move the money from whoever holds your IRA right now into that IRA custodian, and then they approve the investment opportunity and then move it into our investment opportunity there. So you can actually self-direct your IRA or 401k into real estate, diversify out of the stock market, and really preserve your nest egg there and grow it maybe a little faster than

A mutual fund would so about 30 % of our investors do that ⁓ But you can also schedule call our client relations manager on our website People’s capital group comm and then you can explain more details on how to get started with us

Michelle Kesil (21:22)
Perfect, thank you for sharing.

Aaron Fragnito (21:25)
Absolutely, Michelle, no problem.

Michelle Kesil (21:27)
Yeah, and before we wrap up here, I know you just mentioned to go to your website, but if someone wants to connect with you and learn more where else and yeah, where is the best place for people to reach you?

Aaron Fragnito (21:39)
Yeah, I’d say the website is the best place. You know, generally, so I have a whole team in place to handle investor relations. You’re, they’re going to talk to you first before they pass you up to me. If you do want to talk to me, you, you can request that ⁓ once you go to people’s capital group.com and schedule time with our client relations manager, they’re going to qualify you first. only speak with qualified investors. So that’s the first step. ⁓ You know, if you’re a family office ⁓ or an institutional group or fund to fund managers or

you’re looking to do a 1031 exchange, can email me at Aaron [email protected] or go to our website peoplescapitalgroup.com to connect with our team there as well and it will pass you up to me. And our podcast is pretty neat. We have about 200 episodes called the Passive Cash Flow Podcast. We have different guests on there. We have a new episode every two weeks. That’s on all your major platforms that you’ll find this podcast as well, most likely. And you know, so can learn more

about us and learn from other experts on there. have tax experts, real estate investors, financial advisors, ⁓ entrepreneurs and so on on that podcast. So check that out. That’s the passive cashflow podcast. But yeah, it all starts at peoplescapitalgroup.com. We have ebooks, have ⁓ white papers. Our white papers are crazy in depth. You you check those out there to peoplescapitalgroup.com.

Michelle Kesil (23:06)
Perfect, we’ll appreciate your time and your story. Thank you for being here.

Aaron Fragnito (23:10)
Thanks for showing me on the show. Glad to be here.

Michelle Kesil (23:14)
And for those tuning into the show, if you got value, make sure you’ve subscribed. We’ve got more conversations with operators like Aaron who are building real businesses. We’ll see you on our next episode.