Chicago Multifamily Investing: Student Housing, Value-Add Deals & Emerging Opportunities

Khaldoun Sweis (00:00)
That’s why due diligence is not just for underwriting deals and finding out what the infrastructure of a building is or the background and the cap rates, but sometimes you have to do due diligence on your own partners. Look at their background, look at their deals. And that’s why, even as department chair in philosophy, when I see resumes, the main reason we look at resume is one simple, profound one. Your past is a clue to your future. How do I determine how this person will end up? Well, what I could do is look at their past. It is the best determiner of their future choices. That’s why we look at past jobs, past publications, past work, past investments, past people you work with.

Dylan Silver (02:13)
Hey folks, welcome back to the show. Today we’re joined by Professor Khaldoun Sweis. He’s a philosophy professor, department chair, author, executive coach, and multifamily investor. Professor Sweis, thanks for joining us here today.

Khaldoun Sweis (02:28)
It is an honor, Dylan. Thanks for having me.

Dylan Silver (02:31)
Where do philosophy and real estate intersect?

Khaldoun Sweis (02:38)
Marcus Aurelius was also an emperor, in addition to a philosopher, and he took a bunch of notes while he was an emperor, and his private memoirs became known as the *Meditations* of Marcus Aurelius, became a pivotal point in philosophical history for mindset and thinking. So he said one of the major obstacles in our way is actually the way, many times. So the obstacle becomes the way. In that sense, philosophy tells us how we are reflecting on the world around us, how we are reflecting on the world within us, transforms how we see the world and thus how we change the world around us. And dealing with real estate, sometimes we have obstacles galore. And many people do not succeed because of these obstacles, but some people do in spite of them and because of them, ironically. So philosophy intersects by taking how we think. And applying it to how we live and putting the two together in a synchronic format. That’s amazing.

Dylan Silver (03:41)
Now when we talk specifically about, you know, building community and multifamily investing in in particular, one of the challenging pieces is we look at okay, does this deal underwrite? But sometimes we don’t look at, well, what’s the broader impact on the community at large. And sometimes the only people who are thinking about that are like the people that we would go to for zoning. But I’m a Texas licensed realtor. And one of the things I think about is well, if more people thought about what’s going to be the impact on the community, there might not have been this massive surplus that we saw over the last handful of years with multifamily housing in particular. But they were just looking at their one deal and the immigration trends to and from Austin, and maybe less so on the community at large. Thoughts on that?

Khaldoun Sweis (04:32)
Well, my specific wheelhouse is in the Chicagoland area, not necessarily Texas per se, but I understand what you’re getting at. Sometimes we look at profit margins and losses and how we can cut our expenses and maximize our intakes and not recognizing the results and the devastation we can leave behind as we move in and out of these areas. Our jobs as investors, as people in the community is to give back to the community and uplift that community and make it a better place from before we were even in it. Not to suck it dry as the stereotype says, build up as much as we can, take as much money as we can and go, which actually created a lot of problems in blue states, which had now laws that are tenants using against their own landlords who may actually be innocent. It had nothing to do with anything. But because of the bad apples in the tree, the rest of the apples. Get affected, which puts us into a mindset issue. The people you spend your time with and surround yourself with do affect you massively greatly more than you possibly realize. Take one a bad apple, a rotten one, put it with a group of good ones. Come back in a few hours, come back in a day, and you’ll see what happens to the rest. Bad things affect good worse than and much stronger than when good affects bad.

Dylan Silver (05:51)
Yeah, this is something that is very notable when people are working in teams, right? One of the things is that you’re a sum of the people around you, but also one person can bring down a good team.

Khaldoun Sweis (06:04)
Why

Dylan Silver (06:04)
Is that? Why is this there this tendency where yes, you’re the sum of the people around you, but if you have just one person who may be dead weight for lack of a better term, that can have such a profound impact.

Khaldoun Sweis (07:05)
Good question, Dylan. And think about if you’ve ever been boating or canoeing. All it takes is a small little crack in that boat or that canoe to sink the entire ship. And the same thing with prisons. All you have to do is have one little area where a a a massive killer can cut out and escape. So these little areas of our lives that we have to pay attention to make a massive difference in the long run. Even trajectories and flight, if you’re off by even three or four degrees. By two, three hundred miles, you can end up in a different state in a little different country by flying in the wrong direction. Even though it looks like you’re going the right way. Little things add up. Little things add up massively. And of course with real estate, if you don’t start taking care of these little things, important matters start becoming urgent matters later. Such as the door you didn’t replace downstairs to the entrance to your multifamily unit, where someone can come in and not only rob but do a lot worse. These little things, but they can have massive impact. And the key is to distinguish which is which is the ones I’m gonna really spend my time on and which I can delegate.

Dylan Silver (08:10)
As you’re talking, I’m thinking about when people select capital partners and partnerships in general and how these relationships can sour. And you know, it just takes one deal or one additional capital partner for it to have a a cloud over the entire operation, right?

Khaldoun Sweis (08:30)
Exactly. Yeah. That’s why due diligence is not just for underwriting deals and finding out what the infrastructure of a building is or the background and the cap rates, but sometimes you have to do due diligence on your own partners. Yeah. Yeah. Look at their background, look at their deals. And that’s why, even as department chair in philosophy, when I see resumes, the main reason we look at resume is one simple, profound one. Your past is a clue to your future. How do I determine how this person will end up? Well, what I could do is look at their past. It is the best determiner of their future choices. That’s why we look at past jobs, past publications, past work, past investments, past people you work with. References. Are there people who can back you up? Or did you burn every bridge you were on? Now you want to get on my bridge? Well, that’s not happening unless you’re somebody else can back you up and put their reputation on the line and say, I’m willing to work with Dylan. All right, that’s a good thing. Maybe now I could look at Dylan a little bit closer.

Dylan Silver (09:32)
You know, when we talk specifically about this idea of a track record, especially as it relates to real estate, one of the things where we often see this burn people actually is well, this has worked for me for so long and it’s been working for everybody. This has been working great. I’m gonna, you know, take out variable rate debt and develop multifamily housing in the Sun Belt, right? And so we saw this happen during COVID where it felt like at especially at the beginning people had made so much money from let’s say 2012 till 2020 they couldn’t see the that was right in front of them, which is hey, there’s a bubble here. And then when you have a moratorium on rents, of course that’s gonna impact things. So how much will you have this bias that could potentially hurt you if you think, well, this has worked for so long, it’s not gonna, you know, come back in my face now?

Khaldoun Sweis (10:24)
You know, when I do my own investment, I always look to about five percent, sometimes even ten percent of my losses and count those properly. Can I lose this as I invest it? Can I survive if this actually goes bankrupt or lost or the cap rates disappear out of the out of the wind, or the tenants end up moving out or there’s a there’s a pandemic, whatever can happen. I can’t possibly get in that into the equation, but what I can do is allow a miscellaneous section of my profit margin to be possible potential losses. I need to incorporate that. If I can’t do that, then I’m putting all my eggs in one barrel, so to speak. And that’s very dangerous for many people. I’ve known families who have lost not only their own investments, but their investments of their other families together who trusted them because they put almost everything into that one deal. Yeah. No matter how good that deal is, don’t do that. Diversify. Be wise. And I just can’t say that hard enough because not only is it affecting you, it’s affecting your family and the generations to come.

Dylan Silver (11:29)
I wanna pivot a bit here, Professor Sweis. Ask you about Chicagoland. We I’ve had lots of guests on in in Chicago and and I’d like to learn a little bit more about Chicagoland, because forgive me, but I’m a little bit, a fish out of water here in this space. What is Chicagoland like? You know, where would you describe this directionally and what types of deals are you looking at these days?

Khaldoun Sweis (11:53)
Can you ask in more detail of what you mean by that? I could go into so many different realms on that.

Dylan Silver (11:59)
Let’s start with Chicagoland. Directionally, where is the boundaries of Chicagoland?

Khaldoun Sweis (12:04)
Well boundaries of my Chicagoland deals generally deal with the Midwest area. I span out to the areas of Wisconsin, Indiana, even up to down state, Illinois, is a massive and very good market for investment. We have one of the largest congruence of universities, colleges, and institutions for education in the country. So a lot of real estate can be made uplifted and of course you could do a lot of value add from some of these older student housings and some of these are really good deals because student housing is a untapped market for many people so chicagoland area has just an untouched portion of that that many people can look into and see about putting their wealth into an area that can make significant feedback and growth on it. So that’s one area which is student housing. Another is elderly investments. We have a large boom that’s coming up again with the geriatric population, people in their seventies and eighties and up. And a lot of the people are getting healthier and those living longer. At the same time they are moving on and trying to get rid of their businesses, their homes, their real estate that has maybe four or five acres of multifamily housing, they’re just tired of living in it. And to tap into that market is a wise thing. That Chicago has a lot of that going on in our areas here, specifically downstate. Where I am, specifically near the Navy Pier area in Chicago, we have multiple housing infrastructures that are some of them are going into foreclosure, some of them are really outdated, overpriced, undervalued. So I’m looking into these and some of these areas are really booming.

Dylan Silver (13:57)
Now when we talk specifically about those niches, and you mentioned several, right? Student housing, but there’s also like aging elderly population. When you’re looking for the next deal, both geographically and that that niche within an asset class, is there anything in particular that you’re looking for these days? Like are you looking in particular your buy box for the next student housing deal? Or is it a matter of, hey, if a deal comes my way, I’ll evaluate it regardless if it’s directly in this niche or if it’s in, one that’s tangent to it.

Khaldoun Sweis (15:08)
I’m open for multiple deals in different areas. You have to stay in your niche, focus on the area. But if something comes across my desk that looks like a possibility for something that can my investors can find valuable and profitable, I will definitely look at it. I might not look at something in Italy. That’s a little bit out of my wheelhouse, but I will consider something outside of that, such as maybe business opportunities, maybe value add. Communities that have a dual air option where there are businesses located on the lower levels, housing on the top levels, those are different variations of that, of course.

Dylan Silver (15:47)
I’d like to pivot a bit here, Professor Sweis, ask you about something that is on the top of the minds of many of our of our podcast alumni, which is the financing portion of these deals and the capital stack. When you’re looking at each deal, do you have a similar procedure for financing or is it different deal to deal?

Khaldoun Sweis (16:07)
It is different deal to deal, of course. Definitely, absolutely. Because you’re dealing with a thirty million dollar building as opposed to a three hundred and fifty million dollar one. The financing be quite different, the equity portions will be different, your financing partners will be different. So you need to verify that as well as look at the national real estate market areas on housing freezes in the areas as well. Thirty year fixed mortgages hover around what, six point eight or something to that effect right now. This is looking to crawl about three percent from year to year. You we need to verify some of these rates in conjunction with how they work with our lending partners.

Dylan Silver (16:46)
I’d like to ask you about managing these deals and then hold times. You know, I I’ve seen that the property management can sometimes become a source of distress in and of itself. You could have a great deal bought at the right price, but then you have vacancies, or you could just have issues regarding, you know, tenant turnover, you know, and this can start to become a thorn in the side of investors. How do you approach the ongoing property management?

Khaldoun Sweis (17:14)
Well, one of the things you do as you continue to grow in your investment portfolio is you manage less personally and you delegate more with what your work you’re doing. So I work with different property management teams that actually work on that and do that deal with that. So I don’t have to deal with that myself. But I do need to know the run ins and run outs of how things work on a daily basis. Regarding the hold times, I’m not sure the question you’re referring to. Are you referring to when how long we should hold a deal before we let go of it?

Dylan Silver (17:46)
Commonly I’ve seen, you know, people look at five years, I’ve seen three years, I’ve seen seven years. Is that generally the ballpark that you’re looking at as well?

Khaldoun Sweis (17:55)
Yeah, definitely. That’s how I’m looking at it. But there’s a slight caveat here. When you’re looking at investment in a deal that’s for example, if you’re looking for equity, you want to hold off for at least five three to five to maybe even ten years if you’re looking for equity. If you’re looking on cash-on-cash, then you’re gonna do one or two or maybe less than that to see that what you are telling your investors and what your investors expect back with that. For example, what I work at with Logically Syndicated, I look at investors who are seeking something that’s either long-term or do they need cash-on-cash and do they need some kind of profit margins within the next one or two years? That tells me whether the building I’m investing in, the multifamily unit, is a value add something I can take, fix, repair, do a BRRRR on, if so to speak, and flip it and see if I can put it back on the market from a C-class to an A-class property. As opposed to buying an A-class property, I’m gonna have to work on the equity on that. Because that is not something I can flip. That’s not something I can take cash-on-cash on right away. Because it’s already at its maximum as an A-level property, especially areas here where I live by Navy Pier. Although there are some that look like A-class, but when you get in there, they’re actually C and D. Elevators are not working, plumbing needs to be completely vetted, the roofing needs to be restored. That could cost anywhere between two to five hundred thousand and that’ll definitely you know reduce your profits just a bit.

Dylan Silver (19:22)
When we talk about acquisitions in those different grades, you have a lot of folks who are looking for value add opportunities and bring something from, you know, a C to a B. And then when you when you’re looking at these A and A plus properties, there’s of course less opportunity there. However, in in the Sun Belt, and I want to get your perspective on Chicagoland area, you sometimes are and especially now beginning to see folks who their debt is coming due. And so they have distress in a different capacity, which is that you know they haven’t seen the type of returns that they would like. The bank may need to foreclose on these properties. Does this ever happen in Chicagoland with these A-class properties?

Khaldoun Sweis (20:07)
It might, but it hasn’t come across my desk. Generally the case if people are moving or investing into an A-class property, they have to be vetted by the banks and other markets to that they’re investing in to make sure that if this thing does go bust, there is liquid assets available to pull them out of it. In case something does go bust or it goes on a an auction deal. I’ve seen that happen, but I haven’t seen it happen with A-class properties. Not in this area. I’m sure there are other investors may have come across it.

Dylan Silver (20:43)
This is one of the first conversations that I’ve had about Chicagoland, but it’s not the first time that I’ve heard, you know, this about Chicago from just taking Chicago in particular, right? Where it’s just a different dynamic, right? So you’re not having the abundance that that you’ll see of housing that that where there’s high vacancies. That’s just not happening. When we look when we look specifically though at the value add strategy for let’s look at B and C-class properties. How much of this is raising rents versus you know structural?

Khaldoun Sweis (21:16)
You’re talking about the profit margins?

Dylan Silver (21:18)
The opportunity to come in and do a value add. Value add can have so many different components. You could come in and add a roof, you could come in and you know it a add improvements to the individual units, but you could also come in and realize, hey, this property hasn’t raised rents in so long, we’re going to raise rents. So when you’re looking at the scope of what is value add to you and your investors, how much of it is coming in and buying a property that where rents haven’t been raised in so long?

Khaldoun Sweis (21:47)
I think that takes up about maybe eighty, eighty to eighty, seventy-five to eighty percent of our deals with the value add areas. I mean take a look at Chicagoland area here. We are outperforming the national average by forty points in rent. We have large areas of untapped resources, a lot of people moving into the area, a lot of investors moving in because there are families moving in, there are communities being built out, and these communities based on work. For example, Amazon just built a was it a five to seven acre building in Orland Park area near Chicago. That’s gonna require over two hundred thousand individuals, and that will require multifamily housing, which I currently checked just driving by it the other day. There are no multifamily housings within the three four mile radius of that entire place. Five mile radius, actually. There’s maybe two, I think I looked. But other than that, that is an area where I could look at and I have been looking at currently actually for my investors to see something that we can build from scratch because of the booming market in that area.

Dylan Silver (22:56)
Do these deals when you’re looking at development and ground-up new construction, how do these deals pencil? I’ve heard from folks it’s tough to get deals to pencil. You mentioned an area where there’s a real need for that like workforce housing. How are you able to get deals to pencil like that?

Khaldoun Sweis (23:17)
What you do is what you do with a basic property. You start small. You look to see if this is something that has continuous growth. Is Amazon thinking and has they have they really signed the contract to build there? Am I seeing construction workers on the ground for building this massive facility that’s gonna require workers to come in with their families? I’m looking at things outside of the deal. I’m looking at the area, I’m looking at business development. We’re looking at crime trends in the area, which is something that we do need to look at. Yeah. That housing for schools, for children. Generally, multifamily includes families, and families include children, and children need schooling. And do those schools look like they’re in the area and they are profitable for the families on a personal level, not just a financial level. I’m looking at all these other factors to see if it pencils in. And then I’m starting to look at the deal itself. Whether this particular option has a good cap rates, does it is the infrastructure around it safe from collapse. I’m looking at also how much each family on the area is making. Is it six figures, is it five figures? And that’s important for long-term growth.

Dylan Silver (24:38)
Yeah, no question. You know, I think one of the things that can be sometimes challenging is if you have properties where there is turnover, either turnover because of the model, if you look at student housing, or turnover because, there is competition or there there’s a fluctuation in the job market, that can be challenging to manage. If we look at one of those niches, which you mentioned earlier, student housing. This requires a different type of hands-on property management or a property manager with that type of experience. How can folks go from let’s look at a traditional multifamily property where we might call it workforce housing, these are people that’ll be here for a while, versus student housing where it’s more transient, what types of adjustments might they need to make?

Khaldoun Sweis (25:33)
What you do is you look at the families for multifamily units and in and the communities that you have, and you look at the how much they’re making, whether there’s a stable job market in the area, whether there’s current population growth in that area, that’s pretty important. But for student housing, of course, they’re transient by their very nature. Students what stay what two to four years in a unit. And generally what managers and investors do is they don’t even use the students themselves. It’s their parents who are used as the co-signers for these. And those are significant differences on that. You also have to take into account maintenance fees. What do they run around 30, 40 percent for a average fee for a thirty to seventy unit building. So if you are looking at student housing, you can raise that by at least four or five points, meaning 10, 20 point difference. So you’re looking at 70% of your maintenance fees can be raised because students generally are not as safe and as home around their apartments as families are. So those are things you gotta keep in mind when you’re working with student student housing. In addition, a lot of times the universities around the area, like University of Chicago and Hyde Park, DePaul University of Loyola near our area here, University of Illinois Chicago, some of these universities actually give you many discounts in many ways that you can reduce taxes by building comfortable, affordable, and safe housing for these students. You can look into that. There are many grants given to investors to continue to grow and build a safe and productive and fun lively communities for their students to live in.

Dylan Silver (27:12)
I wanna if we can get a little bit granular, maybe without giving away all the gold here, but a nugget for our listeners. When we look at ground-up new construction, of course there’s going to be additional hurdles, including, managing contractors. But also I’ve heard from podcast alumni that if you’re looking in the urban sprawl of Chicago, that just the timeline of these deals can be extensive. So when you’re looking at, underwriting a deal to then breaking ground to then, filling it with tenants. This can be a years-long process. How do you manage both the physical portion of the construction while also investor expectations and understanding that this could be a long process.

Khaldoun Sweis (27:59)
I’m not sure I follow what you’re saying here on that. Are you telling me that how can I look at the long-term way I can continue growing this asset for my investors? Or do I or am I looking at how do I can make this a better community for the people actually living in it? Or is it a long-term

Dylan Silver (28:16)
Referring to as a as an operator, when you’re looking at timelines, I’ve heard from other investors in the urban sprawl of Chicago that there are really long timelines, a years-long process potentially for development of this scale. And so when you’re both managing the contractors involved, but also looking at managing investor expectations, how do you marry both sides of that? Does that does that check out?

Khaldoun Sweis (28:46)
Yeah, I got you. In my last deals, I did something between six months to two years to develop a unit and I have to give my investors that timeline. Over let’s see here, under promise, over deliver, is the saying here. So I’ll give two years to do something and if I could get it done in a year, seven months, eight months, I’ll do it. Depending on the contractors. It’s very important that for the contractor who I’m working with in the area, if they can actually pull the job off. If they can’t, if they have done it in the past, like what I talked about with resumes, it’s a clue that they could possibly do it in the future. And what I could do is look to see if those properties are long-term things I can actually value add to and how long will that specifically take. Now you don’t you know anything. Like if I’m working with a thirty unit building as opposed to a five hundred unit building, the time length are different. Is there mold? Is there is the is a pool need to be renovated? Is the how’s the roofing? How’s the plumbing of this place? And you can have a unit I’ve had before where about eighty to eighty five percent of the units were all pristine. All it takes is two to three units that need some significant work that can actually infest the other units nearby them. Or mold and things of that nature. So it is definitely absolutely situation based in in a in a granular level. That’s why it’s so important. I know having a good management team and a construction team can make or break your deal. And you need to work with people who have a significant real estate background that has people who can reference them and they can show you on paper. I’ve done A, B, and C before. Here are my references. Here’s my receipts. And I could work with them in that regard. But there is no one all be all answer man for that.

Dylan Silver (30:32)
When we look at syndicators as a whole, do you think that’s maybe the the biggest inefficiency or missed opportunity for them is them not necessarily vetting or understanding the experience level of those that they’re working with.

Khaldoun Sweis (30:49)
I’ve had that problem many times, man. I’ve had a contractor I work with who overpromised me the moon and didn’t deliver. Of course, last minute things, plumbing breaks, so you walk in and see the unit. It’s not what looks like in the pictures. That’s why it’s very important to walk in the unit, have feet on the ground or have people on the ground. For example, we have properties in in New York and Kansas City and Texas, where I can’t go all these places. I have to send people I trust to actually put feet on the ground in there and and check it out. And I’ve had people lose so much because they’ve trusted the people they should have. Yeah. Relationships are the key not only to real estate but to life. And being able to see who you can work with or who you can’t. Sometimes it takes more than you. So if other people are listening to me about this and if you’re new here to this, you definitely can need another set of eyes. Now I’ve been doing this for years, but I still can use another set of eyes. I can look at something for hours or months. And keep visiting it and not miss it and just got it. And then I bring in somebody else with me pick out something I completely missed. It’s very important to have another set of eyes, somebody more experienced than you, who’s working with you, and even somebody who may be outside of your field who could come in and take a look.

Dylan Silver (32:03)
Now when you are buying remotely in in other markets, right, where you’re not able to drive to there’s specific considerations that you have to have in place and you have to have, boots on on the ground. How is that of course it’s gonna be different, but what specifically do you have to do differently when managing a deal remotely?

Khaldoun Sweis (32:23)
It is critical that you have a a management team that you can trust who has been already working on the ground, had boots on the ground and other places within a five to ten mile radius of that particular place that you are already there working on. They know the area, they know the population, they know the crime rates, they know the the job market, they know the the the per capita in in each particular section. So you work with these people who already are in there, who are doing their work and due diligence, even the military. When there is an invasion plan for a particular portion of the world, whether it’s Asia or Middle East, the navies or the even the Marines, they’ll scout out local people they can work with, spies, that actually know the terrain, know the ground, know the hidden pathways, they know what’s coming and what’s not coming that the people coming in from outside don’t. So that’s what I look for. I look for people who have been there, who have an invested interest in being there. I like to work with people who I can possibly give a portions of the profit to in my marketing, not only there, but management. They need to know that if this property performs well, they perform well. They get better as a property gets better. So having skin in the game is major for me. I truly, really try to stay away from any property, whether it’s here Chicagoland area or Texas or others, that I can’t be personally involved in. Or I don’t have somebody personally that I trust. To actually run the place from a distance or even be there, boots on the ground, as we said.

Dylan Silver (33:55)
We are actually coming up on time here, Professor Sweis, Any new projects or activities you’re working on these days? Also anything you’d like to mention directly to our audience? Hmm.

Khaldoun Sweis (34:06)
Well, we are currently working in Chicago here near the Northwestern Hospital near Navy Pier Streeterville area. And there are some great multifamily buildings. Some are 1750 units, some are 1,600 unit buildings that are going up for sale, and some are not on the market. But what we do is we’re approaching the owners, we’re approaching the management teams and taking a look to see how we can put our foot in the door and make it profitable for them to get this off of their hands at a reasonable price. So that’s the things I’m working on now in this area. So if people are interested in looking into significant growth, not just in equity, but in cash-on-cash within the next one to five years, this is where we are. I’m looking at Logically Syndicated on Substack, working on multiple articles, intersection of philosophy, life and real estate there.

Dylan Silver (35:03)
Professor Sweis, thanks for your time today. Thanks for joining us.

Khaldoun Sweis (35:06)
It was a pleasure, Dylan. It was a pleasure.