Unknown Speaker 0:01
Good morning, everyone, friend and foe alike. Welcome to 30 minutes with Spyglass lending. We've got an awesome on today we've got a great guest long term client of my own and good friend, and I gotta tell you something, he's gonna be very humbled today. He really is. I known him a long time, but I'm not going to let him we're gonna, we're gonna get right behind the curtain. I'm gonna brag on him a little bit, and I'm gonna gonna see if we can let him do the same for himself. Welcome to the show. Alvin Fung partner in pm developments.

Unknown Speaker 0:31
And it's a pleasure to be here. Say thank you, Erin, for taking the time looking forward to

Unknown Speaker 0:35
not thank you. I appreciate it. You're a busy man. And you took it out of your schedule to be here with me. I run this every Thursday at 11am. No matter what, but you're here. We appreciate it. Let's get right to it. You are Who? What do you do with pm developments? What is that?

Unknown Speaker 0:48
Yeah. So pm developments has been around since 2004. I became a principal and pm developments in Java EE after I graduated from my alma mater, UC Santa Barbara. You know, I thought life had a different path. But it led me to what I do today. And I'm glad I did because I love what I do. I find a ton of value in what I do. And I couldn't be happier doing what I do.

Unknown Speaker 1:13
What was that life path you thought you were on?

Unknown Speaker 1:17
So a little a little background. There's three principles in my business and Tim development. There's myself, my older brother, Frank, and our Garrus. And we all have our own, you know, specific duties and responsibilities and pm development. But quite honestly, prior to joining pm developments, I was going to follow my brother's footsteps and go to law school, become an attorney. I had my eyes set on that. Actually, you know, I took the LSAT got admitted to a great law school, how my bags packed and decided at the you know, 25th hour that it just wasn't going to be what I wanted to do. And I pursued a career in something I have no idea about.

Unknown Speaker 2:06
So you said you just issued everything you would work for and expected you were doing and was like, hey, you know what? No, thanks. Forget the bar. Forget that life of sitting there reading contracts or whatever it may have been? Not you would have been a trial attorney, or would you have?

Unknown Speaker 2:22
Who knows? Yep, that's a whole nother life. And it's hard

Unknown Speaker 2:29
to look back now right here and so many years later, and you said you graduated in 2008. So you know where you're going on essentially your 1415 year as a real estate developer?

Unknown Speaker 2:39
Yeah, graduated Oh, seven. Okay, so as many of us in the real estate world know, that was a year before. One of the greatest corrections that we've ever had. What a perfect way.

Unknown Speaker 2:51
I mean, that was your graduate school. Is that fair to say? Right. 2008 2012. Yeah.

Unknown Speaker 2:56
And that that gave us the experience that we needed in the earlier so really flourished later in our real estate careers. So like everything else, sometimes you can't control timing, you can only control whether or not you're there when the timing occurs. And we were lucky to be there. We saw the down that we kind of wrote it when it was going up. And that leads us today in a you know, a market where we really aren't sure where things will go.

Unknown Speaker 3:30
Well, let's we're going to talk about that in a moment. But I think we need to really set the tone for who you are and what peon developments does, right? Because everybody's different. I think, you know, before we, anyone listening might otherwise say, Well, who are you? Are you a flipper? Do you have, you know, hundreds of units across the country? Are you you know, what, what do you primarily focus on?

Unknown Speaker 3:48
Yeah, it's a it's a, it's a great question. Have you had developments now today, we specialize in ground up multifamily residential development, primarily in the Los Angeles area. We found a niche in the market, we really work to be familiar with that niche and find strategies that allow us to implement across a broad area of LA is a very broad area as you can imagine. So for us, we wanted to be able to be experts at a specific area with specific building guidelines and plans and buildings that we know that the public needs you. So that allowed us to have kind of a strategic advantage so that we didn't have to always reinvent the wheel on every development.

Unknown Speaker 4:39
Yeah, I think what's fascinating about you, and you mentioned when we talked about multifamily but a lot of what you do is in that one to four unit space, so the multifamily we're talking about stills smaller balance maybe duplex triplex quad Plex, right. Do you have anything over a four Plex in anything in the portfolio?

Unknown Speaker 4:54
We actually develop a couple of units or a couple of developments Now we're greater than four, we were met with some challenges with it, because it enters in a whole nother lending criteria since it's all commercial. So we tend to stay at four units and under our niche again, everyone's gonna do what they think is best. But for us, we found that working for units and under is really what gives us an advantage as far as lending, sale and development.

Unknown Speaker 5:29
Yeah, and it's so interesting you say that, obviously because it's true, right? So many developers who want to tackle the big stuff or do the multifamily or small balance multifamily Hey, we're heading to add five unit or 12 unit 20 unit or even something that looks like a mix, right? A mixed use property, residential here, a little retail space, whatever it may be. The financing is so different on the back end. But if you're anywhere in between that one to four, you know, single family all the way to duplex triplex quad Plex, certainly a lot easier to get the financing, both Fannie, Freddie Mac and anything that's DSCR. But what's really interesting about pm developments, I'm fascinated by always have been is really the unit mix that you put together, right? I think when most people think of assuming the bed bath count inside the unit mix, when most people think of the units, you know, oh, well, I mean, they're doing studios doing two bedroom, maybe a three bedroom? Wow, wouldn't it be cool? If they did a three bedroom? You seem to go well beyond that every time, right?

Unknown Speaker 6:27
Yeah, as I said, every area is and have its own character. And the area that we develop in, we found that bedroom count was something that we really needed to emphasize. So early in our in our ground up development days, we made a conscious effort to maximize bedroom count, and bathroom count, and restrict general living area. And so a majority of my units are composed a four bedroom, or greater. I have six bedrooms. Like I said, every area kind of dictates something different. But in our area, we found that people really value Hi bedroom count, I think that it's a little bit easier to rent. And, and that's just what we really run with.

Unknown Speaker 7:17
Okay, so who I mean, five, six bedrooms, who you really renting to I mean, these students that are all together and kind of come through or just larger families or who?

Unknown Speaker 7:26
Yeah, no, we've actually had, we've had one unit that's, you know, pretty close to USC, that was maybe a mile and a half that was predominantly student based. We found a lot of success with that. But quite honestly, we rent to families, larger families that are generational. And I'm glad you asked that because I come from a generational family, right? Like we're very communal. So I grew up the child of war refugee from Vietnam, you know, my parents came here. And when we came here, we didn't have you know, a two bedroom, where it was for people living there, it was a two bedroom with eight people living there. And we got by because we all stuck together. And we really helped each other get to the next level. So it was really that communal family support that got us to the next level. And I think that when you're able to, you know, when I say generational, I'm talking about, you have the parent, but you don't just have the parent, now you have the grandparent and the child, this is the village takes, you know, it takes a village to raise a child. And I'm a firm believer that if you can keep the village close together, then you find a lot of success doing that. And I find that a lot of our rentals are, you know, rented by these types of generational family compositions.

Unknown Speaker 8:45
So that's wonderful. Yeah. And easily rented, right? I mean, you really haven't had any issues many vacancies or getting anybody in there. I mean, every time you build one of these or do these massive renovations, you're quickly renting them is that fair to say?

Unknown Speaker 8:59
It's fair to say I think the rental market in Southern California has been quite hot. I think

Unknown Speaker 9:05
explosive we can use,

Unknown Speaker 9:08
like everywhere else in the world, I guess, are pretty warm. But at the end of the day, if you build a good product, and you're fair and your tenants, and you really have everyone's interest at hand, while it's challenging to do so, I think when you do operate that way, you have success. And that goes from how we treat our tenants, how they treat is how we treat our property managers. We really do try to present a really fair way to operate our business.

Unknown Speaker 9:39
How many do you retain? Right? I mean, are some of them probably too good of a deal to pass up? Wow, we did such an incredible job other investors that come to us after you're done and like, I'd like to buy this I'd like to pick this up, take this off your hands and paying your premium for it. Does that happen here in there? Are you keeping everything in portfolio?

Unknown Speaker 9:56
You know, first 10 years of our development careers, we did sell a majority of our property. In the last five years, we've had a lot more emphasis and our whole, and it's not that I don't sell I do. But these are assets that we work very hard to create. Before we create them, they're dirt. I mean, it's Flatland. Not all the time, but mature to the tires, flat land, that we are sweating, equity into, to develop. And when it's up, it's hard to let go. Sometimes they give good returns. But at the end of the day, like there's a lot of pride of ownership, like we really are prideful and what we build, and we do get approached by other investors who want that retail product. And occasionally, we will like product out. If you know if the climate is right, and we need to move on from a project, maybe there's something greater at hand, then we will if not, we just paying on rent, and then we move on from there.

Unknown Speaker 11:00
Maybe you can tell us a little bit about how you finance this project, right? Because you talked about it being dirt, or maybe not yet quite dirt, but perhaps a house or unit mix already that is ripe for bringing back down to the ground and total rebuild. How did it start for you? How do you put these together on your side with the financing? If you don't mind talking about that? Yeah, so

Unknown Speaker 11:19
we actually, and I guess this is, it's really, it's really important to understand. My family, we didn't really come from much. Like I said, earlier, my mom and dad are war refugees from Vietnam. It didn't start with a trust fund, we weren't for every penny we got. But you know, in the beginning, we developed a really interesting debt equity structure. We have private investors, who trusted us, we performed but instead of spending all of our, you know, distributing and spending all of our income, that we earned our net profits, we reinvested at one project turned to 10, turned to 20, and so on. And we were able to really build our pot of equity. And from that point of equity today, that's actually where we develop from, we have very few outside investors, we have very little initial debt, we're very low leveraged, I believe, in trying to be as low leverage as possible, being very conservative with our investment. And then from from there, once we develop, we have great references, and, you know, you know, people just like you, Aaron, that are specifically you, who help us refinance out and cash out of these properties so that we can move on to the next.

Unknown Speaker 12:43
Yeah, and I can attest to your conservatism, and that you want to keep that leverage low, and the cash out, you're using ultimately just taking a little bit back. So you can essentially roll forward and source something else and put it right back into the business. I mean, no one's taken out into cash and going into vacations here. This is about continuing to build and, and putting the unit mix on the board. What's the goal? I mean, how many units do you want to end up at? or is or is sky's the limit here.

Unknown Speaker 13:09
You know, you know, being comfortable in your life is one thing, and then having goals is another. They're not always mutually exclusive. But once you push past the comfort level, and your goal kind of changes your lifestyle, it's time to reflect in my opinion. And we didn't get into this earlier, but I've been lucky enough to be able to work in other business ventures, because of real estate. You know, Aaron, you know this, but I'm a big martial artist. I opened my own martial arts school in Seal Beach. This is something that I couldn't have done without the capital for my real estate company. But this type of activity keeps me sane. He's the hobby, the outlet. Yeah, it gives me something to work for, so that I can give back to the community in my own way. And we you know, so once that happened, I was able to kind of re set my goals. What do I want? Am I really just earning to get more material things, or my earning more to provide something greater in my own vision? And for me, I've been able to do that. And so right now, as long as we continue our pace, and we're conservative in our approach, because I'm really conservative our approach, I think we'll be fine. But yeah, it's tough. I don't know where the, I don't know where the the limit is, you know, I feel like every year it kind of ratchet it up. But again, when you feel like it's getting a little too high, you got to bring it down, reassess, and really determine what's right for you and your family and your business at that time.

Unknown Speaker 14:55
I love it because you know what you're describing is tremendous because you know, it's one One thing for all of us as investors, or as lenders, or as business individuals to look at our quarterly p&l is and say, Hey, what am I doing here? But you look at it from a, like a whole life perspective, right? Like, it's like, you know, what, what can I do? What's the bandwidth to then take this, and not only make the money and continue to, to add unit mix, but how am I also having time to give back to the community? And be part of it and have a life for yourself as well? I mean, you're a father yourself as well, right?

Unknown Speaker 15:26
Yeah, we air and I share something in common. We're both fathers, the twins. So it's, it's, it's a lot of work, obviously, as any parent can imagine. But it's, you know, your bandwidth is your bandwidth. You take out a one pot, you put into another pot it, it all balances out at some point. So as long as I am able to keep my priorities, focused on what I want to do, then we're fine. You know, but my priority is always my family. And the people that are principal to me, in my business, those are always my priorities. Earning is obviously a reward of it all and what enables a lot of it, but I just try not to lose sight of what's really important.

Unknown Speaker 16:12
I've known you a long time, I have never seen you lose sight for one second. So we should, by the way, before we move on, and we're going to talk a little bit about the market itself or where you think it's heading. Give us a little plug. What is the name of your studio down there and Seal Beach?

Unknown Speaker 16:26
It's Dojo by Leo Vieira. It's a jujitsu school.

Unknown Speaker 16:29
Very cool. Yeah. How long have you been practicing Jiu Jitsu, by the way,

Unknown Speaker 16:32
I've been practicing since 2013.

Unknown Speaker 16:35
Yeah, if I ever run into you, I'm not going to run by ever see him in person. Again, I I'm going to make sure

Unknown Speaker 16:42
every one of your loans is a teddy bear. Definitely are. And I appreciate that. Imagine, it teaches you a lot on the mat. But a lot of those lessons are applied to my daily business to be quite honest, it's learning how to operate under pressure, learning what the best exit is in a bad situation. And sometimes understanding there is no accident. And you just got to take the L, and you got to for the next time, you just got to learn. Let's not get back there. And

Unknown Speaker 17:14
I can say we haven't even been on for 20 minutes, you've dropped a lot of words of wisdom already. And I appreciate that. And anybody listening, I think should appreciate it as well believe me, this man knows what he's talking about. So on that note, let's talk about the market and where you see it heading. Obviously, crazy, just madness. Since you know, January of this year. Obviously, I can attest that straight rise, right, like interest rates have essentially doubled in five months. Prices through the roof, you know, tripled since 2000. But certainly towards the end of the pandemic, and in the last 18 months, just explosive, insane. rents have skyrocketed. So that's wonderful news for you. But of course, we're all dealing with the other side of the equation and what that means, you know, lumber tripled for a long time. Now coming back down the cost of everybody working for you, you know, everybody wants to get paid more certainly supply chain issues. I mean, what what are you mostly focused on to get through this? And where do you see it all heading?

Unknown Speaker 18:06
Yeah. Like, no one has a, every, every person in our industry will say the same. No one has a crystal ball, you operate on a position of have I like you can either extend your risk and possibly lose, or you pull back, and you're ultra conservative, and you just got to survive. And I feel like, you know, it's a mixture of both probably, where I think there's gonna be a lot of opportunity in the next 18 months. For for multiple markets, that development market for the holding market, for the commercial market, I think there will be a lot of opportunity. But I think he has to be pretty critical, and very, have a really extensive, expansive view on what you're getting into. There's no, there's no fast money, you're gonna get caught. If you go out and try to make fast money, you know, the masters of what you do, like what we do, try to find every angle and make sure that those angles are covered. And so if you understand like, yeah, lumber is gonna go up for fine retail prices have gone up. So if your exit strategy is sale, then yeah, sure your acquisition and your development have cost more but you are making on the other side. Now, let's say the market turns, your acquisition, your development, let's say you took too long or just six months happen and things turn for the wrong way.

Unknown Speaker 19:41
Well, I'm gonna we lines here and go with what you're saying here that you think opportunity, the word opportunity coming perhaps in the next year, year and a half, you may otherwise feel like some people are certainly gonna be in trouble. There's there's a recession on the horizon and I don't wanna put words in your mouth. But you know, when when we talk like that investors When we talk like that, as in lenders, the expectation is, oh, there's a softening of the market one way, which creates opportunity. Another certainly, you feel this way?

Unknown Speaker 20:08
I do. Yeah, I do. I don't think that prices can continue to rise, while everything else is weakening. So there's no, there's no surprise, I mean, liquidity is such a huge part of this market. And once liquidity is taken away from buyers, prices have to go down. It can't afford 3% down payments. This is just, this is just real the real life. So prices may soften. But from the real from the investor perspective, Aaron, you and I were just talking about this boss role, where we were spoiled at 3%. Yeah, guess what, guys? You were spoiled. Not okay. If you're splitting, and you're reaping the benefits of it at 3%, great. But the ball rolls at 6% 5%, whatever it is, that that's where you're refining out at, that's where you're refining out at as long as you have the capacity to hold it. And that's where I keep on coming back to our let your leverage position as your rental position. Do you have the plan B? Not everyone thinks that that far ahead. And some people are just seeing the one option of the retail sale, I develop I sell, but have the backup position. If you can't sell if the market turns a little Are you able to cover your expenses? Are you able to cover your hole? Are you able to cover development? If you are up all right? Will you make what you thought you're gonna make? Probably not. But you'll be able to survive, you'll be able to be involved in the market, when it does matter again, and when you are able to capitalize on the market.

Unknown Speaker 21:52
Yeah. And to your point about the the last thing you just said obviously, because a big part of, of what I've heard you say certainly is, hey, prepare for the worst, but expect something good to like, sure helps, right? Because there are opportunities. I mean, it's so interesting, you know, having like the conservative approach on something and feeling it but like, you know, a lot of the conservative people I know yourself included, are also amazing at pouncing on opportunities. And being a little taking on the risk. Because doing what you're doing, I mean, itself is is already a massive risk. And I think a lot of people need to understand that. I mean, to be a developer, you know, what it is every night to think of, you know, everything across the board, and the money you're spending and, you know, just a debt servicing something or even the utilities, I mean, until something is fully refinanced and fully, you know, put 10 Excuse me, put have tenants in place, right. And it's completely done. You know, there's always the thought, and even when they're in place, you're always thinking, hey, what's my new vacancy rate? Or what what happens if this changes or rents do go down, or people leave or a pandemic hits? And there's a moratorium on evictions, and people don't pay? I mean, this is always on top of mind. There's no,

Unknown Speaker 23:07
there's no investment that doesn't come without risk. It's your ability. What makes you successful is your ability to assess the risk. I bring this back to training jujitsu, what, I can't go out and do something that has a higher risk, I'll lose. Yep, I have to go out and be confident in what I do. And I need to understand the risk of what I do. It's that assessment of risk that makes me good at what I do. And so and that allows you to see all the different angles. So yeah, the next 18 months, Aaron, you're right. i No one does. No, there are certain indicators that would probably say that we are heading towards what you're saying, you know, a recession, and every equity market is going to suffer for right. But if you're able to survive, anticipate when is a good time to participate and have options once you participate as far as retail sale, once your development is done, or hold in rent, then you're okay. This the equation is not Ultras difficult, it's not complex. It's an assessment of risk and the ability to move at the market as it moves.

Unknown Speaker 24:21
The complexity is keeping on the party line. Really, because again, like you said, it's really it's not that hard. I mean, if you just know what it is, it's it's just often staying like this is what it is. I mean, yeah, you often have to change systems change, whatever. But if you have that business plan in place, and you know that that's what works. I mean, that's what you've been so wonderful at you and your partners. I mean, it's always the same thing and you're always keeping the same thing in line of sight. And not very one way or the other. Now, yes, you're always paying attention what's going on with the market, or you take the opportunities when you can, but to your point, I mean, really, if you can just stay focused, then then everything's gonna be okay. And that kind of brings us to where what happening now and what we can expect on the horizon because it's the writing's on the wall for a long time, everyone should know you can't go the 12 to 14 year run that we've been on without there being some sort of Fallout and there's going to be everyone knows, or should be paying attention that you can't flood trillions of dollars in the market, like the Federal Reserve did over the past couple of years and put over 20% of all money in circulation, you know, in a two year span, since these since money began in circulation without some sort of Fallout. And now of course, here we are heading into our fifth month of what is going to be very high inflation, because it's not two or 3%, or even 4%, we're seeing well over 8%, right. And the Fed was already telling us close to six months ago, we're going to raise the rates in the year 2020 To prepare for that. And we're going to raise it a number of times, and we're going to dump the paper the 9 trillion that's sitting on our books, as opposed to actually buying it from the banks anymore. Pay attention, and everybody should have said Yeah, well, that means something Oh, everybody was just like, well, it's just the time for that. But now really pay attention. Especially what happened in yesterday's session, the 75 bit hike, that's a lot. And they said they wouldn't do that, right? Just not that long ago was like, Don't worry, 75 Bits isn't really on the horizon, and we're not going to do it up. We're doing that. And they're doing it now in June, not October, not November, descent, whatever it may be, it's here ready. And that should bring the alarm bells off. The jig is up, right? I mean, we're heading towards something. No, no question about it.

Unknown Speaker 26:29
It is uh, but like I've said before, if your fundamentals are right, then whether or not rates have gone from three to six, which the day if your fundamentals are right, while your profit might go down, you're not in the red. So your business operates, you get your financing, you hold, you maybe don't earn the cap, you think or you know, you don't have the cash return you that you think, but you still have a great asset you're still working for and you're still moving on. So as long as you change your expectations in these times, then you're able to survive. If you're overly risky, then yeah, you will hurt and you will not be in a positive position. You might not even be in a negative position or a neutral position, you probably will be in the red. But if your criteria is sound, you have a chance to make it and that's all you can do.

Unknown Speaker 27:24
Are you looking at other markets? Is la only where you remain and you're staying focused? Or are you looking outside anywhere?

Unknown Speaker 27:33
Yeah, no, that's a good. You know, I've been blessed in my whole career as a real estate developer, to have many, many mentors, my brother, my business partner, yours, even though they're my partners, they're my, their mentors, like they've taught me everything I know. But before them, we had another mentor Andrew, Andrew taught us. I mean, Andrew was the mentor. He taught my brother and he taught our gears, they gave me the knowledge. But my other mentor was my father in law. And he's a commercial real estate guy, you know, and he turned his normal business into commercial real estate holdings. He was really intelligent about the way he exchanged his property really had great fundamentals when purchasing commercial property. And so when we do sell our properties in LA, sometimes I will venture off and find exchanges and out of state properties and commercial property out of state. So we have done that we own you know, some in you know, Wisconsin, Missouri and, you know, those are really interesting properties that we like and yeah, cap rates, I

Unknown Speaker 28:47
bet they look a lot better there than they do here.

Unknown Speaker 28:50
Yeah, I feel like that it's a great way to diversify into different markets. You have you know, National Credit tenants, you have multifamily residential families, you know, as your tenant, you know, you just want some diversity so one you know, pot starts to decline a little maybe other one fills up and you just try to keep everything level

Unknown Speaker 29:12
and you do it and you do it so well. Well appreciate all of this Alvin Fung stopping by today on 30 minutes was fabulous lending our 30 minutes is up it goes quick. I'm telling you, dropping off not a lot of knowledge greatly appreciated. You know, you're kicking ass. And I'm sure you're gonna continue to for

Unknown Speaker 29:30
Aaron and now like, like, it's always a pleasure. Thanks for having me on. And, you know, we, my Frank, myself in our gears, we really always have appreciate everything you've done for us. You always go above and beyond and it you know, this human connection is really what it's about. And you're you're a master out now. So thank you for all your help brother.

Unknown Speaker 29:49
Thank you for saying so and I really appreciate it. I'm looking forward to continuing that connection for for a very long time. So that was good. Yeah, we will talk shortly. Thanks again for coming on. By