0:05

Out there on social media, there

0:07

are a lot of get-rich-quick videos. OK,

0:11

I'm going to show you how to make $900 in three hours

0:13

using this stupid easy side hustle. Here's

0:15

a really easy side hustle that even an 11-year-old

0:17

could do. Check this out. And one of

0:20

these types of videos in particular has

0:22

argued that the best way to make money without

0:25

working is by taking advantage

0:27

of a hot housing market and investing

0:30

in real estate. I want to share in this

0:32

video with you some ways that you

0:34

can get started in real estate with no money.

0:37

I'm going to share with you my dirty little secrets to start

0:39

getting rental properties now with

0:41

no money. And I want to tell you exactly

0:44

where you should be looking to buy your first

0:47

rental property.

0:49

In some of these videos, people

0:51

show how successful they've been by flaunting

0:53

their luxury cars and flashy lifestyles.

0:57

Our colleague Will Parker has been watching

0:59

a lot of these videos. And

1:02

they want you to jump

1:04

on board with them, give them some cash

1:06

so they can make you rich like them and

1:09

you can live a fabulous, ostentatious

1:12

lifestyle like they do.

1:15

And do you have to work? Well, no. The

1:18

way it's pitched is that this is a passive investment.

1:22

You just give this guy all this money

1:24

and he makes the investment work and pays you returns

1:27

because he needed your cash in

1:29

order to buy this big apartment complex

1:31

or whatever building. The whole pitch is that

1:34

you don't need to work or worry about it.

1:36

You can make money passively without

1:39

having to manage the day to day. You

1:42

just watch it go up and down and hopefully it

1:44

goes up.

1:46

But now, as the housing market cools,

1:49

these supposed sure thing investments

1:52

are not such a sure thing. And

1:55

one apartment empire shows just

1:57

how quickly it can implode.

2:02

Welcome to The Journal, our show

2:04

about money, business, and power. I'm

2:07

Kate Leimbaugh. It's Tuesday, May

2:09

30th.

2:15

Coming up on the show, the hype

2:18

around real estate investing and

2:20

the story of one of the biggest foreclosures

2:22

in America in over a decade.

2:33

Looking for another great podcast?

2:35

Check out Exchanges, the Goldman Sachs podcast.

2:38

Each week, Exchanges answers your burning questions

2:41

about money, markets, and where the world is heading.

2:43

How high will interest rates go? Will the

2:45

metaverse transform the future? Will

2:47

the European energy crisis impact global

2:50

growth? Goldman Sachs leaders help break

2:52

down the complexity, offering sharp insights

2:54

and perspective to help you navigate the global

2:56

economy. Follow and listen to Exchanges,

2:58

the Goldman Sachs podcast now.

3:07

Those get-rich-quick videos have

3:09

reached a lot of people, including

3:12

one guy in Texas named Jay Gajavalli.

3:15

He immigrated to the U.S. years ago from

3:17

India and built a career in corporate

3:20

IT.

3:21

And at some point within the last decade,

3:23

probably like six or seven years ago,

3:26

he started to

3:28

look for a way out of that nine

3:31

to five office job life.

3:34

And what he found was real estate investing.

3:37

Gajavalli found Brad Sumrock online.

3:40

Sumrock wears sharp suits and drives a Ferrari.

3:44

And in his videos, he tells people

3:46

that they can make money just like he did,

3:49

through real estate deals.

3:59

probably would have been unheard of. You

4:05

join Brad and you join his elite membership programs,

4:10

some of which cost $35,000 a year to join

4:12

and have names like Millionaire

4:15

Multifamily Mastermind. And

4:20

the idea is that he shows you and connects you with

4:22

people who can teach you to do what he

4:24

did.

4:26

And this vision appealed to Gajavelli.

4:29

The term

4:32

for this kind of investing is real estate

4:34

syndication. A

4:36

real estate syndicator is basically

4:39

an investor who goes out and

4:41

he raises money from dozens, sometimes hundreds

4:43

of people, and smaller investments.

4:47

These syndications really took off in

4:49

America's Sun Belt, the south and

4:51

southwestern parts of the country. And

4:54

the properties these syndicators often bought

4:56

were aging apartment complexes.

4:58

There's thousands and thousands

5:00

of these units and many of these buildings

5:03

need some work and haven't had a

5:05

lot of attention paid to them recently.

5:08

And a strategy of buying, specifically

5:10

these sort of neglected, cheaper

5:13

apartment complexes that

5:16

house a really large portion

5:18

of the American working class became

5:21

a really popular investment with

5:23

a lot of real estate groups starting

5:25

in the mid to late 2010s.

5:29

During this time, a lot of Sun

5:31

Belt cities like Atlanta, Dallas

5:33

and Phoenix were booming. People

5:36

were moving there, they needed places to live,

5:38

and the housing market was on fire.

5:42

Syndicator investors saw lots

5:44

of opportunity.

5:45

They would buy these old complexes and spruce

5:48

them up a bit. Put in new kitchen countertops,

5:51

upgrade the washing machines, give them a fresh

5:53

coat of paint, and then they'd

5:55

jack up the rents, often

5:57

by double digits.

5:59

For Gagevele, this kind

6:02

of investing offered him the out

6:04

he was looking for. And

6:06

he was psyched.

6:07

Some people who have met Jay

6:09

or invested with him described him as kind of

6:11

a friendly grandfather type,

6:13

who is somewhat quiet and reserved

6:16

until he starts talking to you about

6:18

real estate and about doing

6:20

deals with him. And he lights up and

6:23

is very cheerful and enthusiastic.

6:27

Bill tried to reach Gagevele, but he

6:29

didn't respond to requests for comment.

6:35

Gagevele dove into real estate investing. And

6:38

from the outset, he was very ambitious.

6:41

He created a company called Apple's Way Investment

6:43

Group, and he started raising millions

6:46

of dollars to buy huge apartment

6:48

complexes.

6:49

One of his strategies to attract investors

6:52

was with his own videos on YouTube.

6:54

Welcome to Fountain's portfolio, a beautiful 400

6:57

unit apartment complex. In

6:59

some of them, he stands at the entrance to

7:01

an apartment complex, wearing a tucked-in

7:04

polo shirt, black jeans, and

7:06

mirrored shades. Let's

7:07

talk about why you want to invest into this property.

7:10

In fact, the property is looking at an amazing location,

7:13

at the busy intersection of highway.

7:15

To attract the investors he needed to raise

7:17

this kind of money, Gagevele promised

7:20

fast, big returns.

7:22

He was pitching that he would be able

7:24

to double or more than double

7:28

people's money by the end of the investment

7:30

period once we jack

7:33

up the rents and sell the property

7:35

again sometime in the next three to five years.

7:38

So that was the plan. Who

7:41

were his investors? There

7:43

were a lot of people that invested with Jay

7:45

that had sort of a similar background. They

7:48

were either Indian immigrants like

7:50

himself or they worked in information

7:52

technology jobs. And

7:55

that was certainly a significant portion

7:57

of his investors.

8:01

He really starts to crank things up

8:04

in 2021, where he's buying

8:07

buildings with hundreds of apartments that

8:09

cost tens of millions of dollars. He's

8:12

buying them on sort of the outskirts

8:14

of Houston wedged between car dealerships

8:19

and cloverleaf exits

8:21

of the interstate that are,

8:23

you know, some of the more lower income housing

8:25

that exists in Houston. And

8:28

that is his focus, is that

8:30

type of property.

8:31

And it worked. Using

8:34

the money he raised and loans, Gagevelli

8:37

acquired several sprawling apartment complexes

8:40

that Apple's Way would manage. By

8:42

early 2022, his company owned more than 7,000 apartments,

8:44

valued at over half a billion dollars.

8:52

Gagevelli had become one of Houston's

8:54

biggest landlords in the span

8:56

of just a few years.

8:58

He was still

9:01

looking to do more. I mean, he wasn't like, I

9:03

made it. I've got this big property empire.

9:06

Now let me take care of it. It was, let's

9:08

keep growing. Let's keep doing this. And

9:10

he's putting more videos on YouTube and looking

9:13

to raise more money, even

9:15

though it's late

9:17

into 2022 and interest rates are so much higher. And

9:20

the real estate market is cooling just about everywhere.

9:22

Jay is still hoping to keep going

9:25

ever upwards.

9:25

But then

9:28

Gagevelli's empire came crashing

9:30

down.

9:33

That's next. My

9:37

mother was very familiar with her neighborhood, but

9:40

one day she stopped at the stop sign and

9:42

she wasn't even really sure where she was at.

9:44

When something feels different, it could be

9:46

Alzheimer's. Now is the time to talk. A

9:48

message from the Alzheimer's Association and

9:50

the Ad Council.

10:00

When did cracks start to show

10:02

in Gajavali's business? At

10:06

one of these apartment complexes in Houston that

10:08

Jay owned, it's called Timber Ridge,

10:11

and dozens of tenants had complained

10:13

about massive rat infestations,

10:17

several feet high piles of uncollected

10:19

trash in the parking lot, mold,

10:22

roaches, abandoned units

10:24

that squatters were living in, crime

10:28

happening at the apartment complex due to

10:30

a lack of security. At one point, the

10:32

mailboxes had been vandalized such

10:34

that no one could receive mail.

10:38

As the owner of the property, Gajavali

10:41

was supposed to take care of the apartments. But

10:44

conditions continued to worsen, and

10:46

tenants complained to the city. Frustrated

10:49

rent payers from the Timber Ridge Apartments on Fleming

10:52

took to City Hall with posters, reiterating

10:55

sentiments about what they called deplorable

10:57

living conditions. The mayor

10:59

of Houston ended up going out there and

11:01

giving a press conference. The situation

11:04

that the people are living in right now is

11:07

deplorable, and

11:09

none of us would want to live in it.

11:12

And,

11:12

you know, it's pretty rare that the mayor of

11:15

one of the largest cities

11:17

in America decides it's worth his time to

11:19

go out and visit like a single

11:21

messed up apartment complex, but that happens

11:24

in this case. It reaches

11:26

that level where the city gets

11:28

involved.

11:29

And what did that mean for Gajavali

11:32

and his business? The

11:34

problem that Jay is facing at this time is

11:37

that his business plan to jack

11:40

up the rents at this place is not working

11:42

because people there, you know, don't

11:45

have more money to pay extra rent, and

11:48

the conditions are so bad that they are leaving or refusing

11:50

to pay, and not much is happening to

11:54

make that situation better.

11:56

And did he ever say why he wasn't

11:58

maintaining the buildings? Most

12:01

of the investors that we talk to don't

12:03

get a lot of information from Jay. They're

12:06

not getting super in-depth updates

12:08

on what's going on with these properties. And many investors

12:11

said they didn't know about this situation

12:13

with the mayor and the

12:16

violations of the property until later.

12:20

Gajavelli didn't respond to Will's questions

12:22

about the Timber Ridge Apartments.

12:27

And then last year, the skyrocketing rents

12:30

and rising property valuations started

12:32

to plateau because the Fed

12:35

raised interest rates to their highest

12:37

level in years. How

12:40

does that affect his business? So

12:44

Jay and his company, like many

12:46

others, financed their

12:49

purchases with floating rate

12:51

loans. A floating

12:53

rate loan means that a borrower starts

12:55

out paying one interest rate, but

12:58

at some point that rate starts

13:00

to fluctuate.

13:03

What did that mean for Gajavelli? At

13:06

this point, he's under way more pressure

13:08

now because in

13:10

some of these loans, what he owes the

13:13

lender is now twice as high

13:16

as what it was when he got started. So

13:19

that wipes out

13:21

whatever rental income he has coming in

13:24

or nearly wipes it out really

13:26

quickly. And then when interest rates

13:28

basically double over the course of the

13:31

next year, then he's really

13:33

sweating it then. And rents are

13:36

not rising like they were either.

13:38

The housing market is cooling a bit. So

13:41

the business plan, I would say by

13:43

the end of last year, is pretty

13:45

close to falling apart.

13:48

And in April, it did. Four

13:51

of Gajavelli's properties with 3,200

13:54

apartments went into foreclosure, including

13:57

Timber Ridge. This

14:00

is definitely one of the biggest

14:03

apartment building foreclosures since

14:05

the financial crisis.

14:07

Nationally. Yeah. Investors

14:11

were sideswiped by the news. You

14:13

know, a lot of investors didn't really know that could happen.

14:16

They didn't know that interest

14:18

rates could wipe

14:20

out your investment, and they feel

14:22

like they weren't being told

14:25

what was really going on. And

14:27

to some extent, they didn't want to

14:29

have to know, right? They expected to just be able to

14:32

sit back and collect cash

14:34

from these apartment buildings.

14:36

And are there any protections for the investors?

14:40

From what we understand talking to securities

14:43

law experts is that it's very,

14:45

very difficult to organize, like

14:47

say a class action or bring claims

14:50

as a group in these syndication

14:52

deals. And for the time being,

14:54

we don't have any direct evidence

14:56

of

14:57

behavior by Jay that would be illegal.

15:00

And, you know, it's a difficult

15:02

legal situation generally.

15:06

Next week, a fifth apples

15:08

way complex in Houston with more than a thousand

15:10

apartments is scheduled to be sold

15:12

at a foreclosure auction.

15:15

Renters will still be able to stay in their apartments

15:17

for now.

15:21

So this is a story about one

15:24

situation that has gone wrong.

15:27

Does it say something

15:29

bigger about the housing market and where

15:33

we're headed? It

15:35

says that the rental housing market, at least parts

15:37

of it, got really overheated by investment

15:40

activity and that rents

15:42

can't just skyrocket forever and

15:44

that you can't just buy every

15:48

lower rent building on the outskirts of every

15:50

American city and expect to be able to boost

15:53

the rents up by 20% every year. And

15:56

there may be thousands of these small investors

15:58

who find that they're going to be able to get their rent. out

16:00

those realities firsthand and lose

16:03

their money. And there's

16:05

been this mantra that had been preached by

16:07

a lot of people in real estate that, you

16:10

know, everyone needs a home. There's so much

16:12

demand. Rent is

16:14

so safe and only goes up. That

16:17

is being tested right now by

16:19

an overheated market.

16:33

That's all for today, Tuesday,

16:35

May 30th. The journal is

16:37

a co-production of Gimlet and The Wall Street Journal.

16:40

Additional reporting in today's episode by

16:42

Conrad Poutzier and Shane Shifflin.

16:48

Thanks for listening. See you tomorrow.