HGTV popularized the fix-and-flip real estate investor journey, but it takes guts to take on buildings that are 100 years old. John Delia Jr, an experienced real estate developer, and self-proclaimed "Construction Cowboy," shared his unique investment approach with the ROCKVAL™ Team.

Delia, a second-generation real estate developer, leveraged his construction knowledge into his investment thesis by targeting 100-year-old properties. When he started his real estate journey at the age of 20, he realized the abundance of foreclosed and vacated buildings in inner cities or suburban markets. Many of these properties were brick, vintage multifamily structures built in the 1920s. Delia was attracted to these types of assets because of the lack of competition and his increased purchasing power. However, while it may have been easy to locate an asset, bringing it online was a feat.

Construction Cowboy

One can imagine that underwriting accurate construction costs for a long-time vacant century-old building is challenging. In addition, the refit usually had to be completed with all cash, as the banks were unwilling to lend in high vacancy or poverty neighborhoods. The known element during the refit is "MEP," mechanical, electrical, and plumbing, all of which were underwritten as a lump sum. Drywall and carpentry are also predictable expenses. Ordinary unpredictable expenses included settling foundations, oddly shaped windows or rooms, and items missed on inspection. The budget required some padding, but over time, Delia and his team were able to tune the process into consistent profits.

Delia considers himself a value investor and recognized the mispricing of these types of assets due to the Great Financial Crisis. With a long-term investment horizon of 10 years, he would utilize the rental income to recoup his initial investment over the first 5-6 years. However, flipping these assets is highly unpredictable and significantly riskier. By targeting assets in first-ring suburbs close to a catalyst for economic development, Delia saw substantial price appreciation year-over-year as the community improved as a whole. But as real estate and tv shows like Fixer Upper became more popular, his purchasing power was diminished... The same $10,000 shell he was pursuing was trading for over $100,000.

Current Strategy

Delia's firm, Housing Joint Venture, now focuses on buying infill lots and ground-up construction in tertiary and secondary markets with a growth factor. The primary reason for the change of direction is the stability and predictability of the project. With the rise in interest rates and housing shortage, home buyers purchasing power has been severely diminished. With the power back in the landlord's hands, Housing Joint Venture is exceptionally bullish on build-to-rent.

Their current project is a 7.7-acre 17 single-family home ground-up construction in Springfield, Ohio. The present investment thesis supports build-to-rent, as Delia expects the region to have an extended period of growth. Ohio is the 7th largest state by GDP and the third-largest manufacturing economy in the country. Intel recently broke ground on its $20 billion manufacturing plant in New Albany, and Honda is building a $3.5 billion EV battery plant in Fayette County. Honda's plant is 40 minutes from Springfield and expects to add 3,500 jobs to the region. Overall, the I-75 corridor is expanding in population and economic development.

Higher construction costs, supply chain issues, and the recent scarcity of debt have put a damper on housing development, further exasperating the US housing shortage. Another important factor is the millennial population entering the housing market, but with inflated home prices and now mortgage prices, millennials are having to opt for single-family rentals.

"The aging of millennials into the key single-family rental cohort (aged 30-44) is a critical secular tailwind for the sector. This key age cohort is projected to grow from 65.7 million in 2021 to 70.2 million in 2030." - Commercial Observer

Key Takeaway

Housing Joint Venture raises capital through 506c offerings and "Managed Joint Ventures." Delia best describes it as training wheels for an aspiring developer. Housing Joint Venture is the developer, but the JV's remain active in decision-making, strategy, and exit plan. This structure allows corporate professionals to be involved as "executive-level franchisees" and learn real estate development along the way. It truly provides a unique opportunity for the "passive investor."

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