The Dealmakers’ Edge with A.Y. Strauss

Filling the White Space with Russ Krivor, CEO and Founder of Sovereign Properties

• A.Y. Strauss • Season 1 • Episode 52

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Russ Krivor, CEO and Founder of Sovereign Properties, joins the podcast this episode. They discuss Russ's journey in real estate, the importance of education, navigating entrepreneurship, raising capital, market insights, the future of senior living, and the significance of building relationships in business. Russ shares valuable lessons learned throughout his career and emphasizes the need for innovative solutions in the evolving real estate landscape.

Takeaways

  • Education is crucial for success in business.
  • Entrepreneurship requires timing and recognizing opportunities.
  • Starting small in real estate can lead to significant growth.
  • The current real estate market presents unique investment opportunities.
  • There is a growing demand for senior living solutions.
  • Today's seniors desire quality living environments and services.
  • Managing stress is essential for effective decision-making.
  • Building relationships is key to long-term success.
  • Giving back to the community can open new opportunities.
  • Balancing personal life and career is vital for happiness.


Enjoy the show? Have a guest in mind? Email us at podcast@aystrauss.com to let us know your feedback and who you want to hear on the next episode.

Connect with Aaron and the A.Y. Strauss team:

AY Strauss: Hello, everybody, and Welcome to The Dealmakers’ Edge. Today, we're really excited to be joined by Russ Krivor, CEO and Founder of Sovereign Properties. Based in New York, Sovereign Properties is a real estate investment firm that specializes in acquiring and developing Class A multi-families and select US suburban markets. Russ launched the company in 2017 after spending nearly 15 years spearheading the development of single and multi-family communities nationwide. His real estate journey began in 2004, with the home building company that initially aimed to build five to 10 homes annually, you certainly passed that, Russ. By 2006, they had exceeded this goal nearly ninefold, completing and selling over 270 homes. As home ownership trends shifted in 2008, Russ reoriented the firm towards upscale multi-family developments. Since then, he's developed over 6,500 apartments in high-income, supply-limited areas across the U.S. Russ, I'm very grateful for you taking the time to be here today.

 

Russ Krivor: Aaron, it's wonderful to meet you. One thing I want to add to that generous introduction. We are now becoming sort of a powerhouse in the senior living space, which we're very excited about as well. So in addition to about 1,000 units of new apartments a year, we're aiming to build about 500 to 700 new senior units every year.

 

AY Strauss: Amazing. I know you're always a man on the move, you understand the market trends, you're thoughtful, you're very strategic. What I'd love to do is sort of go back a while because the podcast, while it's geared to a lot of people, it's kind of aimed to people who are up and coming, they're thinking about how to map out the scope of their career. I'm sure you get pinged for coffee all the time. “Russ, give me advice about this and that.” So, it's sort of the proverbial coffee, if you will. 

And what I like to do is sort of go back. You know how you got started. I know you're young to have accomplished all you have, but maybe if you could talk about your earlier years, I know you went to Northwestern, studied economics, sort of right out of college. How do you get that bug right away and how do you truly launch yourself?

 

Russ Krivor: That’s a great question. So I wanna start by just saying how much  I think, how much I value education. I took a leave of absence during college, which I eventually finished university, it took me a few years. There's this big trend saying education is not important, college isn't important, grad school isn't important, go out and make money. I think it's short-sighted and foolish. I think that education is important and you need to focus on usable skills that you can learn during college. 

First of all, make sure that your major is something that is useful. I think personally we don't spend enough time counseling high school kids on what they should focus on. I don't think colleges help kids. Colleges are so busy helping kids open their minds to everything that by your second or third year in college, you need to know what you're interested in and what your goals are. And I think that parents need to tell their kids, “Hey, you've got to make money one day and how would you like to do that?” I think that college is important. If you want to be in business, you need to take accounting classes, economics classes, you need to understand market cycles, the history of market cycles, how to manage debt properly, how to read a balance sheet and an income statement and debits and credits. Those are sort of the bread and butter of the business world. 

And once you get past that, in college, I think you should intern for financial companies or for companies that work along the lines of what you're looking to do. It'll help you learn interactive skills. It'll help you learn to work with a team. It'll help you learn how to be collaborative in meetings, how to speak and read and write professionally, et cetera. I think that you have to look for opportunities. You have to look to solve a problem and you have to see being an entrepreneur is looking at the white space in the world and figuring out how to address that white space.

So, 15 years ago, in my case, that white space was apartments. I saw that after the great financial crisis, a lot of people were being foreclosed on. And so, the apartment development world was a fraction of where it is today. And I saw that home affordability was going to decline and that there were going to be a lot of new renters who had foreclosures on their credit history and there was going to be a space to be filled there in quality suburbs where people could send their kids to good schools. 

So we set out to put a bunch of land under contract where we could build quality apartments for families slightly bigger, more closet space who had been evicted from their homes due to foreclosure. We allowed families who had been evicted from their homes due to foreclosure, but who had strong income to live in our communities, which some people did not at the time. And we filled the white space, we filled the demand, we solved the problem for a lot of families and became very successful as a result. And so, and now we're seeing that same trend into senior housing, right? There's a dearth of senior housing out there. There's not enough of it. And so we're looking to fill that white space.

 

AY Strauss: Amazing. Yeah, every conversation we've had, it's been very analytical and thoughtful. And you see it's art and science combined. But one thing you did which is unique is you got started really young. A lot of people take the track, go try to work for some big institution or some brokerage firm or any other real estate operating business, you just bit the bullet, frankly, as a teenager. I mean, while you were in college, which is also unusual, how was that navigating just the business world? How do you sort of imagine your growth while you're juggling college and also running an active investment business?

 

Russ Krivor: Look, I'll tell you like this. I think it's a different times for everybody. I think that entrepreneurship is a lot like marriage. You take the plunge when, you know, the intersection of opportunity and passion and luck, when those three things come together. And I see some people who go off on their own at 40 and become wildly successful. And some people who go off on their own at 20 and become wildly successful. I think that KFC Chicken, the gentleman, had a recipe in his family that he didn't start peddling until he was maybe 60, and then he pioneered the franchise model. 

So I think that at any point in your career, when you see an opportunity and you see an unaddressed need and a problem that can be solved, there is usually some way that you can make significant money off of it. So we can start with that. The second thing is, I do think it's accretive to go and work at a company of your choice that has a track that you're interested in. So a lot of people ask me, how do I get into commercial real estate? I say to them, go work as a loan broker for a couple of years, you'll learn how to evaluate properties. 

You'll watch the market cycle. You'll see guys get into trouble and you'll learn from their mistakes. You'll make friends and contacts in the equity world, in the debt world. And then when you find a deal that you like, right, you've watched a lot of sponsors struggle, you then can contact some of these same groups and say, "Hey listen, I really like this asset." right, put some of your own money into it, put it under contract, contact, you know, a sponsor that you trust to be a good person, say, “Maybe we can work together on this”, or contact an equity group and say, look, I put this under contract, I'd like to work together with someone, can you put me together with someone who will give me a piece of the deal, or would you be willing to put some money into it, and then see what happens. But if you spend a few years at that brokerage shop, they're going to train you as to how to work and how to think and execute.

 

AY Strauss: Well said. And that also brings me to another segue too. You've bought a lot of wonderful real estate. You continue to, at this point, you're raising funds. But when you started out, you didn't have a fund. I mean, you were just buying individual properties, raising money. How has the world of raising capital evolved for you from the early days till now and what was sort of the natural segue to sort of up your game collectively as you move forward?

 

Russ Krivor: Great question. I think there are many paths to success, but here's what I would say. Find a small niche that needs addressing first. A lot of guys, they'll have this pipe dream, they'll put a huge piece of land under contract, they have a couple hundred thousand bucks, and they'll put, you know, four-million-dollar piece of land under contract hoping by some miracle to find some equity group that'll work with them. It's unlikely that someone will. 

So, the best thing to do is to start small and scale up. If you live in Brooklyn, for example, find some two-family properties in Brooklyn that you can buy and remodel and either rent out or flip. If you live in Philadelphia, find some two-family units that you can buy, rent out, or flip. If you live in Dallas, find some single-family homes that you feel are undervalued, that maybe need a new kitchen and some new bathrooms. Execute that, flip those. You should be able to do that on your own balance sheet. And what I would even say is rent your own home, right? So that you have space when you apply for a bank loan. Buy that home, right? Because the bank will give you a loan to buy one home. But if you already own one or two, then it gets harder, unless you have additional income. Buy a home and instead of living in it, fix it up and flip it, right? And do that a few times. Then you're going to see opportunities come along in larger properties. 

Then you can say, “You know what? There's this lot in the neighborhood. I think I can build five houses on it. Let me buy it”. And then from there, you're gonna say, you know, I think I'm gonna go down the street to this other city, a little suburb nearby. There's a few acres. Let me see if I can get that few acres and build 20 homes there. But you wanna scale up and also because it'll help you that any mistake you make is going to be small to begin with. And so, you'll learn on small manageable mistakes, not huge unmanageable ones. 

Mind your ego, keep it in check. Our business involves leverage. There are bodies buried through hundreds of years in real estate. There are so many famous Jewish families that have had rises and falls, unfortunately. If you don't want to be one of them, you have to limit your leverage, don't get too excited. And remember, when everybody is telling you that the market can't get any better, you've got to be very afraid. And when everyone's telling you things are going to be in the hole forever, that's when there's probably some opportunity out there.

 

AY Strauss: Well, again, you set me up perfectly for a general market question. I mean, you've been pretty aggressive throughout multiple cycles now. Like we talked about, 2008 was a run-up or you're building the multi-side. I know you're raising a fund, you're really focused on senior living, which seems like it's gonna be a great, great methodology or happening to go down, but people are skittish. They're scared today. There's never a good time to buy, but what are you telling yourself and what are you telling investors as you're raising funds and getting people who are skittish or maybe they're not necessarily interested in the market? How are you portraying the value proposition today?

 

Russ Krivor: Great question. Look, I'm not a stock market expert, but I do invest in the S&P 500. I think the S&P 500 is overbought, and I think real estate right now is oversold. What I love about the investment world is that people tend to throw the baby out with the bathwater. The first book I want everybody to read is ‘The Psychology of Money’. It's fantastic. It helps you understand how people, how everybody has their own biases with money and how to approach investments as an entrepreneur and how to protect your money. By the way, interestingly enough, we've been aggressive through cycles, but we also take our foot off the gas. 2006, I sold out of my 300 single family homes, I sold out of the land that I had for more single family homes and I said, "I'm not doing anything else." 

There were 2.2 million housing units under construction in America and only 730,000 households created that year. When I looked at those numbers, I said, "Things are gonna go really badly." So for two years, I didn't quite know what to do. I got lucky and if you look hard enough, there will be an opportunity. FEMA had a rebuilding project in the Gulf after Katrina. So I benefited from that.

 I moved my home-building operation to the Gulf, to the Gulf Coast for about a year. We built a bunch of homes there that kept us afloat until our apartment business kicked in. But I saw that there was going to be no opportunity in the single-family home space. A lot of people will say, "Yeah, but listen, I need to eat, so I'm going to build, and I'm going to sell, and I'm going to..." You're not selling. You don't sell until your home is done and sold. You're taking a reservation from a buyer that can walk away, right. So you have to gauge how likely it is that a buyer walks away. When 2.2 million housing units are under construction in America and only 738,000 households are created, it's very likely that a buyer walks away. It's very likely that the prices drop. 

So we sat on our hands for a bit. It was expensive for me and it was scary and it was unpleasant. But I did it because I didn't want to end up with the short end of the stick. In 2021 and 2022, we sold out nearly all of our inventory. Everything that was ready was out the door at very low cap rates, very high prices. But then we couldn't buy anything. We couldn't build anything for two years. Construction was wildly expensive. I couldn't justify building anything new and new deals were wildly expensive. And I had investment reps from families and pension funds that I'd worked with for the last 10 years pressuring me to get money out the door and I couldn't offer them anything. And we were making three to five offers a month and we were outbid by somebody paying 20 to 25 % more. When that happens, there's a serious problem in the market. So if that happens once a month, then it means that we missed something. When that happens five to seven times a month on almost every property we offer on, it means the market's way overbought. 

We said, okay, you know what? And it was, by the way, painful and expensive. We had to scale back staff. I personally had to carry the company for about two years. But, now land prices have come down by 50%. Commercial real estate prices have come down 20 to 25%. Construction costs have come down to 20 to 25%. And we don't have a whole set of problems that we have to fix now. And we don't have embarrassments and money deployed into things where we're losing property. So now we can focus on new development and we can focus on new projects and taking advantage of opportunity. And some of our investor investment reps that allocated money allocated it to someone else and now they're doing workouts and they're going through all their problems that we told them they would, but their credit committee knows that sovereign didn't deploy money improperly, right? So the next cycle, we're gonna be top of their list. So have discipline, put your foot on the break, and frankly, sometimes go play golf, wait until things resolve, seriously.

 

AY Strauss: I love it, it's great advice. Now let's talk about where you're focused today with the senior living fund. I know people are sensitive, they don't wanna talk about fundraising, the securities issues and whatnot, but maybe we could talk just broadly about why you're focused on senior living in general and the broader opportunity, which is intuitive, but I'd love to hear you explain it.

 

Russ Krivor: We're really excited about the space. Basically, over the next 25 years, there's going to be 30 million more Americans over the age of 65, and they're going to need a lot of unique solutions. A lot of them are aging without adult children to take care of them or without adult children nearby to take care of them. And so we're going to need all kinds of solutions. From everything I've read, we're going to need about a trillion dollars in new senior inventory in order to house all of these people in order to keep the current availability and penetration. Essentially, you've got all of this demand and that's coming, and we're all gonna have to figure out how to manage it. So I think that there's gonna be a lot of opportunity in that space. 

For those of you who are looking for small business ideas, I've heard of companies, where if you buy a single family home in your neighborhood, that's four bedrooms, they will put one home healthcare worker and move four different people in there and pay you significant rent. There are solutions like that where you can partner with them. I think it's a really cool idea. We're too big for something like that. We do deals of 200 units. But starting now, I'd probably look for some of these companies in Philadelphia, New York, et cetera. Buy single-family homes and suburbs and rent them out in partnership with a company like this. 

I think the other piece is I think we're gonna need unique healthcare solutions because the senior living property of yesterday that looks like a hospital and makes you feel like you wanna jump out the window is just not gonna cut it for today's seniors. Baby boomers have been avant-garde their entire lives. They, pioneered the civil rights movement, they headlined the civil rights movement, they saw the advent of the internet, they changed the world. And now they don't want to live in a community that makes them feel like they're on death's door with sick people that serve awful food. They want great food options, they want entertainment, they want fitness, they want to feel like they're living their best life and they should. Especially because it used to be that you'd retire at 60 and die at 65. And now you're retiring at 70 and dying at 95. So, you've got 20 years of white space to figure out what to do with. That means they're gonna do some working, some traveling, a lot of fitness, a lot of activities and they can be useful to society. And we're also figuring out how to do that for them and how to encourage them to do that.

 

AY Strauss: That's incredible. And I think that's definitely a trend. People are living longer, which is wonderful, but we haven't built to account for that and haven't thought through that. So you're always on the cutting edge, my friend. Speaking of edge, we've talked about this a little bit in the past. It's a stressful undertaking to manage a growing business, to take on debt, manage a team, bid on deals. You really have to fight tooth and nail, and it gets very stressful at times. I know you manage stress particularly well, that's something I've always been impressed with, but maybe you could talk a little bit about your personal edge. We call this the dealmaker's edge 'cause we try to get into the headspace of successful entrepreneurs. Some people work out, some people meditate, some people just have a general macro view of the world. Maybe you could walk us through, how you've managed to become the person with the right mentality and mindset to navigate through all of this?

 

Russ Krivor: I think it's three things. I think the first thing is I have the sort of call in the army mentality. A college tutor I once had said to me “Come hell or high water, it's gonna get done.” I think you have to have that mentality. If it means you have to get on a plane and go and figure out how to fix up that property or go and get the right people, you get on a plane and do it. If it means that you need to find creative solutions, basically you have to cut through the jargon, figure out what to do and get it done now and don't leave it for tomorrow. Even if it's hard, even if it seems unlikely, etc. 

Secondly, never panic. I think that entrepreneurship is like a game of Tetris. And you have to stack the blocks properly. And sometimes they're coming at you quickly, and sometimes they're not. But if you panic, you lose. So slow things down. In every instance, I have a process called slow it down. Malcolm Gladwell speaks about this I believe in his book, ‘Blink’. But basically, when you're in a stressful situation, your heart rate speeds up. You're just, you're not as aware. You've got adrenaline pumping, right? So if you get problematic news, if a situation develops, slow it down. First thing you say to yourself is there is a solution waiting in the wings. I've got to find it. Okay, slow it down, go through every possible outcome and solution. Something will present itself. That's the first thing. 

The second thing is I'm a person of faith. I don't believe that any of us can manage this world alone, honestly. I made a deal with God, when I was 14 years old, I read about someone in the newspaper who had done this. He had said that he would take care of those who were less fortunate if he became wealthy. I read this in the paper when I was 14, and I said, I looked up at the sky and I said, God, I want the same deal. You have my word. If I become well to do, I will never forget those less fortunate. I try not to turn down a request for charity. Some people get a little money, some people get a lot, some years are better than others, we all go through that, but I try not to turn down a legitimate request for charity. I try to give and pay it forward. I give more than 10% of my net after tax income to charity. I recommend you all do the same thing. You see miracles in your life, opportunities open up, the path forward opens up. And when things get difficult, don't think you need to stop giving. You don't throw out the engine of your ship just because there's rough seas and it's lighter. To me, that opens the way for God's blessing.

 

AY Strauss: Really well stated.

 

Russ Krivor: And by the way, when you do go through those moments, and you know you've done the right things, that's how you know that a solution will present itself. You have to work the problem. Years ago, I had a grandmother as a math teacher. She'd give me a difficult problem set, and I'd look up and say, “I don't know how to do this.” She said, “'Cause you're not working the problem. You're looking at me and telling me you don't know how to do this instead of looking at the numbers.” Head down, work the problem diligently. A solution will present itself. Open your mind, remember, failure is not fatal and success is not final. If you fail at something, even if it sucks, even if it seems grandiose, there will be an opportunity to pick yourself up. Take the next right step and the next right step. And when you're on top of the world, you have to remember success is never final. It is always rented. It is never owned.

 

AY Strauss: Really well stated. You just nailed it. And by the way, I subscribe exactly to that philosophy. Extremely motivating to hear that. So I really do appreciate that. Let me ask you this. What else did I not ask you that I should have asked you that would be beneficial to share with people that otherwise may break into your calendar for a coffee, for some general advice about entrepreneurship, growing a business?

 

Russ Krivor: What would I have done differently if I could go back 10 years? There's a great article. You will meet 70% of the most important people in your life by the time you're like 30 years old. Focus on your friendships and on your relationships. I wish I understood how important that is in my 20s. I've always approached my relationships and my friendships with just respect and hard work, and I've always invested in people. But I wish I understood the degree to which that really rings true. Because you wanna surround yourself with a community of encouraging, intelligent people, who will support whatever it is you're trying to do. And the best way to get them to support whatever your mission is, is to show up with an attitude of how can I help you? How can I be of service in every situation, in every sales meeting, in every community interaction? How can I be of service? Raise your hand to say, how can I be of service? And when you do that, you form relationships, you become a part of a community, and just good things flow from that naturally. For those of you who are young, primarily men do this, but nowadays some women also do not put off having a family until you think everything is perfect. Because especially in New York City, many of us encounter extraordinary opportunities and success at a young age. Do not get sidetracked, because by the time you're 60 years old, you're gonna have plenty of money, right? And you're gonna look back, it's what's gonna matter to you is playing with your kids, having family dinners, having your parents interact with your children. How many thanksgiving dinners did you have where your kids got to interact with their grandparents at an active age? Men, we can have kids at 60. But do you wanna be getting hip replacements or do you wanna be playing football with your kids. So you've gotta be cognizant of that.

 

AY Strauss: Really well said, Russ. You've had a lot of just, wonderful life messages beyond on entrepreneurship and certainly on real estate as well. So I guess we'll wrap it here. I want to thank you again sincerely for making the time, looking forward to many more great things from you, Russ.

 

Russ Krivor: Likewise. Likewise, Aaron. Thank you so much. Take care. 

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