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S2 Ep11 Mike Keading on Revolutionizing Real Estate and Tackling the Housing Crisis
41 Plays10 months ago
In this week's episode of Dial It In, we had the pleasure of speaking with Mike Keading, the innovative mind behind Norhart, a Minnesota-based company revolutionizing the residential real estate market. As a $200 million enterprise, Norhart is on a mission to make housing affordable by slashing construction costs, aiming for a 50% reduction in the long run.
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Dial It In Podcast is where we gathered our favorite people together to share their advice on how to drive revenue, through storytelling and without the boring sales jargon. Our primary focus is marketing and sales for manufacturing and B2B service businesses, but we’ll cover topics across the entire spectrum of business. This isn’t a deep, naval-gazing show… we like to have lively chats that are fun, and full of useful insights. Brought to you by BizzyWeb.
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Transcript
Introduction to 'Dial It In' and Hosts
00:00:05
Speaker
Welcome to Dial It In, a podcast where we talk with interesting people about the process improvements and tricks they use to grow their businesses. I'm Dave Meyer, president of BusyWeb, and every week, Trigby Olsen and I are bringing you interviews on how the best in their fields are dialing it in for their organizations.
Meet Mike Keating from Norhart
00:00:23
Speaker
We're back again, Dave. How are you? I'm fantastic. Thanks, Trigby.
00:00:27
Speaker
Awesome. One of the things that I've been seeing a lot in marketing and in the business world right now is kind of one of the buzzwords of building communities in your workforce, building communities in your ecosystem. So I thought we should find an expert and talk a little bit about that.
00:00:51
Speaker
We're blessed to have somebody who's super into and an expert in community building because he's built many and I actually had the privilege of helping him out when he was getting started and he's grown his business to just an amazing extent out then. So our guest today is Mike Keating from Norhart. Norhart is a company based in Minnesota that is a $200 million residential real estate company.
00:01:21
Speaker
that designs, builds, and rents apartments and is committed to solving America's housing affordability crisis by reducing the cost of construction.
Norhart's Mission: Affordable Housing
00:01:32
Speaker
Thanks for joining us, Mike. Yeah, thanks for having me. I'm excited to be here. Now, before we started, I said you weren't very funny, but you're a wonderful guy, so hopefully I'll be able to pull some jokes out of you. Sounds good. I'm game. Well, this is great. It's actually a topic that's pretty near and dear to my heart because my son just moved into his first apartment and he's 20 and got out.
00:01:58
Speaker
And the affordability thing is a very big deal. And we hunted all over the place and found a place right in his school in Uptown. And it's amazing the different amenities and the things that you can do now inside of affordable.
00:02:15
Speaker
apartments and looking through your website, it's very clear that you guys have some pretty interesting and exciting opportunities for people that are looking for affordable places to live in a cool community. So tell us a little bit about what you're doing at Norhart.
00:02:35
Speaker
Yeah. So at a high level, as we talked about, we build these apartments, but really we're focused on driving down the cost of housing. You know, we're achieving about a 20 to 30% reduction typically, but we believe we can get down to about a 50% reduction. But imagine what that means. I mean, someday your rent, your mortgage payment could be half.
00:02:58
Speaker
Now, I think there's an important distinction to make here. You talked about affordable housing. We're not actually affordable housing in the traditional sense. We're a company working to make housing affordable. Why that's important is that affordable housing, the traditional model is you get money from the government, you put it into the project and then you cap the rents as a result of that. Well, that works.
00:03:22
Speaker
But it doesn't work at scale. You can't solve it for everyone. You can't take it not money from the rest of the economy and put it into those properties. It just doesn't mathematically work. The only way you solve housing affordability for everyone is by solving construction costs.
Norhart's Real Estate Projects Overview
00:03:41
Speaker
Amazing. So, Mike, how many different properties does Norhart build and manage?
00:03:49
Speaker
Yeah, we've got a couple dozen, but it's about 1,000 units overall right now, and we're building at about three to 500 units per year. Wow. Three to five, and is that all in Minnesota, or is that- Yeah.
00:04:02
Speaker
Right now we're all in Minnesota, although we do have some manufacturing capabilities off in Wisconsin and we're looking to expand into Texas and start growing a little bit more nationwide. I'd love to see somebody who's growing that extensively. I think one of the things that is really impressive when you look at some of the marketing collateral that you've done for your communities is that
00:04:25
Speaker
They're all very independent, unique, and they all have a particular sense of home to them. You talk about the process of how do you design something that makes people feel comfortable.
00:04:40
Speaker
It's such a great question. It's something that we've been evolving with time. The way we kind of categorize our properties right now are series. So we have a series one, which is sort of a traditional style building. Less amenities, still granted countertops, stainless steel appliances. Then we evolved our thinking to a series two. In a series two, now you've got much higher end amenities. You've got sky lounges, pools, coffee shops, you know, you even have all up to restaurants.
00:05:08
Speaker
And now we've started to evolve and we said, what would a Series 3 property look like? What would that community even look like? And for us, our first answer to that was Norhart Oatdale.
Designing Communities People Love
00:05:21
Speaker
We got really serious about hiring top-end designers and people that think about this deeply to create the kind of community you want to live in.
00:05:29
Speaker
Sonora Oakdale, it feels like Woodbury. Very nice area of the Twin Cities. For people who don't live in the Twin Cities, Oakdale and Woodbury is sort of the first ring supper. Yeah, but a nice up and coming area of the cities. There's a brand new transit line that they're building literally right now that will have a stop right at our front door. The building itself is seven stories tall. The first floor is 22 foot high ceilings.
00:05:57
Speaker
with a restaurant, coffee shop, co-working space. The entire amenity space on that floor is like 300 feet wide. It's 400 feet wide. It's the entire width of the building. Up on third floor, we've got thousands of square feet of amenities, including game rooms, movie rooms, art studios, and much more. Up on fourth floor, we got a spa, sauna, a pool.
00:06:18
Speaker
and this courtyard area in the center. Up on the roof, we have rooftop patio and grill with these penthouse suites that they are 22 foot high as well with views of downtown Minneapolis and St. Paul. It's really reevaluating, rethinking what we can do with apartments to elevate that experience, which seems a little counterintuitive because of the other end is we're also working to reduce the cost. We're trying to push both avenues at once. Think about the iPhone.
00:06:47
Speaker
A few decades ago, computers were clunky, slow, what have you. The dial-up internet was the only way to connect online. But today, you have a supercomputer in your pocket. You get better quality and lower cost. And the way you do that, you solve that, is innovation.
00:07:05
Speaker
When I was a kid, my dad worked for IBM and he once held the record for the biggest deal in the history of IBM.
Luxury vs Affordable: The Market Debate
00:07:21
Speaker
five gigabytes of space. And I can remember going to the ribbon cutting and it was a data center and it was in this very particular glass building that you guys are probably know because you live here in Minneapolis like I do, but it took up three floors of the building.
00:07:48
Speaker
and now I have 50 times that in my pocket at any given time that I pay $500 for. It's amazing how things get smaller and bigger. Okay, so you're building
00:08:04
Speaker
Or would that be considered a luxury apartment or is that still in the realm of affordability? Yeah. So it's a luxury and our prices are current market prices. And I can talk more about that if you like, but we're focused on driving down the cost of construction. Yeah. I mean, I think it'd be good because Dave and I are homeowners and so we don't really know a whole lot about the housing crisis in America right now. So what is an affordable rent these days? So what does that really look like for some
00:08:34
Speaker
Yeah, so the traditional way I describe affordability is sort of the percent of your area median income. Anyway, it's probably around $1,000 per month for a unit. It's maybe the average estimate for affordability. It depends on your income level. It depends upon the area. But the way we think about it,
00:08:55
Speaker
is that we could provide lower rents today.
Solving Nationwide Housing Affordability
00:08:59
Speaker
Because people look on our website and they say, Mike, you've been talking about housing affordability, but your rents are just in line with everyone else. Like, what the heck? What are you doing? Why does that even make sense? And my response is, yes, we could lower our rents today. And if we did that, we would solve housing affordability for a few thousand people. That's great. That's admirable. But it's not the goal.
00:09:25
Speaker
The goal is to reach to a point that we're achieving it for everyone nationwide. How do we solve that? You solve it by building the system that builds apartments. Elon Musk talks about how it's hard to produce a car, but it is 10 to 100 to 1,000 times harder to produce the system that builds that car. We're working on building that system, think factories, think infrastructure, think supply chain.
00:09:53
Speaker
And that takes a lot of capital. So we're taking the profits, putting that system, scaling that system up over the next decade. We're hoping to reach about 192,000 units with a 60,000 unit per year pace. Here's the match.
00:10:08
Speaker
At those sorts of levels, we're now starting to have a meaningful impact on housing supply. And supply and demand factors kick in, with more supply, prices start coming down naturally. And the magic is, it's not just for our own residents, it's for everyone in the communities that we're building.
00:10:33
Speaker
more supply across all of the residents across the community, and then there's more expectations at a better price. All of a sudden, the iPhone just came out, so now Nokia needs to drop keys off of their phone, right? I love that. Exactly. Mike, when we started, you mentioned that you had worked with Trigvia SBDC a little bit to do some marketing. Oh, that was a long time ago.
00:11:01
Speaker
That means that this is a startup and this is something that you formed. And so one of the things in a rapidly growing organization like Norhart is that you have to hire great people. So how did you create the community to do this innovative costs forward kind of a company?
Hiring and Retaining Top Talent
00:11:27
Speaker
Yeah, you know, this taps on the biggest lesson that I've ever learned. And it took me a number of years to learn. In fact, even after I met Trigby for the first time, what we had originally was a good staff, but I would say it was an average staff. And it was really hard to achieve anything extraordinary. It's virtually impossible to do that with an average team. What I've found and what I've learned from people much smarter than me is that you want to hire the very best.
00:11:57
Speaker
When we say the very best, we truly mean that. We fly people in from other states to come work during the week and fly them home on the weekend. Our engineer, our property manager, they're probably literally best in the country at what they do. We have an employee who in 2007, Steve Jobs announces the iPhone.
00:12:18
Speaker
Then Steve Jobs walks off that stage and our employee follows that very presentation on that same stage. It's that kind of caliber of people. Well, most people, most business leaders start thinking, are they saying to me, they say, Mike, that's expensive. Can't afford that. And it's true. It is expensive, but here's what miss most business leaders misunderstand.
00:12:46
Speaker
The best people outperform the average by 2 to 5 to 10 times as much. So if you look at it instead of a cost per person, but instead you look at it at a cost per unit produced, the best people are actually the least expensive.
00:13:06
Speaker
So the people who think they can't afford the best, my response is you can't afford not to. And once you bring out a team like that, it changes the game. There's so much more I could talk about, but that, that's a flavor of what we're trying to do.
00:13:20
Speaker
I love that. That really flips the thinking because if you're in constant cost cutting mode, which a lot of companies are, a lot of shareholder things end up like that where you're focusing on this quarter's performance at the expense of all else, it sounds like you're investing in the long-term future.
00:13:39
Speaker
of your organization as well as the performance. Because if you were hiring a flash in the pan and trying to just get through the quarter, you wouldn't find that person that was at Apple. You would find just some workaday Joe that could crush through some stuff for 15 bucks an hour and throw them a Happy Meal and they're happy. So that's so interesting. And I'm assuming, and I'm sure you're seeing fantastic dividends out of that on a long term basis as well, right? Oh, even short term.
00:14:08
Speaker
You bring on someone amazing and they change your game. They open doors. They make things possible for you that you didn't know were possible. You run into roadblocks and business all the time. When you have amazing people, they burst through those roadblocks. Yeah, I think it's a long-term play and it's a short-term play. Cool. Love it. I think you have this admirable goal of
00:14:34
Speaker
making housing more affordable and it's admirable that you're hiring great people. But I think the third element of that is how do you keep them and how do you create the culture to make people want to buy into that, not just for paycheck, but to go above and beyond.
00:14:54
Speaker
Yeah, we could have a whole podcast just on this one topic. The simple, like if there was one thing to do well to create a great culture is just hire great people, right? Because the people
00:15:07
Speaker
become the culture. Now there's so much more to do beyond that, but that's step one. Now how do you keep those people is one of your questions. And one thing is we often say we have to pay top of market. I never want pay or benefits to be the reason why somebody leaves. And so we actually tell people when they get calls from recruiters, because they do literally all the time at our company,
00:15:27
Speaker
We tell them to take the phone call. Then the reason is multiple fold. One is that we want what's best for them. None of our pay or benefits or all of it vests immediately. They can leave tomorrow with no issue. I want to earn the right for them to be here. And then
00:15:43
Speaker
And once they take that phone call, my next thing is if there's something better, better pay, better benefits, better working conditions, let us know. And we make changes not to just your own pay. We make changes the whole pay scale for everyone that it makes sense for as a result of that new information. So that's, that's one thing, but that still doesn't keep people. That's sort of just a bar or hurdle to hit.
00:16:08
Speaker
See, most people join organizations because of the maybe reputation of the organization because the recruiters sold them on it. Maybe because that pay package was a lot better, but that's not why people leave. People leave because they're interacting with their coworkers and with their manager. Okay. And even with me, the leaders of the organization.
00:16:30
Speaker
And so we're really picky on that, that the people element. So we talked about hiring great people. We have an extraordinarily intense hiring process. I think our acceptance rate is something less, it's like 0.2%. Give you some perspective, Harvard only accepts 4%. And I know the question there is, how do you do that in the world of construction? There's so many people and hard to find people.
00:16:53
Speaker
Yeah, it's such a dearth of available talent. Yeah, exactly. So we ended up hiring 14 recruiters when we only had 100 people employed. And they look for people that aren't looking for jobs, and they actually build out a pipeline well in advance so that we're filtering and bringing in the very best people. So that's a key element of it. The next key element is for many of our positions, not all, but many. There's a trial period. So the first two weeks you're out here,
00:17:21
Speaker
You're being evaluated because we can think we hired the best person, the interview went really well, but they can, I don't know, kind of game the system and come out and be someone different. So at the end of the two weeks, your coworkers will decide if you make it on the team. And those coworkers evaluate you compared to our values, which are stated
00:17:44
Speaker
part of orientation, all up front, they're evaluating that. And then the last step that I'll, one last little nogget I'll throw out there is even if you make it past all of that, we stole this notion of the keeper test from Netflix.
The Keeper Test Philosophy in Employment
00:18:00
Speaker
And the basic idea is as a manager,
00:18:04
Speaker
If your employee worked to quit, how hard would you fight to keep them? If the answer is you would fight tooth and nail to keep them awesome, they're the right person. But if it's anything shy of that, they're not the right person. We need to be helping them.
00:18:21
Speaker
out of the organization. See, most companies know they want the best, most companies know they don't want the worst, but what we're different than most companies is we don't, that most companies are okay with the average, nothing wrong with them, but we just don't want the average, we want just the very, very best.
00:18:39
Speaker
That's a little bit. I totally want to jump on the keeper test because I've heard that before. I think a lot of what employers find in this day and age is that they're finding people who are working just hard enough to not get fired. The concern from the employer standpoint is even though this person isn't ideal and even though this person isn't great, they're at least doing something.
00:19:08
Speaker
There's on the scale of things, there's nothing, there's something, and then there's everything. And yeah, I want everything, but if I get rid of this person who's doing something, I go all the way to them. Yeah. So what would you recommend that person who has that fear and is saddled with that employee who is kind of meh?
00:19:29
Speaker
Yeah, that is why most companies have an average culture. And the average engagement rate of 34% or whatever that is, it's because of the leader's mindset. It's that fear that you just talked about. And so we run into the exact same fear. And for us, our average people are still pretty high caliber. And so it's really tempting to be like, ah.
00:19:55
Speaker
fine it's fine it's fine we're good uh and just to stick with them but
00:20:02
Speaker
Think what I've learned is you just have to be brave. If they're just fine, then you've got to have the conversation with them. This is what I want to see for improvements. If you're not seeing improvements, let them go. I know it's harder initially, but if you have the right infrastructure to hire on gray people behind that, it might take a few months or maybe a few months for a ramp up period. But I have never come out of that decision and said,
00:20:29
Speaker
I'm worse off. I'm always like four months later. I'm like, dude, I am so happy. I made that call. Yes. It was hard. Yes. It was scary. Yes. It was frustrating, but we are in so much better of a spot today as a result. I think as a leader, you just have to remind yourself of that point and have the bravery to do what you know, you know, needs to be done.
00:20:51
Speaker
Well, that's always the trick. You know what needs to be done, but can you have the bravery to do it? What I found is that the older I get and the more people I talk to and the more conversations I have like this, the less culture certainly matters, money certainly matters, but the big underlying factor that is unique to everyone is their own risk tolerance.
00:21:20
Speaker
Mmm, and yeah, are you willing to roll the dice? people processes Money in order to really accomplish something great and a lot of times people fall short because it's it's hard And they talk a good game. Yeah. Yeah. Oh, yeah. I know yeah, I know you do that you achieve greatness and you go for greatness but Greatest also means sometimes taking a step back to move two steps forward
00:21:48
Speaker
Yeah. I've seen many leaders talk about that, but yeah, it comes down. It really, you're right. It comes down to your mindset. Where's your head at?
00:21:56
Speaker
If your head is truly in the realm of, I want to achieve something that will change the world for the better, then you're going to make a subtle, even unconscious kinds of decisions. You know, I ran into a case a few weeks ago where I, or maybe a few months ago, but I, I didn't, my head's mindset was not in the right spot. And an employee came to me and said, Hey, I've got some, one of my employees, they got an offer from another job, you know, what should I do? And I was like, well, yeah, you know what to do. Just make it happen.
00:22:27
Speaker
But in that kind of soft response, that leader then took that as, oh, maybe I need to be more cost focused and not actually raise the wage to keep that person. See, from my perspective, I wasn't, I didn't do anything. I just, I just nodded and let them run.
00:22:46
Speaker
But what I failed because my mindset wasn't right in that moment, I failed at really conveying the importance, the passion, the energy around these principles to give that leader confidence to do what they knew they actually needed to do. So this, this mindset in here really does trickle down to the rest of the organization. You've got to get your mind right before you'll have a successful organization.
00:23:11
Speaker
And just to level set here, you're not managing a team of half a dozen people.
00:23:18
Speaker
How many people work at Norhart? Close to 250. 250 people. Good. Crazy. Yeah. You mentioned failure and you're pretty open about learning about failure. What's your greatest screw up that you've made? That's starting. Oh my gosh. Every year I have a new greatest. What's the current? Then we can talk about your greatest hits.
00:23:44
Speaker
Yeah. Well, maybe I'll dive into one of the most interesting, I think, because early on in my career, so kind of backing up, my dad, my parents actually started this business.
Personal Challenges and Business Growth
00:23:57
Speaker
We lost everything growing up and my dad was even kidnapped in Peru.
00:24:01
Speaker
And we, my parents, we'd be building these small buildings every year. I'd be on site helping build these buildings. And by the time college, you know, it didn't want much to do with the family business because I didn't want people to think it was given to me here. You know, I wrestled with my own ego.
00:24:15
Speaker
But my dad and I kind of hopped in together for a few years because I realized I wanted to make a meaningful impact. I could do it with this business. And so we doubled the size of the company together and then my dad overnight passed away. Oh my gosh.
00:24:35
Speaker
Yeah. And, uh, I was young. I was inexperienced. I didn't know what I was doing. I, I was getting feedback and insight from people like Trig V helping me along. Uh, and, um, yeah, uh, overnight I was CEO of, you know, it was a very small business, but I was still CEO of this small business and I didn't know what I didn't know. I really.
00:24:59
Speaker
I was inexperienced. And so then the next big project, the project I was doing when my dad passed away was a project called Emberwood. And the city knew, they could just tell that I was inexperienced and they weren't going to let anything fly. And they actually shut us down twice. And the second time they shut us down, they looked at me and said, Mike, dude, you're
00:25:23
Speaker
You're inexperienced. You don't know what you're doing. We need you to hire real management. And so I had to go out and find somebody quickly, which is the worst way to do it in like three days so that my crew could actually continue working. Otherwise the city wouldn't let us continue going forward. And so, um, found someone, but it was, it was kind of a nightmare anyway, a few weeks before we were supposed to open.
00:25:48
Speaker
There was this water main thousands of feet long. It was buried 15 feet in the ground. And my contractors, we had a leak. There was a pinhole leak somewhere in this water main. We could tell by the pressure test, but we had no idea where it was.
00:26:04
Speaker
And so, I was out there in my relatively nice clothes, out there with the excavator in the mud, looking for this leak, digging around for weeks, for long, long days. We eventually found the leak and I know just a few days before we're supposed to open. The city comes out and says, Mike, there's no way.
00:26:23
Speaker
There's no way you're not opening this building. I know you got people lined up. They're not moving in. You got to find something else to do with them. We worked like crazy through the nights and the last day the city officials came out for a full or a half day inspection. Half the staff were there. Half the inspectors were there.
00:26:41
Speaker
and we looked at every nook and cranny and at the end of the inspection the head building official came down to the basement with me and said Mike I know we were hard on you in this project but honestly right now this is the best project that we've opened up in this city it was like
00:27:01
Speaker
I am late, but it was years, years of feeling like I was not good enough before getting past that hurdle. But the truth is every stage of our company, we're doing something new and I'm still not good enough. I'm still struggling, right? So I'm always in this feeling of not being good enough, but that's exactly where you want to be in order to grow and to push things forward. Are you hopeful about that with your employees? Yeah.
00:27:26
Speaker
What was that? Are you open about that with your employees? Oh, absolutely. Try and give them a sense of confidence. No. My dad was a college professor and oftentimes he'd teach classes that he didn't know anything about. I'd ask him, how'd you do that? He said, oh, it's easy. You just have to stay one chapter ahead of the class.
00:27:48
Speaker
in business so if you're taking on a new endeavor and you're yeah it's gonna be great we're gonna we're gonna do it are you or do you just like man i don't know let's figure it out yeah so i totally sympathize with the stay one chapter ahead that's that's my entire life but but what i will say is for me at least
00:28:08
Speaker
I want to be fully transparent. I find that being authentic, real, honest with who I am, honest with where I'm at, is actually way more powerful because the right employees, the best kind of people that we work with, they get behind that.
Transparency and Honesty in Leadership
00:28:27
Speaker
And a lot of times leaders often say it's lonely at the top. And I think part of that comes from them wanting to project a certain level of confidence
00:28:37
Speaker
But they don't necessarily feel that internally. And so there's a little bit of a divide between you and your staff as a result. For me, I'm not pessimistic. I'm still positive with the future. But I'm honest about our weaknesses, our mistakes, our failures. If we have a big mistake, I mean, literally within days, there's a full team meeting where everyone gets to hear about exactly what happened.
00:29:00
Speaker
In fact, we do employee engagement surveys, and we get our feedback on those surveys, and we share that with the teams quite openly. And my results, which are typically a hidden thing in this survey, they get to see my results openly and honestly. And last year, we took it a step further, and now we show all of our results on our website. You can read all of the comments, the good, the bad, and the ugly. And trust me, there's plenty of ugly. But the reason I do that is I don't want to be fake good.
00:29:30
Speaker
I want to actually be good. And the first step to actually becoming good is to say, hey, I'm Mike and I have problems, but I'm working on them. And then magic is when you're honest like that,
00:29:42
Speaker
Not only does that help you improve even more, but the people around you give you grace and support and help to gain and build that in yourself. And then they become more humble and willing to take feedback as well. I think that's the only way to really get to a high level of performance.
00:30:04
Speaker
That's really powerful, Mike, and I think as you're talking about building culture and how to be transparent and honest and kind of share, that fosters the ability for people to speak up, especially if you're hiring the right people, you want their input.
00:30:24
Speaker
and their feedback. And it sounds like you have a community or you've built a culture where mistakes are just tolerated, but the risk taking that goes into making a mistake is embraced.
00:30:41
Speaker
celebrated. Yeah, we had someone who made like a million dollar mistake and they came to me a little terrified. I'm basically expecting that this is the end of their job. I had told them, I'm like, dude, I would be crazy to let you go because now you've just learned what causes that million dollar mistake. You were more valuable to me today than you were before that mistake.
00:31:08
Speaker
We talk about that at orientation too. I do all the orientations. We talk about the keeper task. We're very open about it. It said, this is the scariest thing about our company. They say some people are a little afraid of that. They think, well, I'm just walking on eggshells because if you make a mistake, you're just going to fire me. They say, no. How do we decide who to hire and fire? What's our value? Is there anyone under values that talk about making mistakes mean a bad thing?
00:31:35
Speaker
No, it's actually polar the opposite. We want to achieve great things. We want to change this world. And that requires us to try new things. This will result in mistakes. In fact, if you're not making any mistakes, I am concerned because that means you're not really trying. For sure. But how do you set up and kind of looping back a little bit to, I know in
00:32:04
Speaker
big projects like this, you probably are working with funding sources and partners, people that might want to have feedback or input. How do you handle bankers that want to be much more conservative than what you're looking to push forward?
Managing Investor Expectations and Mission Alignment
00:32:23
Speaker
Decreasing the cost of rents in your buildings is probably not chief on that investor's outlook where they're saying,
00:32:33
Speaker
you know, I actually want you to double your rent because then that means more money for me. So how do you handle that balance between more conservative or, you know, cash flow based versus values based conversations?
00:32:47
Speaker
Yeah, that's a great question and something I don't know if we have a perfect answer for I think one well one thing we have done because our costs are so low I don't have any equity investors. I mean that that might change in the future, but it's just my building projects Yeah, yeah, we're a hundred percent owner of all of it. Wow. That's me. Oh Yeah, that's not a small thing. Oh
00:33:10
Speaker
No, not at all. I mean, if you think about it, our traditional costs are 25% less than what the value is. Well, banks are typically willing to lend at 75% of costs.
00:33:21
Speaker
And so, or at least a value, there's some things we have to work out with the banks on that, but generally they're funding most, if not all of each project. And so we don't need equity investors typically as a result of that. Now the world's changed a little bit in the last couple of years because of rising interest rates, but generally that's been the case for us. From a banker's standpoint, as long as all of their key metrics kind of pencil out and the deal makes sense, they're on board.
00:33:48
Speaker
From an investor's standpoint, we have something like our Norhart Invest platform where we've actually taken a little bit of a different approach. It's more like a preferred equity structure where we define the interest or the rates
Introducing Norhart Invest and Its Goals
00:34:02
Speaker
that you get because I am afraid of investors that are just truly on the, they're wanting this 2X return kind of thing because that's kind of not in line with our dream of solving housing affordability.
00:34:15
Speaker
So what we do then is we just outline what your returns will be, come in agreement with that. As long as we're hitting those metrics and providing the returns people want to see, they're happy. Cool. I want to get back to the people element because you and Norhar do something that is, well, it's not wholly unique, but it's certainly unusual. What's your PTO structure like?
00:34:44
Speaker
Yeah, it's unlimited. And so I know that's like in software, that's not uncommon. But in the world of construction, I don't know anyone who has ever done unlimited A-time off for like hourly employees, like low level employees. And yeah, it was a bit terrifying, but it's awesome. And when you have great people, they don't abuse it, right? That's the magic.
00:35:07
Speaker
And what we've learned is we would give as much power, freedom or flexibility as we can to our staff, even down to giving everyone credit, like not quite everyone, but almost anyone who needs it, anyone who asks for it, we'll get a credit card with unlimited spending power, right? Like we don't put any kind of restrictions on that kind of stuff because we find that the best people, we just need to get out of their way rather than putting a bunch of rules and boxes around them.
00:35:32
Speaker
If you had any money if you use those things, I mean I had limited credit card with a spending time I'd be I'd be scoring launches every day probably why I don't have one but Yeah, I mean did you have did that create? Did did some people who would surprise you bubble up to the surface and take three-week vacations or something? Sure so if
00:35:58
Speaker
If someone's taken excessive vacation, it's never really been a problem, but we'll just have a conversation and say, hey, it seems like it's been a little higher than sort of what we see typically. Oh, OK, you had a family death. There's some really legitimate reasons. Not a problem. It's fine. So we haven't seen too much issue there.
00:36:17
Speaker
The credit card is interesting and we haven't had any problem with that. But one of the things I frame it with at orientation is they say, guys, imagine for a moment, it's a hot, awful week. And I know I hired you as an electrician or a plumber or a designer, but today I need you to go out and shovel rocks. Have you ever shovel rocks before? It's terrible. You get like one rock on each shovel. It's like, it's awful.
00:36:43
Speaker
and you're out there in the hot 90, 100 degree weather and a few days in your shovel breaks and you're like swearing my name underneath your breath, you're really just upset. But at least you've got this company credit card, right? So you can go to the home improvement store, you go to the checkout line and you see it, you know, that shovel 6000, the one that control the rocks, super excited about it. Hey, you didn't get to the checkout line. That's when you really see it.
00:37:08
Speaker
the ice cold bottle of Coca-Cola. You think to yourself, dude, Mike is an idiot. This place is crazy. I've earned this. I deserve it. You take the Coca-Cola and you put it on the company credit card. Okay? That's scenario one.
00:37:24
Speaker
Snare number two, same hot, awful week. Your shovel breaks, you go to the store, get a new shovel, get to the checkout line, and you see it. But now you think to yourself, dude, my heme has been struggling. My heme could use a pick me up. My team could benefit from some ice cold Coca-Cola. And so you take the Coca-Cola and you buy it with the company credit card. And I tell everyone, I say, dude, if you're the first person, I don't want you here.
00:37:53
Speaker
But if you're the second person, I love and adore you and I want more of you. See, I can't create enough rules to define those two. But what matters to me is where your heart is at. Is your heart in the right place when making these kinds of decisions? And if it is, you're in a good spot. I think I would fall into category number three, which is I would
00:38:20
Speaker
the sake, oh crap, I broke my shovel. I ruined a company asset. I need to go get a new one. I put it on my own credit card and then pretend it was the same shovel you gave me. Well, I hope nobody in our company is afraid to be open when they did something, but yeah, that could happen.
00:38:38
Speaker
Wow. Okay. So getting back to the housing crisis, what's the next five years
Current Housing Market Trends
00:38:44
Speaker
looks like? I know you're opening the Lux building, which is cool, and I bet it's giving a lot of people the opportunity to flex a little bit more. But I think before I answer that question, where are we as a country going in terms of housing?
00:39:02
Speaker
Yeah, it's really interesting right now because home mortgage rates, I think I saw recently were the highest they've ever been. Own prices are still increasing. And so home ownership affordability is like the worst it's been, I think in 20 or 30 years.
00:39:17
Speaker
That's moving more people into rentals right now. We haven't seen the increases as much in the rental market that we've seen prior years, so that's good news. The scary news, looking out the next couple of years, is the new apartment starts. It's fallen off a cliff. In Minnesota, in the Twin Cities right now, it's fallen by 90%. What do you mean? What's an apartment start?
00:39:44
Speaker
Oh, people starting new apartment projects. So there's projects that are under construction that will be finished up. Those are deliveries, but starts as someone breaking ground doing a new building. And so that's fallen by 90% of the Twin Cities, by 70 to 80% in the rest of the country. And so you pair this own
00:40:05
Speaker
ownership affordability getting worse, more people moving into rent, pair that with no new supply or much less supply of apartments. I see a perfect storm over the next couple of years where apartment prices might climb substantially. And so we're trying to get out ahead of that and to produce more of those units, which is what we're working on.
00:40:26
Speaker
And especially when we're talking about trends, right? So yeah, one of the things that I was reading recently is that the Airbnb trends and all that stuff like on on homes.
00:40:39
Speaker
and vacation properties and things that we're nearing a time of reckoning where the interest rates are probably pushing people where they're not going to really be able to make their money back. That probably doesn't impact you terribly hugely in the apartment space on where you are. I don't know if people can Airbnb out or how that works.
00:41:02
Speaker
Do you see any other big changes coming? It's like the senior affordability problem and the fact that the boomers are all moving out of their homes and they're looking for more affordable or downsize space. What are those big trends that are coming that we should all be cognizant of?
00:41:26
Speaker
Oh, I think the big trend that we're seeing right now is rising interest rates are causing these deals to just not make sense. And so like we said earlier, it's dropped by 90% here in the Twin Cities. And the reason that is is simply because the interest rate is so high, there's no money left over for the equity investors. And so the equity investors aren't interested in those projects anymore and everyone's pulled out. I mean, literally it's a bit of a frenzy right now in the market as a result of that.
00:41:54
Speaker
where we have been positioned pretty well, again, is our costs are lower. So even though now our costs are risen because of the interest rate expense, we can pivot into doing maybe an equity play or some other kind of investment play where other people are going from the equity play into nothing because the numbers just don't work anymore. So that's where it's been beneficial to us. I think long-term trends have been kind of interesting. After 2008, we saw the shift from home ownership into rentals.
00:42:24
Speaker
And I think last time I looked, that shift was going back to homeownership, but now things are so chaotic. We had the COVID, which impacted supply chain, which now supply chain is better, but it's impacting industries, which is impacting construction. It's like this wave that's going through the economy. And it'll be interesting to see how it all pans out over time.
00:42:47
Speaker
There's one other thing that I wanted to talk about that I think really makes Norhart unique and just really fascinating. And that's actually how Mike and I reconnected. So what is Norhart Invest? And Norhart Invest is an investment opportunity that people can put their money into.
00:43:06
Speaker
It offers them high rates of return or much higher than a bank account and you can lock up between six and 24 months and then you get your money back after that time period. Yeah, it's a it is an online account super easy to use and it feels a little bit like a bank account. It's not.
00:43:28
Speaker
Not FDIC insured. Let me be very clear about that. It's an investment, but we offer higher rates of return to compensation for that. Is that something you're using to build buildings or is that a separate project unto itself?
00:43:44
Speaker
Yeah, so we talked about the fact that construction or the interest rates are rising. So if we have $100 million building, our costs might be $75 million. Typically the banks offer $75 million. Now the banks may be only offering $55 million.
00:44:00
Speaker
There's still a pretty healthy profit margin of that entire building. We need to bridge that gap to get us back up to 75 million to cover our construction costs. That's where No Hard Invest comes in, is that's a vehicle that we use to invest in these new projects to fill that bit of a gap.
How Norhart Invest Protects Investors
00:44:17
Speaker
We do have additional protections, I know how to invest itself, where that's a separate entity. Investors put their money into it, but we put our own money, our own capital into it as well. And so if one of our deals, heaven forbid, loses money, the investor does not get hit first. We get hit first and we have to lose the assets that we put into it first before the investor will lose any of their assets.
00:44:44
Speaker
Our goal with No Art Invest is really to protect the investor. Our dream is to bat a thousand so that no one ever even has to think about losing their money. Now, it is an investment. You can lose your money. This is not insured. Very clear in all of that. Make sure to read the disclaimers we have on our website.
00:45:04
Speaker
drawing a line from point A to point S, or I shouldn't say F because that means something different. Point A to point G is you're actually offering the general public the opportunity to help invest in and get returns on building affordable housing.
00:45:26
Speaker
building a much larger community in order to help solve the problem that you're focused on. Exactly. And we with the more expensive route with the SEC, what's called a reggae, but allows us to allow anyone nationwide to invest. But it took us a year. It took us hundreds of thousands of dollars, thousands, I think like a thousand pages of legal documents.
00:45:49
Speaker
We've got to get audited, we've got a background check, just a whole bunch of stuff. In order to protect investors, I think it's actually really good. But we went that route first, people thought I was crazy for doing it, rather than going the easier route of going to institutional investors. But I did that because we'd much rather give the public an opportunity to have access to investments like this that they know they can't. Plus, it's a really powerful way because
00:46:14
Speaker
You can now be invested in helping long-term self-housing affordability and earn a great interest rate on top of that. To me, it's really a win-win. We get the kind of investors that way that are excited about what we're doing. It's been a lot of fun.
00:46:31
Speaker
Well, Mike, this has been great and thank you so much for joining us.
Podcast Conclusion and Further Information
00:46:35
Speaker
And as one of my former counselees from the small business, the SBDC, I wish I could take credit for any of this, but it was neat to see you on the ground floor and see where you are today. So thank you so much for joining us. If people are more interested in Norhart and obviously the investment opportunity I think is really neat, where can people find out more information?
00:46:59
Speaker
Yeah, you can go to our website. It's norhart.com. That's N O R H A R T dot com and click on invest. One other fun thing is we have a show or we have a couple of shows, but one of our podcasts called zero to unicorn. We will look at people who have built businesses or built enterprises that have made a billion dollar and have impact.
00:47:22
Speaker
And our season two is just about to launch. And actually, the first guest of season two is Michael Uslan, who's the original, the executive producer of Batman. And the Lego movie National Treasure, some really incredible franchises. But what's interesting is it took him 10 years of pleading, of pitching, of challenging, of encouraging, of finding the people in order to get Batman off the ground. So it's just really an incredible story.
00:47:52
Speaker
I love the Lego Batman, though. He really bought one with Lego Batman, too, yeah. That's so cool. I love Lego Batman, and I'm a huge Batman guy, so... Awesome, Mike. Thank you so much for joining us. Yeah, thanks for having me.