Why Students Make Perfect Tenants with Darryl Firsten of In8 Developments
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Darryl Firsten is President of In8 Developments which has successfully sold or built over 10 student rental condo projects in Waterloo. Now they are bringing their brand and experience to Kingston to take advantage of the landlord friendly market next to Queen’s University. Learn more about this exciting opportunity to invest in a recession proof asset that is student housing and discover why Darryl says that contrary to popular belief, students make for perfect tenants.
DARRYL FIRSTEN INTERVIEW HIGHLIGHTS
0:35 How did you get started in real estate?
2:00 What was your business before real estate?
3:03 Why student housing? Why waterloo?
4:48 What was your original vision like when you launched the Sage brand?
7:04 What’s your take on the student housing in Canada?
12:24 What has been your track record so far?
15:05 Why Kingston? Key things about Kingston.
17:50 What do we need to know about sage building?
20:25 What’s your experience with parking?
24:19 What is the offer for investors in sage?
|Speaker 1:||Welcome to the True Condos Podcast with Andrew la Fleur. The place to get the truth on the Toronto condo market, and condo investing in Toronto.|
|Andrew la Fleur:||Okay. It’s my pleasure to welcome to the show for the first time, Darryl Firsten. Darryl is the president of Innate Developments, who is a developer for Sage Prestige Condos in Kingston. Darryl, welcome to the show.|
|Darryl Firsten:||Hey, thanks so much for having me. I really appreciate it.|
|Andrew la Fleur:||Great. Happy to have you on, and why don’t we start by, why don’t you tell us a little bit about how you got started in real estate?|
|Darryl Firsten:||Yeah, absolutely. I got to start by saying I started in another business before real estate. I guess my background is, I was an engineer, started another business, fortunately it was pretty successful, and I decided real estate was really the asset where I wanted to be investing money from that other business. I actually started buying student housing in Waterloo in 2005 or so, and basically I’d buy undervalued assets, renovate them, manage them better, increase the rent, refinance them, and I had a pretty good run for quite awhile.|
|I still have some of those houses, but I’ve sort of gotten out of that business. The problem with it is it was extremely labor-intensive owning these really old houses that needed constant repair, and in 2009, I ventured into building student housing apartment buildings with my partner Paul, and we built a series of those, sold them, and in 2011, we started basically our Sage brand, which was going to be student housing condos. We weren’t really sure how it was going to work out. Fortunately, the market uptake was great on our Sage one, and I guess the rest is history. We’ve done, I think about 14 projects since then.|
|Andrew la Fleur:||Wow. Just going back a little bit, what was your business before real estate like?|
|Darryl Firsten:||i[inaudible 00:02:05]|
|Andrew la Fleur:||Flowers, yeah. My understanding is that you’re a true entrepreneur in the sense of starting so many different businesses and being successful at them all. Going back further, what was your business before real estate, and how did you get started as sort of an entrepreneur before all this?|
|Darryl Firsten:||Sure. It was flowers at university and college graduations. I started it while I was an undergrad. It probably paid for my third and fourth years of undergrad in engineering at U of T, and decided to go the entrepreneur route and not take a job working somewhere else, and grew that business, and that allowed me the cash flow to start investing in real estate. I still own that business, by the way, but it’s not my primary focus anymore.|
|Andrew la Fleur:||Wow. Why student housing, and why Waterloo? You’re at U of T, are you from Waterloo originally?|
|Darryl Firsten:||For sure, no. I had no connection to Waterloo. I like to say I picked Waterloo as opposed to Waterloo picking me. First of all, why student housing, I just really didn’t have the money to buy a commercial building in Toronto or anything like that, so it was an asset class I could afford, and my other business was related to universities and colleges, so I was very ingrained in the space of universities and colleges, and what I loved about that space was they grow. If I do nothing, they still keep growing. I wanted to tie myself to another business that would rely on the growth of universities and colleges, and again, real estate was the asset class I was interested in, so I started buying student housing.|
|Why Waterloo, good question. I looked at a series of other cities across Ontario. I wanted to pick the perfect place that made the most sense. In the end, I settled on Waterloo for a handful of reasons, proximity to Toronto is important, so it’s close to very major market, mostly the two universities there as opposed to one university, the growth rate of the two universities there, and the quality of education, or the reputation of the universities there was extremely important to me.|
|Andrew la Fleur:||Great. You’ve been sort of a pioneer in this space, obviously. A lot of people have sort of tried to copy now what you’ve already done, and what you’ve been successful doing. What was your sort of original vision like when you launched the Sage brand, when you said, “We’re going to start building condos,” what was your vision then, and has it staid the same, or has it evolved as your business has evolved?|
|Darryl Firsten:||I think my vision is generally to try something, see how the market responds, and make some decisions on how to go forward. When we launched our Sage one, I had no idea if anyone was going to be interested in it at all. Once we saw they were, we came up with more of a growth strategy of where we wanted to be over the next five years, and how we keep rolling out products. I think it’s really important to understand that we all have to learn, and we all have to keep learning, and with each successive project that we start, and with each successive project we complete, we learn a little bit more, we get just a little bit smarter with each one. I believe each project allows us to create a better next project, and a better service, and a better experience for our customers on the next project.|
|Myself and my partner Paul, we didn’t go into it trying to build a 400 unit condo building on day one. We started small, it was renovating tiny student houses. Our first building was literally four units that we built, apartment building, then we built a 12 unit building, and then we built a 50 unit building, and we sort of went from there. Our first condo project was only 58 units, and then the next one was 200, so we slowly grew, and slowly tried different things as we went to figure out what works best, and after five years in the student condo business, and five completed projects behind us, the five more that are under construction and development already, and a few more on the pipeline, we feel our product line has evolved and evolved, and our methodology for delivering has gotten better and better, and we’re quite confident in the products we’re producing going forward.|
|Andrew la Fleur:||That’s great. Taking a step back at the bigger market, as I said, a lot of people now are interested in this space across the country, really. What’s your take on the student housing market across Canada sort of on a bigger picture? What are the trends that you see? Do you still see this as a major growth market? Do you see any challenges ahead for this segment? What are your thoughts on this sort of bigger picture student housing in Canada?|
|Darryl Firsten:||My first answer would be I like to focus more on me and less on what’s going on outside. I like to spend most of my time focusing on our own product, on our own buildings, and making them perfect, but if you’re asking me the question like, where is this industry going, I think with most industries, we look south, we look to the US and see what’s happened there, and we typically tend to be about a generation behind in whatever we’re doing, and there’s been a student housing boom there that we’re just probably at the beginning of here. I see what we’re doing in Ontario here spreading further across the country.|
|Ultimately, the reason I got into, I told you some of the reasons, but one of the main reasons I liked student housing as a real estate business is it’s an evergreen population. In Toronto, for example, there is a neighborhood that might be the trendy new place to be today, and tomorrow it may not be, and somewhere else is the trendy new place, things change. What I like about universities is, they’re not forever, but there’s a very low probability that academic institution closing or moving locations, so therefor, I know I’m forever next to a population which needs to rent. That’s the big thing.|
|No matter where we go on home ownership in Canada in general, students rent. Some buy condos now, and that’s probably a market that we created, but we know there’s always going to be a population that continues to rent. We know that if the economy is good, well people can afford to pay those rents, and that’s wonderful, and they want to go to school, and get better jobs. We know that if the economy is bad, they go back to school to try to improve their education to get a better job. It ultimately all ends in them renting.|
|Furthermore, the quality of tenants, this is a strange one that people don’t believe me when I tell them, is amazing. The first instinct is thinking about Animal House, and drunken keg parties, and stuff like that, but that’s Hollywood. Students are fantastic. They’re one of the most intelligent groups in our society, they care, they want to do great things with their lives, their future’s ahead of them, they’re going to do their best to avoid making stupid mistakes today that are going to inhibit their future.|
|As a tenant, again, they’re fantastic, considering in many cases, they either have government funding to help them pay for school, or they have parents helping them pay for school, so although they may not all have huge incomes, the quality of the credit of the tenant is probably better than your typical apartment building, or way better than your typical apartment building.|
|Andrew la Fleur:||Yeah, absolutely. That’s certainly one of the misconceptions that comes up every single time with every student condo project that I’ve worked on over the years as well, is this seems to be a myth that’s hard to shake, but anybody who’s actually had experience in the market, and you’ve been in the market obviously for more than 10 years, knows that like you said, students make absolutely great tenants for the reasons you outlined. Another thing I think is just they take instruction well, there’s no sense of entitlement usually, and they’re sort of at the beginning of their life, so to speak, and they want to please you. In a weird way it sounds strange just saying, but they want to please you as the landlord, and they want to do right by you as opposed to a person who is already out in the world and working for themselves, and has their own entitlements and opinions, and it has to be this way, and it has to be my way, and this sort of a thing.|
|Darryl Firsten:||Yeah, absolutely. I’ll give you a couple other notes on students. I had talked to a few apartment building players that own a lot of apartment buildings near universities and colleges, and they loved them, and I asked the question why. They said, “Well no rent control.” I’m like, “What do you mean?” “Well when we own an apartment building in a big city, tenants tend to stay for a long time, which is kind of nice, but it tends, inflation and the real cost, the real cost of operating the building tends to exceed CPI and we’re locked into those rents, or by that plus 1% or 2%.” they’re like, “Then with being near a university, we get great tenants, they stay for two or three years, we get to reset the rent when they leave in two or three years, so we’re not way lagging on our rental rates.”|
|Andrew la Fleur:||Yeah, absolutely. Another great point. Let’s talk a little bit about your, before we get into Kingston, just the last point on Waterloo, so you’ve completed just so people who aren’t familiar with what Innate has already done, you completed five buildings already, like you said, you’ve got five in the pipeline. What has been, again, the condo investor listening to this show is interested to know, what has been your track record so far? What has been the experience so far for the investors in your buildings?|
|Darryl Firsten:||I’d like to say it’s been great for two reasons. Number one, I’ve heard virtually no complaints. Number two, we’ve had a lot of repeat customers. Our Sage one building went on sale, sold out really fast, it was delivered on time at it’s first, not only was it delivered for occupancy at it’s first occupancy date, it closed on it’s first occupancy date, which is virtually unheard of in the condo world. All the guaranteed rents that we aimed to achieve were achieved not only that first year, but that building’s four years old, or it’s been through four rental cycles, and all of the tenants have achieved equal or higher rents than they expected.|
|Our Sage three building has now been complete and closed for a year. It also hit it’s first occupancy date, and closed about three weeks after the first occupancy date, so pretty small timeline. Again, it’s been through two rental cycles now, and everything was rented at the rents that were expected or higher.|
|Our Sage two building is now in it’s second rental cycle. Sorry, it’s now, yeah, so it’s in it’s second rental cycle, and that one actually has a number of units that are renting higher, and it’s actually the one bedroom units there that we projected $995 a month in rent, and they’re getting $1,100, and we’re actually pushing closer towards $1,200 now in one bedroom units, so those buyers were thrilled. They ended up ending up with more in rent than expected.|
|I know the other thing that buyers look for some is capital appreciation or the ability to resell the unit for a higher price than they paid for it. Tons, absolutely tons in each building have buyers reselling their units to parents buying something for their kid, reselling to another investor, and I’ve seen prices only go up for all those buyers. We’ve now completed five buildings, which comprise I think about 700 units in total, and we’re under construction on three more projects as we speak. These are all in Waterloo with two more starting construction in May 2017. Pretty good track record, and people have been very happy with the investment.|
|Andrew la Fleur:||That’s great. Shifting to Kingston, obviously Sage Prestige is your new project in Kingston. Why Kingston? What are the keys to this market for the investor? How do you compare or contrast it with Waterloo, or what are the key things to know about Kingston?|
|Darryl Firsten:||I guess I’d firstly say with Waterloo, we love it, great place to develop, and we intend to keep doing so for many decades going forward. We’d also like to expand our business to other markets. Kingston was our first choice when we looked at expansion, and we look at a series of things. First of all, the quality of the academic institution, how renowned is it, how much do students really want to go there, what’s the quality of the students, and Queens University was fantastic. We were quite thrilled with the potential tenant population and owner population there.|
|We like Kingston because it has natural barriers to entry. It’s not the easiest place to get something developed. In terms of acquiring land, or getting it zoned, or achieving approvals, it’s more challenging, which we’re good with more challenging because it inhibits other players from entering the market too quickly. It has very high rent. Not just in the student housing space. If you look at the CMHC data on average apartment building rents in Kingston, it’s like comparing it to Waterloo, pushing 25% higher, and in the student space as well, the rents were significantly higher, and the supply was significantly lower. We deemed it to be one of the worst markets to be a tenant in I guess, and the best to be a landlord in of all the university towns in Ontario just due to it’s lack of supply and extremely aged supply, and it’s overwhelming demand in growth. That’s why we picked Kingston as our first place to expand.|
|Andrew la Fleur:||Yeah. Certainly seems like it’s a great place to be a landlord, and like you said, Queens is one of the top universities in Ontario. Also, Queens tends to attract a higher, would you say that Queens tends to attract a higher sort of average income economic situation from a student perspective?|
|Darryl Firsten:||Absolutely. We deemed it to be probably the wealthiest student based population of any university in Ontario, which means they could afford to pay more, but they expected a higher quality if they were going to pay more. It was a great market to deliver a triple A product and get the price that you need to justify it.|
|Andrew la Fleur:||What do we need to know about Sage Prestige specifically? What do we need to know about the building, the location, the amenities, the units that you’ve put in this building, the learnings that you’ve taken from all your history in Waterloo. As you said, each building gets better and better, so what are you most excited about, or most proud of for this building and what do investors need to know?|
|Darryl Firsten:||First of all, location’s fantastic. It can’t really be beat. Right on Princess Street, right near the university. Great retail amenity right there, plus a very short walk over to the university, so location’s fantastic. It’s a 10 story building, 326 units in total. I guess our learning curve of our other buildings and bringing that data forward lead us to certain and specific unit types and certain and specific amenities. In terms of unit types, we took a really close look.|
|Again, we’re not working off of future potential projections. We’re looking at how students behaved, and what they wanted, and what they liked from our past buildings, and we found that generally, our one bedroom units in the 450ish square foot range were far more popular than we expected, and really rented fastest of anything in our portfolio, so this building has a lot of that. We experimented a bit with some studios in one of our buildings in Waterloo, and we didn’t do too many, and they flew off the shelf, so we integrated some of those, and we found that very efficient two bedroom units where we could keep the price point down worked really well. We also have some three bedroom units in this building as well, but not very many.|
|Then amenities, again, there’s a lot of great amenities people talk about. We actually have had the experience of getting to see what actually gets used, and listen to tenants that are leasing, and asking the questions of what they specifically want. We have a fitness center, we have a feeder room, we have a I guess a common area, social area, a lot of the amenities that really are the ones that students wanted and would use, as well as retail amenity. There’s basically retail shops along the front of the building on Princess Street as well as this building also has underground controlled parking in the building.|
|Andrew la Fleur:||What’s your experience with parking? That’s a question that often comes up with investors is how important is that to the investment? If someone’s looking at buying the building, do you find many students in these types of buildings have cars, or is it really the same as we see most students in any building, which is very few of them actually do have cars?|
|Darryl Firsten:||I think in our buildings, we’re trying to attract really the affluent students. I think they have a higher probability of having a car than the average student, and that’s what we’ve experienced in our other buildings. I’ll tell you, it’s amazing. When you walk through our Sage one, or two, or three underground parking garages in Waterloo, to look at the makes and models of the cars that are in the parking garage. It is 50-60% German cars, cars more expensive than what I drive, so there’s definitely affluent students who have cars. In saying that, not every student has a car. I’m 50/50 on it. Clearly not every student would have a car. If I was a very conservative investor, I’d buy the parking spot.|
|I can tell you in our other buildings, the parking spots rented in the building, so you’re going to get cash flow from owning the parking spot, and it’s just a safe thing to own to know that you have it. What you wouldn’t want to find out down the road is one of a couple things. You own the unit, but you can’t seem to find a tenant because the tenants you’re looking at all want a parking spot, a little bit scary. Furthermore, you go to sell the unit down the road. In the future it’s worth more than what you paid for it, but the buyer, who’s a pretty high end buyer is buying for their son or daughter who’s going to school there absolutely wants to have a parking spot, but you don’t own one, and there’s no market to purchase one because they’ve all been sold.|
|To me, it’s like an insurance policy against your, if you’re going to buy a $300,000 unit to spend $20,000 on a parking spot, which will cash flow itself is probably a smart move. The other thing you don’t want to do, which we’ve experienced in our other buildings, is if there is parking still available after closing, it’s way more of a pain to acquire it just from a financing perspective. When you buy that parking spot on day one, you roll it into your purchase, and you go to your bank, and you borrow whatever it is you’re borrowing, 65-80% of the purchase price. When you try to purchase the parking spot after the fact, you’re probably paying cash for it, and I guess the leverage and value in the investment isn’t quite as good, so we highly recommend to people, if they’re going to do it, do it early, and roll it in with their existing mortgage, and they’d probably find that the parking spot carries itself based on what people are paying for rent.|
|I should note one small note in Kingston, which is kind of amusing. This is our second project in Kingston. Our first one is called the Capitol, it’s at 223 Princess Street. It’s equally as close to the university, but we really positioned it more towards owner occupiers, not as much towards students. We started by selling parking at $20,000 a parking spot for underground parking. Same as Sage Prestige. We’re now up to $50,000 a parking spot. It’s amazing what the demand for parking in Kingston is. That’s a small note on parking.|
|Andrew la Fleur:||Wow, wow, yeah, that’s incredible. Yeah, certainly along that Princess Street corridor parking is very hard to come by, so that’s a good tip there Darryl for our listeners. Maybe if you can obviously anybody listening is going to be getting the investor package from me on this project with all the details, but maybe if you could just highlight, what is the offer here for investors, somebody who’s going to buy a unit at Sage Prestige, what are they getting from you?|
|Darryl Firsten:||Our goal from day one when we came up with the Sage model, is we tried to create a way to give people worry free, hands off investment in real estate, and specifically an investment in student housing, tying themselves to the growth of universities. What we aim to do, which we’re doing with this project as well, is first of all, make the transaction easy. Great realtors such as Andrew, who know their stuff and can make it as smooth a transaction as possible. The second thing is we want you to have some kind of certainty going in on day one. We analyze the market, we know what we can get for rent, we know our track record, so we give you a two year guarantee on the rent. As you’re getting used to this investment, the developer at Innate Developments is guaranteeing a minimum rent by way of a lease back program, so he has certain security in that.|
|The next thing is hassle free, making it as easy as possible. We have our own property management company, it’s called Sage Living, which we built with the Sage brand. We deem ourselves to be experts in renting student condo units. We provide this service at a very low cost of one half a month per year. Out of 12 months rent, you’re paying one half of one month’s rent for full property management and leasing.|
|Then, to make it easier for you, on day one, we give you that service for free, so the first two years. Basically we take care of everything for you for two years. Innate Developments, our company, guarantees the rent for the first, or guarantees the lease back for the first two years, so we’ve made it as easy as possible, and we believe we’ve created an amazing design of a building, and building layouts, which will be optimum, and what we’d like to call future proof, and great units to be renting in Kingston for many years to come.|
|Andrew la Fleur:||That’s great. Wow, so yeah that’s certainly a fantastic deal, half a month’s rent for a full year of property management and servicing the tenants really, I can’t imagine that you’re making money on that service so much, but it sounds like it’s a value add for the investors and to keep the, well I’ll let you speak I guess. Why do you do it for that price versus everyone else’s certainly charging a lot more?|
|Darryl Firsten:||It’s a customer service thing. Firstly, I can tell you there is a certain efficiency in it. If you went to hire a property manager to rent out your one condo unit somewhere in the city, that’s inefficient. The fact that our service, and again it’s optional. You can manage your own unit and lease it out yourself if you want. This is just an if you want to purchase it. The fact that we’re managing every unit in the building, and we built the building and know all the ins and outs of the building, make it way, way, way more efficient, and we’re managing 12 others Sage buildings simultaneously, so our operational efficiency is incredible. That’s why we can do it for that price.|
|In saying that, our margin is not incredible. We’re not in the property management business for the sake of being in the property management business. We’re in it as a service to our customers. We’re in the developing and building student housing condo business. That’s our primary business. This is an add on service, and the reason we took it over doing it ourselves is we wanted to make sure it was perfect, because we want our customers to be happy, and we want them to come back and buy again, and again, and again and tell all their friends.|
|Andrew la Fleur:||Yeah. That’s the best way, I was just thinking that as you were saying it, that’s the best way to keep people coming back, is to offer them a good service and really give them no reason to leave. If people are getting the minimum or greater rents that you’re guaranteeing and you’re managing it all for them hands free for very minimal cost, then they’re going to keep coming back.|
|Darryl Firsten:||Yeah. That’s been our experience so far, and we’d like to keep that going going forward.|
|Andrew la Fleur:||That’s great. Darryl, is there anything else that I didn’t ask you about yourself or about Sage Prestige, but you wish I had have brought up?|
|Darryl Firsten:||No. Andrew, you’re an expert on this. I know you’ve covered everything, and you know the questions that your clients want to hear. Hopefully I’ve been able to give them those answers, and as you know, I’m always available to you to answer any other questions that anyone might have.|
|Andrew la Fleur:||That’s great. Thank you very much Darryl, for your time, and all the best with Sage Prestige, and hopefully I’ll have you again on the show soon.|
|Darryl Firsten:||Yeah. Thank you. Thank you for having me. Take care.|
|Andrew la Fleur:||Thanks.|
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