Skip to content

Cash Flow Champs

Cash Flow Champs Real Estate Podcast

Stefan Tsvetkov is the Founder of RealtyQuant (www.realtyquant.com), a company that brings data-driven and quantitative techniques to the real estate industry. On a mission to add industry value through education, investment, technology, and analytics.

Financial engineer turned multifamily investor, analytics speaker, and live webinar host. He holds a Master’s degree in Financial Engineering from Columbia University, and during his finance career managed ~$90 billion derivatives portfolio jointly with colleagues.

Featured on multiple Podcast and Webinar events including Elevate, Best Ever Real Estate Show, Investing in the U.S. etc. Host of Finance Meets Real Estate webinar series.

What You’re Going to Learn:

  • A Unique Approach and Deep Understanding of Real Estate Investing and Fund Management
  • Stefan’s Approach to Real Estate Investing: Data Analysis, Syndication, and Operations
  • Reliability of Data in Real Estate Investing
  • Making High-Level Data Analysis Accessible for Passive Investors

Listen to or Watch the Full Podcast Here

Click to subscribe or find us on your preferred app to listen daily!

Show Highlights

A Unique Approach and Deep Understanding of Real Estate Investing and Fund Management

A Unique Approach and Deep Understanding of Real Estate Investing and Fund Management

Prashant Kumar- What sets you apart, Stefan, is your deep understanding of both syndicators and passive investors. While many investors only scratch the surface in their underwriting process, you bring a unique approach that adds tremendous value. Could you share with us what specifically you do and how it sets you apart from others in the industry? I’d also love to hear more about your real estate fund.

Stefan Tsvetkov- That’s a great question, thanks, Prashant. So, what they do is engage in data-driven real estate investing. Essentially, this means that they employ a number of strategies to find and analyze real estate investment opportunities. One key strategy is to gather both on-market and off-market data, performing automated underwriting to screen for deals. They also use rental listing data to model and pursue off-market apartment buildings with the most potential. On the market side, they employ statistical regression analysis to determine which markets are likely to appreciate and assess downside risk. Unlike other syndicators, they focus on market value rather than factors like population growth or income growth, which can become problematic as the market cycle shifts. One important tool they use is machine learning, including automated valuation models like Zillow’s estimate, as well as text classification and computer vision to screen deals and assess property conditions. Social media also plays a role, as they pull data from Facebook groups using natural language processing algorithms to identify potential deals.

This data-driven approach is a rigorous one, seeking to automate many of the aspects of real estate investing. It is a different mindset than that of traditional operators, who may be tied to a specific market. Passive investors may find data-driven investing particularly appealing, as it allows for greater flexibility in choosing the right markets. Additionally, data-driven investing can help identify markets that are not overvalued, which is especially useful for passive investors as they may not have the same level of knowledge and expertise as operators.

Prashant Kumar- I would like to better understand how passive investors can receive guidance on evaluating off-market and on-market real estate deals. Is it possible to provide this information in a simplified format or on a portal to make it more accessible and beneficial for investors?

Stefan Tsvetkov- That’s a great question. On the market side, we already have data available on realtyquant.com for around 3,000 US counties, which provides information on whether these areas are over or undervalued. For example, if you look at Tampa, Florida, it may show that it is 43% overvalued. We also provide a forecast for a mild recession decline and a severe recession decline for that particular market valuation level. This data is readily available for anyone to use without needing any particular skills.

Regarding property analytics, they are more geared towards active investors. We provide reports for different cities, such as Indianapolis, where we model inventory, water rental upside, and income and expense upside. Our algorithm uses rental listings data, which is provided by various vendors and aggregated. This provides very useful insights for investors, as they can take advantage of off-market inventories and focus only on the top 20% of buildings in a particular market that have the most potential. Passive investors, on the other hand, can benefit from being a Warren Buffet of real estate investing by purchasing undervalued markets. They have the full freedom to choose deals wherever they want, be it the Midwest, the South, Arizona, or any other location with sponsors in those markets.

Realtyquant.com is a useful resource for passive investors looking for valuable data on the market side.

Stefan's Approach to Real Estate Investing: Data Analysis, Syndication, and Operations

Stefan's Approach to Real Estate Investing: Data Analysis, Syndication, and Operations

Paul Senior- Let me jump in to better understand what you’re doing. You’re conducting high-level data analysis to identify properties that are likely to provide good returns, and then, once you’ve completed your analysis, are you syndicating those properties? Do you act as the operator for these properties, or do you work with operators to make them available for passive investors to invest in? Could you clarify this further in a more direct manner?

Stefan Tsvetkov- I have transitioned from working on residential projects, such as condo conversions, in New York City, to working on commercial multifamily projects, similar to what your team is doing, but with slightly smaller complexes. My current focus is on around 50-unit apartment complexes that have value-add potential, which I offer to investors. I am currently working on my third apartment complex and am always on the lookout for new opportunities to execute more projects. Thus, my current priority is offering these opportunities to investors. Have you considered providing a similar service? I recall that we may have discussed this previously.

Prashant Kumar- Have you considered offering your services as a subscription service to the general public? It seems like you provide excellent value, and the data you have could be extremely beneficial to others. Can you share your thoughts on how people could benefit from this service?

Stefan Tsvetkov- That’s an excellent question. If individuals visit realtyquant.com analytics, they can purchase data for every market in the US. Market reports for various markets are available for purchase. This is the value that I offer to investors who want to syndicate with me. The real value, however, lies at the institutional level. I recently began to speak with the lending industry, which has more interest in which markets are overvalued since they use it for value adjustments. Active investors should get familiar with the data we offer because it is unique and will guide them as they invest during the recession. It is available on our website, and they can follow me on LinkedIn or check out articles on realtyquant.com. Our commercial multifamily lead generation data is also available as a product on our website, which provides information on the top apartment complexes in each city ranked according to which ones show more value add. This approach is different from what Prospect Now or others offer, as we model them. However, I believe that the data we offer is most useful for passive investors as they can greatly benefit from it. They can easily pivot and invest in safer markets during the recession. Active investors can still benefit, but they are still tied to their current markets. Therefore, I think that passive investors should familiarize themselves with the data we offer at realtyquant.com or contact me as it can be a big value for them during the recession.

Reliability of Data in Real Estate Investing

Reliability of Data in Real Estate Investing

Prashant Kumar- I understand your point, Stefan, but one thing I don’t quite grasp is whether the data produced is reliable. Has the data accurately predicted past events? Have the predictions made based on the data been proven to hold true, so that they can be taken at face value? What are your thoughts on this?

Stefan Tsvetkov- Yes, that’s a great question and a very important consideration. It wouldn’t make sense to rely on data that doesn’t have any predictive power. For instance, if the population trends aren’t indicative of any trends in the market cycle, there’s no point in looking at them. It all boils down to the predictive power of the data. Interested individuals can find more information in the articles posted on realtyquant.com.

To determine the best predictor of downside risk, I examined every recession in the past 45 years. I evaluated factors such as foreclosure rates, volatility, risk-adjusted returns, and other price metrics, including the code sharp ratio in finance. Ultimately, I found that the strongest predictor of downside risk was the deviation from fundamentals, which included income, population, and housing supply. Any price deviation from what prices ought to be based on these fundamentals proved to be a reliable predictor of downside risk during the three recessions in the past 40 years that had any significant impact. Using our data at RealtyQuant, a passive investor can achieve almost scientific-like results with a 90% correlation by investing in metro areas using simple deviation from fundamentals. This was evident during the global financial crisis, where markets that were invested ahead of the crisis using this approach had a 90% correlation with our data.

I have developed a method to identify the best predictor of downside risk by analyzing data from every recession in the past 45 years. I looked at foreclosure rates, volatility, risk-adjusted returns, and price metrics to find the leading indicators with the strongest predictive power. I discovered that the deviation from fundamentals – income, population, and housing supply – proved to be the most reliable predictor of downside risk in three of the past 40 years of recession.

Using our data at RealtyQuant.com, we can identify undervalued metro areas that have not declined much and overvalued metro areas that have declined significantly. At the state level, the correlation is around 85%, but it starts declining as you go to smaller geographies like counties, where it’s around 75%. Although it’s harder to predict at the county level, a 75% correlation is still useful for investing, especially for portfolio diversification. The correlation drops further at the zip code level, and it’s difficult to compute for every geography.

In short, predictive power is crucial in investing, and my method has proved to be a reliable indicator of downside risk.

The key takeaway is that picking metro areas based on this data has extremely high predictive power. However, there is currently a unique event happening that was not present during previous recessions – the suburban trend. This trend is similar to the internationalization of labor in the 50s, where outsourcing to China led to job losses and population outflow in certain markets. The suburban trend is having a similar effect, but with high-paying “white core” jobs. As a result, several markets that are undervalued are actually declining. It is important to factor in this trend and track valuation and population outflow when making real estate investment decisions.

However, the suburban trend is a unique event happening now that was not present in previous recessions. It is essentially having the same effect as the internationalization of labor in the 50s, where cheap labor in China led to job outsourcing and population outflow in certain markets. But now, it’s impacting high-paid white-collar jobs, and we’re seeing several markets like San Jose and San Francisco experiencing a significant outflow of their white core high-income earning population. Even though these markets are undervalued compared to fundamentals, their declining fundamentals are crushing. Therefore, it’s important for everyone to look at valuations and track population outflow due to suburban trends. The main value of realty content and the data I brought at the beginning of 2020 was to calibrate it to previous recessions and demonstrate its predictive power.

Prashant Kumar- Stefan, I understand that you possess the raw data and have created it yourself. Please correct me if I’m mistaken. I propose that we assemble a team to develop algorithms and calibration techniques for this data, which can be presented in a commercial format and made available to passive investors, retail investors, hedge funds, or any other interested parties at a larger scale. With your data and our efforts, we can make a powerful impact in the field. I believe there is a high demand for this type of analytics and information among many passive investors and hedge funds. Other sources may exist with similar information, but we can make our product stand out with precision and reliability.

Stefan Tsvetkov- There are indeed other sources of similar information available in the market. It’s an interesting point you’re making, and it’s worth noting who these sources are catering to and where they are situated. For instance, when we look at syndicators and investors, are they aware of the overwhelmed markets? For instance, let’s consider Rod Cliff, who hosts a podcast on losing money following the global financial crisis by investing in 1000 single-family homes in Florida. On the other hand, we have Viney Chopra, who invested in Texas during the same crisis and managed to come out on top. However, it’s not typical for syndicators to utilize market valuation data. While we have a few who do it through our company, it’s not usually their focus. Having said that, similar data is produced by Moody’s Analytics.

There are various versions of this data available at institutions such as Core Wardrich, Bloomberg Economics, and a study at Florida Atlantic University. This data is primarily being used in the lending industry, where institutions like Moody’s use it to make value adjustments. They can then decide not to buy loans in certain states or neighborhoods if they are deemed overvalued. However, the data is not typically utilized by syndicators or investors, although a few do use it through our company.

To answer your question, the institutional level is where it’s done, and it’s now being consumed by the lending industry. I recently spoke to a company that buys portfolios worth around $9 billion, one of the larger players, and found that their usage of it is still relatively limited. They have some metrics for a few markets, but they haven’t delved too deeply yet. However, they are using it, and while hardly any investors are using it, I find it strange that they are not. Even though investors may be geographically focused, they should be aware of it and use it, as I don’t want to invest in something that I know is doomed for the next ten years, only because it’s overvalued by 50%. This is an excellent question. From my perspective, the real future market is in institutions within the lending industry space.

Prashant Kumar- Awesome.

Making High-Level Data Analysis Accessible for Passive Investors

Making High-Level Data Analysis Accessible for Passive Investors

Paul Senior- I was just thinking that what you have at hand is really great. Prashant mentioned it earlier, but we need to find a way to make it accessible to the average person on the street. Perhaps passive investors could use it to identify geographic locations for investment. It seems like a fantastic tool, but how can we make it available to people in a way that’s easy to understand and use, so they can make informed investment decisions?

Stefan Tsvetkov- Passive investors can now easily use it through realtyquant.com. They can receive market valuations, such as if a market is 40% overvalued, and other relevant metrics. It’s a simple way for passive investors to access the information they need. However, it’s more interesting to discuss institutional integrations. Nonetheless, passive investors do have this tool available and actively use it. Active investors also utilize it. Active investors purchase and use our data. However, it’s unlikely that this is where the biggest economic value lies. I think the most significant market for this data is at the institutional level because they have a different perspective and take greater care in their decision-making process. Even though passive investors can diversify, their investment decisions are based on their relationship and trust in their sponsor. They assume that their sponsor has conducted proper due diligence, but sponsors may not have information on this type of data.

Prashant Kumar- This is fantastic information, and passive investors can certainly go to Realtyquant.com to learn more about the data that you provide, which you have talked about multiple times. However, I think that this data could be commercialized and put to greater use at the institutional level. As someone with a finance major from Cornell, you have produced something that is not being utilized enough, in my personal opinion. Perhaps we should discuss offline how we can package and bring this data to the market. In any case, I want to thank you, Stefan, for your time today. Your insights have been incredibly helpful. Passive investors need to understand that there is a lot of valuable information available, and a lot of brainpower has been used to produce markets where they can buy. One could potentially buy the data and use it to conduct their own campaigns and search for properties, thus creating a business out of it. If I were in their shoes, I would buy the data and start calling those properties to buy them like crazy. If you know which markets will be stable and potentially offer value-add opportunities, there is a lot of potential for small- to mid-sized operators looking for anything below 100 units. How can someone reach out to you for more information? What is your contact information?

Stefan Tsvetkov- I agree with your point about passive investors, as my studies have shown that investing in undervalued markets can be very beneficial. However, the only way for them to access this information across multiple markets in the US that I know of is through Realtyquant. Another option is to subscribe to services like Moody’s, which can cost tens of thousands of dollars and may not even provide the same level of data. Passive investors need to choose their sponsors wisely based on their property skills, but also to use our data to filter through the markets and ensure they are not entering a recession. We have already seen markets like Austin, Boise, and Phoenix decline significantly since their peak, and it’s essential to have access to market data to avoid making such mistakes. The best way to reach me is through our website or on LinkedIn, where I go by the name Stefan Tsvetkov.

Paul Senior- Thank you, Stefan, for sharing your insights and breaking down this information in such a clear and helpful way. Your work is truly amazing and I appreciate what you do. Thank you for taking the time to join us on the show today.

Prashant Kumar- Thank you so much.