Aaron: Good morning, everyone. Thank you for joining us as we're doing every Thursday from now on at 11 PM, excuse me, 11 AM Pacific Time, 30 minutes with Spyglass Lending. Today a very special guest, a good friend of mine, I really appreciate him being here. Thank you very much. This is Josh Gorokhovsky from Telos Properties. And just to get into it, I'm gonna give a little background on how we know each other and why I've invited him on. So, let's start with that. Here we go, I think it was, what was it, like seven or eight years ago right that we met? Does that sound about right?
Josh: When we first started chatting, yeah, maybe 2015.
Aaron: Right, 2015, so we're somewhere in the seven-year range. You were just a young Turk at a college working at Oracle on the up. You had an upright future of Nordstrom off the rack ties in front of you, and a lot of happy hours and jalapeno poppers where you were gonna be a really good six-figure earner at Oracle or a large company like that, and you were like, hey, no thank you, I wanna be a real estate investor. That's what I wanna do and I will stop at nothing to make that happen and live that contrarian lifestyle. And at the time, you know, I had Spyglass Lending up and running and doing a lot of private and hard money, and we met through a mutual acquaintance via hard money. And you know we talked a lot about it and we started working together just a little bit, for a little bit, trying to kind of cut our teeth together as real estate investors. I obviously had some experience prior to that with other partners and doing that, but I kind of wanted to build up at that time. And since then, whereas I have languished as a real estate investor, though I do have some good investments certainly, you have, let's just call it like it is, kicked butt. You're out there, you created your own company and you're scaling up a pretty sizable portfolio. So, does that sum it up? Does that break it down or is there something more you wanna add to that?
Josh: Yeah, no, that was that was very humble intro. Yes, pretty much sums it up. Thank you.
Aaron: Awesome. Well, tell us a little bit about, why don't you tell us about Telos Properties and what you have accomplished in the past, let's say, five years and what you're looking to do the next five.
Josh: Yes, so, Los Angeles based, you know, development firm up to this point. I got into development not by choice but kind of just because that was the flavor at the time that I got into and that's where I could provide the value to investors, and I kind of had those resources available to me through our mutual contact, right? So, started out with one ground up duplex development, which is right behind me actually, and from there kind of kept snowballing. One turned to two at a time and two turned to three at a time, and now we have several, you know, ground up development projects going on in LA. Also do some single family flips and ADUs and stuff like that whenever –
Aaron: Wait, that's a hot button word right there, ADU, but I mean for those listening who may not know the acronym, what is an ADU?
Josh: Additional Dwelling Unit. So in 2017 in California, it was passed that you could build additional units on single-family zoned lots to –
Aaron: Why? Let’s talk about why. Why was that passed? What's going on in our great state of California where they, where the powers that be felt the need to pass such a law.
Josh: Well, obviously another hot button is the housing crisis, right, so they need more units. There's a lot of people coming into California at all times and not enough housing, so that was something that they felt would be able to help solve that, right. Build units in the back, whether it's for renters or maybe in-laws, family members, whatever, so on and so forth. So that program keeps evolving. Now you can build dwelling units on most lots and multifamily lots, so it's something that has definitely been, definitely been a great program, and I think the last time I checked, which was maybe over a year ago, I don't know if the statistics have changed, but it was 67% of all building permits pulled in Los Angeles.
Aaron: 67%. I mean, that is a massive amount, and as we know, right, I mean the idea was streamline the process, right. They wanted to make it like LA, Los Angeles department of building and safety was trying to rubber-stamp those permits to get them through, as opposed to what you know these other dwelling units or other types of buildings would take a long time to do, but the ADUs could otherwise go right through the process and be built pretty quickly. So that would help solve a lot of this, supposedly the housing crisis, obviously. And you know once Covid hit, of course things slowed down. It's just not enough people inside LA yet, and obviously not as easy access to get in and get all this stuff, but that's a great recap. So, thank you for that, and you like you said you've built ADUs on property and flipped them as well. Is that right? So, you added these ADUs and then made a profit selling them to end users.
Aaron: Okay, and how many of those have you done?
Josh: I'm currently doing my second, actually sorry, third ADU project right now, and I'm looking to do more.
Aaron: Yeah, but for the most part really what you've been doing is, as you mentioned, ground up construction, right? You're buying property, you're tearing down the existing structure, and building quadplexes for the most part, right, and building that portfolio.
Josh: Correct, yeah. Now with this new SB-8 that was rolled out at the end of last year, which LA building and safety and housing have just rolled out their adoption of about two weeks ago, so that might change, most likely will change the way that we're gonna attack at this point. Yeah.
Aaron: Well, let's talk about that, let's talk about that. Don't keep the listeners in the dark. How are you gonna attack that? What is that, what's this new law, and how are you, how do you intend to attack it, and how is it affecting what you're doing?
Josh: So, SB-8 was a tightening of the existing SB-330, which was put into place to try and, you know, protect the affordable housing in the state. And developers were still finding loopholes and ways to get around that, so this SB-8 was a tightening. Basically to summarize what it states is that if you are going to demolish and going to build back, whatever you build back you must replace that demolished unit or units with affordable units. So in my specific business model, I'm demolishing a house and building 4 units, now one of those four units has to be for affordable housing, which you know mathematically most of the time will end up killing the deal, right. You're not gonna wanna go through the risk and the time of building if your profit diminished.
Aaron: Okay, well, let's dissect that for a second. So, probably on a larger scale project – 20, 30, 40 units or more -- X amount having to be affordable still pencils in the pro forma, right? But for your purposes on only four units, if you gotta make one of those of the four affordable, you're saying it doesn't necessarily pencil or isn't gonna pencil at all. Is that right?
Josh: Most of the time it's probably not going to.
Aaron: And look, I'm sorry I just wanted to interject one more time on the idea of what is an affordable unit meaning, what's the threshold, right, like what qualifies as affordable? Is there a percentage of what you can charge in rent or is there an actual number, dollar number specified as an affordable unit?
Josh: Everybody is trying to still wrap their head around it, and myself included, but there are resources on the housing website and there is an index of what you can charge per unit based on the amount of bedrooms, and then as far as like the tenants and what or how they qualify, I'm not entirely sure what, you know, they would need to provide to you or if they would need to be part of any kind of government programs to qualify to be a tenant in an affordable unit. But there is an index where you're capped out on what you can charge for rent.
Aaron: Okay, and of the projects you have built, these quadplexes, are they all quadplexes? Have you done duplexes and triplexes, or has it all been four units?
Josh: Yeah, we've done duplexes, no, we've done duplexes, triplexes, and fourplexes. Mostly it's been fourplexes just because of the scale, right, like you can get more income.
Aaron: Tell us why you capped at fourplexes. I mean, why two, three, or four units? Why are you not going over the 4th unit?
Josh: Well, one to four is considered residential, right, and five plus is commercial. So for financing –
Aaron: Now we're talking my language, this is all about the finances.
Josh: Exactly, that's why I started with that, right. So yeah it’s a different ballgame of finances, which you're the expert on and you can dive a little bit more into if you'd like. But as far as like construction, you know we're talking about a totally different form of construction. We're doing 2 duplexes so there's usually not much if any structural steel in these projects. There's not advanced like fire sprinkler systems or elevators or anything like that that usually come as part of requirements for commercial buildings. So, from a construction standpoint it's very simple, it's almost like building a house just four of them, and it's quick, it's buy right. You don't have to get any special entitlements or hearings or, so for me when I got started, you know, and I didn't know the difference between a hammer or screwdriver, that was the way that I could get into the ground up space.
Aaron: But you use the term quick. What is quick? How long does it take let's say, I mean from, not just purchase, but like actual demo, right? You get your permits ready to issue, BANG, you build, you know, you're breaking ground the next day. What's it take to construct all four units, get the certificate of occupancy, and get a tenant in there? What's your time frame?
Josh: If we're, if we're crossing our T's dotting all our I’s, and there's not much error, then it should take about 12 months from start to finish when it breaking ground to getting, you know, there's always little nuances, so it has taken up to like 14 months on some projects.
Aaron: Which isn’t bad, right. I mean 14 months, that’s palatable.
Josh: Yeah, so it's usually around there.
Aaron: Okay, and then and, 'cause you're right, financing, and I'm gonna circle back to that for a second, 'cause this is of course 30 minutes with Spyglass Lending. To your point, one to four residentials, it is a lot easier for you especially, and we're gonna talk about the front end financing in just a moment. But on the back end, after you complete the project when you need to refinance and keep it in portfolio, right, like you have the tenants in place, you have the debt to income ratio set because the money is coming in, and that's what you need ultimately to get that long term financing. You know you've purchased for X price, you've built for X price, now it's valued at Y price down the line, and you're gonna get a loan at a certain amount, a certain loan to value ratio on that finalized price of what you've created. And it's a hell of a lot easier because it's 4 units or less, than it is if you had to go above that, right, because if you're above four units it's a commercial loan. That's a very different animal, although, although, it has become a lot easier, and especially since COVID hit now that there are these debt service coverage ratio loans. I mean, it's pretty incredible that all of these lenders have jumped into that. First of all, do you know much about the DSCR loan?
Josh: Only the little bit I've heard from you, but not as much as I should.
Aaron: And we can get into that, but you know going back, I mean, ultimately why you've been doing 4 units or less or why a lot of developers do four units or less, and then I wanna talk a little bit about some of the lot sizes that you go for, the zoning on the lots that you go for. But how are you financing the front end of the project? What are you doing there to purchase, to build, to hold for the 12 or 14 months it takes to build, and then ultimately, you know, get the tenant in there before you get the final financing?
Josh: Yeah, I mean, these are larger projects than I would like to use, you know, “hard money” for if I don't have to, which I have in the past, and they're not big enough to, you know, go to a lot of these larger funds. So, typically the way that I do it is I have my investors, whether it's one or two guys on these deals, and you know again the deals aren't so big where it's too much to bite off for a lot of my investors. So, we'll get one or two guys, we’ll usually buy the land cash that way while we're getting plans ready and entitled, we’re not, you know, burning on the on the interest payments. So, we usually buy cash we'll get some of the soft costs including plans going with cash, and then, in the meantime, while plans are being readied, we're gonna go ahead and go to one of these institutional guys. Like, I have a really good relationship with First Republic. They'll give us the construction loans, construction to perm, and I've done another way as well. I've done the hard money route where we get money for the construction through a private money lender, and I've even and, actually I'm finishing up two projects right now where we did the entire project out of cash, no financing at all.
Aaron: And let's talk about cash for a second, because this is a testament to you or any real estate investor, and I think anybody listening should understand what it is to really position yourself to go out there and raise capital like that, especially on a small balance project like this, right. You might be an operator, you know, who can go, you're doing 100 units, 200 units somewhere in the sunbelt or building a gorgeous condo project in Utah for, you know, high-end big money skiers whatever it may be. But here just a simple four-unit, like what it takes to go out there and create the relationships that you have and go raise that capital and convince others to, say, come in with this project showing them what their return of money is and why they should trust you. Why don’t you talk a little bit about that?
Josh: Yeah, I mean, it's kind of just like anything else, right, building up your pipeline and showing that you're credible and that you have, you know, a portfolio of what you're talking about, that you know, it's not just some pipe dream, that you've actually gone out there and done it. Obviously, in the first few deals it was more investors taking a flyer and betting on the jockey rather than, you know, seeing some kind of proof of concept. I –
Aaron: Let’s call it, probably friends and family, right, which is a great place to start.
Josh: Right, yeah. Yeah, and you know I, as I mentioned on other podcasts and, you know, to everybody, that I was just very lucky in the sense that somebody that was doing what I wanted to do and when I was going to raise money and I was kind of like, hey you know, I got this guy watching over my shoulder and as much as possible making sure that I'm not fumbling. So, it's just you know a lot of going, a lot of networking, going to events, obviously I guess a friends and family, pitching, getting rejections, sending out deals. It’s like sales. You just gotta keep going through it and then the more you do or that it becomes, the higher the demand comes from the investors, right. They see you've done it a few times and now they're like, okay, I guess what you're saying is not 100%, you know, just like taking a flyer.
Aaron: Right, that makes sense. Okay, circling back to the lots that you're looking for to build two or three or four units. What are you out there searching for, and how are you finding or, you know, how are you just homing in on the properties that you ultimately want to develop and turn into these projects of yours?
Josh: So you're saying how am I sourcing the deals?
Aaron: How are you sourcing, and then also what are you sourcing? Like, what are you looking for in a lot. Like to build, you know, a two or three or four-unit, that's different than putting a single-family house on a certain zone lot. So, tell us a little bit about the zoning and then ultimately how you're going after those specific lots that are zoned for the build of a two or three or four-unit.
Josh: Yeah, I mean typically what we're looking for is lots that are zoned R3, RD15, RD2. I mean, I think that's a little more information than people need. But basically anything that says that the lot can be zoned for more units, right, but then you also gotta look at the size of the lot. So, if it's zoned, you know, where you can build one unit on every 1500 square feet but the lot’s only, you know, 4000 feet, I mean, practically speaking, it's gonna be hard to fit, you know, even what you're, where you want to build there, right. So, you want to look for larger lots as well, and then as far as actually sourcing the deals, just relationships through agents that I've developed over the years with some door-to-door stuff that I was doing back in the day, not so much anymore. But still, you know, whenever I can dropping flyers, mailers. I'm starting a marketing campaign right now and actually –
Aaron: Before we, I wanna hear that about that marketing campaign, but dropping flyers. I mean, again, this is a testament to you and what a good investor will do. I mean, you talk about dropping flyers. You were actually out there in the neighborhoods that you want, you've targeted, you sourced and said I'm actually the one, or hiring somebody or you yourself are out there knocking on the door dropping flyers, is that right?
Josh: Well, yeah, I got that from you. I mean, back when we, back when we were starting, we were driving around looking for dilapidated houses, and yeah, I mean, like I haven't had much time to do it so much lately.
Aaron: You needed to, right? I mean, because once you become somebody of substance who does these, you start to attract other people who are just ultimately gonna, you know, wanna send you a deal, right. You start to get referrals or those agents you just mentioned who might have access to the, or know something off market or have the M LS listing look at somebody like yourself and say, hey, this guy’s done six, eight, ten, twelve projects, whatever it may be, is like that, he gets it done. He really is gonna do this.
Josh: And it's kind of been a little bit easier because my projects are in different areas, so when I'm at those projects, you know, checking up on the progress or meeting with the guys for whatever reason, I'm in the neighborhood all the time and I end up talking to the neighbors very frequently. And I've actually bought quite a few properties just by being around and getting friendly with the neighbors.
Aaron: Wait, let's not gloss over that either because that again that's another big thing. I mean, anybody who's listening to this who says I wanna be a real estate investor or you know I wanna dip my toe, whatever it may be, I mean, think about what you just said. You are there, you're on the site, you know, you're checking with you guys. You're not just the armchair captain, you know, like sitting on your couch making the call. I'll call my general contractor and let them run it or I, you know, I'm just sending over the lumber or whatever it is. Like, you're there checking in on it constantly. You have to really be a part of it. You're making the decisions, you're seeing what's going on, you know every few days or even every day if necessary, right. And because of that, because you're there on-site, that relationship happens, that conversation happens with the neighbor, or somebody seeing what you're doing wants to know who you are, and then, like you said, they've got a deal for you. Is that, that's really what you're talking about here?
Josh: Yeah, yeah, I mean, it's very it's very organic. It's, you know, just if you're there every day you're bound to run into the neighbors right there outside of their watering their lawn, moving their car, whatever they're doing. And you just start from the conversation and they obviously know that you bought the lot, and a lot of them in these areas that I'm buying at least are looking to cash out and retire. So, it's happened quite a few times just, you know, like I said organically.
Aaron: Okay, now you know you've made these purchases over the past few years but of course we all know this in the past 12-18 months, wow, wow, as everything skyrocketed. I mean, even way more than anybody otherwise expected, and a lot of people, rightly so, and I think some of the investors chomping at the bit when COVID first hit were like, oh yeah, prices are gonna go down. This is definitely gonna, it's gonna be a hit. And of course, went the complete opposite way and rocket shipped the complete opposite way. So, how are you dealing with that? Are you, are you penciling in different numbers? And, you know, by the way, and let's be at the same time talk a little bit about the fact that not only have the prices of the properties been going up—ridiculous -- or sellers are saying, “hey, you want my property, you're gonna overpay for it,” but the cost to build has gone up, right. I mean, we've seen lumber months ago skyrocket, then plummet, then skyrocket again, and now, you know, the report came out today. Inflation, real numbers, real numbers, are seven and a half percent. That is no joke, and that hits hard, right, for everybody just buying eggs to a developer like yourself.
Aaron: We may have lost you, you're frozen here for a second. We're gonna, we'll give you a second to hopefully unfreeze. Not sure if you heard all that, but we’ll ask the question again. This is the fun part where I’m just kind of talking to a frozen screen now and hoping the Wi-Fi kicks back in wherever you are, so we'll give it another moment. Come on, Josh, come back to me. Break out the chargers here. Yes, no, maybe so. I'm not even sure if there's anything I could still do here. Press a button to do something else, regenerate. Let's try this screen, we’ll try this screen. My limited production knowledge. Oh yeah, you just dropped out, but I'm gonna keep talking with the expectation that he's gonna pop back into the studio here in just a moment and we'll get him back to finish this up. We've got about seven or eight minutes left with the broadcast and certainly want to fill the 30 minutes, and we're having a great conversation with Josh. So, do not want to miss out on this. And I can see there's still, I can see those numbers here, so there's still some people with us. Appreciate that, but I guess I'll just talk a little bit in the filler. We are talking with Josh Gorokhovsky today of Telos Properties, and he is really giving us some great information about what it's like to be real estate investor out there in Los Angeles. Kind of on a small scale, right, I mean that's just, he's doing two and three and -- there he is again, so we're gonna add him back to the stream.
Josh: My Internet took a poop on me.
Aaron: I see that, and you're back on your phone, right? That's what we're looking at here, so that's good. That looks even better, so hopefully that won't happen again. But how much of the last part of the question did you hear? I mean, like, I was running my mouth about the idea of not only is it hard to get property and the prices have gone up, and, you know, the sellers are expecting. But, you know, the inflation has taken a hard hit on other developers and what the costs are to do the builds. Why don’t you tell us a little bit about that and how you're combating that?
Josh: Yeah, I mean, obviously no secret that everything has been going up with inflation. But, yeah, material specifically and certain materials, and it changes by the week, so you kinda gotta be flexible and just be willing to roll with the punches like most businesses. I mean, when I'm underwriting, it's hard to predict, right. So, I can't really predict the fluctuation in materials or labor or things like that, so I pretty much go off, based off my most recent project. I always bake in a contingency of a certain percentage of the total project so that usually doesn't –
Aaron: Has that contingency gone up because of what's happened, because of this, the prices skyrocketing equity, and because of inflation? Are you baking that in a little higher?
Josh: I've added a few points on the percentage of the contingency. I mean, when I'm underwriting values, again, kind of the same thing, I don't like to speculate and say that, you know, in two years when I'm done with this project it's gonna be worth this much more because of these reasons. I kind of just look at what's going on now. I don't know if prices are gonna go up. Maybe they go up and they come back down by that time, so I'm kind of conservative in my underwriting in all regards and may have left some money on the table doing that, but so far it's been, you know, serving me well. So –
Aaron: May have left money on the table but not throwing money out the door, and that's just as important, if not more, right? What, I mean, okay, but what are your thoughts, I mean, do you have any sleepless nights thinking, holy cow, the crash is coming and when it crashes it's gonna be worse than it was in 08 or less? Or you're not worried about a crash at all? What are your thoughts on that?
Josh: No, I don't worry about things that I can't control. I can kind of just focus in the moment and be diligent, right. I can keep track with what's going on in the world and in the macro economy. I can try my best to you know speculate what's going to happen in the next few months or the next year, maybe. But at the end of the day, nobody knows, right. Nobody has a crystal ball, and I've no idea what's gonna happen. So, all I can do is be agile, be ready to adapt. Like this SB-8 thing that we just talked about in the beginning, right. I mean, everybody in my space that does what I do, everybody was kind of blindsided by this and the intensity of the restrictions. We knew kind of something was coming out, but the intensity of it really just slapped a lot of people in the face. And the people that are gonna lose are the ones that are gonna sit there and cry about it, and the people that are gonna win are the ones that are gonna be able to pivot and keep going and, you know, figure out some other model. So, kind of same thing with, you know, this downturn that inevitably will happen at some point. But whenever it happens, it happens. And we're going to have to pivot, readjust, and keep it moving.
Aaron: Well, I'm gonna put you on the spot a little bit more about that to the term, you know, using that term pivoting, that you're gonna do that as well. So, let's talk about your three- or five-year plan with the expectations of what has already transpired or what's coming on down the pike for you. What are you looking for? I mean, what do you intend to do over the next, you know, 36 months or five years?
Josh: So, if you asked me this question a few months ago, it would have been to you know scale up the four-unit business, continue to do that, maybe purchase another 7 to 10 this year and grow that pipeline. Now as we're continuing to wrap our head around this, these new regulations, I don't know exactly if that's still gonna be the play. You can check in with me in a month or two. But, you know, if there's gonna be some way around it, some kind of analysis that, you know, comes together where, if we place the units in this way or maybe you have an ADU on top of the fours and that way will be the affordable if that works, whatever the case may be, then obviously, we'll keep trying to grow that business. At the same time, I'm gonna probably start ramping up a little more on the flips, the single-family flips and the ADUs. And, you know, as I grow and hopefully get some help internally, I'll try to free up a little more of my time and maybe start looking at other markets, too, whether it's multifamily syndication in other states or here in LA, and, you know, kind of just be agile and go wherever the river takes me.
Aaron: Wherever that river takes you, get out that kayak. Get a bigger life vest ‘cause, man, it's a, it’s class 5 Rapids.
Josh: I’m grabbing my granola bars and I'm going.
Aaron: Right, exactly. Like, make sure you got, you got ‘em all. So, but let's talk about that 'cause, you know, you jump out with something that really perks my ears up: other states. You know, every investor's dream, right. Like obviously what you wanna do in your own backyard, but the idea that there is money in greener pastures. Have you sourced a few states? Have you, are you looking at others already? Have you flown out anywhere and kinda checked the area?
Josh: Not really. I mean, besides our little El Paso escapade a few years ago years ago.
Aaron: Yeah, that was good.
Josh: You know, I have been spending a little bit of time in Austin. My girlfriend lives there, so, you know, while I'm out there trying to do a little bit of research and talking to agents, meeting with people out there. So, the short answer is no, I haven't really devoted enough time to decide if I'm gonna hone in on a few markets yet. But I mean, definitely gonna go where there are gonna be far less restrictions than California, where it’s developer-friendly, investor-friendly, business-friendly --
Aaron: Private enterprise. Are you, I guess I would ask, are you down on California because of that? I mean, are you, have you felt like this state is just not giving me as a developer what I need to, you know, support you as a business owner or developer or real estate investor? And should they, should California be, you know, better suited to help private enterprise?
Josh: Yes, I definitely feel like the middle child here. I definitely feel I'm not getting any love, and, you know, it's hard. But kind of like I alluded to a few minutes ago, it is what it is and you can't sit there and cry about it. The market doesn't care about your feelings, right, and me writing letters and whining about it and calling whoever is not gonna really change anything. So, I –
Aaron: I like to envision you sitting at your desk writing a letter to your local Councilman. Alright, we're hitting our mark here. We're at about 30 minutes. Josh Gorokhovsky. If you wanna follow him, follow his journey @JoshGorokhovsky on all the social media and @TelosProperties. That's T-E-L-O-S Properties across social media. See what he's up to. And obviously, Spyglass same thing. @SpyglassLending. Catch us across all social media that way. Thank you all for joining us today, and thank you to Josh Gorokhovsky for coming on and letting me grill you here. Anything, any last remarks you wanna say before we sign off.
Josh: No, thank you. I appreciate you having me on. I appreciate all your help and guidance over the years, and I will talk to you very soon.
Aaron: Back at you man. Thanks again. Talk to you.
Josh: Alright, bye.