Episode Transcript:  

  You've heard all the controversy surrounding affordable housing, how there's a tremendous need for it, but it never seems to get addressed. We're gonna talk about why that is and why it might be likely to stay on today's episode and more. Let's get REady2Scale.

Hey guys, my name is Jeannette Friedrich. I'm the director of investor Relations here at Blue Lake Capital. Joining me today is Bo Diamond. Bo is the co-founder and managing partner of KS ON Capital Partners, a multifamily investment firm. Previously, he was an adjunct professor of real estate, finance and investments at University of Arkansas.

Prior to that, he was the director at the art companies, which was a value add and opportunistic real estate investing for family offices. He started his career as an investment banker back in the day at Wells Fargo before pivoting into real estate. And a fun fact that we were able to dig up. Bo was actually appointed as a member of the housing crisis task force.

Fayetteville, Arkansas by the city mayor. He served as a member from June, 2024 to July, 2025. He has his master's in finance from Villanova University, as well as his undergrad in architecture and finance from Georgia Institute of Technology, and he's joining us today from Fayetteville. So Bo, welcome to the show.

Hi, Jeanette. How are you? 

I'm great. How are you? 

Thank you very much for having me. 

Yeah. No, really appreciate it. You've got a unique and interesting fact about you here getting to participate in this housing crisis Task force. How did that all come about? 

Northwest. So I'll it, I'll give a little bit of context first.

So I moved to northwest Arkansas from Brooklyn right before the, before COVID. And sometimes people ask me wow that's different. That's quite a change. Is it different? And I say no. I take that, take the four train to the office every day, like the subway and some people are, don't get the joke, don't get like dead hand humor.

But it has been an incredible transition. And but even growth markets that that, seemingly have a lot of land like northwest Arkansas are feeling the crunch. Northwest Arkansas is is a, is an MSA of about 550,000 people. It's been sustaining kind of four to 5%.

Gross population growth per annum over the last 20 years. It's where Walmart is headquartered as well as JB Hunt Transportation and Tyson Foods. And more, more importantly for Fayetteville though, it's where the University of Arkansas is and that the university has grown in has experienced incredible growth and has the student housing need has pinched the housing supply for, the broader.

Population of the city. And that has become a political issue here, like it is in many other parts of the country. And it was a volunteer. I gave you a long answer to a short question. I volunteered. Oh, nice. I volunteered. And among many other people the con the council comprised was comprised of several architects.

The general counsel of a large home builder. Me as a, as an o operator and investor of attainable housing, and then some representatives from the from the renter community as well as as well as activists and, it it was my first foray into municipal politics. I wasn't actually elected or a politician, and so we had, we had the power to make recommendations as you can imagine.

But but ha, happy to get into sort of the experience and how it's helped shape our view of attainable housing needs in the region and throughout the country. 

Yeah, no, I definitely wanna unpack that for sure. Now, just to help everybody understand you are saying attainable housing, is there any differentiator between attainable housing and affordable housing?

Are these interchangeable? How is this all being defined nowadays? 

It's a great question. So we as a firm own and operate attainable housing otherwise known as. Lowercase a affordable housing, which means it is, nothing that we do or none of the assets that we operate or invest in, have any kind of deed restriction or contractual obligation to keep rents at certain of levels.

Usually the industry is the historically divided into, what we colloquially call. A affordable or lowercase, a affordable capital, a affordable being some sort of product that has a legal, contractual, or deed requirement to keep rents at a certain level. They are participants in many different programs, either municipal based programs, low income housing, tax credit programs through the federal government.

They either have a, a broad requirement to keep. Rents or, restriction on increasing rents on an annual basis. Some have a requirement to actually track the income of their of their tenants on a, on a tenant by tenant basis. And then in between. And, but what we operate in is, another synonym for it is naturally occurring affordable housing.

Either B minus or B type. Rental housing, that is when you look at the rents or c plus or that happens to not be restricted when you look at the rents and you apply rules of thumb in terms of what is the, what is the gross rent burden, rent plus utilities as a percentage of.

Gross income of the, of the target tenant base. It is, it, it falls it falls in that level that's affordable for people that make between 80 and 120% of area media income. That's usually, that's our tenant base. We talk about the 80 to one 20 segment that is above what, what.

What HUD considers low income. It's also referred to as workforce housing police officers firefighters some nurses and teachers. A lot of the sort of essential workers of the economy fall in that category. 

Interesting. And what made you decide to take that strategy as opposed to, any other.

So there's a need for it. I, we identified the housing crisis and the fact that the afford affordability is a real problem. It fits very neatly in the thesis of housing broadly as an, as a, as an asset class, right? When you think about. The attraction of investing in housing and something that we feel very passionate about.

I I say I feel very blessed that I've been, given given the opportunity to have custody over people's capital and over people's homes. And, that's a real, that's a, it's a real thing. It's a reason why, why I'm passionate about this business, but the stability of the housing asset class.

Is necessary both in, in, in every segment. Not to state a cliche, but everybody needs a house. And and it's a hard problem to solve. And I think it's one of the reasons why. So many value add investors or would be value add investors, asset class tourists. During the last cycle when capital was easy, got over their skis because they bought class C, C or c plus assets and they thought they could reposition them as they, they were looking at repositioning them against.

Assets that were built in 2016 or 2018, or a relatively new product that's not the right way to look at these assets. You need to understand, you, you have to take a customer first approach to all businesses, right? What is attractive to your customer? What's what are how do you think about your product in terms of product placement, pricing, promotion?

It's just like the normal, back to basic stuff. 

Yeah, absolutely. Now it's hard though, right? Because, as real estate investors, especially as operators, it's our fiduciary responsibility, right? To try to maximize those investment dollars for our investors and get them, as. Strong and healthy of a return, as we possibly can.

And yet at the same time, when you're trying to create that scenario, but also have affordable housing and compassion and really even, I would say a civic sense of responsibility to the communities, that you're operating within and keeping things affordable. It almost seems like they conflict with one another.

Those, goals and those aims I see. 

Sorry, I disagree. Yeah. Great. I disagree to know that those aims contradict each other. We are not. A strictly double bottom line company, right? We are, we are a profit company and we aim to maximize returns for our investors, but we look at investment opportunities through the lens of what is a, an appropriate risk adjusted return.

For the asset that is appropriately priced for our target tenant base. And that is work. Those are workforce members of the workforce that need attainable housing and they're. Taking an asset and trying to over positioning, over position it and trying to raise rents as high as possible.

Like we've seen what happens when when you try to operate like that. Who cares if you're getting $2,000 a month for a one bedroom if your occupancy at 75 that doesn't like what is that, that that's counterproductive for everybody. 

Absolutely. It is, it is nonetheless challenging too, right?

I agree with you. It's not sustainable first and foremost, especially when inflation wage growth being, very stagnant or even potentially, maybe even, lowering down. Cannot keep pace with contemporary rates that we were once capturing for rinse, if something breaks and rinse have to start to soften and we have that correction come into play, which is, good especially for renters. But I, what I'd like to do is I'd like to peel back the layer, the curtain, if you will, and help people understand just how complicated this gets. So I think you being on that task force is a great story to help people see both sides of it. What was it like for you to be surrounded by, activists that really didn't maybe understand the business aspects of, owning and operating assets versus, those that did? And, the, and the politics in between all of that.

How would you describe all of that? 

You also didn't mention the public that came and, yeah. Came during our public comment period every time we met, which was which was a, which was another, eye-opening experience. It is. Really unfortunate. We come from the, I'm a landlord and it's easy to malign landlords.

And we have. To a certain extent become villains in, in the public narrative. 

Yeah. Unfortunately. And 

so that's that's the come from state as me. And like I said, there was a general counsel of a large home builder. And so he, we from the perspective of a sort of le left-leaning college town, municipal government, we were, probably I'm glad we were there because we were in our minds the sort of the voice of reason. And in our humble opinion, the goal was to reduce red tape and increase supply as quickly as possible. The, we did find that the. The municipal politics are ex incredibly complicated.

And this is really something interesting. We can talk broadly about the housing crisis and the origins of the housing crisis, but one of the key, one of the key issues lies at the center of the way that our municipal politics work and the beneficiaries of new housing supply and more affordable housing who benefits from more affordable or new supply.

In in the housing market in a particular municipality, it's people that don't already live in the municipality, right? So it is by definition not the constituents of the politicians that represent those who already live in the municipality. So there's an inherent contradiction and conflict that's embedded in a stated goal of increasing the supply of affordable housing, but also representing.

A constituency of largely homeowners who. May nominally say that they, they, they think affordable housing is a good idea, but is but ultimately when, when the rubber hits the road, are not willing to support it. The, there are, dozens of examples of that.

Yes. The NIMBYs. I, there was a 

particular example on this, on the housing crisis Task force. There was a proposed student housing is a, is a. Sort of almost a third rail in the city of Fayetteville college town because. As you hear politicians talk about it and you hear the public talk about it, they almost don't think that student housing counts as housing.

And what we who understand markets keep saying is, guys, every unit of hous you are gonna have a demand, you're gonna have a certain demand of housing from the students. And oh, by the way, like you're a college town, and so you have a. A symbiotic relationship with the university. Like you guys live and die by each other.

And you want the university to grow because it's great for your town, it's great for the economics of the town. You need student housing because for every student housing unit of student housing that goes unbuilt, that is a unit of market rate housing that gets occupied by a student and then can't also be occupied by maybe a modest income renter.

That is, do, doing whatever. It's another essential worker in the economy. And that break and that lack of understanding that like all markets are inexorably related and they're all impacting each other. It is tougher, is tough. It requires a lot of education. It's tough to get people on board with that framework.

Yeah, no, I'm sure it is. And I'm curious to know, pulling that. Further. When you're looking at the challenges that are surrounding this, there's, multiple angles that come into play. And this is more for maybe the bigger a as opposed to the little A, you could be talking about tax credits, subsidies, loans, all of these different factors.

Where do you think the innovation is needed most? You just said, education, which is very interesting 'cause that's not even a component I had really thought of. But I was looking more at like the capital stack, the approval process or the exit models. Is there somewhere in between all of that you think is also where this conversation starts to fall apart?

It is it's at, it is at every level, first of all. And it varies greatly depending on the constituency, sorry the jurisdiction rather. And the wait. Tax increment financing, any kind of real estate tax subsidies, pilot programs, all of this stuff is great. Unfortunately in, in Arkansas where I live, not a lot of that is actually possible.

I don't need to go into, I put my total policy won hat on. But there are reasons why these things are more difficult to do in this state in particular than they, they are in other areas. There. I think that the key is that people need to start working together more and trusting each other.

Not to sound like a Pollyanna, but the. Developers are not the villain. Landlords are not the villain. Tenant activists are not the villain. Existing neighbors are not the villain. The city council members are not the villain. Architects are not the villain. Like everybody has the same stated goal here, and it is almost.

An emergent property of a complex system that is this chaos that we are, that we're dealing with now, again, some of it has to do with the alignment problem and the fact that constituencies are, like their motivations are misaligned with maybe their stated goals. You asked me about capital stacks and what kind of innovation we we need and those are happening incrementally, right?

The, some of the new programs coming outta the federal government, the idea for middle income housings, tax credits is a great one in various jurisdictions. And New York's always been pretty good at this at points in time. The old 4, 4 21 A program was great. Inclusionary housing requirements to gain zoning and density bonuses.

All of these are good things, but it's all very jurisdiction by jurisdiction. And, there are, there's too much red tape I think in the in, in some of the federal programs. It, it, there we've looked at what is required to do li tech development and it's one of those situations where to be a Li Tech developer, you have to have already done a li tech development.

So how can you have more light tech developers if the requirement is that you've already done one? And I mean that, that's it. That's a chicken and the egg problem that exists Yeah. In a lot of industries. But in this situation, at this particularly poignant a lot of people working on this problem, I have not solved it myself.

Indeed, nor have I, though I have been trying to come up with at least some small efforts that I think might help along the way. But it's a very complex problem and that's why nobody really has the answer, 

I think. And one other thing that I found in in the dialogue with with some of the constituencies and the in, in, within the context of municipal politics.

People need to people don't have enough of a sense of large impacts are made through large impacts, right? We had a lot of people saying why can't you just, make it easy for small scale developers? To, develop on a, on a 0.1 acre lot or something. And I'm like, that's great. That should be part of the solution. But we, you can't say, you can't take the view that the only people we wanna help are the small scale developers to add supply or.

Or to facilitate the development of accessory dwelling units. Granny flats bind existing single family homes like you, you have to open it up to larger projects because it's such a large problem that you need 200 units at a shot, a thousand units at a shot in some markets. Sprinkling a little 16 unit experimental project, unfortunately is not going to, is not gonna move the needle.

Yeah, neither for really the community nor the developer themself. And actually along those lines, let's get into that. So we've got higher interest rate, we've got, construction costs that are definitely on the rise. We've got, a lot of pressure on the workforce and there's a lot of developers that are just frankly sitting on the sidelines now at this point.

From your perspective, what is even worth building right now? Or is it all just too risky? 

I think this gets into the competitive environment and who has a competitive advantage, particularly in their in, in, on the capital side. You have seen recently recent announcements from several large REITs that they're getting back into the business of funding developments.

I think Avalon Bay was pretty, pretty insistent about not in. I don't remember what they said in the most recent quarter, but Q1, they were talking about that in their earnings release REITs have a lower cost of capital than anybody else, and they also have almost an, they have effectively an indefinite hold period.

Right now. The environment's incredibly difficult for merchant builders and people that need to recycle capital and people that have a high cost of capital. So I it, yeah, that's ex, that's challenging. You. You need a, to develop, to do a traditional merchant build development where you're going to build and sell, you need a durable spread between a untreaded yield on cost, on a development deal and market cap rates.

And that just is, at the current point in the market, it's very narrow. Historically, most developers have demanded at least 150 basis points. I think, with the cost of capital of the REITs and their willingness to hold longer, they've said that they're willing to accept something more like 75 to a hundred, and that's why it works for them.

But the, the velocity of institutional capital. In across the risk spectrum is also, come, gives ground to a halt. And so it, some of this is capital markets related, some of it's cost related, some of it's rent related. It'll, our industry is just slow. It's, recoveries are very U-shaped.

They're never v-shaped and everything is cyclical. So we will get back to a point where it pencils to build again. And, but I couldn't tell you whether that's. 12 months from now, 24 months from now, or 48 months from now. 

Yep. Absolutely. Now you work with a lot of value add strategy at your firm, as do we.

And, the name of the game has changed there a lot too. You know what a value add look like. Three, four years ago is not, the, maybe the smartest value add strategy in today's market when you're underwriting deals now. So I'm curious to know, your perspective on that and, maybe some of the types of adjustments that you're making.

And what I mean is, for example, we have found that it just doesn't make sense anymore to go in and do those really heavy value add. Lifts because of the requirement of so much capital to go into it without really the assurance of any type of premium on the backend to really suffice in the ROI that would be needed for that.

So we've scaled our particular value add strategies back a lot to the point that I would almost call them boring. We're talking smart locks, we're talking fenced in yards for dogs. If that's even value add, but this is the reality of where we're at right now, right? And so you have to get creative.

What do you guys. Doing to also address kind of the, we'll call it essentially the evolution of the term value add and how it's definitely shifted. 

Sure. You smart locks are not something that we find any ROI on, so we've never done smart locks in our apartment because when you're talking about attainable housing, like it is quality of life improvement.

Addition additions to the property. So what is number one, two, and three? It's in unit washer dryers. Some of our tenants have never had a washer dryer in their own unit, and that is an actual quality of life enhancement. That, that on a day-to-day basis, people it's got real value.

Not only, not only are people willing to pay for it, but it's got, it really changes. Somebody's quality of life. So that's number one. We're bringing bulk internet to our properties because we can create savings for our tenants through through, through the application of bulk internet.

We can offer gigabit internet at $50 a month where they, if they're buying that out in the marketplace, it's 90 to $100 a month. Even if they're willing to accept a lower speed our, what we're offering is on par from a pricing perspective or slightly less. Yeah.

We want, we're also thinking about interior enhancements that are, that will stand the test of time, right? People talk about granite countertops. Because I can get, in fact, I saw, I think I saw this was, I didn't really buy into this analysis, but I did see a study, I think from one of the larger property management firms that tried to put a actual price on each little value add component, like $15 lift for granite countertops.

$10 lift for stainless steel appliances. I was like, okay. I don't know. Like we, we think about it more holistically than that and what does the product look like relative to the competitive properties? But because that capital cycle right now is because there's not as much capital flowing into the asset class right now, particularly in workforce housing.

We think that the, a lot of the existing stock will not receive enough investment over the next five year. Cycle five to seven year cycle. And so if we're willing to accept a slightly lower return on the individual unit renovations, right? Like historically, people are like, okay, I need to see at, I need to see a five year payback period.

So a 20% yield effectively on the investment on that unit, the actual unit cost allocation, we are willing to take, a 15 and which is a longer payback period than the. Than the life of the asset. But it's going to make the asset look it the com, the competitive positioning of the asset's gonna be more durable relative to the other workforce housing comps, because we don't think they're gonna receive any real level in of investment over the next several years.

Or it's, it's gonna be lighter and so that. We'll start to pay dividends, not, maybe in year one we will get a hundred to $125 rent lift, but we will be able to, be the preferred property for that tenant base over the longer term. 

Yeah. Interesting. Very smart too, really focusing on that, that positioning advantage down the road as part of your whole strategy with, obviously your ION exit there.

Very smart. Now admittedly, and you touched on this we do target different. Tenant demographics we typically focus more on class B or even a minus, core plus. So we, we do have a little bit of a difference, but I'm curious because I was having a fun and interesting conversation with one of my investors earlier this week and.

Sharing with me that with a property that he owned years ago the garbage disposal turned out to be one of the most expensive recurring, just thorns in their side throughout this holding period. And he specialized more on the maintenance side of things. And so he kept, telling, they gotta get rid of this. We gotta get rid of these. So I was curious, as I was hearing you, share this and talking about the quality of life improvement of how significant it can feel to someone to have a washer and dryer in their house. For maybe the very first time, I wondered what your opinion was on the great debate of garbage disposals.

Our tenants would absolutely expect one and probably just. Assume there's a garbage disposal without even double checking it. And maybe not realize until after the fact if there wasn't. But I'm curious to know, the great debate here, are garbage disposals worth it or should we all just chuck 'em?

And and regardless of, class B or C or whatever we're doing if you ever 

lived, if you've ever lived in an apartment in New York, you know that they're not so common. Yeah, that's true. In New York City all of our apartments have cars. S or as the Canadians say, garburator the, I've never heard that term before, but yeah, I, I.

We don't view that as a maintenance issue. And it's a, it's an expectation in most of our markets. But it's not in, in some markets. And that has to do with the infrastructure of the broader sewer system and, all that stuff. 

Yes. But

that's a, that look, I love those debates, right? They're fantastic.

It, the, you the, it's a little tongue in cheek, but there is a real question there. It's. Is, are you also making are you selecting investments that also have not only a top line impact, but a bottom line impact, right? Are there investments that both increase revenue and reduce r and m expenses?

Granted, countertops are a perfect example, right? If you're measuring the ROI on a granite countertop only. Through the increased rent. That's not the full picture because laminate countertops re are, need to be replaced every couple years. They have to be resurfaced.

Granite countertops are, pretty much immune to that. So if you look at the full life cycle of. Of that. Then, there, there's both the top line and the bottom line. Impact, I, similar situation in like low flow fixtures. I had a mowing rep one time.

Tell, tell me that they would provide, like lifetime filters for the faucet. And that was why I should pay three times as much as the, like the bathroom fixtures that I buy. And I was like, I don't know if that, I don't know if that if that argument. I don't think, I don't think I'm gonna go there.

We can't afford name brand fixtures. 

Indeed. Bo this has been very fun and I really appreciate you digging into this conversation with me. For those of you that were listening, sorry that we didn't exactly have a solution to this, but of course no one does. And hopefully it helps everybody understand why it can be more complex.

And then just also the realities of being multifamily owner and operators. And, some of the crazy conversations that we have to have, right? Rather it's about low flow toilets, garbage disposals, what type of value add strategies to put into play. There's so much that goes into understanding how to really be.

An effective owner and operator and a smart investor. I think your conversation today definitely helped enlighten some folks to look at things from different angles, and I appreciated your input. 

Thank you so much for having me, Jeanette. And happy to come back and chat at any time.

Yes. Now, before I let you go though, we have to do what I call the lightning round questions, which is when we put the business aside and have just a little fun. So these are five questions that I ask all of the guests on the show. So are you ready? I am. All right. So when you are not conducting underwriting and financial analysis of affordable little a.

Housing. What do you do for fun? 

Big into gravel cycling. So I do long distance gravel, medium distance, gravel races. And I have young children and they take, they're a full-time job. I've got a five, 5-year-old and an 8-year-old, both girls. And and that's a that's the totality of my life.

Yep. You're busy. Got it. For sure. What is something interesting about you that most people don't know? 

You did say that I have a degree in architecture and most people think that I'm a pure finance person. I, I also play improvisational music. Oh, cool. I'm a here's, I'm a huge deadhead and like that, that is, that's something that not everybody knows about me.

Nice. Very fun. Awesome. All right. And then what about as far as a book or podcast? What would you recommend to listeners that you've either found helpful, insightful, funny, whatever it may be? What's in your these days? 

Oh my gosh. I read a lot. I listen to a lot of Audible and I listen to a lot of podcasts.

My generally one of my favorite podcasts is Odd Lots bloomberg Podcast, which is great. Covers a whole variety of topics. Obviously have to give the shout out to Jay Parsons as well. If you can't be in this industry unless you pay attention to him. Fun book. I just. Finished a week at the beach and I read the brand new book.

I'll give AJ Wolf a shout out the new book called Disney Adults which was absolutely fantastic in insight into a whole different culture of of adults that are obsessed with Disney and the entire Disney ecosystem which I also love. 

Wow. Interesting. Someone even wrote a book about this now.

Huh? Wow. 

I mean there was, I think it was a Rolling Stones article in 2022, that 20 22, 20 23 that said Disney adults are the most hated group on the internet. Which wasn't very nice actually. 

No, that is not very nice. Interesting. Even second to landlord.

Yeah. When they're right. 

Yeah, for sure.

Alright. Now one of the things too, that we'd like to talk about on the show is, yes we all wanna make money and we wanna have good returns, but it, that's not really the point, right? The point is, ideally we wanna build and live extraordinary lives and it's really about, that money being a tool for us to be able to live our lives in ways that are significant and meaningful to us.

So what is your advice for someone that is focused on that goal? 

Look I've, everybody's had their struggles. I've had my, my, my struggles personally professionally I think any find something that is that is, that, you can, something outta work that you can really dedicate yourself to.

There's a really helpful, framework that that is, is called a find a building mastery. Exercise and building mastery doesn't have to be like you, you wanna become like a virtuosic pianist or something like that, but it means something that you can do every day or almost every day that helps you build a skill in a very small, incremental way.

And over time you'll, see a huge difference. I have several. One of 'em is playing the guitar. But it can be going to the gym every day. It can be practicing music. It can be, doing a devotional. It can be, anything like that. But something that, that kind of grounds you like that and allows you to reach a flow state in your mind is critical.

Yeah. Excellent advice. See, you had it in you. Very good. All right, and then last but not least, Bo, if people wanna get in touch with you, how can they find you? 

Either on, you can find us through our website, www.caseoncap.com. Send me an email, B diamond, D-I-A-M-O-N-D, just like the ring@caseoncap.com.

C-A-I-S-S-O-N-C-A p.com. Or you can look up Bo Diamond on LinkedIn. I'm around that. That social media sphere from time to time too, usually making snarky comments that are trying to keep people real. Not just blowing smoke. 

Very good. Very good.

That's important, and we'll be sure to include that in the show notes too. So if anybody needs to catch that one more time, just take a look at the show notes. Awesome. All right, both thank you very much. This was fun. It was stimulating and it was honest, and I appreciate it. 

Thank you so much for having me, Jeanette.

This was great. Great. And happy to chat at any time. 

Yeah, absolutely. For those of you that invested your time with us today, thank you. I appreciate it. Please make sure to leave us some comments, let us know more that you want us to dig into, and in the meantime, be bold, be extraordinary, and keep moving forward.

We'll see you guys on the next episode.

Ready to Scale is brought to you by Blue Lake Capital, where we hunt down the best multifamily investment opportunities that we can find and invite investors to join in with us. We target class B value add multifamily properties across the Sunbelt. Our CEO Ellie Perlman, invest a substantial amount of capital into every deal.

This means our interests are aligned with yours. If you're an accredited investor looking to expand your portfolio and diversify sponsors, be sure to visit us@bluelakecapital.com. Blue Lake Capital, be bold, be extraordinary, and keep moving forward.