How to Scale Commercial Real Estate
Remove the guesswork from real estate investing and establish a clear path for consistent returns. Here, building wealth is straightforward and fun.Discover how commercial real estate investors from all over the world got where they are today, how you too can generate truly passive, tax-efficient income, and confidently invest in real estate, even in the face of risks and unknowns.Real estate has made more people wealthy than any other form of investment. However, it can come with a steep learning curve and high risks if you don’t know what you’re doing.If you are a business owner who dabbles in real estate and wants to grow your portfolio or expand your network, you are in the right place.Welcome to How To Scale Commercial Real Estate. On the show, we expose the most important, needle-moving real estate investment strategies, leading you to maximize your returns. This is your friendly guide to getting past the roadblocks of investing in real estate so you can sail smoothly toward creating the financial and time freedom you’ve been wishing for.The best minds in real estate give you the tips and tricks to scale your real estate investment portfolio. Listen to industry professionals as they reveal insider secrets that helped them acquire multimillion-dollar assets in a strategic way.Hear details about the most crucial and painful mistakes they made in real estate so you know what to avoid and how to plan carefully throughout your real estate investing journey.Learn about leverage, real estate metrics that matter, and gain valuable resources, connections, and tips that will shift your mindset toward an immediately more prosperous, passive income-generating path.Discover how investors build high-performing teams and find the best deals and then implement their advice to build your own robust real estate portfolio. Your host, Sam Wilson, is passionate about helping you fully grasp real estate fundamentals and know what to look for in any real estate deal, whether residential, commercial, short-term or syndication. Real estate syndications are group investments in large commercial assets where you can invest your money passively, alongside dozens of others (including Sam!) and earn reliable passive income through distributions and equity. Sam Wilson is an active investor in self-storage, multi-family apartments, RV parks, laundry facilities and single-family homes, bringing vast industry knowledge from a diverse background to the show. Unlike other established real estate investors, Sam is in the middle of his own growth journey. He invites you to rise alongside him and his team members as, with each conversation, he’s learning too! Sam is the Founder of Bricken Investment Group, where he helps clients find commercial real estate syndication investments that align with their investing and lifestyle goals. Likewise, this podcast guides listeners through real estate’s steep learning curve to mitigate the risks. If you want to be a successful real estate investor without necessarily becoming a landlord, you need real estate syndication investments in your life. Growing and diversifying your portfolio and high-worth network boils down to making the right investing decisions and surrounding yourself with a like-minded, growth-pursuing community. It starts right here. Jump into the discussion of How To Scale Commercial Real Estate with Sam Wilson at https://brickeninvestmentgroup.com/podcast/. Together, we'll achieve life-changing growth and invest in commercial real estate assets ripe with strong fundamentals, leading to the financial and time freedom we’ve been dreaming of.
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Exploring the Potential of Credit Trade and Hotel Development in Commercial Real Estate
04/22/2024
Exploring the Potential of Credit Trade and Hotel Development in Commercial Real Estate
Today’s guest is Greg Friedman. Greg has more than 23 years’ hospitality experience with an emphasis on deal-structure and financing. He successfully has led Peachtree in more than $8 Billion in hotel acquisitions, investments and development since co-founding the company. Show summary: In this podcast episode, Greg Friedman shares his insights on the commercial real estate landscape, focusing on the lucrative opportunities in credit trade for financing acquisitions, developments, and recapitalizations. He recounts Peachtree's adept navigation through economic downturns like the Great Financial Crisis and the pandemic, crediting proactive investment strategies. Greg also discusses the hotel industry's potential, driven by favorable supply-demand dynamics. -------------------------------------------------------------- Introduction (00:00:00) Greg Friedman's Background (00:01:07) Influence of Family and Entrepreneurship (00:02:00) Navigating the Great Financial Crisis (00:04:29) Investing During Market Disruption (00:06:39) Hotel Investment Strategies (00:09:23) Opportunities in the Hospitality Space (00:12:11) Investment Risks and Opportunities (00:13:17) Lending and Financing Strategies (00:16:58) Target Audience and Demand Profile (00:18:44) Conclusion and Contact Information (00:20:30) -------------------------------------------------------------- Connect with Greg: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Greg Friedman (00:00:00) - Across all commercial real estate. I think the best opportunity set is on the credit side. The credit trade me hands down, is the most compelling trade today. And if you're doing direct lending, you know where you're financing groups to go out and acquire and develop assets or even recapitalize existing assets. And a lot of cases were, you know, ultimately driving from a standpoint of the investments we're making, we're getting, you know, outcomes that are very similar to what we would be getting if we were investing on the equity side. Intro (00:00:29) - Welcome to the how to Scale commercial real estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:42) - Greg Friedman, thank you for taking the time to come on the show today. I certainly appreciate having you. Come on. Greg Friedman (00:00:48) - Yeah. Thank you Sam. I appreciate the opportunity to be on the show with you today. Sam Wilson (00:00:51) - Absolutely. Greg, as our listeners know, normally I give the guest bio there in the beginning, telling all about the guest and where they come from. Sam Wilson (00:00:58) - But instead, we're going to skip straight to the same question I ask every guest who comes on the show in 90s or less. Can you tell me, where did you start? Where are you now, and how did you get there? Greg Friedman (00:01:07) - Definitely. so, you know, I graduated from University of Texas at Austin back in 1999. I spent, you know, about eight, you know, 8 or 9 years in banking before I started Peachtree going back, you know, to 2007. And, you know, Peachtree, when I originally started it, it was a, you know, small family office that we were focused on going out and acquiring and developing hotel assets. And like all businesses, we've transitioned through the years and we've transitioned into a vertically integrated private equity firm that invests across, you know, all commercial real estate property type. So we invest, you know, still very heavily across the hotel space. But we also have investments across all commercial property types as well as we have investments outside of real estate as well. Greg Friedman (00:01:49) - And then as I mentioned, we're vertically integrated. So we own an operation development lending asset management company, so forth. Sam Wilson (00:01:56) - That is fantastic. Did you grow up in a family of entrepreneurs? Greg Friedman (00:02:00) - You know, I did. So my my grandfather was a huge entrepreneur. He was a doctor by trade. And he, he also owned a bunch of real estate, like any good doctor that lived in a small town in Alabama, because I grew up right outside Tuscaloosa. He was, you know, he was very focused on not only being a doctor. He was an eye doctor. He was also focused on doing everything from owning commercial real estate, you know, to owning a home building business to owning movie theaters. So he was, you know, very entrepreneurial. So he was a huge influence on my life. And he, you know, owned hotel properties. And that was, you know, that's how I sort of got into the business because he owned a business that owned hotels, but also owned a hotel lending business. Greg Friedman (00:02:43) - So I personally grew up around the business before, you know, professionally getting into the, hospitality business on the lending side, when I graduated college. Sam Wilson (00:02:51) - Got it. And so was that. I guess maybe that's the answer, the question that's kind of what gave you the bug early on that said, hey, this is this is kind of the direction we're going to take, but what did you decide to do differently? Maybe, you know, when you launched Peachtree that your family wasn't already involved in. Greg Friedman (00:03:08) - Yeah. So, you know, at this point in time, when I launched Peachtree, my family was pretty much out of the hotel business outside of, you know, some limited investments. So it was, you know, my grandfather, unfortunately, he was, you know, at this point in time, he passed away shortly after I started Peachtree, but didn't have a lot of, you know, he had sold off most of his investments. And same for my mom, who was a big influence as well. Greg Friedman (00:03:29) - But, but really went in and, you know, initially thought I was going to, you know, just focus because I knew the hotel business from a professional perspective that was out there financing, capitalizing hotel projects and have financing capitalized over 300 hotel projects across the US when I was on the banking side, so I wasn't necessarily looking to duplicate what the family business had done. I was trying to really create my own legacy. And, you know, with myself and I had a partner that still is involved in the business today. The two of us both wanted to create our own legacies, to go out, you know, acquire and develop hotel properties. And we had, you know, our own capital that we were investing. So, you know, personally was using my capital along with my partner. And then our family members were investing heavily. So my grandfather, my mom and so forth were big investors. Initially when we went out and acquired developed assets, when we set up a business. Sam Wilson (00:04:20) - Got it. Sam Wilson (00:04:20) - You launched that in 2007. That seems like the prime time to, get heavily into commercial real estate. How did you weather the next 3 or 4 years? Greg Friedman (00:04:29) - Yeah. So we're good at picking timing here. So we picked it in May of 2007 when we formed Peachtree. And and that was probably the absolute peak before the great financial crisis. And so we, you know, so we went out and, you know, made about eight, 8 or 9 investments across the lodging space, in 2007 timeframe where we bought some land parcels that we ended up developing into hotels shortly thereafter, or we bought actual hotel assets. And it was, it was sort of interesting, just as I reflect on it, because, you know, it was probably the best lesson, you know, for us on the business side, because we quickly went from, you know, being able to play offense, meaning we were able to make investments to happen to play, you know, truly play defense because we were going through one of the, you know, worst economic situations of all time. Greg Friedman (00:05:17) - With the great financial crisis that really took hold by the mid part of 2008. And, and we successfully navigated through that environment, not only do we end up producing, you know, decent returns, we, you know, all those investments we made, we actually made positive returns on every investment we made pre, great financial crisis. But we were we were super active. We were, you know, very good about not only playing defense but being able to go out and play offense and buy a lot of distressed debt during the great financial crisis. You know, where we bought over, you know, 50 loans. We bought a lot of hotels that were in distress on the real estate side as well. And we bought, you know, we developed a bunch of hotels from the ground up in the middle of the great financial crisis. So we had a lot of success making new investments as well as playing defense. And, you know, being able to, you know, really optimize and drive the returns across our, you know, our existing investments at that point in time during the great financial crisis. Sam Wilson (00:06:13) - It sounds like you guys were. What? Let's be brave when others are fearful. Like you guys were brave when others were fearful in in this time. What? What did you guys do differently that able you know, that allowed you guys to go out and buy distressed hotel assets and say or distressed debt, whatever it was and say, hey, we're able to do something better than the previous operator has done. Greg Friedman (00:06:39) - Sure. So I think, you know, I think a couple different things. I think it's just part, you know, at this point in time, I think it's part of our DNA, of our organization. And when you look at just the culture here, we're not afraid of chaos. We're not afraid of, you know, operating in tough environments. And we've had a lot of success doing that, obviously through the great financial crisis. And then even through the pandemic, we were one of the most, you know, active buyers of distressed debt. We bought over, you know, 180 loans in 2020 and 2021. Greg Friedman (00:07:06) - In the middle of the pandemic, we bought a bunch of hotel distressed hotel assets, even during the pandemic, as well as, you know, we made a lot of, direct loans to groups that needed rescue capital made over, you know, 29 loans to different groups that needed rescue capital to make it through the pandemic. So I think it's it's one of those components where we're willing to be decisive when the market pulls back, you know, you find a lot of groups, become, you know, very timid when there's a, you know, when there's a chaotic environment, when there's disruption in the marketplace. And we're very proactive in the sense that we, you know, like what we did during the great financial crisis, we were very proactive in asset managing our current investments and really setting those investments up to be successful. And then simultaneously, we were able to, you know, shift our mindset because it's hard to play defense and offense at the same time. And you have to sort of, you know, you have to bifurcate those two strategies. Greg Friedman (00:08:02) - And that's something we did successfully during the GFC. And then as we grew our company because we were much larger, you know, you know, before the pandemic started and we're even larger today than before the pandemic. But, you know, we were able to split our team where we had a certain part of our team focus on playing defense and really optimizing the performance of our existing investments. And then we had another team focused on going out and making new investments in finding and sourcing opportunities. And a lot of cases, what you find in the especially in the hotel industry, there's a lot of inefficiencies from one operator to another. And we've you know, we internalize the operations side going back to 2008 and Peachtree, we did it in order to play defense during the great financial crisis. And having our own internal hotel operation platform has paid dividends for us, not only being able to identify opportunities, but truly being able to outperform, you know, how other operators operate. And unfortunately, when there is disruption in the marketplace, like a pandemic or a great financial crisis, you can quickly see who's good at operating and who's, you know, who's been struggling, but you know, has had the benefit of the, you know, economic conditions before that disruption. Sam Wilson (00:09:13) - What are some telltale things that you guys look for in an operation where you say, man, that would be a great buy because we can implement X and make this so much better. Greg Friedman (00:09:23) - Yeah. So a lot of it is looking at revenue management strategies, like you find that a lot of hotels don't really optimize their actual revenue management strategies, being able to maximize rates that they're charging and simultaneously driving the occupancy. So being able to drive those revenues into the asset, you find that other operators are really good at revenue managing. But when you get these revenues, they just overspend and you know, you want to drive. Great guest experience. And we pride ourselves on being able to do that across our portfolio. But you want to be able to, you know, simultaneously because you're making you know, you're making investments in these assets because you're a for profit enterprise. You know, usually and for us, we're for profit. So we want to make sure we're able to control expenses. And we keep a very tight budget on, on what we're spending on the operations side, but we're doing it at a level where we don't want to impact the guest experience. Greg Friedman (00:10:15) - So being able to balance that out is usually where you can find those opportunity sets. And then, you know, I would say from a more just high level value add strategy that we've been able to implement. When you look at the hundreds and hundreds of, you know, investments we made on the equity side across hotels we've acquired, you know, what you find is a lot of times hotels are undercapitalized from a CapEx perspective. So we'll buy an asset and go in and spend a lot of money to renovate that asset and actually bring it into a level where it can be competitive with the other hotels in its comp set to be able to charge higher rates and be able to drive occupancy. And, you know, other cases, you know, you find that, you know, we're able to, not only, you know, spend money to drive performance from a standpoint of renovating the asset, but change the brand and going from one brand to another brand. There's a lot of value that could be, you know, that could be created by making those brand changes. Greg Friedman (00:11:11) - And we've had a lot of success in doing that, taking something that's maybe unbranded and putting a marriott or Hilton brand into it. So it has a strong reservation system to help drive that performance. Sam Wilson (00:11:22) - No, that's really, really excellent. I love the insight there. And I know probably of all commercial real estate asset classes, I know the least about hotels. So this is this is kind of a fun conversation for me to learn, from you. So. Well, Greg, let me ask you this. Like, where is the opportunity that you guys? In hotels today. I mean, it's something where, you know, the traveler preferences have changed. We've seen a lot of, I think, shift in the in the market. you you mentioned here even before we started hitting record that you saw that there's chaos in commercial real estate. So I'm sure having weathered 2007, you know, been through that, built an enormous company up until now. You guys are constantly reassessing where opportunity lies. So give us kind of the insight on what you think and where you guys are positioning yourselves as it pertains to the hospitality space as a whole. Greg Friedman (00:12:11) - Yeah. So and we we love the hotel space. And we also, you know, we still think there's a lot of opportunities within commercial real estate outside of hotels as well. But across all commercial real estate in general, hands down, the best opportunity set today is not to go out and acquire assets. You know, we think there's a better opportunity set actually on the development side across hotels today, although I think there will be a better opportunity to buy hotels more opportunistically later this year. But we're finding, you know, a better opportunity set if you are investing on the equity side, on the development side versus actually acquiring assets. But going back to my original point, though, across all commercial real estate, I think the best opportunity set is on the credit side. The credit trade me hands down is the most compelling trade today. And if you're doing direct lending, you know where you're financing groups to go out and acquire and develop assets or even recapitalize existing assets. And a lot of cases where, you know, ultimately driving from a standpoint of the investments we're making, we're getting, you know, outcomes that are very similar to what we would be getting if we were investing on the equity side. Greg Friedman (00:13:17) - Yet we're in a, you know, position that you could argue that's protected because we're in a lower leverage position because we're financing 60 to 75% of the, you know, acquisition costs, development costs, you know, the current value of the assets. To recap. So to me, that's the best opportunity set right now, is to invest through credit versus taking on the last dollar risk on the equity side. But if you are going to take on Las or equity risk across hotels, I you know, I believe the, you know, the development side to be super compelling because there's a lot of markets, you know, when you look at hotels in general, you know, supplies down roughly about 30 to 40% from historic averages. So supply is growing at less than 1% a year. That's projected to be the case for the next five years or so. And that's just a, you know, that's a you know, that's really the outcome of what happened during Covid, where supply pipelines were shut down because nobody wanted to build new hotels when no one was traveling. Greg Friedman (00:14:13) - And then all of a sudden we transition as travel started coming back, you know, back in, you know, 2022, we started transitioning into this environment where the credit markets became dislocated. So it became more and more challenging to finance construction or new construction assets. And and that's created that constraint of new supply. And simultaneously, there continues to be robust demand. Drivers like demand continues to grow from where, you know, where we were even last year across our industry. And, you know, we're still expecting over the next five years, demand is going to be, you know, growing at historic levels at 2% or higher per year. So demand's way outpacing supply. And there's a lot of markets that, you know, could support new hotels be built in. That's one reason why we do favor development. The other, you know, just sort of interesting component to hotels compared to other property types. Today, if you wanted to invest across, you know, any property type hotels trade at higher cap rates. Greg Friedman (00:15:08) - And part of the reason, you know, I'm probably a little bit, you know, negative towards equity investments in general right now is I still think we're going...
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How to Get Money for Real Estate Deals Without Relying on Traditional Money Lenders
04/17/2024
How to Get Money for Real Estate Deals Without Relying on Traditional Money Lenders
Today’s guest is Jay Conner. Jay Conner has been buying and selling houses since 2003 in a town of only 40,000 people with profits now averaging $78,000 per deal. He has Rehabbed over 475 houses and been involved in over $118 Million Dollars in Transactions. Show summary: In this episode, Jay Connor discusses the advantages of using private money and private lending over traditional banking methods for real estate investments. He shares his personal success story of raising $2.15 million in private funds within 90 days. Jay also highlights the importance of mastermind groups, building a strong team, and the transition from mobile homes to single-family houses. Additionally, Jay promotes his book "Where to Get the Money Now?" which offers a step-by-step guide to funding real estate deals, and he provides a special offer for listeners to receive an autographed copy. -------------------------------------------------------------- Mastermind Groups (00:00:00) Background and Journey (00:00:45) Transition to Private Money (00:02:22) Deployment of Private Money (00:03:49) Protection for Private Lenders (00:04:38) Applicability to Commercial Real Estate (00:05:59) Building a Strong Team (00:06:52) Automation and Delegation (00:10:03) Efficiency and Growth (00:11:48) Raising Capital Strategies (00:14:31) Raising Private Money (00:16:35) Mindset and Rejection (00:21:40) Book Recommendation (00:22:24) Offer for Listeners (00:22:46) The giveaway (00:22:55) Raising money principles (00:23:39) Thank you and closing (00:23:56) -------------------------------------------------------------- Connect with Jay: Web: Facebook: Linkedin: Free Book: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Jay Conner (00:00:00) - My business started to skyrocket, like overnight when I started joining really good mastermind groups, mastermind groups of where I, fellow like minded individuals are in real estate investing and have been doing it a while. I'm not listening to advice from somebody that hasn't even done their first deal yet, right? I'm listening to advice from fellow mastermind members that are doing 50 plus deals a year. Welcome to the how. Intro (00:00:33) - To Scale Commercial Real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:45) - Jake Connor has been buying and selling houses since 2003, in a town of only 40,000 people, with profits now averaging $78,000 per deal. He has rehabbed over 475 houses and been involved in over $118 million in transactions. Jay, you've been on the show before. It's really great to have you back for round two. Thanks for coming on today, Sam. Jay Conner (00:01:08) - Thanks so much for having me back. Talking about my favorite subject in topic. And that's private money and private lending, because quite frankly, that in and of itself has had more of an impact on our real estate investing business ever since 2003. Sam Wilson (00:01:24) - Absolutely. Jay, I asked this question to every guest that comes on the show, and so I have to ask it for the listeners maybe that didn't hear your first episode in 90s or less. Where did you start? Where are you now? How did you get there? Jay Conner (00:01:40) - So where did I start? I grew up in the housing business with my dad, Wallace Conner, and at one time he was the largest retailer of mobile homes, manufactured housing in the nation. So I grew up, you know, being around a family that was that helps people own a home. So in the early 2000, the consumer financing for that product went away across the nation. And I knew if I ever wanted to, if I ever got out of mobile homes, I wanted to get into single family houses. Now I've done commercial as well. I've done condominium developments and, shopping centers. But my focus has been single family houses. So how did I get to where I am today? Well, I'll tell you. Jay Conner (00:02:22) - In short, from 2003 to 2009, I relied on institutional money and local banks to fund our real estate deals. And in 2009 January 2009, I had a rude awakening. I was on the phone with my banker, and I learned that my line of credit had been closed with no notice. January of 2009 I'd done a ton of deals with my banker, and of course, during that time, they were not loaning out money to real estate investors anymore. So I knew I had to find a better and quicker way to fund my real estate deals. So right after that, I was introduced to this concept of private money private lending, self-directed IRAs. I'd never heard of any of that stuff. And so in less than 90 days, I raised $2,150,000 in private money and lending from individuals through connections that I have and had. And since that time, I've not missed out on a deal for not having the money. Sam Wilson (00:03:27) - That is fantastic. It, $2.15 million in less than 90 days. Yes, you had the context or contacts to do that, but what did you have them invest into? I mean, it's one thing to go out and say, hey, I have, you know, this is the thing we're doing, but where did that money get deployed so rapidly. Jay Conner (00:03:49) - In single family houses? So I had houses under contract to buy and close on before I knew that, you know, that my, my line of credit had been shut down and so but I only needed, $500,000 or so to take those houses down. So the other $1.5 million we started putting to use on other deals that we were negotiating on, you know, over that 90 day period. Sam Wilson (00:04:20) - Got it. One of the things I think, that you've always stressed to your lenders is they are direct investors. Their name is on the they, you know, not just a promissory note, but they hold the deed of trust or I guess, you know, depending on what state you're in, I'm not sure how North Carolina does it or the mortgage. is that still the case today? Jay Conner (00:04:38) - That is the case. Everything that we do with single family houses is what we call one offs. So what do we mean by a one off? Well, a one off is that you've got a private lender, which by the way again we're not talking institutional money. Jay Conner (00:04:51) - These are individuals. These are human beings just like you and me, using their investment capital and or their retirement funds to invest in our deals. And so you have a private lender or maybe a couple of private lenders that are funding a single family house. And as you said, they get the problem. They get the same protection as a bank, right? They get a promissory note, they get the mortgage or the deed of trust here in North Carolina that collateralize that note. So we're not borrowing unsecured funds. They get named as the mortgage on the insurance policy. That's another layer of protection. We name them also as additional insured on the title policy. So we give them the same protection as the bank. So the private lenders are not having any kind of equity position. It's not joint venturing. The private lender acts in the same capacity as the bank. And it is our entity, our company that owns the properties. Right, right. Sam Wilson (00:05:47) - And that makes perfect sense. And for those of you who are listening to this, go and wait, Sam, why are we talking about private lending on single family homes? On the how to scale commercial real estate podcast? It's because the principles are the same. Sam Wilson (00:05:59) - Not only do I think the principles are the same in the in the way that you can utilize this strategy in commercial real estate, because I think, as you mentioned, you may have done that with shopping centers and with other things. but it also could give you something else in your tool belt. Another way to think about how to take down a deal, because there's there's not a one size fits all approach to how we finance and take down assets, even on the commercial. And I think even especially on the commercial real estate side, where you get into some very, very creative financial structures. So this, this may be just one more thing in your, in your toolbox that you can go, oh, here's, here's a way I can plug somebody. And I know that has a lot of capital that maybe could help us get this deal done. So very cool. It sounds to me when you mention all of this, like, you have to have a great team behind you that is able to get all these eyes dotted and t's crossed. Sam Wilson (00:06:52) - Otherwise this becomes an administrative nightmare. Jay Conner (00:06:55) - Absolutely. The team is so important. So who are the team members? Well, first of all, it's my opinion. You're not really in business as a real estate entrepreneur or investor until you have a relationship with an excellent real estate attorney. As a matter of fact, our real estate attorney is right next door down the sidewalk, about ten feet, so that's pretty convenient. I've been with the I've been using the same firm, the same group of people, ever since 2003 when we started. So we got a long history of relationship to Sarah. So the real estate attorney is important. I am not a realtor. I don't want to be a realtor. I want, but my relationship with my realtors are very, very important. My primary realtor that I've been doing business with, it helps me find deals, pulls all my CMA's. For me. Comparative market analysis gives me opinion on value. his name is Chris. We've been together doing this thing ever since 2004, the second year that I started. Jay Conner (00:07:55) - And so the realtor relationship is so important. And then, of course, my team members, I've got a full time acquisition list that's been with us for 18 years. But what in the world is an acquisition? Acquisition negotiates the deals, I make the decisions. you know, based on what I want to offer on properties and etc. and then I've got my project manager. So I got a actually, I have two project managers that oversee, the houses that we're doing on rehabs. So they go out and they estimate the repairs and budgets when we're actually rehabbing a house. And, by the way. As a side note, private money is not just for rehab. Business private money is when the seller of any kind of property requires all the cash. Now, of course, we're familiar with all kinds of creative ways to buy houses and commercial properties and etc.. You know, when you're in the commercial space, of course, self storage and all that kind of stuff. Very popular to have seller financing. Jay Conner (00:08:55) - Take back a note with single family houses. We will, you know, buy houses sometimes, subject to the existing note where the owner agrees to sell us their property and we agree to make the payments on their current mortgage and leave that in place. But at the end of the day, and, Sam, I think you will agree. At the end of the day, particularly in the world of single family houses, most of the time, as in 87% of the time, to be exact, the seller requires all the cash. So having the cash ready to be ready to go is going to allow you to make more offers and not miss out on any more deals. But back to the team. Acquisition is very, very important. And, I have a I have a full time personal assistant that helps, you know, runs my calendar, schedules my appointments and etc. but let me go back to day one. It didn't start out this way. Day one. I mean, Jay Connor was running around with his hair on fire, you know, 60 plus hours a week trying to do everything myself. Jay Conner (00:10:03) - And I learned a very, very important lesson. You cannot scale. You cannot grow if you try to do all this stuff on your own. So I. I set out on a quest after I'd been in this business for about 3 or 4 years to start automating, delegating everything that I can and to only be involved in the activities in the business that I really enjoy. Right. So today, what do I do? Well, I make decisions. It's my job to make sure the marketing machine was motivated. Several leads are coming into the funnel every day, every week. Because I say if you don't have consistent leads coming in all the time, you're not in business. You got a hobby, right? So I make sure the marketing leads are, turned on. And another important part about communicating with my team is the proprietary software that I use, communicating with the entire team as to where we are with any given deal. That's why with the team in place and our software of communicating with each other, regardless of where that deal is in the pipeline, that's how I'm able to run this business in less than ten hours a week. Jay Conner (00:11:16) - Right. Sam Wilson (00:11:17) - And that. Yeah, you you've hit on hit on the, the, the team systems. I mean, that stuff takes time to build. And it goes back to the, Seven Habits of Highly Effective People. I think I'm thinking of, I think. The, the third, what is the third chapter where they talk about, Efficiency is not efficiency, but it's something along those lines where they have the, the, you know, the the matrix where it's urgent, not urgent, important, not important. Sam Wilson (00:11:47) - Oh, right. Right, right. Sam Wilson (00:11:48) - You know what I'm talking about. Where it's like most people spend like 80% of their time in the urgent, important category, which is crisis mode. Jay Conner (00:11:56) - That's right. Sam Wilson (00:11:57) - Where we need to be spending, you know, the inverse 80% of the time in the not urgent, important category in those. Jay Conner (00:12:04) - Well, you know, if you're if you're in the if you're in the reactionary mode, right. versus focusing on growing your company and making it better and putting systems in place, then your company's never going to grow. Jay Conner (00:12:18) - If you're in the reactionary, you know, box. Sam Wilson (00:12:22) - Does building team and system, does that come naturally for you, or is that something you've honed over time? Sam Wilson (00:12:30) - I'm sure I honed that over time. Jay Conner (00:12:33) - I didn't get a college degree on how to build a team and grow system and put systems in place. That'd be a great degree. I tell you, I tell you how all that did come about very early on. And this right here is, is very, very important advice that I would give to any real estate entrepreneur, whether you're brand new or you've been in it for a while. My business started to skyrocket, like overnight when I started joining really good mastermind groups. Mastermind groups of where, fellow like minded individuals are in real estate investing and have been doing it a while. I'm not listening to advice from somebody that hasn't even done their first deal yet, right? I'm listening to advice from fellow mastermind members that are doing 50 plus deals a year, so I can't recommend that strong enough to get involved in a group to where you can really learn from and contribute to your fellow mastermind members. Sam Wilson (00:13:39) - Right? No, that's really, really powerful. I like that. So we've talked a bit about team. You know, I like the idea. We talked about this a little bit off air. I like the idea of debt. And this is just again, you know, full disclosure here on my own show, which is that I don't love I don't love raising capital. It's not something that comes to me. And I'm like, man, like you said, you know, find team members that love doing this. Not that's not what I love doing. just because of the amount of work that goes along with it. One, you're now married to that investor for 5 to 8 years, potentially answering questions, fielding emails, responding back. I'm not an amazing communicator, Jay. It's not something, again, like, you know, outside of the podcast, it, you know, my wife handles all outbound family communications. Like, I don't know if you want to hear if you want to know something from our family. Sam Wilson (00:14:31) - I talked to my wife, because I'm just going to do, like. That's where I specialize is doing. And I found that one of the shifts that we've made strategically is that we take on a lot more debt. It's short term debt now, similar to a private lender. And in fact, it is private lending on on a lot of deals where it's debt as opposed to raising equity. And I found that to be really powerful one, because it ticks all the boxes for me personally, where I now no longer am and beholden is too strong of a word, but I'm no longer responsible. I will say to those people that gave me the money, because there's great responsibility when you have equity investors, and as long as I'm making those payments back to those lenders on time, they don't give a rip what I do in my day in and day out. And so it alleviates that communication, you know, kind of kind of hang up that I have. So I don't know, what are your thoughts on that when you when you hear that? I mean, for me, it's it's just a strategy we, we're employing more and more and I'm really enjoying it. Jay Conner (00:15:26) - Yeah. Well, let me comment on. What's what are the activities that we do to raise private money. So. So I've got two comments or two thoughts. Number one, as far as an activity goes or a way to raise private money as far as having an event, the only events I've done are what I call private land or luncheons or private lender events to where I will invite a group of people, you know, to a luncheon, and I'll teach the private lending program that I've put together that gives our investors high rates of return safely and securely. And so I'll just teach the I'll teach the opportunity. You know, since I started doing this, I've never asked anybody for money. And they say, J how did how do you have, you know, right. At $10 million, now that you've raised a private money without asking anybody for money, it's real simple. I put on this hat that's called my teacher hat. So this is my private money teacher hat. And I just teach people how. Jay Conner (00:16:35) - So, you see, the traditional way of borrowing money is you go to the bank or the institutional lender, and you get on your hands and knees and you say, please fund my deal, right? It's you're begging, right? And this world, I'm not asking for a mortgage. Excuse me, I'm getting interrupted here on my screen. I'm not asking for a mortgage. I'm offering a mortgage. Right. So. So as far as activities, I mean, I've raised $969,000 at just one private lender luncheon, and I wasn't pitching any deals. There's no there were no deals at at that luncheon. It was the program. So they tell me what they want to do and how much they got to work with. And then I call them up with the good news phone call. Well, what in the world is the good news phone call? Well, Sam, let's say you're one of my private lenders, and you've told me you got $150,000 to invest. And let's say I got a house with an after repair value of 200,000 over in Newport. Jay Conner (00:17:34) - So I pick up the phone. Believe it or not, we still have handsets here in North Carolina with cords attached to them. But anyway, I pick up the phone and I call up Sam and you and I have a little chit chat. And then here is the script. Here's the script. Let's hear it on the good news phone call. I say, Sam,...
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From Medicine to Money: Dr. Joseph Ryan's Journey into Commercial Real Estate
04/08/2024
From Medicine to Money: Dr. Joseph Ryan's Journey into Commercial Real Estate
Today’s guest is Ryan Smolarz. Dr. Joseph Ryan Smolarz is the founder of STOR, leveraging his experience as an entrepreneur and Otolaryngology practitioner to guide people toward financial sovereignty. Show summary: In this podcast episode, Dr. Joseph Ryan, a former otolaryngologist and founder of Store Partners, shares his transition from medicine to commercial real estate, focusing on self-storage facilities. He highlights the importance of team building, relationship-driven negotiations, and ethical business practices. Dr. Ryan also discusses his podcast, "Medicine and Money Show," and invites listeners to connect with him for educational discussions on investing. -------------------------------------------------------------- Building Successful Teams (00:00:00) Introduction to the Show (00:00:31) Dr. Joseph Ryan's Background (00:00:44) Transition to Real Estate (00:01:10) MBA and Transition to Real Estate (00:02:08) Challenges and Enlightenment from Higher Education (00:04:27) Transition to Self-Storage Focus (00:09:42) Staying in Self-Storage Lane (00:11:41) Decision-Making and Deal Selection (00:11:47) Managing Capital and Acquisitions (00:13:57) Challenges in Business Growth (00:15:51) Remote Operations and Team Building (00:19:51) Finding Deals and Relationship Building (00:20:59) Building Rapport and Deal Cycles (00:23:26) Conversation with Potential Investors (00:25:03) Conclusion and Call to Action (00:26:19) -------------------------------------------------------------- Connect with Ryan: Web: Linkedin: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: *Ryan Smolarz * (00:00:00) - Where I think the, you know, the Alpha lies in building the teams. we have a big focus on that. And, trying to find people who were who were all rowing in the same direction with. I find that super important. you know, the when you know, you have a good team, when one person on the team doesn't like the decision, but everybody else does, and they are rowing even faster in the same direction that everybody else is. Intro (00:00:31) - Welcome to the how to Scale Commercial real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:44) - Doctor Joseph Ryan is the founder of store. That's. That's spelled excuse me store. He leverages his experience as an entrepreneur and otolaryngology practitioner to guide people toward financial sovereignty. Ryan, welcome to the show. *Ryan Smolarz * (00:00:59) - Hey, thanks for having me. Sam, this is going to be great. Sam Wilson (00:01:02) - Absolutely. The pleasure's mine. Ryan. There are three questions I ask every guest who comes on the show in 90s or less. Sam Wilson (00:01:07) - Can you tell me where did you start? Where are you now? And how did you get there? *Ryan Smolarz * (00:01:10) - I started in 2017. I realized that, going from room to room as a doctor wasn't going to allow me to retire. And, once I decided that I ended up in a month, I was sitting at a desk in the in an MBA program in Miami. And, so we decided to get into commercial real estate. We, built a assisted living home and started an e-commerce company. Like a lot of people kind of, diversified out. And now we're sort of the diverse offering, if that's a word I'm not even sure, down into more of a focus. And, self storage is certainly one of those. And, where we're going, we want to do right by our investors, raise capital and buy, self storage facilities and, you know, do the best we can for, for our people, our investors, the people who believe in us and treat us well. Sam Wilson (00:02:07) - Got it. Sam Wilson (00:02:08) - Now, you're you're an EMT and you decide that you want to do. You said going room to room as a doctor isn't really going to lead us to where we want. So you went to get your MBA? Yeah. It sounds like more education. I mean, you're already super highly educated. So what what was the kind of thinking there or thought process there? And how did you get how did getting an MBA lead you to real estate? *Ryan Smolarz * (00:02:29) - Yeah. So, when I was what happened was, I woke up one morning and decided I wanted to go on a surf trip, and I had no idea how to get into my bank account to see if I had enough money. I didn't even know what bank we banked at. So my wife took care of all of that. and so I realized that, you know what? Maybe, money is not fun tickets. And I should probably take it a little more seriously. Right? So doing the things that I do, I sort of take it to the extreme. *Ryan Smolarz * (00:03:06) - And I was like, well, if I'm going to do this, I'm going to go all the way. So let's learn how to do business and the whole bit. And so, yeah, the next month I was in that MBA program and, kind of spiraled from there. you know, I realized that I really liked it. And in that moment, I became, an investor instead of a consumer. And I can tell you that that was one of the most powerful things that's ever happened to me. or, you know, my children's birth and and raising them and my wife and the relationships, but just the outlook on life. my thought process sort of switch from thinking about, you know, watches or cars or whatever it was to solving the world's problems and, capitalism. And, you know, how can we take those thoughts and, you know, do something with them and change the world for better? And, man, it was life changing. Sam Wilson (00:04:05) - Did you do you feel like you. Sam Wilson (00:04:07) - And I'm going to. I guess when I say this, I don't think of higher education as a place where people typically get enlightened to go be an entrepreneur. Even in the MBA program, how did was just the right school, the right timing? Was that the right people? Like what was the confluence of things that occurred to really inspire this in you? *Ryan Smolarz * (00:04:27) - Yeah. So, you know, I was starting from absolute zero. I didn't know, you know, how a bank worked. I didn't know what an interest rate was, really. I mean, we had a mortgage on our house, but, you know, I was like, oh, it could have been 12, 15, 100. It wasn't. You know, I don't want to change anything for me. I didn't really grasp the concept of, you know what that meant. And, once I figured out that, you know, if you do understand business and you can, you can put these ideas into fruition. that there was always a place that there was, like, this itch I was trying to scratch, and I never could figure out what what it was that was off. *Ryan Smolarz * (00:05:12) - and almost instantaneously, when I made that, that jump, it was completely different. Like, I didn't have that feeling anymore. And so, yes, the MBA, the MBA program was really meant for people who are in that, you know, business, corporate ladder. But I just use the information in a totally different way. Right? I just took what they were telling me and applied it to where I wanted to apply it. and it really worked out perfectly. Sam Wilson (00:05:44) - That's awesome. So you've gone from a guy that doesn't even know where he banks to now running funds, buying self-storage, raising capital. I mean, being very, very in the weeds in the finances. *Ryan Smolarz * (00:05:58) - Absolutely. Yeah. We did it, man. Sam Wilson (00:06:00) - That is that's awesome. So what, outside of the MBA program, how did you then take the next steps to figure out? I know you mentioned the e-commerce business. You mentioned some other things along the way, but kind of give us the, the maybe the modified version of what happened over the last six years to get you where you are now. *Ryan Smolarz * (00:06:18) - Yeah. So I you know, I always had these ideas in my head about things that I wanted the bucket list. Right. What are the things in life that I want to accomplish? And, I had these ideas for some patents. And so, you know, one day I just said, you know what? We're going to write these patents and we're going to push it through the system and see what happens. And so we did, got a patent attorney and, started having the conversations and, wrote two patents. One of them is supposed to launch the product here in a couple of weeks. It's been, you know, almost five, six years of in production. Wow. yeah. So, you know, once I figured out that Wall Street sort of has this language that they don't want retail to know what it means and that, you know, I've been through medical school, got the anatomy under my belt and learn Latin and, you know, all the things that were really difficult to learn. *Ryan Smolarz * (00:07:17) - I said, you know what? I think that, you know, the stereotype of doctors not being able to learn this stuff is just garbage. it was the same thing in flying a plane. You know, people told me that I couldn't be a pilot. I said, that's just garbage. so I'm going to go learn how to do it. And, you know, being a contrarian and it's just sort of the way I think and the, you know, you tell me I can't do something. Okay, well, that means that I'm going to do it. If I want to write, I want to. Sam Wilson (00:07:49) - I would I'm sorry. Go ahead. *Ryan Smolarz * (00:07:51) - No. That's it. Sam Wilson (00:07:52) - I would imagine then that being a contrarian again, in a field where everybody kind of has to play by the rule book has been helpful for you because you stand out. No. *Ryan Smolarz * (00:08:03) - yes and no. there have been certain times where that has certainly worked. not in my favor. but from making that switch from, you know, this ultra conservative, profession to quite the opposite, you know, where the world is, your oyster, kind of scenario. *Ryan Smolarz * (00:08:24) - it was an easy transition for me because it was hard for me to sort of fit into that box and just never, never been that kind of guy. And so, you know, I would come in and say, why don't why don't we do this in surgery? Think of the work a lot better. Oh, that's not what the books say. Right. And so I pushed it a little too far on occasion. with those, you know, mentors and things like that. But I think that, you know, hard work, dedication that's never been a problem. They knew they knew I was working hard. But, you know, it just kind of it was it fit my mentality so well, to make that sort of jump. Sam Wilson (00:09:03) - That's cool. Tell me, how did you get to today your you are through store, which again is store. What is the store partners you said was the website. Is that right? *Ryan Smolarz * (00:09:12) - There's dot com. Yes. Store partners. Com store. Sam Wilson (00:09:16) - Partners.com. Sam Wilson (00:09:17) - You have to go check that out. How how did you get into what you're doing now. Because even that even being in real estate this is yet another. And it sounds like you love to learn. That's one thing I've picked up from our conversation is that I think, calling you a lifelong learner is probably an understatement, but, you know, what you're doing now is even a unique subset of commercial real estate. how did you get into what you're doing now? *Ryan Smolarz * (00:09:42) - Yeah. So, interestingly enough, I remember where I was. I was driving to the airport, and there happened to be a podcast on and I was getting done with my training through the MBA, and I really didn't want that to fall to the wayside. I was pushing hard, to try to use that, if, if nothing else, the mindset. And so there was a guy on there talking about self storage and, I thought, you know, my life is so complicated that what, what I want to do is to find an asset class that is the the most that I can find. *Ryan Smolarz * (00:10:24) - That's not complicated. And, you know, people say that you can look at your set of keys and figure out how complicated your life was. I looked down at my seat and there was like 300 keys on my passenger seat. And I said, man, my life is super complicated. So here's what we're going to do. We're going to go buy a concrete slab with a metal box. And we're going to do that. And, so I went online, try to find the best, person to learn from that that I could in the world. And that's kind of how I do things like, you know, I, I love mentor programs. I love coaching programs. you know, I want to learn from the best. And I always feel like if I don't, then what did I miss? so I ended up in this group, and I've been there since 2000 and really 2018. We started in 17 because I got an a limited partner deal to, to try to learn. And, it's just grown over the time and, you know, got to know and, respect the, the guys in the group. *Ryan Smolarz * (00:11:26) - And so it's almost a lot of, you know, it's as much fun as learning going on a quarterly basis up there to see them. Sam Wilson (00:11:32) - Right? I bet it is. So you've stayed in the self-storage lane the entire time? Yeah. *Ryan Smolarz * (00:11:40) - Yeah. Intro (00:11:41) - Absolutely impressive. Sam Wilson (00:11:42) - Hats literally. Hats off to you. That's impressive. Sam Wilson (00:11:46) - I. Sam Wilson (00:11:47) - I mean, there's temptation. I only speak from personal failure on this front, but I'm sure over the years you've had some really great deals come across your desk and unique opportunities that were outside of the slab in a box methodology that you've, been employing. How have you said no to those? *Ryan Smolarz * (00:12:06) - Well, there's been some times where I have and, you know, it was basically friends and family flipping homes and said, okay, well, here's some capital. Go for it. Right. but I'm just not interested. I don't know it. I, you know, I could probably underwrite it, maybe, but it's a headache, right? I mean, it's just like, it's it's much easier for me to take a self-storage deal, look at the number of, you know, what they're selling it for, for square feet. *Ryan Smolarz * (00:12:34) - I know the the ins and outs. It's kind of like Warren Buffett. You know, he's got you call him up in five minutes later. He knows if he wants to do the due diligence and put it under contract. you know, it's just it's the experience. It's the knowledge. It's knowing who's in the business know, knowing who to call. I mean, it makes me want to vomit, to try to learn, relearn all that. Right? It took me a lot of time to figure that out. Sam Wilson (00:12:58) - No doubt on on that front and that and that kind of learning that, those soft skills to where you can have a deal sent to you and within just a few quick, you know, glances, you're like, yes, no or maybe investigate further. I mean, that's a, that's a, that's a hard earned skill set. And even even yesterday I had somebody had a broker send me a deal and I just called her back and said, hey, you know what? If I offer on this, it's going to be one less than one half of what the list price is. Sam Wilson (00:13:28) - And here's three key reasons why you want to draw it up. Knock yourself out. But that's about where I'm going to be. Yeah. She you know she understood it. But having that innate kind of, you know, built an understanding of what what it takes to make those sorts of deals go around is, is really, really powerful. So you are a full time EMT. You work really hard during the week. You are running your and tell me what is the structure or current structure of what it is that you do, or you guys running a fund or you doing a deal by deal syndication? What what is that? *Ryan Smolarz * (00:13:57) - Yeah. So it's a series LLC. so there are barriers between each deal. so if you invest in one deal, you're not invest is not a blind pool. it's basically a syndication under a holding company is really what it is. So syndication on syndication on syndication. and so going through that process, my main focus these days is the fund manager role of a fund. *Ryan Smolarz * (00:14:25) - That's sort of where my, passion lies. And to be able to, you know, to, to do all of those components, which is super fascinating to me and super boring to everybody else. I absolutely love it. and so to be able to do that in self storage, which I have a fair knowledge base on and bring in the right people, it's it's just been it's been fabulous and, almost. Well, it is life changing for me, right. Sam Wilson (00:14:56) - Does that, what was I going to ask you on that it was or are you guys allocating capital? Are you guys actually buying the deals yourself and running them? *Ryan Smolarz * (00:15:05) - Yeah. So it started off as allocating capital. we were almost like a debt fund for equity. that's how I can describe it. but now we've moved into our own space. we have a acquisition team that we're building, and, we're going to do it all in all in house, under the under our roof. And, you know, if there's a development deal and we decide to JV with, with another sponsor, or firm, then so be it. *Ryan Smolarz * (00:15:34) - But right now we're, we're focused on acquisition and, that's, that's sort of where the bread and butter lies for us. Sam Wilson (00:15:41) - What has been probably the, number one lesson or maybe the hardest thing that you've had to solve in growing a business like what you're doing right now. *Ryan Smolarz * (00:15:51) - Oh, it's certainly. Well, one thing is timing. Like when the capital comes in versus when the the deal closes and, and trying to make all that work is, sometimes just torture. but the other thing that I think is more kind of, you know, the 30,000 foot view where where I think the, you know, the Alpha lies in building the teams. we have a big focus on that. And, trying to find people who were who were all rowing in the same direction with. I find that super important. you know, the when you know, you have a good team, when one person on the team doesn't like the decision, but everybody else does, and they are rowing even faster in the same direction that everybody else is. Sam Wilson (00:16:43) - What do you when you. Can you explain that a little bit further? If what I heard was you saying that you may have a team member that doesn't necessarily agree? With the decision, but yet is still meaningfully participating in and helping everybody push in that direction. Is that. Sam Wilson (00:16:59) - Right? *Ryan Smolarz * (00:16:59) - Absolutely. Yeah, absolutely. And it may be me that disagrees in the other part. People on the team want to push forward. It really depends on the scenario. But if you're out in the middle of the ocean, everybody thinks that, you know, North America is to the left and Asia is on the right, and you got to get to the, the, the place that's closest. If everybody wants to go to the right and you want to go to the left in the decisions made, you paddle as hard as you can and, and to the right and, you know, you're you're all in. So this is, you know, a team sport. It's not an individual sport, and it's full contact. *Ryan Smolarz * (00:17:38) - there is no doubt about it. Commercial real estate is full contact sport. Sam Wilson (00:17:42) - It is indeed. You're based in the US Virgin Islands. Where do you guys buy? And...
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The Power of Delegation and Automation in Land Investing
04/01/2024
The Power of Delegation and Automation in Land Investing
Today’s guest is Mark Podolsky. Since 2001 Mark has completed over 6,000 raw land deals with an average return on investment of over 300% on cash purchases and over 1000% on land deals that he financed. Free Book: October 2021 podcast: Show summary: In this episode, Mark shares his journey from hands-on management to overseeing his business in just 30 minutes a week by building a capable team, establishing efficient systems, and utilizing technology for automation. He stresses the importance of delegation, staying focused on high-impact activities, and operating at a strategic level. -------------------------------------------------------------- The importance of focusing on your comparative advantage (00:00:00) Introduction to the show (00:00:39) Mark Podolsky's impressive track record (00:00:52) Mark Podolsky's return to the show (00:01:04) Recent developments in land investing (00:02:08) Automation and scalability in land investing (00:03:30) Different methods of buying land (00:05:27) The value of cash flow in financial security (00:08:51) Adapting to economic cycles and mitigating risks (00:10:54) Land as an inflation-resistant asset (00:13:44) Strategies for land acquisition and investment focus (00:14:55) Time management and life philosophy (00:16:37) Scalability and automation in land investing (00:18:26) Achieving business efficiency and learning from past experiences (00:19:35) Leveraging comparative advantage and delegation (00:21:10) Mark's offer (00:22:31) Link in show notes (00:23:06) Contact information (00:23:39) Closing remarks (00:23:53) -------------------------------------------------------------- Connect with Mark: Linkedin: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Mark Podolsky (00:00:00) - Let's say, for example, you are, you know, the best at finding deals, right? Right. Like that's how you're making your money. You're, you're you're finding these deals, but you also type 135 words per minute. Right. And so you're like, well, I can I can hire someone at 80 words per minute. But they're not. I mean, they're fractionally as good as me. I might as well type it for myself. But the answer is no. You're comparative advantage, even though you're might be the best typer is going to be you're only should be focusing on deals, right? And letting everything else go. Intro (00:00:39) - Welcome to the how to Scale Commercial Real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:52) - Since 2001, Mark Podolsky has completed over 6000 raw land deals, with an average return of over 300% on cash purchases and over a 1,000% return. That sounded like I just hit puberty. Sam Wilson (00:01:04) - My goodness, Mark, where did that come from? 1,000%. Let's try that again. A thousand. Hey, whatever. We're going to leave it in there. I like this man. You made 1,000%. I don't care how you say the number. That's a lot on land deals that you financed. Mark, welcome back to the show. Mark Podolsky (00:01:17) - Sam Wilson. Brother. Great to see you again. And look, I. You know, these these little puberty things. That's pretty cool. Sam Wilson (00:01:26) - It is until you're until you're 42. And,, you know, you don't want to be there anymore. Hey, man, it's great to have you back on the show. For those of you who are listening. Today, Mark came on the show two, two and a half years ago. I don't have the episode number right in front of me. If you want to go back and listen to that, I would highly advise it, because what Marc does in that show is really breaks down the land investing business and what that looks like. Sam Wilson (00:01:48) - We probably won't spend as much time on the nuances and kind of not the new, but maybe more time on the nuances today, but last time, kind of explaining what the land business is. So go back and listen to that if you want a primer for this episode. But today, Marc, it's great to just have you back on the show. We got lots of things to talk about. So tell me, I guess in the last two and a half years, what's been going on? Mark Podolsky (00:02:08) - Well, I'll tell you that it's a good time to be a land investor. And the reason being is when we are doing our deals, we're paying cash. And so interest rates can do whatever they want. And it really doesn't matter. And so for us, it's been a great, you know, sort of bull market in in raw land investing. And we've seen our note portfolio increase now., gosh I don't even have the percentage. But it's it's really been exciting last two, two and a half years watching our clients get out of what I call civil economic dependency, which means if they're not personally working, they're not making any money and seeing how they've been able to quit their jobs, it would retire their spouses and have that security, knowing that when their passive income exceeds their fixed expenses, they're working because they want to, not because they have to write. Sam Wilson (00:03:07) - No, that's hey, man, that's that's a great,, a great thing, certainly to strive for the land business, at least a lot of times what we see and other guests that we've had on the show that talk about the land business, it's a very active. It's like flipping houses, but without the house. I mean, is it how how does how does what we've kind of heard some people talk about versus how you do it, how do those two differ? Mark Podolsky (00:03:30) - Yeah, that's a great question. So really, the last thing anyone wants to build from this build for themselves is another job. Right. And we see this happen all the time where people come in, they're enthusiastic, but then they don't have the wherewithal to start building systems, processes, playbooks, swim lanes to say, okay, how do I leverage my time for the highest impact activities? So the way that we teach this, and the way that we set up our own business is using software on the front end, inexpensive virtual assistants and software on the back end. Mark Podolsky (00:04:10) - 90% of this business is automated and is scalable. And so it actually said, I've got my my second book. It's just about ready to come out in a few months. Dirt rich too. The plot thickens. How to scale your land business. And so I talk all about the pieces that you need in order to to grow, scale your lab business without making yourself crazy. And this really can be applied to any business that you're trying to grow., it's just it's just one of those things because. We think, well, we should be doing all of it and we don't scale. And so it kind of gets back to that sort of Michael Gerber E-myth piece as well. And, you know, are you the technician? Are you the,, you know, the other pieces of it and most people are coming in the technician and we want to become the CEO of our business. Sam Wilson (00:05:08) - Right? Absolutely. Yeah. And the land business is a it's a is a very interesting business because there's a thousand ways you can do it. Sam Wilson (00:05:16) - Like what I know you mentioned here, you mentioned early on a note portfolio like what's right. If there is any one particular strategy that you like to employ, what is it? Mark Podolsky (00:05:27) - Yeah. So I like really three buying. Sort of simple ways to start to buy land. The first one is direct. So what we'll do is we'll do county research, we'll pick our county, and then we'll start looking at comparable sales. And essentially we'll take the lowest comparable sale in a county. We'll divide by four. That gives us what Warren Buffett call a 300% margin of safety. And we'll send direct offers to those people. And why are we doing that? Because we don't want to be in the appraisal business. If we send out a blind offer, then next thing you know, we're spending all our time on the phone appraising and negotiating. So this is just an offer. Take it or leave it. Maybe there's some room for renegotiating, but not much. Right. So that's the first way we can buy. Mark Podolsky (00:06:14) - The second way we can buy is we can totally eliminate the aspect of getting a list, scrubbing a list, pricing a list, mailing a list, and we can go straight to a wholesaler. They've already done all this front end work, and now we're buying it at a premium of what the wholesaler bought it for. But they've left enough meat on the bone because our margins are so high that we can go in and make. Maybe 100 to 300% on our investment. So you've got retail, you've got a wholesale. And then let's say that you're really cash constrained. And you just want to sort of dip your toe in the water or you're just. Your capital is really dwindling. There's something that we have been teaching now called land arbitrage. And so land arbitrage is typically when someone like me will buy a piece of land, let's say the market I bought it in, let's say I paid $10,000 for it, and I started selling it for $400, down $400 a month. And after, say, ten months of receiving payments, I've gotten 50% of my capital back. Mark Podolsky (00:07:28) - Right. And then someone defaults. Well, I've already established here's the market. It's $400, down 400 a month for $10,000 a piece of property. Well, what I'll do is I'll use a land arbitrage technique. And so I'll say, Sam. Hey, look, I know you don't have $10,000, and what I'll do is I'll land arbitrage this to you. So instead of $400 down, $400 a month, I'm going to sell it to you for $8,000. $200, down 200 a month. And now you're going to flip it $400, down 400 a month, and you're going to make the spread at a $10,000. So because I've got my almost all my capital back out, I can afford to do this. And then you can lock up a piece of property for only $200. And so let's say it's three months and you couldn't sell the property. Well, now you're only out 600 bucks, so you've mitigated your risk and you've been able to keep your capital. So those are three really simple ways of buying land. Sam Wilson (00:08:38) - Got it. No I love that I love that yeah. The, there's there's lots of different ways that you can do it, but it sounds like you've been building and will continue to build a note portfolio of your own because you like that monthly cash flow. Mark Podolsky (00:08:51) - Yeah, I mean, I, I prefer cash flow over cash.. I think it's the antidote to financial insecurity. I really do. I think cash is great. And I think there's certain circumstances where you want cash. But ideally, if you can get to cash flow and you have steady cash flow, it's the antidote to financial insecurity because, you know, you don't have to go hustle for your next deal. You know, you can get sick. You know, life can throw any curveball it wants at you. And you have the steady cash flow coming in every single month without you having to put in too much effort. I mean, let's face it, nothing's completely passive. If, you know, if I gave you $1 billion, you'd still have to do something with that capital actively. Sam Wilson (00:09:40) - You absolutely would. I've always said that that, you know, the misnomer of passive investing. It's like, no, it's not passive. I'm still vetting sponsors. I'm still, you know, making sure distribution I'm still entering those bond spreadsheets to track the performance of sponsors. I'm still I mean, there's still a lot of still getting tax return documents. I mean, there's nothing passive about passive investing. Maybe less. Mark Podolsky (00:10:02) - Nothing. Yeah, it's it's less active, but there's nothing passive. Intro (00:10:06) - Right, right. Sam Wilson (00:10:07) - Absolutely. So you're a big fan of the cash flow which I couldn't agree with you more, man. I don't know where you were ten years ago, Mark. When? Our 11 years now, when I got into real estate, of course, I read the purple the purple book. And you know, that's all Robert Kiyosaki talks about. It's cash flow. And I'm like, that doesn't make any sense. Like, I want the big lick now. Like, and. Intro (00:10:25) - Yeah, you. Sam Wilson (00:10:26) - Know, 11 years later I'm like, man, he was on to something. Cash flow makes a lot of sense. So. Right. It's it's funny how your,, how your perspectives change. When you came on the show a few years ago, you had mentioned that in 2008 you were in the land investing business and got crushed. How are you positioning yourself differently now in light of kind of wherever, whatever we are, wherever we are in the economic cycle that no one knows?, what's different now for you? Mark Podolsky (00:10:54) - I think I think when you get crushed the way I got crushed. And so it wasn't that the the land business was still profitable, but what I didn't understand was I had Parkinson's law of money. So the more money I made, the more money I spent. And it's an interesting thing because I was I was listening to a podcast recently where Americans feel that how things are going now, they'll continue in this trajectory, where in Asian countries, they're always waiting for the other shoe to drop. Mark Podolsky (00:11:30) - And so I'd like to take the more Asian approach now because I've felt it. And I know that anything can happen. There can be any kind of black swan event. Nobody could predicted Covid, right, in most of the things. And really that's the definition of risk is when you've thought of everything, what's left, that's risk. And so to me, knowing that I've thought of everything and I can't think of everything, how am I going to mitigate that inevitable risk? And so I probably have more cash on hand than I that I should. Right. And I probably am more conservative with my personal debt than I should be. And. That's really how I think about it. And I'm constantly looking at the market. I'm constantly asking myself that Jeff Bezos question if everything's going to change, what's not going to change, and sort of position myself in the land business in that way. So I think that's just sort of being a little bit conservative, paranoid and having enough cash on hand so that I can weather the inevitable financial storm. Mark Podolsky (00:12:43) - That's that's coming. It is coming. I don't know when, but I can tell you right now it's been a great, you know, ten year or what. How long has it been since the. Sam Wilson (00:12:55) - 16. Mark Podolsky (00:12:56) - Is it. Sam Wilson (00:12:57) - 6000? Eight was 16 years ago. Yeah. Mark Podolsky (00:12:59) - Yeah, yeah. So you could say. Okay, Covid was, was a big dip for some sectors, but other sectors, it was crazy. And you have this huge government bailout. They throw trillions of dollars into the economy. You've got massive,, inflation now. And now we're trying to set that back. I mean, it always feels a little. An unsteady to me. And so I want to prepare myself,, for that. Sam Wilson (00:13:29) - Absolutely. What about. What about the the. Who am I going to ask this? The recession. Inflation. I would imagine that land would be considered inflation resistant in the sense that it's dirt, right? Mark Podolsky (00:13:44) - Yeah. Yeah. So so when in when you know, we we benefit in a, in a high interest rate environment. Sam Wilson (00:13:51) - How's that. Mark Podolsky (00:13:53) - Well because the the the land is a is basically a fixed asset, right? So just like gold or silver, you're,, it's a great inflationary asset. In that sense. So as I said, interest rates, I mean, we're finding interest rates because we're not using debt, but also in an inflationary environment. We do really well as well. Sam Wilson (00:14:15) - Right. Because you can just reprice to whatever that now. Mark Podolsky (00:14:18) - Yeah. Sam Wilson (00:14:19) - Value is. Mark Podolsky (00:14:20) - Exactly. Sam Wilson (00:14:21) - Well are there, are there. Ways of. I know you said you buy everything in cash. Is there a particular size or a particular use or., you know, are there things you're staying away from in the land business like development projects or subdivides or infill lots or you name it? Is there anything right now that you're like, yeah, you know what? That style of land investing is not for me because of where I see us, where you perceive us to be in the cycle. Mark Podolsky (00:14:55) - Yeah, I'm agnostic when it comes to these different strategies of acquiring land. Mark Podolsky (00:15:00) - What I focus on is where can I get an asset 25, $0.30 on the dollar. And in today's market, it's not going to be an infill lot. I'm just not going to get that right. I might be able to get an incredible deal in, say, a rural area where I can subdivide. Absolutely. I'll do that deal all day long, a development deal. I'm not going to go through the the risk and the process and the headaches and, you know, the years of of, you know, going through that process of getting a piece of land shovel ready. Right? Right. I think it can be a great model. It's just not for me. And so I don't necessarily avoid them. I just sort of I'm an inch wide and a mile deep. I just keep doing what works for me. Sam Wilson (00:15:55) - That makes a lot of sense. That links, I mean, which essentially you said, hey, you don't see there's anything wrong with those. It's just not necessarily the one that you want to be personally investing in. Mark Podolsky (00:16:06) - Yeah, absolutely. It's just not going to be in my buy box. Sam Wilson (00:16:10) - And a lot of those require a very, very unique skill set like the one, you know, where you just talked about the risk, the process of getting, taking a parcel, subdividing it and then getting it shovel ready for whatever you perceive may be the best, highest and best use of that that can be. A lot of years, a lot of gray hair and a lot of,, a lot of time that maybe you could have spent otherwise, you know, on on your business. Doing what,, what you're what you're best at. Mark Podolsky (00:16:37) - No, absolutely. And I'm, you know, vicious with my time. Right? So,, I've got an app called Y croak, and it reminds me five times a day of my death. And so I. You know, I'm very conscious of the fact that, like, it's really short. It's terrifyingly short. And so how I spend my days is how I spend my life. Mark Podolsky (00:17:02) - And I want to have the most enjoyable day as possible, doing what I love to do the most. And so if there's something I'm doing that I don't love, well, I either, you know, delegate it, automate it, or eliminate it and that's it. And sort of taking this inventory of, of how I'm spending my time to make sure that,, I can live, you know, the best life I can. Sam Wilson (00:17:30) - That is, I've never heard anyone mention that we croak. That's,. That's pretty funny. I mean, but it's realistic. You know, I always joke and say that this is just a rental suit. Like, I don't get to keep it, you know? Yeah, you wear it for a while, and then it's all it's over. So. Yeah, that's,. That's pretty funny. Delegate. Automate. Eliminate I love that., okay, so we've talked a little bit here about kind...
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Can Self-Storage Strategies Thrive in the Current Real Estate Market?
03/25/2024
Can Self-Storage Strategies Thrive in the Current Real Estate Market?
Today’s guest is Ben Lapidus. Ben Lapidus is the Chief Financial Officer for Spartan Investment Group LLC, where he has applied his finance and business development skills to construct from scratch a portfolio of over $500M assets under management, build the corporate finance backbone for the organization, and organize over $200M of debt capital from the firm. In addition to completing over 50 real estate transactions at and prior to Spartan, Ben is also the founder and host of the national Best Ever Real Estate Investing Conference and managing partner of Indigo Ownerships LLC. Best Ever Conference Code Use code “INVEST” for $300 off any ticket type at https://www.besteverconference.com/ Show summary: In this episode, Ben Lapidus joins Sam to discuss the nuances of the commercial real estate market, with a focus on self-storage and investment strategies. Lapidus shares his expertise on navigating the current market, the importance of robust business plans, and the challenges of finding attractive yields. They also talk about the Best Ever Real Estate Investing Conference, detailing how it adds value for passive investors and the innovative strategies used to attract them. -------------------------------------------------------------- Self-Storage Market Insights (00:00:00) Introduction and Background (00:00:37) Current State of Self-Storage Market (00:02:03) Investment Strategies and Passive Investors (00:03:34) Conversion Deals and Opportunities (00:05:18) Shift from Office to Self-Storage (00:06:00) Interest Rates and Debt in Self-Storage (00:07:14) Pricing Mechanism and Market Response (00:08:36) Commercial Real Estate Market Overview (00:10:33) Alternative Investments and Portfolio Allocation (00:11:57) Best Ever Real Estate Investing Conference (00:13:46) Strategies for Attracting Passive Investors (00:15:41) Conference Organization and Team Management (00:18:28) Closing Remarks and Special Discount (00:20:16) Best Ever Conference (00:20:30) Contact Information (00:20:50) -------------------------------------------------------------- Connect with Ben: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Ben Lapidus (00:00:00) - If your business plan can survive 2 or 3 years of negative leverage, because you can take a low enough IRR that you can store enough cash on the side, then it is a great time. If your business plan is overly aggressive or you're trying to seek a very high IRR at a at a velocity of capital deployment, that's unachievable, then now is a bad time to make an investment. You might want to wait 12 or 18 months to do so. Welcome to the How to Scale Commercial Real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:37) - For those of you that don't know Ben Lepidus, you need to know him. I've known Ben. Now. What? Man? What's been seven, eight years at this point? Yeah. About to go about that. I met you normally, Ben. I love to do a long winded introduction about how great the guest is. You are a great guest. I'm. It's my honor to have you on the show today, but before I give you my own introduction, I'd love for you maybe just to come on the show today and tell us a little bit about who you are, and then we'll get into it from there. Ben Lapidus (00:01:03) - Yeah. I'm the founder and host of the best ever Real estate investing conference., not the brand, just the conference. And,, was a founding team member of Spartan Investment Group, which bought a half a billion assets under management in self-storage, recently retired, but have a long history of buying single family multifamily self-storage assets over the last 12 years., recently or prior to that,, was in the adtech space, learned a lot about big data, started a study abroad company Costa Rica., and have tried several other startups that failed. So I'm an entrepreneur at heart and can't wait to talk about whatever you want to talk about. Sam Wilson (00:01:36) - Dude, that's that's a whole lot. I mean, my gosh, that's a lot of moving pieces there. Most recently you were like you mentioned a,, a partner there at Spartan Investment Group where you guys bought an absolute ton of self-storage. Why don't you just give us maybe a high level view recording this? What? Its end of February 2024, high level view of where self-storage is now and then maybe is what you see across the commercial real estate space as a whole. Ben Lapidus (00:02:03) - Yeah. So self storage still has incredible fundamentals. When you look at the supply demand of self-storage, it's gone from 1 in 11 households to one in less than nine households are leveraging self-storage or consuming self-storage just over the last 5 or 6 years. That's an incredible shift in demand in a 5 or 6 year period simultaneously, construction costs,, going up, interest rates going up have made new supply difficult. So the fundamentals that drive storage is still in a very attractive asset class. That's on the consumption side on the on the,, the consumer side, on the investor side, investors have wised up to it. So it's become incredibly competitive. And the the spread between what you can get on the equity side versus what you can borrow on the debt side, has been radically compressed., and it now mirrors one of the major five food groups. You've got all of this office money, which was the largest component of commercial real estate coming out of office. And it's number one place to place it is self storage. Ben Lapidus (00:02:59) - And that's just a lot of moving money. So from an investment perspective, the supply and demand,, isn't as attractive as it used to be. So I think what we're going to see over the next two years is do rates compress faster than cap rates?, and do the supply and demand economics on the consumer side kind of create a skyrocket effect of occupancy and rental rates such that it's attractive enough despite the competitiveness on the investment side? Sam Wilson (00:03:23) - Wow. That's a that that that's an impressive,, impressive insight there. So yeah, I guess, you know, in short, is now a good time to to be investing in self-storage. Ben Lapidus (00:03:34) - Now, there is never a bad time to be investing in self-storage. To be clear, it's recession resistant. It's always going to go up because of those supply demand economics. It's just is this the best time to generate the cash flow that you need to kind of cross the chasm if you're buying in a negative leverage environment. And so it's really about your business plan. Ben Lapidus (00:03:54) - If your business plan can survive 2 or 3 years of negative leverage because you,, can take a low enough IRR that you can store enough cash on the side, then it is a great time. If your business plan is overly aggressive or you're trying to seek a very high IRR at a, at a velocity of capital deployment, that's unachievable, then now is a bad time to make an investment. You might want to wait 12 or 18 months to do so, right? Sam Wilson (00:04:18) - Right. What about what about that conversation with investors like as in passive investors? How does that work when you're looking at deals that may be negative leverage? I mean, is that even a conversation that's being had? Ben Lapidus (00:04:30) - It is. And that's because you just kind of find a different investor profile as the yield moves from kind of value add to more opportunistic, you have to find the investors who are willing to take the risk return ride with you at the end of the spectrum where those yields are achievable and attractive. If you're trying to get, you know, a 6% cash flow with a 14% IRR on an asset, that's 70% stabilized, that's been in existence for ten years with no expansion potential, that's going to be really tough. Ben Lapidus (00:04:59) - But if you can find a conversion opportunity or the doughnut hole in a state that is booming with those supply demand,, economics working in your favor on the consumer side, then you can achieve those 20, 25, 30% IRR on a ground up development or conversion deal or an expansion. Sam Wilson (00:05:15) - What do you say when you say conversion deal? What comes to mind? Ben Lapidus (00:05:18) - Yeah, conversion is just taking,, a space that is not used for storage today and converting it for,, storage purposes. If you if you like, like a Macy's, a Kmart, a Shopko and just converting it into kind of like how urban air. I don't know if you've got urban air where you are, but I. Here in Colorado, there's an urban air chain, which is like an indoor like,, pre-teen park for trampolines and stuff. And they've just been converting, you know, grocery stores basically into,, urban air adventure parks. It's the same thing with storage. Sam Wilson (00:05:51) - Same thing with storage. Be it office. Sam Wilson (00:05:53) - , I know I'm a passive investor in an office to storage conversion project right now. Ben Lapidus (00:05:58) - Hotel to storage? Yeah, all sorts of things. Sam Wilson (00:06:00) - Which is wild because you're looking at this. They've they've converted it from,, office to storage and, and just like you're saying, the opportunity in this particular area was unbelievable. I mean, it's leasing up at like 30 or 40 units a month. I mean, it's just flying off the shelves as soon as they got their Co, which was,, kind of kind of crazy to see. So that opportunity exists. You mentioned the money that's coming out of office and going into storage. How are people even getting their money out of office? I mean, talk about something with negative leverage. What's that look like? Ben Lapidus (00:06:31) - I mean, we're seeing,,, gosh, I'm gonna I'm gonna fail to come up with specific examples, but we're talking like, institutional level, like CRO holdings,, tremble., you know, bam capital, like those, those size of organizations,, dumping their office assets or dumping their office up co partners and selling them off, whether it's at pennies on the dollar or not. Ben Lapidus (00:06:55) - And they are recalibrate or,,, rebalancing their portfolio to not reinvest that into office but say let's let's find alternative assets. Self-storage being the darling of the alternative asset space inside of commercial real estate. Sam Wilson (00:07:08) - Got it. Very, very interesting. What's that look like on self-storage right now? Ben Lapidus (00:07:14) - That is just as attractive in self-storage as it was anywhere else. And now that's a misnomer because nothing is attractive in debt., I just I use that to say it is just as attractive as any other lending rate outside of the agency world. So you're not going to ever beat, you know, government backed loans like you would get in housing. But outside of that,, you can get self-storage. Lending rates are akin, if not better than than office lending rates today, if not better than retail rates today., you can still find like, kind of the needle in a haystack. Sub six low 6%,, interest rate. Although the majority of what you are seeing on average, when you make those phone calls or high sevens, low eights, and then you're kind of getting to the riskier stuff of nine, ten and even double digits, you know, interest rates. Sam Wilson (00:07:59) - Anybody doing long term fixed rate on that or is it all floating debt. Ben Lapidus (00:08:03) - Oh, sure. Yeah. You can find long term fixed rate either, either by way of, you know, like doing shorter term or by doing a swap,, or some other derivative that, that, that creates that, that fixed rate despite starting with the floating rate product. Sam Wilson (00:08:17) - Okay. Very very cool. Have we seen maybe you've answered this already and forgive me. I'm I'm,, I'm riding the short bus here today, but have you seen seller prices come up as interest rates have also climbed or not? Solid prices go down. Rather like have we seen that that sellers become more realistic or is it still. Ben Lapidus (00:08:36) - Yeah. So? So I drove the acquisitions team and was very familiar with that up until about 7 or 8 months ago. So I've started to fall off of my, you know, a thumb on the, on the pulse of things. But we haven't seen the correction that you would assume,, with, with,, interest rates climbing. Ben Lapidus (00:08:54) - So number one, we've only seen rental rates correct by 3% with all this inflation maneuver. And that is incremental street rates not in place rates. So revenue is still going up at self-storage consistently in the industry. And you look at the rate level reporting revenue still climbs quarter after quarter after quarter. The incremental customer rates might be decreasing. But you've got one month leases. You can you can do existing customer rate increases after providing that discounted rate almost immediately if you choose to. So we're still seeing rates increase. So it's an inflation hedge. So we haven't seen the pricing correction in response to the interest rates that you might assume. Because you've got investors coming out of longer term lease product like office like retail like industrial, for the purposes of hedging their inflation and going into short term lease product like self-storage, because they see the future potential of that inflation benefit. So yes, we we have seen pricing come down a little bit. But now instead of, you know, pricing to,, a 4.75% cap rate on a T3 or maybe pricing to a 6% cap rate on a year two pro forma. Ben Lapidus (00:10:03) - So we're just we're seeing a different heuristic to kind of come to the same pricing or margin of error pricing as we were just a couple of years ago. Sam Wilson (00:10:10) - Right? No, that's very, very interesting. Thank you for taking the time to give us kind of a brief snapshot on where the self-storage industry is today and kind of what's driving the pricing mechanism behind that. Certainly appreciate that. Let's hear what your thoughts are on the commercial real estate market as a whole. Like where is opportunity if that's still one that people are, you know, fighting tooth and nail over to get involved in? Where do you see opportunity today? Ben Lapidus (00:10:33) - Yeah, I think commercial real estate just doesn't have the spreads that it did for the last decade. I mean, it was if you're listening to this podcast, you probably have a sentiment that there was a time where raising capital was on the easier side of the spectrum if you wouldn't just blatantly say easy. And that's because you could achieve like a yields an IRR just by consequence of of appreciation that was happening in commercial real estate in general. Ben Lapidus (00:11:01) - , that appreciation has evaporated as a result of interest rates climbing., and maybe that appreciation will return if and when interest rates decrease. But for right now, you do not get the cash flow that you're you're used to getting after the last decade and a half, you do not get the appreciation that you're used to getting after the last decade and a half. So kind of commercial real estate wide, it's just not a very attractive time to be in commercial real estate relative to yields that you can get in other places. And, you know, modern portfolio theory suggests that up to 30, 35% of somebody's portfolio should be an alternative assets, with real estate being the largest segment of it. About 9 or 10% of the average portfolio contains real estate. So there's a long way to go for alternative assets to kind of climb to 35% to get to that modern portfolio theory number. But there's a lot of other segments of alternative assets like precious metals, operating businesses, secondaries,, private equities that have not been tapped into nearly as much. Ben Lapidus (00:11:57) - And I think that those yields are more attractive today than what commercial real estate offers. And that's and that's probably going to be for the next 18 months at least. Sam Wilson (00:12:05) - Well, yeah, absolutely. And I'm I'm testament to that. I mean that's what we're investing in right now is operating business simply because it is inflation resistant. It's recession resistant, like it's it's stuff that spins off cash flow at rates that commercial real estate just simply can't. And that's like. Ben Lapidus (00:12:22) - I'm more interested in the activity of how the space is being used right, right now than the than the value of the space itself. Right. As an investor mindset. Right? Sam Wilson (00:12:33) - Right. Yeah, absolutely. That makes a heck of a lot of sense. So you've got you've been through,, you know, all of this here with with Spartan here up until, you know, seven, eight months ago. And what do you do with your time now, like when you talk about these things and you think about, okay, alternative investments, operating businesses, what what are people doing with the space? Like what piqued your interest today? Ben Lapidus (00:12:51) - Yeah. Ben Lapidus (00:12:51) - And the way that I found my way to,, the partnership at Spartan was through the Best Ever conference, which I founded with Joe Fairless the year before, joining up with with the guys at Spartan Investment Group. And,, that that conference has been a North Star for me because I've been building it to service me as an avatar consumer of the conference. Who do I want to learn from? Who do I want to meet? Who do I want to be surrounded by? And let's just kind of create all of the details of this conference to attract those people, those speakers, those sponsors, those attendees. And, and I don't I don't know if you've seen that consistently year over year, Sam, but you were there at the first year. Every single speaker that I picked was somebody that I wanted to hear what they had to say personally, like myself. And that's still the case today. We don't have anything to sell at the. Conference. We just want to create a community of like minded people who are intelligent, are having a good time, and want to collaborate with each other to get more out of their businesses and out of their lives. Ben Lapidus (00:13:46) - , and so that's that's the premise of the conference today. And,, I'm just kind of using the small amount of free time that I have,, after prioritizing my family and my kids, which is the major shift that I made this year into growing and improving the quality of that conference., and so a lot of our effort this year, with the conference coming up in April, April 9th, ten, 11 and 12, in Salt Lake City, is to focus more on the needs of the the passive investor. So as our conference has grown, we've attracted a lot of participants on the syndication side of the house, the operator side of the house, the people who have their their fingernails dirty with the real estate. But the passive investor hasn't had as much,,, emphasis at the best ever conference. So we've built a deal list site that we're going to be launching next week that allows all of the passive investors who are going to be in attendance to review all of our pitch slam competitors and all of our syndication sponsors deals in advance. Ben Lapidus (00:14:45) - We're...
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A Deep Dive into Flex Warehousing with Portal Warehousing
03/18/2024
A Deep Dive into Flex Warehousing with Portal Warehousing
Today’s guest are Alex Morrison and Andrew Runnette. Alex Morrison has broad experience across real estate, capital markets and startups. Alex currently is the founder and CEO of Portal Warehousing, an innovative real estate operating company in the flex warehousing space. Show summary: In this podcast episode, Andrew and Alex, co-founders of Portal Warehousing, discuss their innovative flex warehousing business. They detail how they provide small industrial spaces to various businesses, emphasizing the flexibility and services they offer, such as logistics support and community building for their members. They share their strategic approach to market underwriting, building selection, and the importance of location in gentrifying areas. Despite challenges in scaling and logistics, they highlight their efficient systems and the high demand for their spaces, evidenced by rapid occupancy rates. The co-founders invite building owners to consider management deals with Portal Warehousing, which seeks to expand its unique model nationwide. -------------------------------------------------------------- Intro (00:00:00) Concept of Flex Warehousing (00:02:17) Finding Properties and Plugging Tenants (00:07:17) Membership Perks and Differentiation from Self-Storage (00:12:27) Challenges in Scaling and Overcoming Them (00:17:08) Underwriting Deals and Selecting Locations (00:18:17) Underwriting Markets and Demand Generation (00:18:59) Building Criteria and Location (00:20:12) Real Estate Cost and Client Opportunities (00:21:34) Minimum Building Size (00:23:07) Conclusion and Contact Information (00:23:55) -------------------------------------------------------------- Connect with Alex and Andrew: Facebook: Instagram: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Alex Morrison (00:00:00) - They have very limited options after they outgrow their first space, which maybe is a garage, maybe a bedroom as they get to that next level., the options drop off. They need to sign a five year lease, and there's not a lot of space that's available sub 5000ft². So what portal is doing is being an institutional level provider of small warehousing space. Sam Wilson (00:00:19) - Welcome to the how to scale commercial real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:32) - I've got Andrew and Alex with me here today from Portal Warehousing. Andrew and Alex, welcome to the show. Alex Morrison (00:00:38) - Thanks so much for having us. Andrew Runnette (00:00:39) - Absolutely. Sam Wilson (00:00:40) - The pleasure's mine. I always asked every guest who comes on the show in 90s or less. Where did you start? Where are you now and how did you get there? And, Andrew, if you don't mind kicking us off by answering that question. And then Alex, I guess we'll have you be up next after that. Andrew Runnette (00:00:55) - Yeah. No problem. Thanks for having us on., we started the company about three years ago., we just opened our fourth warehouse,, and we've got for,, Salt Lake, Tempe, Brooklyn and LA., it's been a journey, and we're, you know, we're growing and just moving on to the next one as we go. So I'll let Alex take it from there. Alex Morrison (00:01:21) - Yeah. I mean, the the genesis of the company actually came at the start of Covid when the world changed. And, you know, traditional methods of real estate were kind of changed overnight. And I was based in LA, and the only thing you could, you could tour for the first six months of Covid were industrial buildings., so we looked at buying a lot of industrial buildings for my last,, the company I worked for lastly, which was a real estate private equity company. And ultimately that journey led us to developing an operating company that could plug into vacant real estate and add a lot of value. Alex Morrison (00:01:54) - And that and that, you know, three years later is portal. And what we do is as effectively,, we're a co warehousing, flex warehousing operators. So we provide industrial space for businesses of all sizes to, to use for all sorts of purposes. But basically the solution is a flexible industrial product that,, serves a lot of needs on the logistics side and the warehousing side. Sam Wilson (00:02:17) - Okay, that's really, really cool. I love that in the name again of your company is Portal Warehousing going to learn more about it? I think it's join-portal.com. So give me a breakdown on that. Like what's a who's a customer. What is flexible warehousing I know we talked about this before the show. You guys said something along the lines of, you feel like where you are now is where maybe self storage was 30 or 40 years ago. Kind of give us just a broad overview if you can. Alex Morrison (00:02:43) - Yeah. Like I'd say from a fundamental perspective, if you think about an industrial business or an industrial user of space,, there's a long tail of users that are smaller. Alex Morrison (00:02:53) - , you know, the Amazons of the world take on 50,000 100,000ft² plus of spaces, but there's a massive amount of companies that just need a couple thousand square feet or less space. And their options are super limited. So the genesis of portal was actually thinking about our network in the e-commerce space and learning, you know, their their kind of supply profile as you as you start a company and think about the last company you saw advertising or purchase from on Instagram, these companies have products they need somewhere to store them and fulfill them out of. They have very limited options after they outgrow their first space, which maybe is a garage, maybe a bedroom as they get to that next level,, the options drop off. They need to sign a five year lease, and there's not a lot of space that's available sub 5000ft². So what portal is doing is being an institutional level provider of small warehousing space. Sam Wilson (00:03:42) - Got it. An institutional provider of small warehousing space. Is this kind of I mean, we're going to use this maybe not even the right term, but I mean, we see it happening across Airbnb ten years ago, you know, hey, we're working. Sam Wilson (00:03:55) - We're doing you know, people are renting out their houses on Airbnb. We're seeing it happen in the parking industry where we're, you know, anybody with a lot that can park a semi and some other things those get, you know, turned into,, you know, semi parking spaces. And you guys kind of saw this, I guess same opportunity in again, smaller, potentially unused spaces. And or maybe you're taking big buildings and converting them I don't know. I mean it's that kind of am I thinking along the right lines here. Alex Morrison (00:04:21) - Yeah, exactly. The thought is there is a massive amount of of customers out there that need a functional place to operate. They don't need the 32 foot clear class A building. They just need an industrial logistics environment with a dock door and loading in a commercial address. And we can take spaces that range from your class A warehouse to, you know, our newest location in Brooklyn is actually on the seventh floor of a multi-story, you know, a true multi-story warehouse that was built 100 years ago with freight elevators and logistics for that manufacturing kind of company. Alex Morrison (00:04:52) - We can plug our customer in. That just needs a highly functional space,, and some logistics services and basically fill buildings that, you know, are antiquated from today's traditional logistics perspective. Sam Wilson (00:05:06) - Got it. Okay. That's really, really cool. Tell me, I guess when you you guys are all over the country, you said Salt Lake City, Tempe, Brooklyn, Los Angeles. How how do you underwrite? How do you even figure out if this model will work where you guys are going? Alex Morrison (00:05:24) - I mean, we there is an enormous demand. We think this product works in, in every city. We have to be smart on location. We're really focused on infill amenities markets. If you think about our customer profile, which Andrew can kind of jump into a little bit, they want to be in a convenient we're really selling convenience as well as space here. The core product is space, but it's also the alternatives are very slim. So our customers are paying for for high quality functional space near where they where they work. Alex Morrison (00:05:55) - So generally that means last mile locations that are infill. They'd rather be in downtown LA than going out to the Inland Empire, for example. And Andrew, one of you, you know, show Sean some of our story, Sam, some of our,, example kind of customers that we work with. Andrew Runnette (00:06:13) - Yeah. We've seen a lot of crossover sand between, you know, people doing industrial work but also doing e-commerce work, but also using the spaces where they work out of it as well. So you've got your side hustler, you've got your Amazon full fillers, right. You've got all those kind of profiles that come across, but also a lot of service industry customers where, you know, satnav company, right. They get a contract to do some restaurants in Phoenix, for example. We've had this numerous times where they come in and use our warehouse to fulfill their contract. Then they're gone, right? So it's flexible. You know, they're signing a six month lease or a 12 month lease and, you know, that's it. Sam Wilson (00:06:55) - That's really interesting. How how does it work? I guess, you know, from a buildout perspective. Are you guys are you guys subleasing space from another, you know, are you guys buying the warehouse and then, you know, making it into smaller bays or are you guys buying are you guys subleasing space and then leasing that out again. Like how are you guys finding the properties and then plugging the right tenant into the right spots. Alex Morrison (00:07:17) - Yeah. Like,, just to kind of exhibit an example is our, our building in, in Brooklyn., we have a bunch of different strategies. We do select releases, but generally we're moving away from that. We're doing mostly management deals now and then acquisitions through some of our capital partners or where our partner buys a vacant building and we come in and operate it and generate a pretty big increase in NOI, because we're generally getting at least three times market rents on our on our, our spaces, because we're making them much smaller than a market lease is. Alex Morrison (00:07:50) - , so we'll take a 50,000 square foot warehouse and break it down into spaces that average about 500 or 700ft², where 50 companies can operate out of. And we have a logistics operational component where we help them with a bunch of services and give them an awesome space to work out of. But for the most part, you know, they're doing their own business within their own space. It's private, but they share the logistics infrastructure, so we're allowing companies that will never have access to things like a dock door., because generally, it's hard to find that when you when you are below 5000ft² and don't want to sign a five year lease, where do you find infrastructure like that? We can provide someone who needs 200ft² of space with a commercial, you know, dock door, which which allows them to grow their business very quickly and grow with us. Sam Wilson (00:08:36) - Got it. So you guys, are you guys moving? I maybe I misheard this, but you're moving away from the like actually buying of the of the warehousing and then leasing them out and more into the management model. Sam Wilson (00:08:47) - Is that kind of what I'm hearing? Alex Morrison (00:08:50) - Yeah. The last two deals that we did were management deals., and one of them was an acquisition through a partner of ours, and the other was a third party management deal. And we're seeing a lot of opportunity with that as the as the product matures and, and the track record kind of appears and it looks really good. Really good. Honestly, our track record in terms of filling space or buildings or 100% full generating big premiums, people are saying, can you do this with us? Can you do this in our building? And we can take some of these funkier buildings that are in, you know, gentrifying pockets but are not class A industrial and generate like class A+ rents on those, right? Sam Wilson (00:09:24) - No, that makes a lot of sense. And I would think from a scalability model, I mean, that's far more scalable than you guys, one building at a time, taking it, building it out, doing whatever you're going to do, then managing it and then going back to the next building. Sam Wilson (00:09:37) - Like at this point, your customer base is nationwide. You're you're just running the management side of it. How does that work? Say, I came to you today and I said, hey, I need 200ft² and, you know, Salt Lake City, like, how do you how do you define what that 200ft² is? And where does a customer, I mean, what's what's that space even potentially look like? Andrew Runnette (00:09:57) - It's pretty small, but it works for a lot of people., but it's already set, you know, it's got a it's got a key. It's got a door, you know, it's it's already set. We we've modeled out how many we need of that size in each of our locations. And we've got 250ft², 500,015 hundred square foot spaces that are just predefined. And people make it work and they, you know, they can move in same day. Really. We've made it really easy. We've automated everything. Sam Wilson (00:10:27) - So it is a lot like I mean a storage unit. It's just you walk in, you get the keys. Sam Wilson (00:10:32) - Hey, this is the size,, you know, like you said, two 5500 was your next one 1500 square feet something along those lines? You can pick one of those three sizes and boom, you're ready to go. Andrew Runnette (00:10:43) - Yeah. And we've we've taken a lot of learnings from storage. Right. We've taken a lot of learnings there and and really automated things and made it pretty easy. We only have one general manager at each location, so operating a 40,000 square foot warehouse. Sam Wilson (00:11:00) - Right. Okay. What were you going to say, Alex? Alex Morrison (00:11:03) - I was going to say, we mentioned earlier on the call that, you know, we see a lot of similarities between storage. I think another another name for this product is could be like industrial Self Storage, where it looks like self storage. It feels like self storage. Our customers are not people, they're businesses., and it's a very diversified rent roll. And you know, we're cutting up space. It's a you know, it's changing the model to a monthly model versus a per square foot model. Alex Morrison (00:11:27) - And, and that's what storage does. And you can get some pretty big premiums when you do that., so so we do think this is,, like an early asset class that you'll see more and more of and just like self storage., you know, 30 years ago, it was,, mom and pop industry or maybe not institutional industry. And now it's a darling of real estate. So, you know, not to say that that will become of this, but I think it could I really do. Sam Wilson (00:11:52) - Got it. So let's say you rent that 1000 square foot space or 1500 square foot space. But I am looking at I think one of the things that you mentioned here was that all of your spaces have a services component that goes along with it, maybe that you're not going to find,, I guess I'm what I'm searching for here is the differentiator between self-storage and what you guys are doing. And I know there is one. So maybe you guys can clarify that for me, because when I see here 200ft², I'm thinking, well, why not just go rent to ten by ten, roll up storage units, and then you're at 200ft², and it's probably less than maybe what you guys do. Sam Wilson (00:12:23) - But there's got to be some differentiator there. So tell me what that is. Maybe. Andrew Runnette (00:12:27) - I think there's two,. The docs, as Alex. Alex mentioned earlier. Right? You can't find a loading dock at it. Such a small space. Right?, and then second would be we receive goods for people. So say you have 6 or 7 pallets coming in. You let us know. We'll grab them off the truck for you. Pretty simple. And we'll throw them in your unit if needed or, you know, if you can't be there. So companies are saving you know that labor piece, right? They're saving the money right there by not having to have somebody out there warehouse at all times. Sam Wilson (00:13:00) - Absolutely. And if you don't know, for those of you that's never been in a business that has receivables like that, that come on trucks, I was a long time ago. And what a nuisance that is. Man in the middle of the day you're trying to get something done and all of a sudden there's somebody knocking hey man, there's a there's a semi trailer out back like crud okay, let's go pull something. Alex Morrison (00:13:19) - And we also help on more on the logistics side too. I mean we help with the outbound and the inbound. So you know we arrange pick ups from all the major carriers. So from a if you're a small e-commerce brand sending out 100 packages a day, all you need to do is give you past a product that's been packaged to us, and we'll handle it from there. And we aggregate that amongst the facility. So we have economies of scale and get the past that labor cost and the shipping costs. Savings on to our members. So there's a big component of of the logistic services that, you know, we have a lot of companies that actually come to us from self-storage. They're in 4 or 5, six self storage spaces, and at some point that breaks and it's definitely a more affordable model. But at some point you have to make a decision, do I want to run my keep growing my business professionally or do I want to stay, you know, limited by storage units and in generally, you know, it breaks at some point. Alex Morrison (00:14:10) - So, you know, our model is kind of the next stage. If they're not ready to go lease a 2000 square foot industrial space, if they can even find it, where the next kind of stepping stone for that, for that journey. Sam Wilson (00:14:21) - Right. Yeah. Like you like you mentioned there, if you can even find it, let alone being able to find it on flexible terms, you know, which it sounds like that's another perk that you guys have where it's not, hey, we're not tied in for 5 or 10 years on an industrial space. It is. You know, I don't know what you're I'm sure there are varying lease terms, but it's it's probably much shorter duration, I would guess. Alex Morrison (00:14:43) - Yeah, it's 3 to 12 month terms. And generally, you know,, customers don't leave us after their initial term. They just they like the flexibility. Something changes. We, you know, we've had companies grow from our smallest space to our largest space, 200ft² to 2000ft² over the course of a year. Alex Morrison (00:14:59) - And then and then they're ready for their next, you know, traditional term. And they'll go find a 5000 square foot building to lease...
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Navigating Challenges and Opportunities in Commercial Real Estate Financing
03/11/2024
Navigating Challenges and Opportunities in Commercial Real Estate Financing
Today’s guest is Ben Fraser Ben Fraser is the Managing Director and Chief Investment Officer at Aspen Funds, where he combines his analytical nature with a passion for delivering outstanding client service and strong returns through out-of-the-box investments. Show summary: In this episode, Sam speaks with Ben Frazier from Aspen Funds. They delve into the complexities of raising capital and the strategic shifts Aspen Funds has made to adapt to the evolving market. Ben outlines three common scenarios they encounter: providing gap funding for urgent capital needs, facilitating loan assumptions to improve leverage, and offering rescue capital in distressed situations. He explains the intricacies of negotiating with senior lenders, emphasizing the importance of understanding their motivations and the power of being the last money in. Ben also candidly discusses the current challenges in the commercial real estate market, including rising interest rates and an influx of new supply, suggesting that survival through the next few years will be key for investors. -------------------------------------------------------------- Intro (00:00:00) Ben's Career Journey (00:01:14) Evolution of Aspen Funds (00:02:00) Challenges in Raising Capital (00:03:42) Adapting to Market Changes (00:04:55) Navigating Risks in Real Estate Investments (00:05:13) Building Trust with Investors (00:07:13) Attracting Capital through Thought Leadership (00:10:52) Timeline for Capital Attraction (00:12:13) Current State of Commercial Real Estate Market (00:14:05) Future Opportunities in Real Estate Investments (00:17:57) Conclusion of the Show (00:17:57) Gap Funding (00:18:24) Loan Assumption (00:19:56) Distressed Rescue Capital (00:20:52) Hope for Sponsors (00:23:32) Negotiating with Lenders (00:26:15) Conclusion and Contact Information (00:28:52) -------------------------------------------------------------- Connect with Ben: LikedIn: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Ben Fraser (00:00:00) - There's something like 9 million accredited investors just in the US, right? For any one of us to be successful, I only need like a couple hundred investors. You know, if I want to go big, a couple thousand investors, that's not that many in the sea of accredited investors. And so my mindset started to shift. We started to position ourselves as thought leaders,, to attract capital to us as authorities in our space, doing a lot more content,, getting in front of audiences virtual and in person and starting to kind of build a,, an attraction mechanism to bring capital to us. Intro (00:00:36) - Welcome to the how to scale commercial real estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:49) - Ben Frazier is the chief investment officer at Aspen Funds. They're an inc 5000 company, and he's responsible for sourcing, vetting and capital formation of investments. He has prior experience as a commercial banker and underwriter, as well as working in a boutique asset management group. Sam Wilson (00:01:05) - He's also the co-host of the Invest Like a Billionaire podcast. So if you haven't checked that out, go check that out as well. Ben, welcome to the show. Ben Fraser (00:01:12) - Hey, thanks for having me, Sam. Absolutely. Sam Wilson (00:01:14) - The pleasure's mine. Been there. Three questions. I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now? And how did you get there? Ben Fraser (00:01:22) - Yeah. So you kind of said a little bit. I was,, spent some time in banking as a commercial banker, underwriter. Learned a lot. Got to look under the hood of ultra wealthy borrowers of the bank. And my favorite thing was going to look at their personal financial statements and tax returns. Learned a whole lot. Two biggest takeaways were the most wealthy,, borrowers were business owners and real estate investors. And I thought, hey, that's what I want to do. So an opportunity to join Aspen Funds about six years ago now, I've become a partner and,, helping scale and grow the business,, and running running my team. Ben Fraser (00:01:55) - So it's it's been an amazing ride. And,, just kind of getting started to. Sam Wilson (00:02:00) - That's really cool. What was the opportunity that you saw when you joined Aspen Funds? Like, what was the gap that you said, hey, man, this is something I can fill and this is the direction we can take the company. Ben Fraser (00:02:09) - Yeah, well, I kind of got bait and switch that I like to say in a in a certain way, because I was coming on to be the VP of finance. So as a banker, you know, finance MBA. So I was like, I'm going to go kind of the CFO route, kind of help with the the finance side of the business. So I joined, you know, they'd been going about five years at that point, had only raised about 10 million bucks. So it was pretty small at that point. But so opportunity to help scale and grow something. But then very quickly they said, hey, you know, we actually need help raising capital because that's, you know, really we need to scale. Ben Fraser (00:02:43) - And I'm like, okay, that's not what I really signed up to do. But hey, I want to just help out where I can and, and the and grow. So learned very quickly., I had no idea what I was doing and,, tried all the wrong things. Made a lot of mistakes., wasted a lot of money,, trying to do different campaigns. But fast forward to six years later. We've raised over $200 million in equity from investors. And,, continue doing to to scale up. So it's it's been a fun thing. I have an amazing team. It's not all me. I have about,, six different people that are on my marketing and investor relations team. So we just continue to be able to invest in good people. And I don't do any calls anymore. But still, you know, run that team, right? Sam Wilson (00:03:27) - No, that's really cool. I'd love to hear a little bit more about those kind of mistakes and things that you say maybe you did wrong early on, but before we get there, let's talk maybe about what Aspen was doing then and maybe what it's doing now. Sam Wilson (00:03:40) - Like, how has that changed? Ben Fraser (00:03:42) - Yeah. You know, I think it's important to have an agile business model, especially in real estate and investing, because the tides can change. Right. And what you were doing before,, may not be a good place to be now. And what was really cool at the genesis of Aspen, it was really an opportunistic thing that our, our founders saw, and it was buying discounted distressed mortgages on, on homes. Right. And at that point, coming out of the great financial,, crisis, they saw this opportunity was a great opportunity., but it really launched us. We continue to operate those funds that continue to perform very well, but it's just not the same level of growth that we've seen in the past. And so several years ago, we started to take the same approach that we use to identify really good opportunity sets, really good, what we call macro driven themes. So we're looking at the macro economic picture, trying to find where we think these long term trends are going to kind of carry the next wave and, invest in those verticals. Ben Fraser (00:04:45) - And so we have a few different verticals we kind of focus on and have expanded into a lot of different,, kind of asset classes from there. And, continue to, to grow those. Sam Wilson (00:04:55) - Got it. What about the distressed mortgage business? What's that? I mean, what's that look like today? If you guys were I asked this this is kind of a leading question because I'm, I'm an investor in a distressed mortgage fund that is basically gone belly up at this point. Ben Fraser (00:05:13) - Oh, no. Yeah. Sam Wilson (00:05:14) - It's not good, man. It's not good. I could I got a front row seat on telling you the wrong things to invest in., but it's gone belly up and I'm looking at it going, and they made some mistakes, I think maybe 3 or 4 years ago where they ended up doing. They took these loans and they did worker work workouts. Work around. Ben Fraser (00:05:29) - Workouts. Yeah. Workouts. Sam Wilson (00:05:30) - Yep. Workout. Okay. I'm not in that business. You can tell,, with the borrowers, but they were resetting then, you know, the interest rates at that point in time, like, hey, Ben, cool, man. Sam Wilson (00:05:40) - We can rework your loan. I know you had 100 grand. We bought the loan for 20 grand., you know, we'll reset it for 70, and you can,, you know, you can take the well and we'll, you know, set it at 3 or 4%. Well, now, nobody wants those. They can't resell them. Like the value of those loans is declined to almost nothing because nobody wants to take a 4% or 3% loan on their books because they're not worth anything, because now it's, what, 7% that's going rate something like that? How did how did you guys get around not getting caught holding the bag like that? Ben Fraser (00:06:08) - Yeah. You know, again, being agile not both in a macro sense, but also a micro sense. So as the market kind of matured we had to shift strategy. And so, you know, we we saw that one of the biggest risks would be rising interest rates. And at that point we thought it was a pretty, pretty minimal risk because we'd have low rates for a long time. Ben Fraser (00:06:28) - , but we always risk adjusted our pricing. And we just kind of held to that and, you know, missed out on some opportunities, but just felt like that's, you know, we're taking more risk working with a borrower that is,, you know, not as good credit quality as, you know, you or I. And so we risk price those to,, you know, much higher interest rates. So our yields, our gross yields are generally in the 13 to 15% range., and so we've been able to stay right sized in that fund and still pay our investors their full return and haven't missed in 11 years. And,, have, you know, still pretty good healthy portfolio. So it's, you know, call it some luck, call it a little bit of foresight and just good discipline. Throughout changing, changing times. Sam Wilson (00:07:13) - Right. And I think a lot of people are afraid of that. One of the things that we hear a lot of people say is, you know, don't don't fall prey to shiny object syndrome, which is a real thing. Sam Wilson (00:07:22) - You know, we're investors, they get involved. I'm I'm one of them. I'll be honest. It's, you know, early on, you're like, oh, hey, what about this? What about that? That's really cool. That's really cool. But yet at the same time, there's a right time and place to be like, no, we're pivoting. We're not doing that anymore. Because as you said, very at the beginning that, you know, times change and you got to have to have a, have to have an agile business model in order to adapt with the times. So really cool. Thank you for sharing that. Let's talk a little bit about the early on days of raising capital. You said you spent a lot of money and made a lot of mistakes, did some wrong things. Give us some insight there. Ben Fraser (00:07:52) - Yeah. You know, so I came in with pretty much no network. We didn't have a website that worked,, and no background and raising capital. I'd done some like sales jobs before, so I knew how to like, talk to people. Ben Fraser (00:08:03) - But, you know, that was about it. So my initial thought was, hey, if I just. Go into rooms where there's wealthy people. We have a compelling product, compelling offer. I can convince them to invest with me, right? I mean, it's that simple. Money needs a place to land. We got a good place for it. You know, easy as pie. So we started doing. I mean, it's kind of funny because we go to this this,, conference, and there was this,, kind of service provider that mostly worked with financial advisors, which this is a very common lead generation tool where they go do dinner events, they send out mailers, they bring people to a fancy steakhouse. They do a whole, you know, dog and pony show and convert people to a,, an appointment where you kind of talk one on one and then you, you know, get the assets. So they tried to apply this to,, fundraising. And,, so we tried this and, you know, I went to like a whole week long training of how you do these seminars. Ben Fraser (00:09:03) - And,, we went all all in on it and spend a lot of money and had a lot of success from people coming to their and people that were interested. And then we had a really high conversion rate to appointment. So I'm like, man, this is working. So we just keep doing this while we're working through the the lead pipeline. And then at the end of the day, we did, I think, 3 or 4 of these events, and they're costing us 15, 20 grand a pop. So, you know, we're dropping some change. And at the end of the day, I raised a big fat goose egg and I was like, what just happened? Because people came, they were interested, they wanted to learn more and I couldn't close them. And what was so interesting to me, you know, there's different reasons why people decide not to invest, but the ultimate one was they just didn't have enough trust in us. They didn't. There wasn't enough of a,, comfort level, knowing who we are, what we're doing. Ben Fraser (00:09:57) - And, you know, we had a little bit of a track record, but, you know, this was these were called audience. And so very quickly learned, you know, the kind of idea of, of funnel,, marketing, but also in capital raising, building that trust is so important. And finding ways to shortcut that trust curve is like kind of really became my, my passion of learning how to do that. And so what really shifted was we instead of like my approach at that point was begging and groveling and just any dollar I could get I would take. But, you know, it created this scarcity mindset to where it was like, if I don't close this investor on the phone right now, I don't know when my next investor is going to come and I need the money to, you know, invest in this deal to an abundance mindset of, you know, I think I forget the number that changes all the time, but there's something like 9 million accredited investors just in the US, right? For any one of us to be successful, I only need like a couple hundred investors. Ben Fraser (00:10:52) - You know, if I want to go big, a couple thousand investors, that's not that many in the sea of accredited investors. And so my mindset started to shift. We started to position ourselves as thought leaders,, to attract capital to us as authorities in our space, doing a lot more content,, getting in front of audiences virtual and in person and starting to kind of build a,, an attraction mechanism to bring capital to us. And,, then you build on momentum right where you, you find where the momentum's rolling and you just double down, triple down and,, and just keep, keep going. So it's fast forward. Now, we've raised, raised a lot of money and it's I'm not working any harder. Not necessarily any smarter is just doing the right things. Right. Sam Wilson (00:11:36) - No, I love that. Thank you for sharing that. That's,, that's that's time intensive on the front end. I think putting in those, positioning yourself as thought leaders, putting out content, I mean, what was the,, it's like,. Sam Wilson (00:11:50) - You know, Google ads or something like that. You know, they say on the front end, like you're going to spend the first 4 or 6 months and you're pouring in tons of money in an ad campaign in the first 4 to 6 months of that. There's just very little happening. You don't think, and then eventually, you know, you start to get traction with it. What would you say the timeline is for you? Or you said, hey, man, we put in the hard work that 12 months, 24 months, what was how long do you feel like before you start to really get your feet underneath you? Ben Fraser (00:12:13) - Yeah. You know, I think it's just it has to be a mindset shift where we all want a silver bullet that if I just do X and I invest Y into it, I get out Z and I make all this money. Right. And it's it's never as simple as that. And I think I spent so long trying to find the formula that we could just pour money into that would just give us, you know, new capital. Ben Fraser (00:12:34) - , but it's like the quick fix, right? And it's so much of what we're doing, you have to play the long game. And when you're doing content, when you're building a,, an audience, when you're building a platform, whatever mechanism you choose, whether that's, you know, blogs, whether that's YouTube, whether that's a podcast,, whatever it is, it takes time. And so for us, we started with SEO,, we had some skills internally of being able to,, rank high in Google. And so we started doing that, writing articles and, ranking high in Google for certain keywords and then doing layering on advertising on top of that. And then, you know, that became kind of the first,,, flywheel that we could kind of build off of into other, other things. And so it took some time. It's hard to say exactly when it really kicked off, but I would say we spent. Probably a good portion of a year or two, like with this mindset of we're just going to go hard. Ben Fraser (00:13:25) - We're going to, you know, build this thought leadership platform with results along the way. But I would say at about that kind of 18 to 24 month mark. Everything. Just start taking off, right? Because you get a couple wins, you get on a couple stages and all of a sudden, you know, you just start to attract more and then it's,, this kind of snowball that picks up steam and just gets bigger and bigger and bigger and bigger. And, you know, you just kind of roll with it, right? Sam Wilson (00:13:49) - I love it, love it. Thank you for sharing that. Certainly appreciate it. We've got about nine minutes left here on the show. I want to get cover. Two things. One, I want to get your thoughts on what the current,, commercial real estate market looks like. And then what you guys are really going along in right now. Ben Fraser (00:14:05) - Yeah. You know, it's it's interesting as we stand today, beginning of 2024,, we're sitting on the back end of the fastest,, rate increases in history. Ben Fraser (00:14:15) - And,, the market is still digesting. What does that mean? You know, how how long is this going to be? When can we get our first rate cut, please? Jerome Powell and it's from my perspective, caused a,, a misalignment of expectations to reality. And I think a lot of people are just wanting to go back to the old normal. Right? What we're used to really low interest rates, really cheap money. And I think we're entering into a new normal. And,, I think we're going to have rates higher for longer. What does that mean? I mean, anyone that knows, you know, some basic math and you have smart listeners, but, you know, higher interest rates put a lot of pressure on higher cap rates, which really puts, you know, downward pressure on value. So I think we're...
/episode/index/show/howtoscalecre/id/30261168
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All-Cash Real Estate Investment Strategy
03/04/2024
All-Cash Real Estate Investment Strategy
Today’s guest is Joel Friedland. Joel has 40 years of experience as a broker, investor and syndicator in industrial real estate. Show summary: In this episode Joel Friedland shares his journey from starting as a broker to establishing his own firm. He stresses the importance of specialization and building lasting client relationships. Joel discusses the industrial market's growth due to e-commerce and manufacturing but warns of economic downturns. He advocates for all-cash deals, avoiding debt for investment stability, and highlights the competitive edge it provides. Joel compares leveraged investing to gambling, promoting a risk-averse strategy for long-term security. -------------------------------------------------------------- Intro (00:00:00) Staying focused on industrial real estate (00:01:57) Market swings and the state of the market today (00:06:18) Types of industrial real estate and market demands (00:09:10) Positioning in the industrial real estate market (00:11:06) Reasons for selling industrial buildings (00:15:24) The no-debt financing model (00:17:53) Competitive offers and leveraging returns (00:21:29) Risk Aversion and Leverage (00:23:45) Gambling in Real Estate (00:24:47) Balanced Portfolio and Risk Mitigation (00:26:57) Conclusion and Contact Information (00:27:48) Closing (00:28:25) -------------------------------------------------------------- Connect with Joel Friedland: Instagram: @investingwithjoel YouTube: @britproperties Tik Tok: @investingwithjoel LinkedIn: Brit Properties Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Joel Friedland (00:00:00) - In every downturn when there's been, let's call it agitation of my mental health and my investors. Investment safety. Yeah, it's been because in every case I can prove in every case it's because we had a loan. Intro (00:00:18) - Welcome to the how to Scale Commercial Real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:31) - Joel Friedland has 40 years of experience as a broker, investor and syndicator in industrial real estate. Joel, welcome to the show. Joel Friedland (00:00:39) - Thanks, Sam. It's great to see you. Sam Wilson (00:00:41) - Absolutely great to see you, Joel. I asked three questions to every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now and how did you get there? Joel Friedland (00:00:52) - Sure., so I'm 64 today. I've been in the real estate business since day one. I've only had one career, and it's industrial real estate in Chicago. I started out as a broker, working for a family that was in the business for decades, and they had 80 buildings that they owned as syndicators, and they hired me as a leasing agent right out of college, and they trained me and taught me, and they were my mentors. Joel Friedland (00:01:20) - And eventually I tried to join the family wasn't my family, and they wouldn't let me in. So I started a business with three other guys and we did the same thing. I've stayed close with that original family. I'm so close with them, actually, with one of the one of the sons that today I'm having a call with my advisory group before I buy buildings. I have an advisory group zoom meeting, and he's one of the leaders of the zoom call, and that's from 40 years ago. Same relationship. Still love him. We love each other and he's brilliant. Sam Wilson (00:01:57) - And that's absolutely amazing. I mean, I don't know if I would put that in the blessed category, like there's there's very few people that can have a single career, not only a single career, but one in a very, very niche asset class without ever looking to the left or to the right. How did you stay on track and avoid temptation to look at other shiny objects? Joel Friedland (00:02:24) - So I have studied successful people. I've studied people who are super wealthy. Joel Friedland (00:02:32) - And primarily families that are super wealthy. And I'll tell you what they have done with their business. They've stuck with it. They don't go. They don't go to the right. They don't go to the left. They just stuck with it. I can give you the stories of about 200 family businesses that I've done business with as a broker and as a syndicator, where they invest with me and every one of them goes back decades. I have a company. We're buying a building right now from a family that started a business in 1935. In Chicago. It's called the. The company in the building is called talk. Often they make you know, have you ever been in a parking garage or a university or mass transit place where they've got those posts with the blue lights, with the phone you pick up or you push a button to get security? Yep. They make those talk. A phone makes that. So these two guys started the business back in the 1930s. And now the the family that owns the building that they've been running the business in. Joel Friedland (00:03:44) - , they are are the grandchildren of the original founder. Why are they so rich? Because they did one thing. Because if you jump around, you don't learn. The ins and outs of the business. When you do something long enough, you learn it. And I'll give you an example, just like a. A metaphor or a or a. I don't know the difference between the, but,, an analogy. So,, my mother had,, kidney cancer diagnosed a few months ago. All right. So who does she go to? She goes to the kidney. Removal urologist. Who's the best in the world, right? You want the best one in the world? Would you go to someone who says, well, I used to do knees and I didn't like that so much, it didn't work out. So I started doing brain surgery. Sam Wilson (00:04:45) - It didn't like. Joel Friedland (00:04:46) - That. So I decided to go into being a urologist. And I've done a few kidneys. I've done it for a couple of years. Joel Friedland (00:04:54) - You know, you could move the frick out of there so fast. Yes, but the person who has done dozens and dozens of kidney surgeries a month, right? Same thing, same thing, same thing. So that's what my mother did. We went, we're in Chicago. She went to the University of Chicago. And Doctor Shalhoub is the guy that she saw. You know what? He removed my dad's kidney 12 years ago. Wow. He's the guy we trust. So. I'm in the same business, industrial real estate in Chicago. The niches, small industrial buildings, class B. With it are occupied by manufacturers that are owned by families. That's my niche. That's it. And there's 16,000 industrial buildings in Chicago. And there's about 20,000 companies in Chicago and industrial one point 5,000,000,000ft². If I can't make a seven figure income by knowing that market really well, I'm a moron. But I'll tell you what. If I go do deals in Tennessee, or I go into the office leasing business, or I go into the retail business or the multifamily, someone who's been in it for 40 years like I have, is going to eat my lunch, right. Joel Friedland (00:06:15) - So I stick with one thing. Sam Wilson (00:06:18) - I love it, I love it. That's that is that is admirable. And I appreciate you, given the insight onto your motivation and kind of thought process behind why you have stuck with that one thing, that one thing has seen, I'm sure, in the last 40 years, many different. Comings and goings of both market swings, of industrial appetite, of tenant, types of lease rates, cap rates, the whole nine yards if you will. Can you break down some of that for us? And maybe at the end of that give us a state of the market today? Joel Friedland (00:06:52) - Sure. 1981, when I started working for the Podolsky family,, there were interest rates out there like you wouldn't believe 17, 17 to 20% makes today's 7% mortgage look like a really good deal. We were in a terrible recession. It rode up after that because there's a recovery after recessions. And then in 1990, we hit another bump and there was a downturn. And through the 1990s it was great. Joel Friedland (00:07:21) - And then there was another downturn in 2001 when nine over 11 happened. And we rode that up. And then there was another downturn, which is the worst 1 in 2008. And now things have been riding for 15 years, all to the good low interest rates, cap rates coming down. You can't blow it in a market where you can borrow at 4% and cap rates keep going down. But that's changed. And now people are struggling because interest rates are all of a sudden at 7% instead of at 4%. And if you had floating rate debt and a lot of debt, you're screwed. So the market's been great. Industrial has been great for four years. Rents have increased 80% throughout the entire market in North America, including Canada. And that means if your rent was $5 a square foot when you started out five years ago with the lease, today it's nine. So it's been booming because of the internet? Because the internet requires warehouses. And because of manufacturing. Because as manufacturing does well, it requires industrial buildings, which are warehouses that they fit with their machines and bring all their employees in to make stuff. Joel Friedland (00:08:35) - So that's that's what the look is today. I think the market's coming down a little today. I think the the economy, the real estate economy is in a bit of trouble. And industrials still doing great. But it's not immune. Nothing's immune. Sam Wilson (00:08:51) - No. Nothing's immune. Certainly I would I would propose that things change as in the especially, you know, the types of industrial maybe that tenants want. Have you seen any shift in the last couple of years on the types of industrial real estate that is, that people are, are leasing. Joel Friedland (00:09:10) - They're leasing every kind of industrial real estate. So if if you drive down the highway in any town, big, big city, small town along the highway, you're going to see big industrial buildings occupied by companies like Amazon, right? Wayfair, like target for their online sales warehouse and for their warehouse for their stores. And if you think about it, every product in the world is made in an industrial building, except for crops that come from a farm. Joel Friedland (00:09:41) - But they are brought to industrial to be packaged and sent out. So there's nothing. If you look around on your background and you've got,, the sign, you've got the wood, you've got the,, microphone. Everything in your office, in your house was made in an industrial building someplace. Yeah, and they have to keep making it. You know, you look in the background here, everything here. There's what's in my office here probably represents 10,000 industrial buildings where products were made that either are parts that went into my phone or parts that went into my lamp. Industrial is everywhere and is necessary. And it's a part of the supply chain. It is the supply chain. Right, right. Sam Wilson (00:10:30) - No, that makes absolute sense. I love it, and it's one of those. It's one of those.. Who? I don't want to call it recession proof, but it's almost my question for you would be is on the,, you know, as demand changes or if the if the man doesn't change, I mean, tell me a guest on that front. Sam Wilson (00:10:49) - I know you said that. Yes. Everything comes from a factory and or an industrial warehouse, but how do you position yourself to be in front of what that demand type is? And or, you know, what customers want? Is that is that a question? Even make sense? Joel Friedland (00:11:06) - Yeah. I don't have to be in the front of it. I have to be in the middle of it. What's that mean? I have to be in the middle of it. I have to be. I have to own industrial buildings in great locations where companies want to be, and I have to keep my tenants. And, you know, you and I talked about this before we buy all of our buildings., all cash, no mortgage, debt free. And I think I've done a little study. There's probably 4000 syndicators in the United States with portfolios over $50 million. And I would say of the 4000, we may be the only one that does all cash deals. Yeah. So when I say I have to be in the middle of it, I have to own buildings. Joel Friedland (00:11:49) - My investors put 25, 50 or $100,000 into our deals. They expect me to know what I'm doing and to protect their money, which is why we don't have mortgages. You can't lose to a bank if there's no mortgage. Right. My tenants expect me to give them a fair deal. And they expect me to keep their roof from leaking. These are net leases. But even in a net lease,, in industrial, landlords are almost always responsible for the roof and the structure of the building. So being in the middle of it means knowing my market inside out and only buying buildings that are desirable for any kind of tenant. No matter what they do, whether they're a distributor or a manufacturer. And making sure that they are in locations where there's a lot of,, population density public transportation in Chicago., we own ten industrial buildings in the city, and with one exception, they are all occupied by distributors and manufacturers. We have one that's a service company., in Florida, for example, there's a complex in in every major city in Florida where they have service companies,, and they have drive in doors so that companies that install shower doors or companies that do sprinkler systems or clean pools, they don't have loading docks and they don't have manufacturing. Joel Friedland (00:13:18) - Florida is not a manufacturing area. Right, right. Pretty much the Rust Belt is. So the Rust Belt is is sort of the East Coast. The the Midwest. And then going out into Southern California, there's there's a lot of manufacturers there, but most of the other markets are distribution markets. So to be ahead of the market, you'd have to have a big warehouse in Nashville. There aren't a whole lot of manufacturers moving to Nashville, and it's a smaller market in Chicago. There are so many companies manufacturing products. I just need to own a building that they all like. That's the key. So it's gotta have high ceilings. It's gotta have good loading docks. It's all about the geometry and the physical makeup of the building. So I don't have to be in front of it because it's a very old line business. All these buildings go back to the 1960s. 70s 80s 90s the last 20 years,, we just buy existing buildings. We don't build anything. So the people who stay out in front of it are the developers who build these giant 500,000 square foot buildings, million square foot. Joel Friedland (00:14:29) - We don't do that. Because we're syndicators, we have to do a smaller variety of business than buying a $200 million complex with one tenant. Sam Wilson (00:14:39) - Right, right. And that's actually here in the Memphis market, which is, you know, a huge distribution market. That's what we're seeing. Sit vacant actually, right now are those massive buildings that there was a boom there for a while. But those massive buildings are the ones that I was talking to a broker here locally about. They said the smaller stuff like maybe, you know, what you're getting into is stuff that's still, you know, in high demand, but those huge buildings just are they're tougher to move right now. So that's, yeah, that's really interesting. Let me ask you this. Why? Why do people sell these buildings? You're in a market that sounds like it has just. You know, unmet demand. So why are people even selling this at all? Joel Friedland (00:15:24) - Now they don't. Very often. That's the problem. There are very few buildings on the market. Joel Friedland (00:15:29) - Are our,, vacancy factor across the Chicago areas? About 4%. Whoa. And people don't move if you're in a in the industrial business. So let's say you're in multifamily or let's say mobile home park or let's say,, self-storage. Yeah. How long does it take one of those tenants to leave? Few hours, right, a few hours. An industrial company that's manufacturing products, that has 40 machines that are screwed into the floor, with 40 employees that have been trained how to use those machines over a period of years. Moving that takes two years from the start. When you think you want to move to actually implementing the move as a two year process. Wow. You can compress it probably to a year and a half if you're really good as a as an owner of a company. But why would they want to move if it takes two years to do it? And it's a distraction from what they do running their business. Also, they can't lose their employees. They don't want to move. Joel Friedland (00:16:40) - They don't want to retrain people. And also usually if it's an entrepreneurial company, the location of their building is right near where they live, so that they don't have to drive that far for their commute. So for so many reasons, they don't leave. And, you know, the cost of moving the machines. This is just one company. We have a company that makes fruit juice concentrates in a building in Chicago. They're in 40,000ft². If they moved, it would cost them $20 million. Sam Wilson (00:17:13) - Right. So they're heavily incentivized to stay put. Joel Friedland (00:17:16) - That's they're not leaving. Yeah. No, no, they're. Sam Wilson (00:17:20) - Not going. Joel Friedland (00:17:20) - Anywhere. Sam Wilson (00:17:21) - I want to ask you a question about your. And thanks for giving me the insight on that. That's that's really cool to be in a market like that and to,, be able to play in that in that space is,, is pretty cool. That's, that's, that's that's a very niche niche market niche kind of type that you're in there in the industrial real estate space. Sam Wilson (00:17:38) - I think that that's fascinating. But let's talk a little bit about your. Financing and or lack of financing model. When did you kind of hatch that idea and potentially tell us why? Joel Friedland (00:17:53) - , I've bought a hundred buildings over the years with my investor groups. And in every downturn when there's been. Let's call it agitation of my mental health and my investors. Investment safety. Yeah, it's been because in every case I can prove in every case it's because we had a loan. Sam Wilson (00:18:21) - Wow. Joel Friedland (00:18:21) - Every time you get in trouble, it's like, how are we going to pay the debt? How are we going to pay the mortgage? Okay. Real estate is a mortgage business. It's a business where you have leverage. Everybody knows that. That's what real estate is. But after 40 years really after about 35 years. So a few years ago, after recovering from 2008, where we did have losses, we lost money on sales, selling buildings that we should have made money on if we had better staying power. Joel Friedland (00:18:52) - . And I look at all of the deals of the, of the 100 deals we've done, we own 19 and we've sold the other 81. And of the 81 we've sold, nine, which is roughly 10% have lost money. Wow. And the common link on every loss is that when things got bad in a down market, paying the debt became very difficult. Banks...
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Capitalizing on the Surging Demand of RVs
02/26/2024
Capitalizing on the Surging Demand of RVs
Today’s Gust is Ben Spiegel. Ben is a experienced portfolio manager specializing in niche lower middle market commercial real estate opportunities. Show summary: In this episode, Ben Spiegel, founder of Redwood Capital, discusses his transition from investment banking to real estate private equity, focusing on niche lower middle market opportunities. He shares his "asset agnostic" investment philosophy, in-house property management strategy, and his goal to build a premier outdoor hospitality brand. Ben also talks about the benefits of diversifying asset classes, the growth potential in the outdoor hospitality industry, and his success in developing luxury RV resorts, leveraging USDA loans for financing. He offers insights into selecting locations for RV parks and encourages engagement with his firm. -------------------------------------------------------------- Intro (00:00:00) Transition to Real Estate (00:00:57) Future Goals (00:02:25) Operating Different Asset Classes (00:04:09) Bullish on Outdoor Hospitality (00:05:14) Luxury Outdoor Hospitality (00:06:51) Financing and Development (00:10:51) Location Selection (00:18:38) -------------------------------------------------------------- Connect with Ben: Linkedin: Instagram: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Ben Spiegel (00:00:00) - I don't think that it is that difficult to specialize in more than one asset class. And I think that when you when you don't subject yourself to specializing in one asset class, it enables you to really have a much more robust deal pipeline that allows you to source many more opportunities and therefore deploy more capital. Sam Wilson (00:00:23) - Welcome to the how to Scale Commercial Real Estate show. Whether you are an active or passive investor. We'll teach you how to scale your real estate investing business into something big. Ben Spiegel is an experienced portfolio manager that specializes in niche, lower middle market commercial real estate opportunities. Ben, welcome to the show. Ben Spiegel (00:00:45) - Thanks so much for having me. Sam Wilson (00:00:47) - Absolutely. Ben. There are three questions I ask every guest who come to the show in 90s or less. Can you tell me where did you start? Where are you now and how did you get there? Ben Spiegel (00:00:57) - Yeah. So I started on the investment banking side of things at Barclays. I quickly moved to the buy side, working at, uh, several, uh, special situations, hedge funds, uh, investing in, uh, distressed and, uh, stress, special situations, bankruptcies and restructurings. Ben Spiegel (00:01:16) - Uh, I was there for about 4 or 5, six, seven years. And then when I, when I started working at those firms, I was smart enough to start taking half my bonus and buying real estate with that. And after being on the buy side for about 6 or 7 years, I was presented with an opportunity to buy a large non-performing loan, uh, and take it through bankruptcy and, uh, restructure it. And when I did that, I decided to leave the buy side, and that's when I started, uh, Redwood Capital, which is a boutique, uh, real estate private equity syndication firm. Um, so I, I have about 75 million under management, uh, right now, uh, fluctuates up and down. Uh, I invest really. I like to call myself asset agnostic and that I invest in everything from medical offices to, uh, to our to luxury RV resorts to multifamily. I don't really have a preference as long as it has, uh, cash flow and I can understand the drivers of it, I will invest in it. Ben Spiegel (00:02:25) - And, uh, basically, where do I want to be? Uh, I want to be five, ten years from now. I want to have 1500 to 2000 pads, uh, under management or under my ownership, uh, in a private REIT that I'm currently forming right now. Uh, and to be a premier outdoor hospitality brand, uh, similar to a, a marriott or a Hilton, but, uh, of an outdoor hospitality style. Sam Wilson (00:02:54) - Man, that's really cool. I love that you mentioned a lot of different asset classes there. Are you guys coming in just on the capital side on those or you actually operating the deals yourself? Ben Spiegel (00:03:04) - No, we're we're we're we're operators as well. We have in-house property management. And uh, actually I just actually was talking to somebody about this the other day. I think that's really one of the most important and overlooked things in this business. I said that, uh, in real estate, if an asset is managed by a third party, it really will never reach its full potential. Ben Spiegel (00:03:24) - Uh, because coming from the private equity world, incentive is being incentivized and having a sense of ownership is everything. So in every deal I do, I give my property manager internal property a piece of equity. And I also put them on a quarterly, uh, bonus structure, uh, that's tiered based on, uh, profitability of, uh, how the building does in terms of if it's clear, certain NOI hurdles, they get an incrementally higher bonus. And I have found over the years that that had the return on investment for that amount of money has been ten x. Sam Wilson (00:04:02) - How what's that process been like, and how does your team juggle all these different asset classes? Ben Spiegel (00:04:09) - So I guess, um, real estate compared to corporations where you have fluctuations, commodity price fluctuations, it's it's relatively straightforward. I mean, you have your revenue, your expenses. Uh, I mean, uh, there's some obviously variables related to the tenant structure, uh, the longevity of it, but I don't think that it is that difficult to, to specialize in more than one asset class. Ben Spiegel (00:04:38) - And I think that when you when you don't subject yourself to specializing in one asset class, it enables you to really have a much more robust deal pipeline that allows you to source many more opportunities and therefore deploy more capital. Sam Wilson (00:04:57) - Interesting. Okay. Very very cool. And the one thing that one focus of yours and you mentioned this here and kind of what your 5 to 10 year plan is, is that you are incredibly bullish on the outdoor hospitality space. You want to grow that side of your business. Can you give us some insight as to why? Ben Spiegel (00:05:14) - Yeah. So just to kind of give you some quick four facts and a lot of people are really aware of. But right now the average age of an RV owner in the US is 32 years old, right? Last year, our 2022 460,000 new RVs were shipped, but only 17,000 new pads were built. The average age of the existing RV destination is over 40 years old, and 92% of which are owned by single owner Mom and pop that do not have the necessary resources to invest back into their businesses. Ben Spiegel (00:05:54) - To bring the, uh, their destinations up to the level that the new generation of RV owner needs, such as even most. Most don't even offer Wi-Fi or cell service on their on their sites. To kind of give you an idea of how behind the industry is and what really, uh, makes things exciting is Covid just changed everything post-Covid, 60% of uh, uh, permanent office worker or office workers are now permanently remote. So you have this whole new lifestyle, this new nomadic lifestyle that's being embraced. And it's, uh, it's really catapulted the industry into a stratosphere that nobody really thought it could ever go. Sam Wilson (00:06:40) - Buddy. And you're specifically focusing though on the luxury outdoor hospitality spaces. What does that mean and why is that? Ben Spiegel (00:06:51) - Yeah. So luxury in terms of outdoor hospitality. Me it's more of an amenity focus. Uh, that it's luxury is it's certainly a lower bar than you would think of when compared to most other asset classes. Uh, luxury basically means you keep a clean site. You have a pool, you have a pickleball court, a gym, maybe a gym. Ben Spiegel (00:07:15) - Uh, we have gyms. And, uh, we like to incorporate a work center, maybe, depending on the location. But, uh, there's two different, really, uh, main kinds of RV destinations. You have communities and resorts. So resorts are located very close to a major attraction, uh, close to Disney World, or they're right on the beach. Uh, and they're able to charge a higher average ADR average daily rate. But the downside with them is you have a lot of higher turnover. Your average day is 3 to 5 days max. So there's a lot of turnover, a much larger vacancy rate as opposed to a community where you're probably located. Still in a very convenient location right off the highway, but probably about 30 or 40 minutes away from like the beach. So I, I only focus on the Gulf Coast, more specifically, uh, Alabama, Mississippi and Louisiana. And, uh, so we're we a community would be about 30 to 40 minutes from the actual coast, uh, right off a hot, you know, a main highway. Ben Spiegel (00:08:22) - Um, it would it still have, uh, not as many amenities as a resort, but but close to it. But the main difference is your average stay is 45 to 60 days. And, uh, you also need less, uh, staff to, uh, run it. So you're, uh, you're basically your your net operating margins are about 60%, compared to about 45 to 50 for a resort. And instead of operating at like a 30% vacancy or 30% vacancy, you're probably closer to an 18 or 20% for a community. So they both they compliment each other. Well. Sam Wilson (00:09:03) - Got it. Okay, that's really interesting. And I guess how far how many of these do you own currently? And has your model evolved as you have bought different resorts over time? Ben Spiegel (00:09:15) - Yes. So, uh, when I first started to get into looking at getting interested in the business, it was during Covid. And at that time, uh, existing RV destinations were trading at all time high valuations. I mean, I'm talking three, 3 or 4 caps for some of these and that were for that were like 30 or 40 years old. Ben Spiegel (00:09:36) - And, uh, what really occurred to me is I could build at a cost per pad, brand new, at almost a similar cost, if not less than what what I would have to pay for a 30 or 40 year old one. So that got me, uh uh, on the path to starting a joint venture with a existing owner operator of RV destinations, who's also a feasibility consultant. And, uh, basically we formed a joint venture and, uh, we went off to start building, uh, luxury RV resorts and communities, uh, in, uh, mobile, Alabama, Biloxi, Mississippi, and even, uh, Gulfport. And, uh, so now we have two we have two sites, uh, combined, probably about 172 pads. And, uh, but we have, uh, we have land under contract to build, uh, 300 pads right now, uh, which is the by far the largest development we've ever done. And, uh, something, you know, really interesting about this industry that kind of even makes this whole dynamic even feasible. Ben Spiegel (00:10:51) - There not a lot of people are aware about is, uh, the US Department of Agriculture has a very unique niche loan program called the Rural Business Development Loan Program, where they will lend 75 to 80% loan to construction cost, uh, to build an RV destination. I mean, think about it. So you're paying like we're in contract on a piece of land for $1.5 million. 40 acres. Uh, you know, about 35,000 an acre, you know, and our construction budgets? 15 million. What kind of lender in their right mind is going to lend you $15 million on a $1.5 million piece of collateral? No. So it's just, uh, without this program, it's just, uh, it's not unless you're a family office with, you know, so much cash that you can afford to fund the whole thing with cash and then refinance once you season the cash flow after, um, the USDA loan credit program is is critical to being able to to build these, uh, in most locations. Sam Wilson (00:11:54) - Yeah. That's a that's crazy. I knew that the USDA had programs like this. I've not ever applied indoor. Um, actually work my way through that process. Especially not on an on a luxury RV destination project. That's, uh. But that's crazy. Yeah. That's crazy loan terms. I mean, does it ever, um, is there any, I guess, any concern as you look at that and you go, oh my gosh, like, we're almost over leveraging and or this is like, I don't know, I guess when you think about that, what are what are some what are some areas of concern. Because this allows you to do things that maybe otherwise wouldn't make sense. Right. Ben Spiegel (00:12:29) - Yeah. Well, I mean, I guess one of the scariest things is you have to you have to show 1 to 1 asset coverage on a full recourse basis. So if something does not work out, uh, they're coming for me or they're coming for us. Uh, right. They're going to. Ben Spiegel (00:12:45) - They're coming for everything. So you have to have a lot of faith in the project you're building. Um, one thing I'd say is that we we usually were never really we never really go above the 75% LTC level. And we have enough experience with our general contractor at this point, uh, that we. We know how the process goes. We know what to expect. We know what the costs are. We're comfortable with the bank. The banks that we deal with that are subsequently secured by the USDA. I mean, how it works is it's a 12 month draw. Schedule a draw once every 412, and then upon completion, it immediately converts to a 25 year amortizing facility. So there's like no refinance. It's it's it's a lot simpler than you think. As long as you can keep construction and think there's no vertical construction. I mean, the only vertical structure you're doing maybe is a single story clubhouse. Uh, you're just dredging. You're you're laying plumbing, electric fiber, and, you know, maybe doing some site work, uh, land moving, but that's really about it. Ben Spiegel (00:13:55) - It's not high risk. You're not building a skyscraper. I mean, in my experience, you know, I've done ground up developments in Malta and in other areas. And, you know, usually the problems don't start. So you start going vertical and. Right, um, you know, so the fact that you don't really have to do any vertical, I mean, not only is your construction time cut by 75%, you know, it's a year versus four. Um, but it's just that's honestly the big kicker that makes it that makes you comfortable with it. Uh, I would not take on those kind of recourse terms to, to build, to build a regular multifamily building, that's for sure. Sam Wilson (00:14:34) - Right. Yeah. There are there are certainly strings attached there. And I guess that when that 12 months is up, that's when that loan starts to a fully amortized fixed interest rate 25 year loan. So you don't really know. In the end, I guess you're underwriting a range. You're like, hey, you know, it could land here, could land there on your final fixed interest rate. Ben Spiegel (00:14:58) - So basically it's usually a, uh, between a 25 and 50 basis point spread above the Wall Street prime rate, which right now is about, uh, seven, three quarter percent. So, uh, it's not it's not very cheap, but it's not insane. It's not like normally you'd have to go to a bridge lender and you'd be paying 13, 14% and three points upfront, and you'd only be getting 40% LTV if you're lucky, even full price. And then the cash on cash returns just do not make sense. So you kind of how are you going to syndicate a deal like that? Uh, the deal, you know, only really makes sense with these loans, so. And but and then there's on smaller and smaller destinations, like I'm going into contract on ten acres, uh, on the beach in, uh, in Long Beach, Mississippi, which is right down, down from Gulfport, uh, west of Gulfport. And, uh, it's going to be about 120 pads. And the development budget, there's about, uh, 6 million there. Ben Spiegel (00:16:02) - You can you can get a local bank to get you to get you 65, 70%. Uh, it's recourse. But, um, uh, you know, you know, relative relatively similar borrowing rate. So you want to be very selective. And also the USDA has a max if you want to go above 25, you can't have more than 25 million outstanding at any one time. So once you hit that $25 million mark, you kind of have to start to, to, uh, try alternative sources, whether that's, uh, talking to a life insurance company, going to other private areas to borrow money once you have proof of concept or your track record. But, uh, they do have that $25 million mark. But then you're all there's ways around it to mix in some SBA or, uh, 500 sevens in there to kind of, uh, dilute it a little bit. There's ways to get around it, but you want to be very careful. It's not something you want to just take on very lightly. Sam Wilson (00:16:58) - No, certainly not. And that that makes sense. And I think the other thing to point out here is I bet there's probably some multifamily investors who are listening to this right now and they're like, wait seven and a half or seven and three quarters plus 50 basis points, and now you're at 8.25% and they're going, oh my gosh, that's unsustainable. But the margins inside of the outdoor hospitality space that just want to point out are probably a lot more robust, maybe, than what you would find in a multifamily project. Ben Spiegel (00:17:26) - Oh, absolutely. And you also have to understand, uh, from an expense ratio standpoint, the taxes down there or nothing. And the reason why you're in that space is you you literally you just own the land. Uh, you don't have any repairs and maintenance. Uh, something breaks in the RV. It's not your dime. If anything, you sign an exclusivity agreement with a repair company, and you take a piece of all the money that they make repairing them. Right? So that's, you know, it's, uh, there's multiple, uh, you know, ways to, to generate incremental income. Ben Spiegel (00:18:01) - And, uh, it is very sustainable at those rates. Uh, man, we're able we're I mean, we're throwing off I don't know if we were throwing off, you know, mid to high teens, uh, leverage free cash flow yields. And, uh, we target a 4 to 5 year over a 4 to 5 year hold, period. Uh, LP equity multiple between two one and 23X. Sam Wilson (00:18:22) - Right. Oh, that's really cool. I love that last question for you here, Ben, before we sign off on this, how do you go about determining what a good location is to build an RV park or luxury RV park ground up. Ben Spiegel (00:18:38) - Absolutely. So there's a few, uh, items on the checklist that you always have to abide by. Um, one, you have to be very close to a major interstate. I mean, within maximum of 1 to 2 miles. And that interstate has to be seeing at least, uh, a traffic count of, uh, you know, 50,000 vehicles per, you know, 50,000 plus vehicles per day. Ben Spiegel (00:19:04) - Uh, number two, uh, you you need to be within ten mile, ten miles of a Walmart. Uh, I that's that's not an industry standard. That's my own. Our personal underwriting. I just feel that Walmart has the most, uh, advanced population analytics software, uh, in the real estate industry. And they're not building a supercenter in an area where the population is going to be declining, um, let alone it's definitely going to be steady if not growing. Also, I, I only...
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Nomad Capital: Repurposing Retail for Premier Storage
02/19/2024
Nomad Capital: Repurposing Retail for Premier Storage
Today’s guest is Clint Harris. Clint spent 16 years in medical sales, built a STR portfolio to replace that income, and a property management company. He made the jump to self storage conversion projects, and then syndication, and is now a General Partner with Nomad Capital, $120 million AUM. Show summary: In this episode, Clint Harris, a partner at Nomad Capital, shares his transition from medical sales to real estate investing, focusing on short-term rentals and self-storage conversions. He emphasizes financial independence and the value of time and location freedom. Clint discusses the slow but rewarding process of real estate investing, the balance between active and passive roles, and the importance of aligning strategies with personal goals. He also speaks on the power of partnerships and leveraging others' strengths. -------------------------------------------------------------- Intro (00:00:00) Clint's journey in real estate (00:01:05) Lessons from early real estate investing (00:03:16) Transition to self-storage projects (00:09:39) Balancing financial and time independence (00:13:07) Challenges of managing multiple ventures (00:18:52) Operating Partner and Manager Selection (00:19:09) Nomad Capital Partnership (00:20:05) Contact Information (00:21:02) Podcast Wrap-up and Call to Action (00:21:19) -------------------------------------------------------------- Connect with Clint: Linkedin: www.linkedin.com/in/clint-harris-543265139 FB: https://www.facebook.com/clint.harris.3150?mibextid=LQQJ4d IG: https://www.instagram.com/clintstagram_nc/?utm_source=qr Web: https://nomadcapital.us/ Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: https://www.facebook.com/HowtoscaleCRE/ LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/ Email me → [email protected] SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: https://podcasts.apple.com/us/podcast/how-to-scale-commercial-real-estate/id1539979234 Spotify: https://open.spotify.com/show/4m0NWYzSvznEIjRBFtCgEL?si=e10d8e039b99475f -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Clint Harris (00:00:00) - Traditionally, we'll buy a building for a couple million bucks, put a couple million into it, and then stabilize. Value is usually between 13 to $17 million, which means we're sitting at around 30 to 35% loan to value when we are stabilized. So we can refi to 5,560%, pay our investors and ourselves when we do that, and we're paying people out by way of a refinance, it's a nontaxable event because it's not a capital gain. We didn't sell anything, so they're getting a nice return. We keep some money, keep the lights on here at Nomad, and then that gives us the ability to continue the scale. Intro (00:00:32) - Welcome to the how to Scale commercial real Estate show. Whether you are an active or passive investor. We'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:45) - Glenn Harris has 16 years in medical sales. He has built a short term rental portfolio to replace his income. He has a property management company and now he's doing self-storage conversion projects and syndications. He's also a general partner now with Nomad Capital and has over $120 million in assets under management. Sam Wilson (00:01:04) - Clint, welcome to the show. Clint Harris (00:01:05) - Thank you. Sam, great to be here. Great to see you again. Sam Wilson (00:01:08) - Absolutely. Always good to see you, Clint. There are three questions I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now and how did you get there? Clint Harris (00:01:18) - I started building in a career in medical sales. That is a short. It's a young man's game that will grind you up in terms of nights, calls, uh, working weekends, heart problems. I was implanting pacemakers and defibrillators. That is not a Monday through Friday, 9 to 5 kind of job. So that's where I started. Because of that, I actively focused on looking to build an off ramp from that lifestyle to stop trading time for money. Uh, and that got me into single family rentals, where I discovered that it's a very slow way to get ahead. That got me into, uh, buying small multifamily properties and converting them to short term rentals. Clint Harris (00:01:59) - And that taught me the value of multifamily and the value of asset class conversion that drastically increases the value of an asset, because you change the formula by which the asset is valued. And that led me to, again, a very active profile. It replaced my income. It gave me a level of financial freedom, but it did not give me time or location independence. So in the pursuit of time, location and financial independence, that led me to self-storage, which is where I am now, and general partner with Nomad Capital. We specifically focus on buying big box retail buildings like Kmart's, grocery stores and warehouses, and we convert them from one single big box into 6 or 700 class A climate controlled self-storage units. And it's taking those same lessons. It's it's one property that can be converted to a different asset, where you change the formula by which the value is created, and you create multiple tenants and putting them in place, you're buying for less than the replacement cost. Use vertical integration to leave as much value as you possibly can. Clint Harris (00:02:55) - And that's what changed my life in a meaningful way. And I left Cardiology behind in in 2022 and, uh, full time nomad and real estate investor. Sam Wilson (00:03:04) - Man, that's really cool. I love that you you've gone through several iterations of the business, and I guess in what and what year did you start investing in real estate? How long has that been? Clint Harris (00:03:16) - I started investing in real estate. Let's say I bought my first property as a duplex when I was in my early 20s. I'm okay. I'm 41 now. I would tell you this. I started investing in real estate when I was probably 2324. It was the post 2008 crash era. So between 2010 and 2013, I think my wife and I bought nine single family properties, I believe, um, the reality was there's a big difference between investing in real estate and doing it correctly. I'll tell you, I did it wrong for at least ten years. It wasn't until, uh, I relocated to Wilmington, North Carolina. My wife and I took a promotion. Clint Harris (00:03:56) - We moved to the beach, and I used a lot of road time to start listening to podcasts aggressively and educating. So I said, I've been doing real estate a long time. I've been doing real estate correctly, uh, since 2018. That was when we first got it right. And we started we unloaded some single family properties. We did some 1030 ones, and we started buying multifamily properties with bad long term tenants, converting them to Airbnbs. And that's really where it kind of took off. And the lesson I learned is, you know, you could have four condos at the beach with four mortgages, four sets of HOAs and four sets, utilities and break even. Or I could buy one quad plex, have one mortgage, one set of taxes and utilities, and net 80 grand a year. So the unit density in that lesson. So I think there's a big difference in investing and investing correctly. And I certainly was not doing it the right way for the first ten years or so. Sam Wilson (00:04:46) - Well, yeah. Sam Wilson (00:04:48) - And that I mean, that's kind of the thrust of the show is how to scale. Like it's it's one of those things where and you've made the, the, the progression. I think that so many investors make along the way, myself included, where it's like, oh, wait, like this, just this doesn't work at the single family level. Uh, what were some of the things, I guess, I mean, you because you developed a model, you said, okay, this model didn't work or isn't working the way we want it to. Like getting through those transitions is oftentimes tough. And or people can be accused of shiny object syndrome going, well, here's the next greatest and best thing. Like, how did you work your way through that without feeling like you're just chasing your own tail, trying to find the next iteration of what might work? Clint Harris (00:05:27) - Well, I did, I think that's a really, really good question. If I'm trying to give you the most condensed life experience that I can that's going to offer the most value to you and your listeners, I would say this with single family rentals. Clint Harris (00:05:38) - The lesson that I learned there is that if one property is 1 or 2 headaches a year, and then you multiply that by nine, it's it's a very slow way to get ahead. It does not scale very well. And ultimately like it's just not worth your time. The mistake that I made from there, not a mistake. As part of our journey moving into small multifamily properties. And we still own and we have 14 Airbnb properties and a property management company that manages another 80 listings. Which is why I keep talking to you about laundromats, because we got £40,000 of linens a month during the summer to deal with, um, the the issue when I made the jump from that first portfolio that we built and ultimately we took it apart and rebuilt it into something else, here's the important thing I think I was really focused on. The finances. And single families would just way too slow. So the financial independence and the goal that I had to reach in terms of financial independence and cash flow was there by jumping to a short term rental strategy, specifically with multifamily properties. Clint Harris (00:06:38) - However, when we built that portfolio out to the point where it replaced my income from surgical sales, we tried to turn it over to some property management companies. And the reality was, nobody's going to manage my business the way that I manage my business. Right. So our options were to either unpack that and go in another direction or do what we did, which is build a property management company around it. And it took us two years to do that. And now people look at it and they think that it's passive income. We've got checks rolling in and my properties are being managed at cost and it's passive income. The reality is it's residual income. We just frontloaded the work several years ago, and you don't see all the work that went involved. And now it just looks like mailbox money. And here's the issue that I ran into. Then the goalpost moved my goals for what I wanted to accomplish changed. And I suspect that throughout my life they're probably going to change again. So I'm trying to get ahead of that by talking to people farther down the road and learn. Clint Harris (00:07:38) - I was focusing on financial independence when I hit that level of financial independence. It did not come with time or location independence. We're all after financial independence, right? And everybody says that they love investing. The reality is, I don't think they love investing. I think they love what investing represents to them in terms of freedom of choice and freedom of purpose. But the way that you build out your portfolio, you could be painting yourself into a corner and pitching, pigeonholing yourself. I have properties, multifamily properties at the beach that cash flow like crazy. But instead of one tenant in each property, I have 8 to 10 tenants per month in each listing. They're paying a lot of money to be there, and they have high expectations and there's a lot of turnover and the messaging and communication and issues that pop up, even with just managing the people that are managing our property management company. It's on the weekends and it's during the summer, and it does not get you time or location independence because you have to stay on top of that. Clint Harris (00:08:43) - And it takes extra work to create the extra value from the multifamily properties there. And so for me, the goalpost moved because it wasn't really just financial freedom that I was after. It was time and location independence. So if you take a step back and you look at things in terms of scale, the same lessons from value add that were there with single family and leveraging and BR and using the money again is there with multifamily, the importance of residential density and more rental units than you have sets of fixed overhead. And the lesson of an asset class conversion that changes the value of the property? All those lessons are there. But then you factor in, okay, what's going to give me the time independence, the location independence and the financial freedom to get where I want to be. And ultimately, when I talk to the older guys that were farther down the road, for me, it was one of three things. But traditionally hard money lending and lending, uh, cell storage and mobile home parks. Clint Harris (00:09:39) - And I didn't have $1 million to lend anybody. I didn't have any interest in mobile home parks. I wasn't that thrilled with tenants at the moment because of who we'd been dealing with through our short term rentals and the 85 properties that our company managed. So that led to self storage. Then when I met my partners, Eric and Levi Hemingway, through local networking, they're doing asset class conversion. We went in and did a joint venture in 2021. We bought an old Kmart for 1.5 million. The replacement cost on the big box retail building was 6.5. We put 2.5 million into it. We're into it for 4 million. We converted it to 600 climate controlled self-storage units, and it's worth three times what we have into it, depending. Different projects vary, right. But that was the one that as a joint venture was like, okay, if we wanted to build this cinder block shell, it's going to cost us $6.5 million. But we can buy it because there's very little appetite for big box retail. Clint Harris (00:10:30) - But it's got the residential density and A1357 mile radius. It's got the vehicle count that created the value for us to be able to move on. And when you talk about scalability, if you buy an asset, no matter what it is, you fix it up and you make it nicer. You increase the rents. The value goes up by 30%. In order for you to a pay day, you either have to wait and get your cash on cash return through the cash flow, or you probably have to liquidate the asset for you and your investors to get a payday. The good thing about asset class conversion is that it can be such a swing in value that it leaves you sitting at a really low loan to value. Like traditionally, we'll buy a building for a couple million bucks, put a couple million into it, and the stabilized value is usually between 13 to $17 million, which means we're sitting at around 30 to 35% loan to value when we are stabilized. So we can refi to 55. 60% pay our investors and ourselves when we do that, and we're paying people out by way of a refinance. Clint Harris (00:11:30) - It's a nontaxable event because it's not a capital gain. We didn't sell anything, so they're getting a nice return. We keep some money, keep the lights on here at Nomad, and then that gives us the ability to continue the scale. So the lessons from everything I was doing earlier, it's the same thing. I think that's why the importance of people going through the steps of whatever it takes to get them, uh, through their career and learning, just understanding that it's significantly more likely that whatever you're doing right now is probably a stepping stone to where you want to be later versus the destination. And if you feel that way, I think it's easier to always be learning and networking, and that's typically how you're going to get ahead. Sam Wilson (00:12:09) - I love it, I love it, Clint. That's very, very insightful. I would say there's two thoughts that come to mind when you were talking. One is that real estate is a get rich, slow game. And I think that people oftentimes, myself included, probably, you know, in yester years they've thought, oh my gosh, we're going to do this and we're going to do that, and we're going to do one deal. Sam Wilson (00:12:26) - Like, you know, Clint is talking about right now, man, we're set. But it's like that's like you said, it's a stepping stone. I think it's a get rich slow game. And the second thought I had behind that was holding with three fingers when I'm already counting the two. The second thought I had behind it is that you were talking about, um, financial independence, then time and location independence. And I think one precedes the other. Like for a lot of people, you do have to initially find the financial independence so that you can then begin thinking about what time and location independence might look like. Talk to me about how you're doing, what you're doing right now, and how that plays into your set desire to be time and location independent. Clint Harris (00:13:07) - Yeah, that's a great point. I think it's not. You can't scale all of those things at once. You just traditionally you're going to reach a level of financial independence. And then what you do with that money determines whether or not you're going to be able to afford to get your time back and get your, your location independence. Clint Harris (00:13:22) - So what we're doing now in terms of scalability is last year we did six individual deals. We did two kmart's, three warehouses and a grocery store. This year we've converted to a fund model. So we've got a $10 million fund open right now for the purchase of $30 million worth of buildings that are going to be converted to $80 million worth of storage. So we get a scalability bump there. In terms of working with a portfolio. We just closed the first two properties. We got three more to go, and we can order the materials and get them a lot cheaper. We have different crews that are working at the same time, basically overlapping on different projects. So the overall fixed cost of the properties continues to get lower and lower, which just helps us with that loan to value with the stabilization and be able to refinance and move on. So in terms of that, like that, just we're just continuing to make those small tweaks and move forward. I think I heard something really recently that just impacted me. Clint Harris (00:14:14) - It was a statement somebody made in passing, and it just it gave me pause. And coming from someone that has an active real estate investment portfolio, small, but I mean, it does well for us. It's one of those things where I have to look on at the return of the property from the initial purchase price we were buying at the beach in 2018 and 2020. We've had massive appreciation, so I've got my return on the property, return on the initial investment, then I've got my return on the equity as to how much equity has grown in the property, and it might be lackluster there, but then there's also, you know, those are fairly active. And then I look at the returns that Nomad is paying out or that you can find across the alternative investing landscape, like if I invested in your, your, your laundromat funds or whatever it may be, you can choose your asset, your operator or anything else. But somebody said recently, you know, I've done a lot of active investing in the past, and I used to look at my return on investment now where I am in my life, I look at the return per hour that I have to spend worrying about it every year, and I can make 50% return on investment. Clint Harris (00:15:19) - But if I'm an active investor working on something, that's one thing. But if I'm making an 18 or a 20% return with a passive investment strategy and I spend two hours a year thinking about it, or reading the reports or reading the...
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Optimizing Real Estate Portfolio Operations
02/12/2024
Optimizing Real Estate Portfolio Operations
Today’s guest is Anton Ivanov. Anton Ivanov is a US Navy veteran, real estate investor, entrepreneur, and founder of RentCast.io and DealCheck.io. Show summary: In this podcast episode, Anton Ivanov, a seasoned real estate investor, shares his expertise on optimizing real estate operations. He advises on the importance of delegation, professional property management, and maintaining a CEO mindset. Anton recounts his journey from house hacking to managing a diverse portfolio, emphasizing starting small and learning progressively. He highlights the need for efficient turnover processes, tenant retention, and aligning rental rates with market trends using tools like RentCasio. Anton's strategies have notably increased revenue without new acquisitions, showcasing the value of operational efficiency and cost management for sustainable growth. Links: -------------------------------------------------------------- Delegating and Focusing on Improvement (00:00:00) Introduction and Background (00:00:26) Starting and Growing Real Estate Portfolio (00:01:18) Focusing on Improving Operations (00:02:48) Transitioning to CEO Role (00:03:35) Professional Property Management (00:04:50) Minimizing Vacancy and Tenant Retention (00:09:14) Implementing Systems with Property Managers (00:13:45) Lease Renewal and Rent Adjustment (00:18:14) Vacancy Minimization (00:20:36) Lease Renewal Strategy (00:22:13) Action Items for Revenue Growth (00:25:13) Expense Reduction (00:27:27) Contact Information (00:28:56) -------------------------------------------------------------- Connect with Anton: Email: RentCast Facebook: Twitter: Web: DealCheck Facebook: Twitter: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Anton Ivanov (00:00:00) - You know, ultimately you are in charge. It is your business, it is your assets. But you need to be able to delegate and kind of step back and focus more on areas that need improvement, as opposed to just doing everything yourself. Sam Wilson (00:00:13) - Welcome to the how to Scale Commercial Real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:26) - Anton Ivanov is a US Navy veteran, a real estate investor, entrepreneur and founder of rent, Cascio and Diehl Checchio Anton, welcome back on the show. Anton Ivanov (00:00:36) - Thanks for having me, Sam. Great to be here as always. Sam Wilson (00:00:40) - Absolutely. The pleasure's mine. Anton. It, uh. I didn't look it up here ahead of time, I can't remember. It's been a couple of years since the last time you were on the show, so it's great. Great to have you come back on. I don't remember the episode number. So here, maybe we'll include that there in the show notes, in case you want to go back and kind of hear Anton's, uh, first podcast with us, where he breaks down a lot of the ways he built this business and some really other cool, uh, things that he's done there in his real estate investing career, which we're not going to really get into too much today. Sam Wilson (00:01:07) - However, Anton, for every guest who comes on the show, even returning guests, there are still three questions I asked them in 90s or less. Can you tell me where did you start? Where are you now and how did you get there? Anton Ivanov (00:01:18) - Absolutely. So we started investing, uh, me and my wife about, uh, it's been about ten years now going on that, uh, we actually started very small. We started with house hacking. Uh, you know, we bought a one duplex that we lived in. One of the units rented out the other. We moved on to some out of state turnkey investing in single family properties. And then most recently, we were buying commercial multifamily in, um, commercial and like, fourplex residential multifamily in Kansas City, Missouri. So we've had kind of a very, uh, more slower growth, I like to say it, but it was more manageable. Uh, it helped us make, you know, some smaller mistakes, learn from them, and then move on to bigger deals over the years. Anton Ivanov (00:01:59) - And we've covered a lot of this with you, Sam, on the last podcast. So, um, again, I'm a big proponent of kind of not jumping into necessarily the biggest deals, uh, if, if, you know, if, if you prefer starting smaller and learn from that. Um, and yeah, we've been super happy with that, uh, lately and kind of what I wanted to focus on this show. We've, we've spent a lot of time on focusing on improving our operations, um, and kind of increasing the cash flow. The existing units we have, we have, uh, 42 units right now spread out across, uh, three places, Atlanta, uh, San Diego, and then the bulk of our portfolio and, uh, Kansas City, Missouri. Um, and yeah, just the market recently has been a little bit tougher. You know, obviously we have still prices are pretty up there. They haven't, uh, softened up, as I would expect them by now. Anton Ivanov (00:02:48) - And then the rates are high. It's just kind of a tougher environment, in my opinion, for acquiring new rentals. So I think it's a great time to focus on operations, because I think it's oftentimes neglected by some investors that just kind of focus on more and more deals, more and more units in their portfolio. Uh, but I think you can get a great ROI in your time and kind of effort by just focusing on what you already have. Sam Wilson (00:03:12) - Man, there's a lot to be said for that, and I look forward to jumping in to getting kind of the nitty, your nitty and gritty details on how you guys have done this. I guess before we get into that, though, 42 units spread completely across the country. I mean, yeah, Kansas City, San Diego, and if you're if you are managing operations, it sounds like you're, you're self managing these properties. Anton Ivanov (00:03:35) - Um, so no. And actually that that takes me straight into our first point is, uh, you know, I look at, you know, when you first starting investing in real estate, you're kind of more I would say, uh, you know, boots on the ground. Anton Ivanov (00:03:48) - You're more involved, especially with acquisition and management. I think it's important as you transition to larger volumes of units, you know, ten, 20, you know, 40 like US units, especially if they're spread out across the country. Um, I think at that point, you kind of stop being maybe like the workhorse of your business, of your real estate, uh, you know, venture empire, if you would, and you kind of start to become the CEO, right? Where you're, you know, ultimately you are in charge. It is your business. It is your assets. Uh, but you need to be able to delegate and kind of step back and focus more on areas that need improvement, uh, as opposed to just doing everything yourself. So one of my, you know, first tips for kind of improving operations at scale, uh, again, is not necessarily doing it yourself, but finding professional property managers. So we've used professional management for all of our units. Funny thing is, when we bought that duplex that we house hack, that was our first property that we bought, we used the property manager for the upstairs unit, even though we lived in the building. Anton Ivanov (00:04:50) - And it sounds kind of stupid, maybe silly, you know, like, hey, why don't you just manage your your right there. It's the unit above. But I had this vision of kind of growing our portfolio to 40, 50 units, and I wanted to start getting experience with working with property managers, kind of seeing how that plays out, which prepared us to, uh, later buy out of state properties that I was not going to manage myself. So I think it's important, you know, I I've met folks who self-manage, especially if they're local. The buildings that they own are local. It can work. But I just think it turns into a full time job very quickly, especially if you have a lot of units. I think you can free up your time. Uh, and if you find a good manager, you know, and kind of work with them. Right. It's it's also another thing I would say about property managers. Uh, it's it's not really a give it to them and forget. Anton Ivanov (00:05:40) - Kind of arrangement, which I think some people expect. Um, and, you know, in an ideal world, maybe it would be. But everybody is different. You're you're different from, you know, Sam from, uh, from me the way you want your units managed. And, yes, a property manager has their own, like, procedures and steps, and they like to do things a certain way. That doesn't mean that you can't go to them and say, hey, look, I know you guys like to do it this way, but here's how kind of I would like to tweak the process. Like, again, you're basically the CEO. You know, they're working for you. You're paying them. Um, and I think as the CEO, you have the full right. And kind of not to micromanage them essentially, nobody likes that. You know, they don't want you to be there just making every little, you know, second guessing their decision and stuff like that. But know if you feel like things are not going the right direction, step in there. Anton Ivanov (00:06:28) - You know, do a monthly phone call. This is what we do with our property managers, even if things are going smoothly, just to check in and see how things are going, any big issues, anything we should be concerned about? Look at trends and let them do the work. Uh, especially if you own out of state properties. Sam Wilson (00:06:43) - That's really great advice, and I bet most people don't do that who are out of state owners is having that monthly check in. Yeah. How do I mean and I also wonder if, you know, how did you convince and or get on the calendar of your property manager saying, hey, I want this monthly check in because I bet some property managers out there that would be like, hey, Anton, it's great knowing you, buddy, but I really don't want to spend 20 minutes with you once a month talking about your properties and go away. So, uh, how did that conversation. Anton Ivanov (00:07:16) - Yeah, well, two things. So I think as you, uh, you know, as you scale your portfolio, the more units you own in a certain area, the more units you have each property manager manage. Anton Ivanov (00:07:25) - Uh, you kind of become a more valued client. Right? So if, if you, if they're just managing one house for you, you're absolutely right. They may just not be inclined to spend as much time with you because you're like one out of 500 or something units. But as your units grow, you have, you know, a dozen 20, 40 plus units. Uh, it becomes much more easier, at least in my experience, to get on their calendar, uh, have them be a little more responsive. Um, and I would take advantage of that. You know, I would. You are a more valued client. They should spend more time with you. Um, so that's kind of one thing. I think it's natural for that to just happen as you grow your portfolio. The second one does come down to property managers and not being able to basically, you know, fire one if it doesn't work out. I had to do this in some of our markets, you know, some property. Anton Ivanov (00:08:13) - There's so many property management companies and some are like you said, they're just like they don't really want to like stir the boat. They just kind of want to collect their cut from from the rent every month. They don't want to talk to you, you know, like they don't want to talk to the tenants. Um, and in my opinion, those are usually not the best property managers. Like, I don't think, again, a property manager should be like, always, you know, shaking things up, but they should be responsive. Communication is like one of the keys that I always looked at in property managers. If your property manager is not responding to your emails, phone calls, whatever, I bet they're not doing that with the tenants. Also, like there's probably some some like communication issues with the tenants and that's what you don't want. Because to me, like how they talk to me is, you know, kind of relates to how they talk to the tenants. And I want a property manager that will talk to the tenants, be responsive, like stay up to date, because that's how you increase tenant satisfaction and retention, which actually takes me to our next point, uh, very, very nicely. Anton Ivanov (00:09:14) - How do you improve operations and kind of efficiency of your portfolio is minimizing vacancy when you have a portfolio at scale, a large multifamily commercial portfolio? What I've found and I've talked to a bunch of investors is vacancy becomes your biggest expense. It's not your taxes, it's not your insurance. It's not your it's it's actually vacancy. If if you have 40 units and ten of them are vacant, you know, that's like a 25% reduction in your income, it becomes huge. So focusing on minimizing vacancies. And there's many different aspects to this right. This it's both basically you know when you do have vacant units, uh, you need to get efficient at filling them. And this comes down to having a very good unit term process. You know, you're not like messing around, finding a contractor doing scopes of work. Like we've got it down to a science where basically we have a portfolio like our bulk of our portfolios in Kansas City. We have a standard list. Like I'm like, hey, here's basically a punch list, right? Here's here's what you go through. Anton Ivanov (00:10:15) - Uh, they we have a standard set of contractors where they agreed on budget and materials. Like, we like to standardize, we paint like, you name it, like it's it's such a well honed process. And again, that's something that's easier to do at scale. You know, if you own a single family here or single family, there is kind of a little more individual work. Like what does this house need when you have commercial units, you know, larger special talk to folks that have 100 plus years. When it's right there. Like I can't be going and doing a personal inspection, or every manager is going to do an inspection, like have a standard set for how you turn a unit. So when a unit does become vacant, they give you the keys. It's like, boom, we done the inspection, boom, we've scheduled the work. We had contractors lined up, you know, a week too. It's it's done. The work is done. We can release it. We already know what we're leasing it for. Anton Ivanov (00:11:04) - Uh, we already have a kind of a marketing plan. We know where to pose these properties. And, you know, with the unit is vacant for a weeks, you know, 2 or 3 weeks, like max, where as a as opposed to sitting there on the market because, again, every month you're not collecting rent, you're losing a ton of money. Uh, and it's kind of like a hidden expense, right? It's not like on your operating expenses, on your CapEx or anything. It's it's it doesn't show up there. But but when you're not collecting rent, that is an expense. So huge, very huge minimizing vacancies. The other thing I will say, kind of where we started with the whole vacancy, is the whole tenant. I call it like tenant retention. Right. Uh, general concept, but it basically involves keeping tenants happy. It's it's a multifaceted thing. It's it's hard to like, point it like, hey, do this and your tenants will be happy. Anton Ivanov (00:11:53) - But having a good property manager like we started talking can go a long way. You know, tenants, in my experience, most of them like they're not like super picky. Like you'll get 110 and out there, that's just kind of a pain in the butt. Uh, excuse my language, but but most people, you know, if if they have an issue, uh, they understand, like, things break, right? You know, dishwashers break, whatever garbage disposals break. They just want good communication. And we've heard that time and time again from our tenants. Like, they love the fact that. So we have like, programs where they can text, they can use a website to submit maintenance requests, like it's easy to get Ahold of our managers, our maintenance departments. And I think that alone can go a long way to like, keeping tenants happy and keeping them in your units as opposed to like you know, always moving out because they just, you know, they ask for something to get fixed. Anton Ivanov (00:12:44) - And it's been weeks before somebody even called them back. Like, that's not the experience you want. So, uh, just work with your property manager, establish some programs that can be very simple, like you don't have to send them gift cards or like, you know, I've heard, like some landlords do, like crazy stuff like that, you know, they'll, uh, send them a birthday gift, send them a Christmas gift if you have the capacity and kind of to do that, like. Yeah, I think it'll be great, you know, at least a little postcard or something like that. But even just the basics, you know, be responsive if they have issues, you know, work with them on the issues. Just be reasonable with the tenants. Uh, keep them happy. Put yourself in their shoes. I think that can go a huge way to to reduce your vacancies. Sam Wilson (00:13:24) - You've brought up a lot of things that I would feel are more on the property manager. Things to do, such as? Right. Sam Wilson (00:13:32) - Having text message, you know, hey, I can text and say, yeah, something broke or this or that. How are you incorporated? Or how are you having these discussions with your property managers and saying, hey, these are systems we want to implement. Anton Ivanov (00:13:45) - Yeah. So that that yeah, you're absolutely right. So I'm not doing these myself. I'm not out there like with my phone number giving giving it to the tenants. No, this is exactly like the first thing I think, you know, having a good, good, good property manager, having a good relationship with your property manager and then finding one that is willing kind of to work with you if they don't have these systems to implement them. That's like one of the keys. And that's why I started with that as my number one point, a property manager at a scale like with a with a larger portfolio can make or break, you know, your basically success, your long term cashflow. So again, it's you know, it's more like an art form. Anton Ivanov (00:14:24) - I can't tell you like, hey, you know, go on Yelp or something like that. Look for these keywords. Find a property manager like it's it's it's been like a bit hit or miss for us. You know, we've we have started with some companies that were doing okay. Then we got to a certain point with kind of our larger volume that we found. Hey, you know what? This is just not working. I would say the best thing that helped us was a I only ask I only find property managers now through referrals. Uh, we haven't entered a new market in a while, but I would never, like, go on Google or Yelp or whatever and just grab a random company. I just think that's, you know, your the chances of you finding a really good one are pretty low. Um, I would definitely. If you're in a new market, you've never invested there before, I would try to network and connect with other investors, property groups, like...
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Unlocking Real Estate Wealth: Navigating SBA Opportunities
01/22/2024
Unlocking Real Estate Wealth: Navigating SBA Opportunities
Today’s guest is Robert Withers. Robert is an Entrepreneur and Real Estate Finance professional with experience in Conventional , SBA & Private Equity CRE financing. Show summary: The conversation unfolds with an introduction to unconventional loans, followed by an exploration of the scale of real estate podcasts.The discussion touches upon selling brokerages, navigating agreements, and imparts valuable lessons on scaling a real estate business. Throughout the episode, the speakers candidly address challenges in scaling, regional business variations, the significance of relationships, and provide a comprehensive overview of the current state of commercial finance. -------------------------------------------------------------- 00:00 - Intro 03:54 - Speaker, guest journey. 06:48 - Guest's background, transition. 09:31 - Selling brokerages, agreements. 12:45 - Scaling business lessons. 15:54 - Challenges in scaling. 18:32 - Regional business differences. 21:45 - Importance of relationships. 24:50 - State of commercial finance. -------------------------------------------------------------- Connect with Robert: Facebook: Linkedin: Twitter: Phone: (914) 490-8623 Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: 00:00:00:01 - 00:00:36:12 Robert Withers Why lock into a seven and a half percent, 3 to 5 year conventional loan with prepayment penalties when you can take interest only debt at a point they have a point and a half to two points over that. Okay. No prepayment penalty. And if it pencils, meaning if the numbers work, you'll have an opportunity in two years to hopefully lock into long term as cheap as possible interest rates going out for that, you know, for that either five or ten year term that you're looking for. 00:00:36:23 - 00:00:58:16 Sam Wilson Welcome to the How to Scale commercial Real Estate Show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Robert Withers is an investor, entrepreneur and real estate finance professional with experience in conventional SBA and private equity. Robert, welcome to the show. 00:00:59:01 - 00:01:00:21 Robert Withers Thank you, Sam. Great to be. 00:01:01:03 - 00:01:09:21 Sam Wilson Absolutely, Robert. The pleasure's mine. There are three questions I ask every guest who comes on the show in 90 seconds or less. Can you tell me, where did you start? Where are you now and how did you get there? 00:01:10:21 - 00:01:42:18 Robert Withers Well, okay. Where do I start? I started in the men's clothing business back in 1982. And basically what happened was I had was given an opportunity to be able to jump into the mortgage business because of the expensive men's clothing that I wore. Somebody took notice. So that was a sharp dresser. It gave me an opportunity to be able to get into sales in the mortgage industry in the early eighties and taught me the business. 00:01:42:24 - 00:02:14:15 Robert Withers Four years later, I went into my own business, started my own company after three mortgage companies on the residential side, which I all sold the last one right prior to the to the financial crisis. We took a little time off, reset things, decided that residential mortgages wasn't something that I wanted to do any longer, and jumped into the commercial real estate finance field. 00:02:14:23 - 00:02:18:03 Robert Withers And I've been there ever since. That was in about 2014. 00:02:18:22 - 00:02:32:16 Sam Wilson Got it. Okay, now that's cool. How did you when you sold all three of those businesses this this is getting in the weeds a little bit, but it sounds like you figured out how to do it once. And you said, look, we built one company. Want to go out and just do it again. But how did you get around non-compete or did you just. 00:02:33:03 - 00:02:33:24 Robert Withers I waited them out. 00:02:34:09 - 00:02:34:17 Sam Wilson Okay. 00:02:35:04 - 00:02:55:04 Robert Withers I waited them out. You know. But you know, Sam, it's interesting you bring that up because I. I sold a mortgage brokerage. Now, I don't know if you know anything about our business, but not a lot to sell there, right? There's not a lot of, you know, really good will and maybe some of a pipeline that you may have in it. 00:02:55:20 - 00:03:18:10 Robert Withers The companies weren't huge companies, but they did you know, they did a few million dollars worth of business a year. So they were nice sized companies. My first one was a sale and I was young when I did it, so it was awesome. I sold it for seven figures. I actually sold it to somebody who decided to reinvest the money back into the company so we could go national. 00:03:18:17 - 00:03:45:24 Robert Withers That did not work out. It didn't work out for me. It didn't work out for him. And I wound up buying the company back, which and then developed my second company. So the non-compete wasn't really an issue because of the fact that I kind of waited it out and then was able to buy the company back and take it into my second mortgage company, which I sold and turned that actually into a mortgage bank that we were in several states. 00:03:46:08 - 00:04:07:00 Robert Withers So it was kind of cool. We had a great time. But my, my partner and I had a disagreement in the in the direction I wanted to take it more of a New York luxury market based. And he wanted to do government based business. And we had a we agreed to disagree. It was very you know, it was it was very cordial. 00:04:07:10 - 00:04:23:01 Robert Withers And then my third one, which launched me into my third company, which I shut down really, but sold off some pieces of it, but shut down prior to the financial crisis, non-compete were really never an issue. Timing because of the timing that we took. So. 00:04:23:01 - 00:04:42:02 Sam Wilson Right. Yeah. And if you're listening to this and you haven't sold a business, a lot of times there's going to be restrictions around you getting back into the same business, especially in the same geographic area. If it's a geographically bound company where it's absolute what you can't for three or five years compete in this, you know, whatever the radius is from your business or, you know, and they're all structured differently. 00:04:42:02 - 00:04:56:10 Sam Wilson But that's a that's really cool. I appreciate you giving us the insight there. I think you may have answered this question, but you said in the company that you guys look to scale because the name of the show is how to scale commercial real estate. You guys said, hey, we're going to scale. And I think the principles are the same. 00:04:56:21 - 00:05:08:10 Sam Wilson We're going to scale this business, you know, across the United States. And you said that didn't work out. What were some of the lessons you learned in that didn't work out, process it? 00:05:08:10 - 00:05:46:18 Robert Withers I think for the most part it was two things. We were really more of an East Coast. The leadership team on our company was really East Coast focused. So I found as we talked to people throughout the country, that mindset and how things are done both in, you know, on a local basis and on a regional basis differ greatly from New York to California here and from New York to Tennessee and from New York to the you know, to the northern parts of our country. 00:05:46:18 - 00:06:11:02 Robert Withers So, you know, I think cultural and that not culturally. I think it was just a matter of mindset. And I think the way that we wanted to run our company isn't what we saw. We could replicate well in other parts of the country. So we decided to really stay more on the East Coast. We were licensed in Connecticut, New Jersey, New York, Florida. 00:06:12:09 - 00:06:36:09 Robert Withers And from that part, we were we were successful. And we, you know, we were able to scale, but we were able to scale in what we knew rather than, you know. And you would think, you know, listen, you know, a product like a mortgage is universal, right? It's the same it's a national thing. You know, it's it's it's rates are driven by national for national reasons. 00:06:36:09 - 00:07:02:02 Robert Withers You know, there are state regulations. But for the most part, the markets that buy mortgage loans are national at Fannie and Freddie Mac. But doing a good job in markets that you don't understand is it can be very difficult. And when management doesn't agree with what boots on the ground, well, the flops, the philosophies of each when there's no agreement, it's difficult. 00:07:02:02 - 00:07:22:13 Sam Wilson So I could see that. And that's something that I think until you've lived in various parts of our country, you may not understand. You know, here in here in Memphis, Tennessee, if you get on the phone, even with somebody if I saw you yesterday, Robert, we're going to talk for about six or 7 minutes about nothing. We're going to talk about the weather. 00:07:22:21 - 00:07:39:24 Sam Wilson We're going to talk about, you know, family, all sorts of things. I lose you there, Robert? No. Okay, cool. And I was that you were you were you were still a stone. I was like, oh, shoot. Maybe the Internet froze. But no, we'll talk about a lot of different things long before we ever get to the reason for the call. 00:07:40:05 - 00:07:56:15 Sam Wilson It's just the way it's done. And I'm from Indianapolis. I was born there and we don't really like we pretty much get on the phone and, hey, you know what you need, Robert? What's going on, man? And we get down to business, but here in Tennessee, man, I had to slow down. I'm like, wait, like, if I don't ask and it's just kind of rude if you're just like, Hey, what's up? 00:07:56:20 - 00:07:58:20 Sam Wilson Click like it just doesn't work. 00:07:59:06 - 00:08:04:02 Robert Withers If you're from Indianapolis, right? You were like, right down to business. Now I'm from New York. 00:08:04:05 - 00:08:07:20 Sam Wilson Oh, you guys are even more I mean, you guys are like, what? 00:08:07:20 - 00:08:33:01 Robert Withers We jump a couple of spaces in front of you and it comes down to, okay, we won't even introduce ourselves. And we're pitch and we're pitching a product. You know, we don't get me wrong, I'm not I'm not a big I'm a relationship builder. I've been in this industry for almost 40 years in one way or another. So I didn't survive this way by being transaction, you know, triad transaction related. 00:08:33:08 - 00:08:43:13 Sam Wilson And I'm not suggesting that it's just, it's just a different way of communicate. And if you're not prepared to spend the 7 minutes talking on the phone about nothing, then people are going to think you're rude and be like I don't wanna do. 00:08:43:19 - 00:09:06:15 Robert Withers Business with developing relationships are is you know is something that you know I mean you can start it in 7 minutes, but some of my best clients are ones that came back to me, you know, the second, you know, two or three times we had spoken two or three times transactions didn't work. And then all of a sudden it kicked in and things actually wound up jelling between the two of us. 00:09:06:15 - 00:09:08:10 Robert Withers So relationship building is huge. 00:09:08:14 - 00:09:25:23 Sam Wilson Absolutely. No, I appreciate you giving the insight on that because it's one of those things, even for people out raising capital, it's an important skill set to master. Am I talking to somebody from New York, New York investors? Man, we is down to brass tacks on the beginning. The phone call, I call somebody from Memphis, Tennessee. We're going to spend our time on the phone. 00:09:25:23 - 00:09:40:17 Sam Wilson And so it's knowing and being able to shift even gears immediately when you jump on the phone with those people. And knowing how that works is I think it's an important skill that as you scale your business, that you and your team have to master. So that's a rabbit hole. But I appreciate you taking the time to kind of go down some of that. 00:09:40:23 - 00:10:02:13 Sam Wilson Tell me about your business today. I know you said in 2014 you decided to get into commercial real estate finance and Gilliam saying this is ten years ago now. You know, 2014 was when I think things really started to recover in the real estate markets. Commercial real estate, residential real estate started to, you know, go on that upward curve that we've seen for the last nine or ten years. 00:10:02:13 - 00:10:16:23 Sam Wilson What tell me about the business you guys are in today and maybe give us, you know, if you can, just a quick rundown on what the last decade looked like and kind of how you guys are positioning yourselves now, changing it. 00:10:17:00 - 00:10:41:03 Robert Withers Things have changed a lot from going from an investment market where, you know, we're cap rates were compressed and, you know, they were low and everybody, you know, we had cheap debt. Let's face it, you know, at one point we were looking at 3%, you know, commercial real estate rates that that were trading. So it wasn't hard to get a deal to pencil. 00:10:41:10 - 00:11:29:23 Robert Withers So people were were were trading investment real estate left and right. We work in basically four major food groups or product sets is a better way of describing it. And that is we do a lot of SBA financing for owner occupied clients are looking to finance property they want to buy for their business. We do conventional financing for somebody who's buying a some sort of a mixed use or multifamily product or an industrial product for purposes of investment, we or or owner occupied, we do bridge loan financing which is short term up to three years type financing, which, you know, is in short, short term a great, great tool for actually what's going on right 00:11:29:23 - 00:12:15:08 Robert Withers now because nobody's actually buying into conventional rates because they're high. So putting in a short term solution like a bridge loan makes a lot of sense in many cases. And and spec spec construction, construction financing for the purposes of building a, an investment property, whether or not it's a single family home of a bunch of different homes, you know, you know of it in the case of a of a of a development project or, you know, something that's more like an apartment building, not and we're not seeing a lot of mixed use or multifamily construction going on right now for the purposes of of of in the investment markets. 00:12:16:17 - 00:12:40:23 Robert Withers So we concentrate on those four types of programs here or products here. And from 14 to 23, for the most part, it's been up and down. You know, Sam, it's you know, we started off really, like I said, in a very low interest rate market. So the products were really all, you know, either CMBS loans or they were regional banks that I we don't do a lot of business with national banks. 00:12:40:23 - 00:13:06:24 Robert Withers It's mostly local or regional banks offering great product. And as rates changed over time and an opportunity changed over time, we shifted gears. Last year was our biggest year ever with SBA financing. We did a lot of SBA financing and bridge loan financing. So and quite frankly, I think we're going to we're going to see a repeat of that for 24, as they've been saying in our industry. 00:13:06:24 - 00:13:26:01 Robert Withers Andrew About your industry. Sam But in our industry they've been saying it's survive until 25. So you know what? I think for the most part, you know, we're looking ahead and maybe, you know, going to see some of that investment type real estate come back in 2025. Right, equity investment properties. 00:13:26:07 - 00:13:44:13 Sam Wilson So that makes a lot of sense. We're going to cover, I think, get into some of the more nuanced pieces of this. I'm looking here, bridge debt. You mentioned that bridge debt is a good tool for now a lot of people. And I'm going to I'm going to I'm going to ask you to tell me why I'm wrong. 00:13:45:09 - 00:14:00:23 Sam Wilson So a lot of people have taken on short term debt in the last 2 to 3 years. And from this side of things, I look at it and say, man, bridge, that's a bad deal. It's a bad deal because right now there's I don't know how much what is it? What then? You could probably give me the accurate number on this. 00:14:00:23 - 00:14:08:03 Sam Wilson I'm going to pull this one up and say it's north of $1,000,000,000,000 in debt coming due in 2024 on commercial. 00:14:08:05 - 00:14:08:15 Robert Withers Scale to. 00:14:09:03 - 00:14:09:13 Sam Wilson I'm sorry. 00:14:09:24 - 00:14:10:17 Robert Withers Close to it. 00:14:10:23 - 00:14:25:05 Sam Wilson Right. So in in some of that, I would venture to say I don't have any empirical evidence to substantiate this claim. But I would say that a large part of that is probably bridge debt where it's like, hey, man, we got to get out of this. We don't know how to get out of it. We got to refi somewhere. 00:14:25:12 - 00:14:42:04 Sam Wilson And so we're going to see cash in, revise happening and or assets selling at a massive discount because of the way they structured the debt. Tell me why you say in light of that frame, tell me why you say that bridge debt is still a good tool for now and how do you use it without playing with fire? 00:14:43:02 - 00:15:09:18 Robert Withers Interest rate cycle sent interest rate cycle was lower three years ago when this debt was was originated. So unfortunately, that debt that's coming due is is being refinanced in a higher interest rate market. We've for the most part, if you were to believe the Fed in I have a hard time believing the Fed. But, you know, if you're over the next couple of years, we're going to see that cycle turn around. 00:15:09:18 - 00:15:31:15 Robert Withers I think for the most part, we can agree that interest rates have topped out. You know, there is certain concerns on the employment jobs data side, but for the most part, inflation looks like it's under control. And although take my word for it, I never seen the price of eggs and bread be where it is at this moment. 00:15:31:15 - 00:15:51:09 Robert Withers But for the most part, inflation, if you're going to go on a on a pure core product or service or, you know, in this case a product gasoline, you know, gasoline prices are coming down. Now, you could say that that's, you know, technical in nature. But quite frankly, I think it's a good indicator where we're headed in regards to prices. 00:15:51:20 - 00:16:38:24 Robert Withers So having said that, I think that people who are originating bridge that now like we have a bridge program that's one overpriced three quarters to one over prime you're single digits right why lock into a seven and a half percent 3 to 5 year conventional loan would prepayment penalties when you can take interest only debt at a point they have a point and a half to two points over that okay no prepayment penalty and if it pencils meaning if the numbers work you'll have an opportunity in two years to hopefully lock into long term as cheap as...
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Should Commercial Property Owners Invest in Electric Vehicle Charging Stations?
12/28/2023
Should Commercial Property Owners Invest in Electric Vehicle Charging Stations?
Today’s guests are Jeff Patterson and Matthew Bell. Show summary: In this episode of the How to Scale Commercial Real Estate Show, guests Jeff Patterson and Matthew Bell discuss the opportunities presented by electric vehicle charging stations for commercial property owners. They highlight the benefits of having charging stations, such as increased customer stay and revenue generation. They also discuss the potential costs and incentives of installing these stations, emphasizing the importance of taking advantage of current incentives. The guests also explore the marketing strategies for charging stations and the potential for partnering with the federal government in developing charging infrastructure. -------------------------------------------------------------- Opportunity for Commercial Property Owners (00:00:00) Introduction of Matthew Bell (00:01:04) Monetization and Regulations of EV Charging Stations (00:06:11) The payback period and potential costs (00:09:51) Incentives for EV charging stations (00:11:17) Solar and EV charging possibilities (00:16:23) The Efficiency of Solar Power for EV Charging Stations (00:19:12) Opportunities for Commercial Property Owners (00:19:47) Marketing EV Charging Stations (00:21:51) -------------------------------------------------------------- Connect with Jeff and Matthew: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Jeff Patterson (00:00:00) - There's a reason why, um, companies like Starbucks and, uh, waffle House, which I put in one of my recent LinkedIn. There's an article out there where they're looking at it because they want people to stop and stay longer at their business while their car charges, and they've ran the calculations on how they're going to make more money by people being longer inside their stores. So it's not just about the investment in getting the return of the chargers outside. It's about the additional money you could make inside your business. And depending on what your business model is, um, you know, that could turn out really favorable for you. Intro (00:00:36) - Welcome to the how to Scale Commercial real estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:48) - For those of you that don't know, Jeff Patterson was on the show on November 6th, you should go back and check out that episode. That's episode number 866. Today we're here doing round two of the show with Jeff and also with Matthew Bell. Sam Wilson (00:01:04) - Matthew, welcome to the show. If you don't mind, you know, again, if you want to hear, just buy. I'll go back and hear that one. But, uh, we're introducing Matthew here to the show as well. We're going to do a two person or three person episode here today. So, Matthew, can you tell us, uh, just quickly what your background is? Actually what I normally ask Matthew, and I can't help but do it. I'm sorry. In 90s or less. You got to tell me. Matthew, where do you start? Where are you now? And how'd you get there? Matthew Bell (00:01:26) - Sure. Absolutely. Thank you, and thanks for having me on today. Um, so I'm our vice president of business development at Pyramid Network Services. So, uh, I started in telecom right out of school. Uh, worked on the first major build out for sprint. From there, I moved I became outside counsel for Verizon for a number of years. Uh, there I moved to in-house, um, corporate counsel for a large fiber company. Matthew Bell (00:01:50) - Uh, eventually that sold, went back to sprint, uh, for a period of time, uh, and ran national build out there for Network Vision, where we went and, uh, updated 27,000 sites in about three years. Uh, and then when that ended, uh, wanted to do something a little bit different. And that's how I ended up at pyramid. Sam Wilson (00:02:10) - That's awesome. Cool. I know the topic that we are covering here today, for those of you who are interested in what episode or the, uh, you know, round two of this, of this episode is we're talking about electric vehicle charging stations. So maybe, Jeff, you can kick us off and tell us just what that means, what the opportunities are, and kind of how you guys tie into that right now. Jeff Patterson (00:02:32) - Sure. Thanks. Good to see you again, Sam. Um, so everybody's hearing all the the sound out there on the street, and it's in this article on this social media platform about EV car. Jeff Patterson (00:02:45) - You know, uh, they're making this new one, or, uh, California is mandating no combustion vehicles after 20, 35 to be sold. Um, there's a lot to be said, but there's a lot of consumer questions going on. And I know for a lot of investors and commercial property owners, what do I do? Who do I even talk to about this? And that's where Phoenix kind of came in the market of, well, we're talking about cars talking about charging a vehicles, which typically is going to happen in a parking lot. So parking companies seems to be a logical place that you'd reach out to. Um, now for us, we decided to partner with pyramid and s, uh, because of their full turnkey agnostic, uh, services. So, um, instead of me partnering with, just for instance, ChargePoint, which a lot of people, you know, know anything about EV chargers I've seen out there. Nothing wrong with them. Um, but I would be dedicated to one single charge company with pyramid and s. Jeff Patterson (00:03:46) - Um, we are able to work with multiple, uh, charging station companies to offer what's best for anyone out there. And it doesn't just have to be someone who's looking for my particular operation services. It could be a strip mall. You could be a a waffle House, a huddle House, uh, uh, a Walmart, um, the Starbucks, you know, we do everything from start to finish and, um, you know, really are there to help everyone along the process because most people don't know. Where do you start? Sam Wilson (00:04:17) - Absolutely. No. I mean, yeah, if you asked me that today, I'd be like, I have no idea. So you you guys get to plug in and work basically with everybody, you know, everybody from even I would imagine, multifamily property owners. I mean, any property type is really your target avatar. Jeff Patterson (00:04:33) - Correct. Sam Wilson (00:04:34) - That is wild. So what's what's the opportunity for a building owner, say, somebody like me, like, how do we how do we how do we, no pun intended, plug in with this. Sam Wilson (00:04:44) - And I mean, is there monetization opportunities? Is there like why would we even provide this other than just a nice thing to have? Jeff Patterson (00:04:55) - Well, it depends on what type of property you do have. You know, you mentioned multifamily, for example. Well, what type of, um, multifamily project do you have? If you're in our city and you're in places where EV charging is growing? If I own an EV car, I'm not going to come live at your apartment complex if I don't have a way to charge my car. So this becomes very important for you to be able to, um, not lose potential, uh, residents. As you know, you're growing and maintaining your business profile. Uh, similar things would be, um, think about, like, a Whole Foods or. Uh, Matt and then were recently educating me on school buses. Uh, a lot of school buses are going, uh, electric and, uh, pyramid has a platform there. They work with a company, and they installed the chargers for the entire county for the school system to take the school buses. Jeff Patterson (00:05:49) - Electric. Uh, it really depends on where you're at, but there is monetisation options. For instance, no one really charges for free. Um, you know, you plug up, you pay for the amount of time you use and, um, you know, based upon your initial capital investment and what you're charging for therm, uh, you know, like any other investment, there's a break even point and then profitability afterwards. Sam Wilson (00:06:11) - Is there on on that monetization aspect, are there regulations around how much you can mark up that electricity? I know utilities are pretty heavily regulated. I know if you produce and of course, you know, it's the fox guarding the henhouse, but if you produce electricity, you know, via solar, you're going to be limited via contract rates. And as to what that gets sold back to the grid. So conversely, are there limits as to what you can charge at an EV charging station to the end user? Jeff Patterson (00:06:41) - I'm going to turn this one on to Matt. Matthew Bell (00:06:42) - Yeah. Matthew Bell (00:06:43) - There currently are not. Um, obviously, if you're charging a huge amount, there'll be an issue there, but it really comes down to the speed that you're charging at, and I think that's why it's not regulated. So there's obviously a larger upfront cost to install a level three EV fast charger. And the EV fast charger can, uh, charge your car in approximately 15 to 20 minutes. Uh, whereas like a level two charger is more set up, uh, to do it over a few hours. Uh, so again, thinking about the different kind of, uh, location that you're at, whether you're a commercial property, uh, a hotel or something like that, people are going to be there for a longer period of time. Uh, the two hour charge of the EV works a little bit better. Uh, a level three charger is something that, you know, you'd want by, uh, a highway or at a McDonald's or something like that. Uh, people stopping by trying to fill up, grabbing something quick, and then moving on. Matthew Bell (00:07:50) - So I was just going to add in to, you know, I think a piece of this is the question you were asking before was, you know, do we want to be a part of this? Why would we be a part of this? And I think those are great questions to ask. But another another thought about this is that, you know, EV is here to stay. And I think we're seeing it just kind of slowly building. But it's it's not a fad. It's not going away. Um, the last couple of years there's been like between 1 and 2 million, uh, cars produced, EV cars produced, uh, but they're projecting in 2029, uh, which is, is five years from that will be over 6.5 million. Uh, so the demand for this is, is going to be huge. Um, and we've seen just in 2021 and 2022, some of the largest investments from the US automakers as well, uh, they put in over $70 billion to gear up for this. Matthew Bell (00:08:44) - And the cars are are very different. Um, they will recognize some benefits from it as well. And that, you know, uh, an internal combustion engine has over 2000 parts that move inside of it, whereas an EV only has 20, uh, the components in a in an Ice car, uh, an internal combustion engine car, there's over 30,000 components. There's half as many, uh, in an EV car. So beyond just the, uh, benefits, the environmental benefits, uh, that people are talking about, there's a lot to be gained, uh, for the, the automakers to as this process matures. And I think it's going to be something that that people are going to demand and, and require when they go different locations. Sam Wilson (00:09:30) - Right. And I would imagine that the speed of adoption, uh, early on for people placing charging stations is probably like the early bird gets the worm, in a sense, in that because it's not widely spread. It's something that if you if you put these in now, you obviously can can probably recoup your investment much sooner, say, than somebody ten years from now. Sam Wilson (00:09:51) - It's like, you know, scratching their head, going, oh, man, you know what? We should probably put an EV charging station in, you know, because I don't know I don't know what the in Jeff, you mentioned this what the payback period is like. How long does this take. And maybe you guys can speak to what that, you know, potential costs are. And I know, like you mentioned there, uh, Matt, that that, you know, level one, two, three, I'd imagine there's probably different costs associated with that. What are, you know, talking about government and intervention or involvement, rather, what are the incentives, uh, are there incentives available for this sort of thing? I mean, maybe you guys can just give us some insight on that, because this is obviously a world I know nothing about. Jeff Patterson (00:10:29) - Definitely. I wanted to piggyback there real quick on Matt. Uh, last comments, we're just talking about how the automakers are into it. Jeff Patterson (00:10:36) - Well, you also have the big guys like BP, where they are now leveraging and investing their money into lithium and creating their own chargers. So it's not just the automakers. Um, you see it all around in all the industries where they are leveraging and shifting direction, which, um, you know, ultimately means, as Matt said, it's not going anywhere. Currently, there are lots of incentives. That's part of what Phoenix and Pyramid working together, uh, help throughout our turnkey process is, you know, when we get to that, uh, that stage with whomever we're working with, we will help work with you on those incentives. Sam Wilson (00:11:17) - What? What is this? Can you give us a breakdown of of like, maybe payback period. And and I know obviously every installation is different. Uh, but you know, what? Should somebody be looking at from a payback period? And then also from a just, you know, cost of, uh, cost of implementing a system like this. Matthew Bell (00:11:37) - Yeah, I'll jump in on that. Matthew Bell (00:11:38) - So, you know, like Jeff was saying, um, we manage a database, a national database that tracks all these incentives. Uh, and, and this part sounds kind of salesy, but the time really is now, um, to to grab Ahold of these, there are tax incentives, there are utility incentives. There are state incentives that are municipal incentives. There are national government incentives. Um, there's a lot of money out there, and it's coming from a lot of different sources. Uh, and we track all of that. So, you know, even if you're thinking about wanting to do this, um, you know, I would say reach out to Jeff, reach out to myself, um, and just let us run the incentives and see what's out there, what might be a possibility for you because, um, eventually, like, we always see, the money goes away, right? The the the system starts to mature. You get more of these locations out there. Uh, you don't need these incentives any longer. Matthew Bell (00:12:37) - And so, you know, I was telling somebody this the other day, but a few years ago, somebody came to my house and said, hey, you want to put a new roof on? And I said, yeah, I don't think I'm really looking to do that right now. I said, do you mind if I go up there and take a look at it? I said, sure, and he spent a few minutes up there and he said, yeah, I think you're probably gonna need one in the next year or so. And, uh, there's, there's some hail damage up here. Probably get a good portion of this covered. I'm a lot more interested in a new roof at this point. So, uh, you know, I think that this. Sam Wilson (00:13:07) - Is. Matthew Bell (00:13:09) - It's kind of akin to what we're talking about here, but there, there really are, depending upon what state you're in, and we can look it up by the exact address and location, uh, to tell you what's available now or what may be available, uh, in the coming months. Matthew Bell (00:13:23) - Uh, but that that's one of the factors that comes in. So, um, to get back to your a question about the payoff period, you know, it really depends a lot on, um, obviously the upfront expense and, and that can be driven by, you know, a level two charger. You're talking kind of in the tens of thousands of dollars, uh, a level three you're probably closer to. You know, 80 to 100,000. Um, and that just because of the power upgrades that are going to be required, uh, and the equipment that's going to be required, that's a level two is, you know, much more like a trickle charger. And, and people can usually support that with the infrastructure that they currently have. But uh, a level three a lot of times requires a new service. That said, obviously people enjoy being able to charge their car in 15 minutes versus, you know, two and a half or three hours. So what you can charge for that is significantly more. Matthew Bell (00:14:25) - Um, so I think you have to find what fits for you. Um, but we have seen, uh, payback periods in just a few years. Um, for, for both level two and level three, dependent upon customer traffic and pieces like that. Sam Wilson (00:14:42) - Right. So here here's I'm going to give you a little bit of a potential case study. We've got a facility in a small town in Tennessee. And the, uh we're putting solar in. Now, I will say that solar in general, from our perspective, doesn't make sense. Like the payback periods, like 25 or 30 years. I mean, and from a, you know, especially when bringing in investors, most investors don't get too thrilled with a 25 year payback. We break even in 25 years. It just doesn't make sense. But based on where this building is located, the zones it's in and, you know, some some arbitrarily grown or derived government map, it's a 90. We have a 90%, um, between tax credits and everything else. Sam Wilson (00:15:25) - It's a 90% of that solar installation is covered. So our payback period is actually one year, which is you know, that's fantastic. Fantastic. Right. And so, you know, a company like you came to me and said, hey, man, you know, we should do solar on your building. And they said, well, here's how we're going to do it. And then they guided us through the process and they had their grant writer write the grants and blah, blah, blah. And down the road we go. And it was I mean, it was a brainless move, like, of course we'll do that. Is that same kind of thing available here in the EV charging space? Matthew Bell (00:15:54) - Yeah, we actually submitted for incentives, um, at a New York property the other day for just that. And we, we believe it'll be between 80 and 90%, uh, of that that's covered, um, again, but not to set that expectation for everywhere. New York is pretty progressive and and a lot of money available there. Matthew Bell (00:16:13) - California same way. Um, and, and other states are following suit um behind that. But but that's out there. Exactly. For example. Sam Wilson (00:16:23) - Right. Which is, which is, which is really weird because I kid you not, ten miles down the road, another facility would only qualify for 50 because we looked into it as well. And it was like, well, okay. Now once again, solar no longer makes sense because again, it's a 12.5 year payback period. So scrap that one. But we're going to do the 90%, you know, one with uh with no questions. So that that's really great to think about. And on that question, you know, follow along with that is let's talk about solar to EV charger possibilities. Anything like that exist out there. Matthew Bell (00:16:56) - There are. And I apologize, Jeff, I want to give you a chance to jump in here, too. But, um. Yeah. You're good. Um, there are, uh, solar opportunities out there around that. Matthew...
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Valuing Land for Development: Andrew Brewer's Unique Approach
12/27/2023
Valuing Land for Development: Andrew Brewer's Unique Approach
Today’s guest is Andrew Brewer. Andrew is a Real Estate Developer and a Buy & Hold Investor Show summary: In this episode real estate developer Andrew Brewer shares his journey from stationary engineering and facilities management to real estate development. He discusses how his background has equipped him with valuable skills and insights into asset management and construction. Brewer emphasizes the importance of continuous learning and understanding the concerns of property owners. He shares his strategy as a developer, the challenges of remodeling versus new construction, and his approach to valuing land for development projects. He also highlights the necessity of taking calculated risks for wealth building. -------------------------------------------------------------- Stationary Engineering and Facilities Management (00:01:43) Experience Working on a High-Rise Building (00:04:13) Lessons Learned from Construction Defect Litigation (00:06:14) The skill set as an owner and investor (00:10:15) The difficulty of remodeling vs building new (00:11:21) Valuing shovel ready projects (00:18:28) The risk of investing (00:19:27) Valuing land and potential (00:20:20) Factors in determining offer price (00:22:09) -------------------------------------------------------------- Connect with Andrew: Linkedin: Facebook: Web: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Andrew Brewer (00:00:00) - What the owners look for. What do investors look for? What makes something a good investment, which is a different skill set to this is how you asset manage this facility. Um, and then I was able to use that knowledge and speaking with, you know, the HOA and the property owners at this facility because I'm starting to think like, okay, what are they thinking? You know, what are their concerns? They've bought this unit in this building. What are their concerns as an owner, which may be very different to my concerns as somebody that's trying to keep the lights on. And then how do you balance those two things? Um, so I think that, you know, that was really invaluable to, to starting my own company. Intro (00:00:35) - Welcome to the how to Scale commercial real estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:48) - Andrew Brewer is a real estate developer and they buy and hold investor. Andrew. Sam Wilson (00:00:53) - Welcome to the show. Andrew Brewer (00:00:54) - Hey, thanks for having me. Absolutely. Sam Wilson (00:00:56) - The pleasure is mine. Andrew. There are three questions I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now and how did you get there? Andrew Brewer (00:01:05) - Um, so I started, uh, I grew up in the San Francisco Bay area, so I guess I started there. Um, I actually started my career as a butcher. Uh, I did that for eight years through high school and college. Uh, when I graduated college, I moved into stationary engineering, uh, which is facilities management of large commercial assets. And from there, um, I moved into, uh, running my own company and developing real estate. Uh, where I'm at right now is I run my own company and I develop real estate. And what was. I'm sorry, what was the third question? Sam Wilson (00:01:40) - Where did you start? Where are you now? And how did you get there? Andrew Brewer (00:01:43) - Uh, how I got here is I, you know, I did a lot of reading, you know, listen to podcast, read books, went to meetups, like, did that whole kind of route to educate myself about the ownership side of real estate? Uh, and I developed my skill set through my W2 job as a stationary engineer. Andrew Brewer (00:02:01) - Uh, and then also by doing projects, uh, both by myself and with partners, uh, kind of mushed all of that knowledge and everything together to start my own firm, and here I am. Sam Wilson (00:02:12) - Wow. That's a lot. A lot of moving pieces. I'm curious, what is stationary engineering? I've never heard that term, and that's, uh. I'd love to get a little insight on that and how that shaped what you do currently. Andrew Brewer (00:02:25) - Definitely. Um, so stationary engineering, contrary to most people's first opinion, is not creating new types of paper. Um, it actually is the the other definition of the word stationary, which means like stationary as and it doesn't move. Uh, and that's um, that's as opposed to in that industry, marine engineering. So when you're dealing with like large boats, battleships, cargo ships, things of that nature, all of those ships have systems that, you know, keep that ship running. They have generators, boilers, filtration systems, um, all that kind of stuff which run, you know, the power for the ship, for it to move lights, you know, anything like that that's needed on a large ship. Andrew Brewer (00:03:09) - Now, all of those systems can exist off a ship, and often they exist in buildings. So when you are a stationary engineer, you are doing all of that applied engineering work, but in a stationary facility, as opposed to a facility that moves. Um, so a stationary engineer could also be called, uh, like a facilities maintenance person or, you know, something like that. Uh, the engineering portion of it generally comes when you're dealing with a large systems like high pressure boilers or things of that nature, which is a little more in-depth and requires a much more specialized skill set than just, you know, swapping out. You know, light fixtures or something like that, which is something that, um, which all facilities maintenance people do. But it's only the engineers that get to work on the actual, like, big systems because something like, uh, a high pressure boiler, I mean, that could explode and kill people. So you need to know what you're doing. It can't just be some rando that comes in and starts working on it, uh, so that, um, that's that job, um, where I was working. Andrew Brewer (00:04:13) - I mean, they have these in all types of buildings. Um, the facility I worked in for a number of years, uh, was in San Jose, California. Uh, it was a high rise building, 27 storeys, um, composed of 197 residential units and then eight ground floor commercial spaces. So it was half of a city block, that one facility, um, because it was a high rise. We had a lot of, uh, singular systems in the building, um, on a lot of apartments, like garden style apartments. When you think about the Hvac system, generally, you'll see like a roof, and there's just like a whole bunch of condensing units all in a row along the roof. You know, when you're in a 27 story building, you've got less roof area. You can't just fit a bunch of condensing units. You have one system for the entire building, uh, which would be a cooling tower or a chiller or something like that. And then that is supplying, um, you know, refrigerant and cooled water to all of the 197 Hvac units that are in there. Andrew Brewer (00:05:13) - So it's a very different system that you have to work with. Um, so that's that's the building that I worked in. I started there as a utility engineer, worked my way up to the assistant chief engineer of that facility, um, and worked on, you know, everything in that building heating and cooling, electrical, plumbing, uh, you know, even some structural work, cosmetic stuff. Worked very closely with, uh, the HOA board and the property manager to keep that facility running. Um, keep everything running on budget. Um, you know, there was a there was a lot of it was kind. A mishmash of, you know, property management, maintenance work, asset management, facilities maintenance. Like we kind of did it all because we were actually a relatively small team for that facility. Um, and that's, you know, that's really how I got a lot of my hands on knowledge. Um, while I was there, I also acted as a consultant for construction defect litigation lawsuits. Andrew Brewer (00:06:14) - Uh, so I did that. And, you know, basically that's suing developers and builders for, uh, defects in their construction. Um, and so, you know, so I did that as well and then participated as a project manager in reconstruction projects. You know, like if you win a construction defect litigation suit, generally there's a large settlement. That settlement, if it's used properly, is used to remediate all of those problems in the facility. So that's, you know, basically a huge redevelopment project that then has to happen, which in a high rise, as you can imagine, involves a lot of work being done suspended on lifts many hundreds of feet above the ground. Um, which is not always super fun. Sam Wilson (00:06:59) - No, but would you say that that is where you really, um, you know, figured out how to become a developer? Andrew Brewer (00:07:08) - Uh, that was instrumental in it. So, um, doing that job, um, I didn't actually develop anything from the ground up, but the process of, you know, redevelopment, working on those lawsuits, um, that all gave me a lot of background knowledge. Andrew Brewer (00:07:24) - So, you know, as I'm developing properties now and building properties, I know exactly what's going to put me in court at the end of the day because I know what to look for. I know where common mistakes can pop up. I know how, um, how serious those things can be if you don't do your due diligence as a builder. Um, and a lot of this stuff can be relatively mundane. It's not something that people think about. Um, you know, I'll give you a good example of that. One of, um, one of the big issues in this facility I was working in was, uh, was plumbing problems. And, you know, it turned out that that one of the issues was the builder used, um, the wrong kind of rubber and a lot of the gaskets and seals and it, you know, the water source in that area, you know, had certain, you know, certain things. And it's very hard water in San Jose. It's very similar actually, here in Austin, Texas, there's just a lot of calcium in the water. Andrew Brewer (00:08:23) - And, uh, you know, those minerals that were in the water reacted poorly with, um, with that type of rubber, I guess the chemical composition of that rubber, and it degraded it prematurely and led to just leaks everywhere. And, you know, as, as I'm sure you know, you know, I mean, you got water will do wonders for your, your flooring and your sheetrock and, and everything. So, you know, the the leak itself may not cost that much to fix, but having to remediate, you know, a big leak cascading from the 20th floor all the way down. I mean, that's a lot of damage. That's hundreds of thousands of dollars of damage for a single plumbing leak. Um, so those things get amplified. So I kind of saw that in real time, like, oh, this is bad. These can be millions, tens of millions of dollars in damages if you don't build this stuff correctly. So that's really informed. You know, how I've approached development is making sure that, you know, I take all the steps to not get sued for that, you know, to protect my investors as well. Andrew Brewer (00:09:22) - When I started developing, um, you know, I have a partner here in Austin that I develop with, um, he actually grew up, uh, building spec homes with his parents. His parents had a spec home building company, and they would go out and, like, buy land, subdivide it, build houses. So he and I had very complementary skill sets. He knew, you know, like, hey, this is the specifics of like, land development. And I had the point of view of like, hey, this is what it takes to do this with a large commercial facility. Um, because the process of doing, you know, redevelopment or reconstruction, I mean, you still have to go to the city, you still have to pull permits, you still have to get approvals. You know, you still have to work with contractors. A lot of that is very similar, even if it's not like exactly apples to apples. Um, but, you know, I mean, pulling a permits, pulling a permit, you know, that that doesn't change whether you're doing it for a new build or redeveloping something. Andrew Brewer (00:10:15) - Um, so I learned all that through my job, and, uh, and that really informed, you know, what I'm able to do now, um, at that same time that I was doing that, you know, that's when I was doing, you know, a lot of reading. I still do a lot of reading, but I was doing a lot of reading then listening to podcasts, going to networking groups. Um, and I was investing myself just on the side outside of my job in smaller single family stuff. Um, and so I developed that skill set as an owner and as an investor. Like, what do owners look for? What do you investors look for? What makes them? Being a good investment, which is a different skill set to this is how you asset manage this facility. Um, and then I was able to use that knowledge and speaking with, you know, the HOA and the property owners at this facility because I'm starting to think like, okay, what are they thinking? You know, what are their concerns? They've bought this unit in this building. Andrew Brewer (00:11:09) - What are their concerns as an owner, which may be very different to my concerns as somebody that's trying to keep the lights on. And then how do you balance those two things? Um, so I think that, you know, that was really invaluable to, to starting my own company. Sam Wilson (00:11:21) - Absolutely. And I and I would I would say that just from an outside perspective, the remodel indoor remediation side of things is 10 to 1, the difficulty of just building something new. Andrew Brewer (00:11:33) - It is. Um, that that's definitely true. You know, my dad, uh, my dad was a carpenter and a staircase builder for a time, uh, back before I was born. But, you know, in another life, he was that. And, you know, like, as we talk about that kind of stuff. Now, you know, the thing that he's always said to me, which I found very true in my career, is, you know, when you're remodeling, um, or, you know, he would say it's so much easier to build new than to remodel, because when you remodel, you're fighting for inches and you got to find them somewhere. Andrew Brewer (00:12:03) - If you're building new, you know, you can just add inches and it's really easy. Um, so that with him just saying, like, yeah, you're always fighting for inches, that is just kind of always stuck in my head. Um, it's part of the reason I like new development more than more than rehabbing stuff. It is a little easier in some ways. Sam Wilson (00:12:20) - Absolutely. I would, I would the only the only thing that I would argue on that front is that your speed to market could be potentially faster on a remodel than maybe on. Andrew Brewer (00:12:31) - That's definitely true. Um, you know, I have some folks, you know, that I know that are able to, you know, they buy property or maybe we're able to exit it pretty quickly, you know, especially during like 2020 to 2022. You know, it's like, hey, I'll buy this apartment complex. I'll renovate 20% of the units, get some higher rents. It's proof of concept. Turn it around and flip it. I've got an exit in 6 to 8 months. Andrew Brewer (00:12:53) - Put that on their resume. Like, look, I've got all these exits now with me, it's a little more challenging when I'm developing a property. I can't really just, uh, in six months be like, well, I built some of the framing. I'm going to flip it to you. Like people really expect you to finish it. So. So my holds end up being a bit longer because I actually have to stick with them from all the way from the beginning, all the way through the end. Sam Wilson (00:13:13) - What's your what's your plan on the development side of things? I mean, I see, you know, the there's there's developers that get it too completed, partially occupied and then punt it. But in your bio there, you said you're a buy and hold investor. What's your what's your strategy on that front? Andrew Brewer (00:13:30) - My ultimate goal in every project I do, I guess I'll say aside from single family home subdivisions, because I, I don't want to compete with, you know, D.R. Horton or Lennar or anything. Andrew Brewer (00:13:40) - I will entitle lots for them, but I don't want to build the houses, um, for my townhome and multifamily projects, my goal is always to buy raw land and title it, develop it, build it, and then hang on to it forever. Like that's what I want to do. That doesn't always work to do it that way. Uh, there can be deals found at any stage in the development process. You know, I have bought shovel ready deals. I have bought raw land. I have bought land that was already zoned, but not, you know, entitled or developed. Um, I've bought land that, you know, wasn't even annexed into a city with no utilities. Um, I can come in at any point in the development process, and I have, um, it all depends on, you know, how the how the numbers work out. You know, like, if somebody wants way too much money for their entitled land or their zone land or whatever, like, I'm not going to do that deal. Andrew Brewer (00:14:37) - If somebody is offering like a great deal and I see a good way to make, you know, investors a lot of money, uh, then then I may buy something shovel ready. But ultimately I would like to, you know, extract as much value as I can. And you do that by doing the entire process, you know, from raw land all the way through, holding the final asset. At the end of the day, I'm going to do what is best for the investors, which sometimes is to sell. If there's a crazy good offer on the table or, you know, if there's a feeling that, you know, maybe the next phase of a project might not go so smoothly, maybe there were some recent, you know, changes to the zoning code or changes to, you know, the building codes or maybe you know, somebody in, you know, a local municipality that is, you know, Anti-development just got elected. You know, I, you know, I might say, like, uh, might not be the best thing for us to stick with this project. Andrew Brewer (00:15:33) - We could probably get it done. But the risk, you know, may not outweigh or, um, may outweigh the, the rewards at this point. So I'm always very cognizant of, you know, what's going on in the area, what's going on with any project. If we have to exit, or it makes sense to exit to minimize risk or protecting investors investment, like I will absolutely do that in a heartbeat. Um, but ultimately, I, I want to just hang on to stuff. You know, that's there's so much time value of your money in real estate. Like, you know, real estate goes up over time. You know, if you get a good asset at a good price, you know, it can make sense to just hang on to it, you know, as opposed to trying to repeat the same thing every couple of years. Sam Wilson (00:16:17) - I mean, outside of the constraints of, you know, like you said, elected officials coming in that are anti-development things like that. Sam Wilson (00:16:23) - What what else is there that might prevent you from holding something long term? Andrew Brewer (00:16:31) - Um, other, you know, other things. There might be, uh, construction prices going up, like if this is if...
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How to recover after losing $50million: Rod's Journey from Loss to Recovery
12/25/2023
How to recover after losing $50million: Rod's Journey from Loss to Recovery
Today’s guest is Rod Kheif. Rod Khleif is a multiple business owner and philanthropist who is passionate about business, high performance, real estate and giving back. Show summary: In this episode Rod Kheif, a successful business owner and philanthropist, shares his journey in the real estate industry. He discusses his early start, inspired by his mother's investment, his significant loss during the 2008 financial crisis, and his recovery. Rod emphasizes the importance of mindset, determination, goal-setting, and focus. He also highlights the significance of surrounding oneself with a positive peer group and the role of meditation in enhancing focus. Rod provides insights into the current state of the commercial real estate market, advising listeners to be conservative in their projections and to educate themselves before investing. -------------------------------------------------------------- The mindset it took to recover from losing $50 million (00:01:54) Importance of goal-setting and decision-making (00:03:48) Pushing through fear and limiting beliefs (00:06:13) The importance of focus (00:07:38) Playing to your strengths (00:08:25) The power of peer group (00:09:15) The Projections and Debt Crisis (00:15:23) Opportunity in the Market (00:16:11) Lowering Interest Rates and Future Outlook (00:17:42) The episode ends (00:23:57) Rod shares his contact information (00:23:35) The hosts thank the guest (00:23:50) -------------------------------------------------------------- Connect with Rod Kheif: Website: LinkedIn: Rod Khleif - Twitter: @RodKhleif - Instagram: @Rod_Khleif - Facebook: Rod Khleif Official - YouTube: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Rod Kheif (00:00:00) - It's how do you get anything if you don't know what it is? You've got to create a burning desire or hunger. You've got to want it. That's how you push through fear. That's how you push through limiting beliefs or that's how you get uncomfortable. You know that comfort zone is a nice, warm place, but nothing grows there. And so you've got to push through fear and all that by knowing what it is you want and why you want it. Sam Wilson (00:00:20) - Welcome to the how to Scale Commercial Real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:32) - Ratcliffe is a multiple business owner and philanthropist who is passionate about business, high performance, real estate and giving back rod. This is your second time on the show. It's been a couple of years. I didn't have time to look up the episode number beforehand, but in case you didn't hear rod the first time, go back. Find that episode there on the How to Scale Commercial Real Estate podcast. Sam Wilson (00:00:50) - That was a great episode then. Rod, it's a pleasure to have you back on today. Rod Kheif (00:00:52) - Oh thanks, brother. It's good to see you again. Sam Wilson (00:00:54) - Absolutely, rod, the pleasure is mine. There are three questions, however. I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now? And how did you get there in 90s? Rod Kheif (00:01:07) - God. Oh, man. That's a that's a long, sordid story, brother. I started because my mom bought the house across the street when I was 14 for 30 grand. Two years later, she told me she'd made 20 grand in her sleep. And I said, forget college. I'm going to do real estate. And and fast forward to today. I've owned over 2000 houses. I've rented long term 200 of them in your backyard in Memphis. We won't talk about that. And then the rest are in Florida and Denver. But, you know, I now own thousands of apartment units. Rod Kheif (00:01:37) - I lost $50 million in 2008 and nine, and it was a single family that pulled me down. And so what I'm known for talking about on my podcast and at my live events is the mindset it took to have 50 million to lose in the first place. And probably more importantly, the mindset took to recover from that to the success that I'm blessed to have today. Sam Wilson (00:01:54) - Let's talk about that because I think, you know, if we get and we don't have an agenda for this show, I think you and I talked here ahead of time. For those of you listening, you know, a lot of times we'll just kind of hash out some of the high points we want to hit. I think you and I are going to kind of wander all over the place today and have a good time doing it. But one of the, you know, we talked about that on your first episode. So you can go back and listen to Rod's story. You can lose in 50 million bucks. That's a big deal. Sam Wilson (00:02:17) - That's a big hairy deal, not only to build a portfolio of 50 million, but then to lose it. I do want to talk about the mindset it took to recover that. So let's spend a little bit of time there and then compare that if we can, before the show is over, we're going to compare that to where you see us in the market today and kind of how. Rod Kheif (00:02:32) - The proverbial, you know, what's about to hit the fan, uh, there's no question about it. So, uh, you know, so how did I, uh, how did I have 50 million to lose in the first place? And how did I recover? I, when I, when I lost everything I associate with what I wanted and why I wanted it. So, you know, if you come to one of my boot camps, the first thing we do is goal setting on steroids. Because how do you get anything if you don't know what it is? You've got to create a burning desire or hunger. Rod Kheif (00:02:57) - You got to want it. That's how you push through fear. That's how you push through limiting beliefs or that's how you get uncomfortable. You know that comfort zone is a nice, warm place, but nothing grows there. And so you've got to push through fear and all that by knowing what it is you want and why you want it. So you've got to do your goals. By the way, if you haven't done your goals, write this down. Write down rods, links com or text the word links to 72345. If you're driving at the bottom of that link tree, that's got all my social media, it's got my podcast. I have the largest commercial real estate podcast really in the world now we're over 20 million downloads. And and it's because I spent time on mindset and psychology. But if at the bottom of that, Linktree is my goal setting workshop, I do it every year on the first year. I'll do it again January 1st of this year. And you know, how do you get anything if you don't know what it is? Right? And and people spend more time planning a Christmas party than they do designing their lives. Rod Kheif (00:03:48) - And so do your goals. That's designing your life. Have your spouse do it. Have your kids. If they're over ten years old, do it. So again, text the word links to 72345 or go to rods links.com. It's there. I'm not going to try to sell you anything. Just go design your life. So that starts with goals. Then you got to make a decision. And that's what I had to do back then. I decided to get out of my pity party and get my butt back up and make stuff happen. And the Latin word for the word decision means to cut off. Uh, for a great analogy, for a real decision would be if you're going to attack the island, you're burn your ships because you're taking their ships home. It's committed. There's no one foot in, one foot out dipping a toe in the water. It is freaking done when you make a decision. So you got to make that decision. That's the next piece. Then. Then for me, I had to I had to get back up after I made the decision of what I was going to do, which was focus on on multifamily, uh, because my multifamily did just fine when I lost everything, it was the single family that pulled me down. Rod Kheif (00:04:40) - So then I took that first step and I went out there and started buying multifamily again. And that's the next piece. You got to take that first step. And, you know, in this business, I have a lot of students that are very analytical. And if you're analytical, you know who you are, and I love you, but you know how you typically have to check off every box before you make a move? Well, you can't do that here. You've got to take that first step. You know, great analogy for this would be you can drive all the way across the United States at night. Headlight only seen 60ft in front of you. You know you'll make it. Other people have made it before. You may have some obstacles, but it's the same way with your goals. But you got to take that first step, okay? So make a decision. Take that first step because you don't want regret. You know, um, the worst thing in the world is regret. Rod Kheif (00:05:20) - Don't fear failure. Fear, regret. Um, you know, there was this nurse in Australia I may have mentioned on the last episode with you named Ronnie Ware as a hospice nurse, and. Yeah, and you're right, the five, uh, five biggest regrets of. She asked that, she asked her hospice patients. Do you have any regrets? And the biggest regret was not doing what I know I could have done. Doing what someone else, uh, you know, told me to do. Not doing what I know I'm capable of. I can't think of anything worse than that. So no regrets. Don't fear failure. Fear that. And then, you know, it's it's, um. The next thing is pushing through fear and limiting beliefs. You know, when I, uh. So what is fear? Um, you know, f everything and run or false evidence appearing real, I think. Yes, it's probably that for sure, because 99% of what we fear never happens. But it's definitely, in my opinion, face everything in rise because it's the successful people that push through in spite of the fear, um, and limiting beliefs. Rod Kheif (00:06:13) - You know, when I immigrated this country, I got thrown into school. I found out what bullies were for the first time, and my mom proud dutchwoman that she is, sent me to school in these wooden shoes. These are the actual wooden shoes. We found them when we put her in assisted living. And so I got my butt kicked again. And then we had bullies that lived on the end of my street. And, uh, you know, she they chased me home, and she chased them off with a flyswatter. So next day, I got my butt kicked, you know? So I came up with this belief system that I wasn't good enough. I used to ask myself, how can I show them I'm good enough? Uh. And which presupposed that I wasn't. So, you know, a lot of people have these limiting belief systems. I'm not smart enough. I'm not good enough. I don't have enough time. I don't have enough money. I'm not analytical enough. That was another one of mine. Rod Kheif (00:06:51) - There's a reason the acronym for Belief Systems is B.S., because 99% of them are. They have no basis in fact, but we believe they're real. The next piece is focus. I knew I had to have laser focus. The most successful people on the planet have an extremely high degree of focus. And here's the thing whatever you focus on gets larger, and wherever focus goes, your energy flows. But you know you want to make sure you're not focused on negativity. You know, we start to talk about politics and what's happening in this country. And I got flamed up because I'm very much on one side of the fence there. And but the bottom line is whatever you focus on gets larger. And, you know, they asked Mother Teresa when she was live, she was antiwar. She said, no, I'm pro peace. You know, I get students or people, not student students no better. But I get people to call me and say, you know, what do I do to get out of student loan debt? I'm like, wrong question. Rod Kheif (00:07:38) - What do you do to make so much money? The debts are irrelevant because again, whatever you focus on gets larger. I listen to two podcasts, um, and, and you know, and I try to stay on both sides of the aisle. One is Tim Ferriss was definitely on the other side for me. And then there's Joe Rogan. And, you know, I get excited about my 20 million downloads. I think they get that a week on theirs. But on Tim Ferriss Show, I listened to it because it's fascinating. And he interviews the best of the best in every walk of life, the best athletes. Michael Phelps, NFL, NBA players, best actors Ed Norton, Hugh Jackman, Arnold Jamie Fox, uh, CEOs of the biggest companies in the world like Zuckerberg, um, um, billionaires like Ray Dalio. And he deconstructs their success. Okay? He interviews them, deconstructs their success. And I started to hear a pattern. They almost all meditate. What does meditation enhance your focus. Rod Kheif (00:08:25) - Right. So pay attention to focus. That's a big one. The next one is playing to your strengths. I knew what I was good at and I'm a great communicator. And so I started the podcast and I'm the mouthpiece for, for for my acquisitions company. I have my thought leadership business. I have, you know, over a thousand students around the country. They now own coaching students. They now own over 180,000 units that we know of. I'm super proud of that. Um, and I've only been teaching five years and, and and, and and I teach them play to your strengths higher align or partner for your weaknesses. Okay. Because when you're playing to your strengths, you love what you do and what you love what you do. Success is inevitable. Don't do what you don't love. You know, one of the best combinations in my business, multifamily real estate, is an analytical person with an outgoing person. Introvert with extrovert. That's a match made in heaven because you need both pieces. Rod Kheif (00:09:15) - Some people are both, but most are better in one or the other. Here's the thing though. Don't live someone else's life. Do what you're good at and when you do, you never work another day in your life because you love what you do. And when you love what you do, you're passionate. And passion is required to influence people. And so, you know, and so focus on your strengths. You're going to love what you do. You'll be passionate and and then you'll be able to influence people. And that passion is the fuel. You know, when you have that passion it breeds creativity and innovation and minimizes or even eliminates fear. Um, just a couple more pieces. The next one is peer group. Who you hang out with is who you become. You know, uh, I when I was losing everything in 2008 and nine, I was in Tony Robbins Platinum Partnership, which at the time was about 130 grand. It's more than that now. But I was around people that were killing it in the crash when I lost, you know, $50 million in 2008 nine. Rod Kheif (00:10:04) - They were killing it. And that's when, right when I was in that mastermind and they're like, get up, you big wussy. Go make something happen. 50 million, million. That's who you want to be around when the soup hits the fan. Right. And so, you know, that's that's, uh. And so pay attention to who you allow to influence you. Most people will default to a peer group that they went to school with or that they work with. And, and sometimes these people don't have your best interests at heart. They're naysayers or they're afraid of your success, or they feel afraid of feeling like a failure. You succeed. And sometimes it's family. And I'm going to tell you I love your family, but choose your peers. Get around people that want more out of life, people that will push you and hold you accountable. That'll hold you to a higher standard. Most importantly, that that think what you think is hard is easy. You know, if you're playing tennis, do you want to play tennis with somebody that's better than you or worse than you? I mean, you know the answer. Rod Kheif (00:10:52) - Um, and then the last piece I'll talk about is, is failure. You know, you only fail if you don't get up, back up. You don't get the lesson. You know, I call them seminars. We really fail our way to success. You know, problems give you feedback. You know, I will tell you, if you come to my bootcamp, I've got a virtual one coming up in January, and I'll give your peeps a hell of a deal if they want to come. But, you know, uh, it's a Saturday and Sunday. On Monday, you'll get a survey from me asking you what you thought. And of course, 99.9% of the feedback is fantastic, but I'm looking for that 1% of constructive feedback. And how do I make it better? And that's the only way to get it. You know, I got to meet the billionaire owner of Spanx, Sara Blakely. You know, that the women's undergarments that hold everything together for women and women know who this is. Rod Kheif (00:11:36) - But anyway, she started with 5000, and she's a billionaire. But I met her at a mastermind that I went to, and she told me that her dad used to ask her and her brother once a week, what have you failed that this week? I thought, what an awesome freaking question to ask your kids. You mind if I mention my boot camp real quick? Sam Wilson (00:11:52) - No. Go for it. Rod Kheif (00:11:53) - Oh, okay. Yeah. So I've got a virtual boot camp coming up. It's coming January 6th and seven, so you can do it at home in your underwear. I don't sell anything there. It's not a sales pitch. It's two days of training. And if you come use the code, Sam, and you can come for $97. Okay. And so where you go is you go to rods, links, comm. If you're driving, text the word links to seven, 2345. There's a ton of free resources there. I've got free books there. My social media is there. If you've got a question about anything about this business, I answer every single question on social. Rod Kheif (00:12:24) - So if you ask me a question, you'll get an answer for me every time. Some people are like, is this a bot answering? And I got to send a picture of my underwear with my fingers up or something. No, that's me. But anyway. But the point is, go there that my boot camp site is there when you know the price will be 4 or 500 bucks by the time the boot camp comes around. But if you put in the code, Sam, you come for 97. I don't sell anything there. It's every aspect of the multifamily business. Soup to nuts. And and if you go to the bottom of the boot camp website, you'll see hundreds and hundreds of testimonials. And if you come and you don't love it, I'll give you your $97 back. I don't mean like it. I mean freaking love it. I'll give you a $97 back. So you know, there is that. But, uh, but anyway, so that's coming up January 6th and seventh and rods links. Rod Kheif (00:13:02) - There's a lot of free resources there. And again, at the bottom is my goal setting workshop. Do your goals. You should be doing your goals 2 or 3 times a year. Go do it. You know you'll really enjoy the process I promise you. Sam Wilson (00:13:12) - So yeah rod that's a lot man. I appreciate you going into detail on that. You know, having the people around you, I think that, uh, you know, can help recenter after a devastating loss. It's probably one of the things that took away from what you. Rod Kheif (00:13:26) - Oh, no, it helped me a lot. Help me a lot for sure. Yeah. For sure. Sam Wilson (00:13:29) - Absolutely. So you you came out of that, you rebuilt your portfolio. You kind of gave us some insight on, you know, how you, you know, structured everything and got your head in the right...
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The Most Crucial Tax Advice You Need for Successful Real Estate Transactions
12/21/2023
The Most Crucial Tax Advice You Need for Successful Real Estate Transactions
Today’s guest is Michael Wiener. Michael Wiener, Partner at Greenberg Glusker in Los Angeles, focuses his practice on structuring real estate and corporate transactions in a tax-efficient manner and providing his clients with creative solutions to complex tax issues. Show summary: In this episode Michael Wiener discusses various topics, including 1031 exchanges, California property tax, and partnership tax issues. Michael emphasizes the importance of consulting tax advisors early in the process and having a sophisticated team to handle all aspects of a transaction. He also shares his personal experience as an investor and the complexities of holding real estate through legal entities. The episode provides valuable insights into real estate transactions and tax implications. -------------------------------------------------------------- The 1031 Exchange Challenge (00:04:37) Understanding Taxable Boot (00:08:25) Complex Math in Tenancy in Common (00:09:42) The 11th Hour Panic (00:11:01) Consult Your Tax Advisors Early (00:14:34) Complexities of Partnerships and Separate Exchanges (00:18:59) Passive Investing and Syndication (00:22:00) Negotiating 1031 Exchange in Joint Venture Agreement (00:23:00) Challenges of Distributing Cash from 1031 Exchange (00:23:59) -------------------------------------------------------------- Connect with Michael: Linkedin: Web: . Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Michael Wiener (00:00:00) - You sell $20 million of real estate that has $10 million of equity. You need to purchase at least $20 million of real estate with at least $10 million of equity, because you also see, some people will say, hey, well, I purchased the $20 million of real estate. I got a $12 million loan, and I just cashed out $2 million. And yeah, no, you did. That's great. But. It's taxable boot. Intro (00:00:27) - Welcome to the how to Scale commercial real estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:40) - Michael Winer, a partner at Greenberg in Los Angeles, focuses his practice on structuring real estate transactions in a tax efficient manner and providing his clients with creative solutions to complex tax issues. Michael, welcome to the show. Michael Wiener (00:00:54) - Thank you very much for having me, Sam. I'm really excited to be here. Sam Wilson (00:00:58) - Absolutely. The pleasure is mine. Michael. There are three questions I ask every guest who comes on the show in 90s or less. Sam Wilson (00:01:04) - Can you tell me where did you start? Where are you now? And how did you get there? Well. Michael Wiener (00:01:10) - About ten years ago, I had my own firm. I was, uh, or just starting my own firm, um, doing some 1031 work, I. Wound up, uh, seeing an ad on the internet. I don't even remember what I was searching for. For an attorney to join a tax boutique in Century City here in LA. So I responded to the ad. Turned out it was a 1031 exchange specialty, um, firm. And, you know, basically based on my practice and some of the clients I was doing work for, we knew a number of people in common. Um, so I wound up joining that firm. It was a four person firm. A few years later, that firm was acquired by a slightly larger firm, and then that firm was in turn acquired by a larger firm. Um, and throughout it, I have to say, I'm really grateful my, uh, my traditional client base stuck with me throughout all the, uh, throughout all the firm uprisings. Michael Wiener (00:02:15) - Um, and then from the larger firm, which was one of the largest firms in the world, um, I transitioned my practice with, uh, one of my partners and colleagues who have been with me since the, uh, since the smaller firm over here to Greenberg Luster, which was a, um, which was a better fit. I'd worked alongside Greenberg Lustgarten deals, both co-counsel and adverse for many years a phenomenal firm and, uh, and been here for about four and a half years. And I love every day of it. Sam Wilson (00:02:45) - That's cool. And it's 1031. What you still focus on primarily? Michael Wiener (00:02:51) - Um. Uh, I generally wind up dealing with tax issues related to the real estate industry, and obviously 1031 is a big part of that. The last, you know, four ish years, really, since 2018, qualified opportunity zones have, um, have become a bigger part of that. We also being here in California, we have to deal with prop 13, California property tax, um, and transfer tax issues and then also deal with um partnership partner, excuse me, partnership tax issues related to structuring um, joint ventures and and real estate investments. Michael Wiener (00:03:35) - Um, and that then extends its way out to sort of syndicated tenancies of common and, you know, different ways of investing in real estate and being able to take advantage of all of the wonderful tax benefits of doing so. Sam Wilson (00:03:51) - That gets really complicated really fast. For those of us that want to just go out and buy stuff and own and run real estate projects. You're a great complement to our to our team because the rest of us don't want to think about, you know, probably the things that you think about day in and day out, you know, specializing in this. I can only imagine. No, no, two days are the same would be my guess. Michael Wiener (00:04:14) - Oh, no, two days are the same at all. Um. Sam Wilson (00:04:18) - It's crazy. Michael Wiener (00:04:19) - Every day is a unique challenge, and every day is another opportunity to learn. So what are some things? Sam Wilson (00:04:27) - Let's talk. Let's talk. 1031 because you've touched on several things, and I know any one of these topics, we could probably burn the entire podcast, you know, going down that rabbit trail. Sam Wilson (00:04:37) - But let's let's stay on 1031, because I would imagine that for the bulk of our listeners, that's probably something that is applicable. What what are some common challenges and what are some common misconceptions, maybe that you run into when executing a 1031? Michael Wiener (00:04:55) - Well, the first thing that a lot of people forget about or just don't remember is that in addition to spending all of the money that you get from the sale of your relinquished property, you also have to replace your debt. Sam Wilson (00:05:13) - And. Michael Wiener (00:05:14) - You know, you see people from time to time who say, oh yeah, no, we completed our exchange. We sold a property for, you know, $20 million with $10 million of debt, about a $10 million, uh, property. This is very, let me say, very simplifying the facts. Fact pattern. Um. We bought a property with, um, with the $10 million. And, you know, we got this great deal. We only have to put $2 million, $3 million of debt on it. Michael Wiener (00:05:42) - And we, you know, you know, huzzah! We, uh, we completed our exchange, and it's well known. Yeah. I mean, yes, you did complete an exchange, but you're going to have to. And it's very important to remember that that gets, um, especially tricky in a, uh, uh, tenancy and common context where you have multiple exchanges. Um, investing people, completing multiple exchanges, investing in the same property. And they have to, um, and they have to, you know, satisfy their debt replacement requirements, especially if they had different leverage ratios on their, um, on their up leg. And can wind up with a situation where you may need to invest some fresh cash in order to to equalize it. Sam Wilson (00:06:34) - So let me let me see if if I can summarize what you said, you replace the one of the one of the things that's often overlooked is that you replace the debt and the equity. So if it's a $20 million property that you originally purchased and that was debt and equity, again, let's call it 10 million in debt and 10 million in equity. Sam Wilson (00:06:53) - And then you sell that, you harvest, let's call it it was a breakeven deal. You harvest that 10 million in equity. You can't go out and buy a $12 million property with 10 million in equity and 2 million in debt. Exactly. You got to replace that debt. Michael Wiener (00:07:07) - Well, you can you don't have to replace the debt per se, meaning you can add fresh cash. You have to go basically equal or up in value and equal or up in equity. Right. So, you know, if you you could put in $2 million of your own money, you know, not exchange cash or money that you raised from an investor and then just get an $8 million loan, and that's fine. But too many people overlook that, overlook that aspect of it. Sam Wilson (00:07:38) - And that that is not an aspect of that. I even understood until right now. So not just to many people, but myself as well. Uh, so yeah, that, that that's really it has to be equal or greater. Sam Wilson (00:07:49) - Price point. Intro (00:07:50) - Period. Exactly. Sam Wilson (00:07:51) - Then what you previously. Michael Wiener (00:07:53) - Just if you sell, you know, using our fact pattern, if you sell $20 million of real estate that has $10 million of equity, you need to purchase at least $20 million of real estate with at least $10 million of equity. Because you also see, some people will say, hey, well, I purchased the $20 million of real estate. I got a $12 million loan, and I just cashed out $2 million. And yeah, no, you did. That's great. But. It's taxable boot. Sam Wilson (00:08:25) - Right. And you call it boot b o o t. Michael Wiener (00:08:28) - B o o t is what the term is generally called. Sam Wilson (00:08:32) - Taxable boot. There's a new uh there's a new one. I'm going to put that in my newsletter. Michael Wiener (00:08:37) - That's yeah called um generally defined as sort of money or other non like kind of property that you receive in a 1031 exchange. Sam Wilson (00:08:48) - Right. And so you can do it, it's just you just have to know that whatever portion remains you're just going to get taxed on. Michael Wiener (00:08:54) - Exactly. Sam Wilson (00:08:55) - Right. Okay. And and maybe that's an acceptable, uh, you know, solution for some. You presented another wrinkle there that maybe um, just to again to, to hash it out again, you were talking about maybe, you know, let's use that $20 million example again. We'll see if I can if I can craft this correctly. But I sold that I owned it by myself. And then you sold another $20 million property. And together we were going to go in and buy a $40 million property. Right. But maybe your debt to equity ratio was different than mine was. And somehow you've got to get we can go in as tenants in common buying this now new $40 million property together both 1031 and into a bigger deal. But now we've got to figure out some sort of really complicated math as to how it's all got to work out. Michael Wiener (00:09:42) - Well, like, you know, let's say, you know, we're going to go in and buy a, you know, a $40 million property with 20 million of debt. Michael Wiener (00:09:50) - Um, and we're 50, 50 tenants in common. Right. But my. You know, leverage on my download property was, let's say it was very it was more highly leveraged. Let's say it was, you know, $15 million to just to take sort of an extreme example. Okay. When I go in. Um, to that, you know, $20 million property I have to figure out. Well, am I going to put in more cash? Um, if I do, I can put in cash to equalize it. Right. Uh, um, and, you know, that would be fine, but that requires me to come up with $5 million, you know, outside of, uh, you know, outside of the exchange, and, you know, maybe I can go shake the money tree or something, but, uh, you know, that's easier said than done. Sam Wilson (00:10:42) - Right. And so you help clients when they get into these situations where especially I mean, 1 or 2 is complicated, but I imagine 810 on a much even bigger property than that. Sam Wilson (00:10:51) - Yeah, it becomes a bit of a, uh, yeah, a bit of a process. You have some. Michael Wiener (00:10:55) - Uh, pretty extensive Excel schedules, let's put it that way. Sam Wilson (00:11:01) - Right? Sam Wilson (00:11:01) - I bet you do. I bet you do. And when and when people get into these situations, like, do you find that they come to you at the 11th hour going, oh, crud, we didn't think through this and now we need help. Is that pretty common that happens. Michael Wiener (00:11:16) - That's happened. Um, the you know, the good, the good clients, the, uh, the the clients who I've worked with for a long time, generally by now know to, uh, to get me involved early. But it is, let's just say, not uncommon for, uh, you know, people to come at the 11th hour. And, you know, we had one, you know, just. A year ago that I can think of where, you know, literally a week before closing, we had to restructure significantly the, uh, transaction. Michael Wiener (00:11:52) - Um, the client scheduled it or structured it without tax advice. Um. With three tenants and or they had tax advice but not 1031 advice with three tenants in common. And you know, one was just a fresh cash tenant in common not exchanging one one with one or I guess the other two were exchanging and. Basically I, you know, took a look at it and within three minutes I said, oh, you're going to have, you know, $7 million of boot of taxable boot based off of not replacing your debt. And what we had to do was we wound up having to combine the fresh cash non exchange tenant and tenant in common, make that part of the exchanging tenant in common and that using those those numbers allowed it to uh allowed it to work and to get them to satisfy all the requirements. But you're talking about org charts already haven't been given to, um, to a lender. You're talking about documents already having been drafted and signed and having to go back to people and saying, well, you know, you were going to invest because for the people who are investing in the what I'm going to call fresh cash tenant and common. Michael Wiener (00:13:15) - There are, you know, a set of expectations with regards to your depreciation and outside basis in your joint venture. And these are technical terms I know, but uh, but um, there are certain let's call it tax expectations that. You would expect to have when you are investing in, um, a non exchanging entity just in a straight real estate deal, in a straight real estate syndication. And those things change a bit when you're, uh, when you're coming into an entity, when you're coming into an existing partnership that is competing with 1031 exchange, there are different issues that you need to be mindful of. And and they can be worked out. But, you know, people need to be aware of them. And people need and, um, documents need to, you know, need to address them and reflect them. And, um, you know, doing all of that a week before closing is, you know, lots of fun. Uh. Sam Wilson (00:14:20) - So is that what they call it? Michael Wiener (00:14:22) - I would, um, I would strongly encourage people to, uh, to if you're doing a 1031 exchange, consult your tax advisors early. Sam Wilson (00:14:34) - Consult them early. Absolutely. Michael Wiener (00:14:35) - And especially early and early and often I would say. Right. Sam Wilson (00:14:40) - And I would think, you know, on a single property, single investor, it's pretty it's pretty cookie cutter. Michael Wiener (00:14:47) - Well, yeah, when. Sam Wilson (00:14:48) - You get into stuff like this, the complication factor just rises, uh, you know, dramatically. So that's, that's really, really interesting. And how, how do you feel like when you're going back and dealing with legal? Because I mean, at this point, I imagine in this particular scenario, talking about like you're getting legal on the phone, you're getting everybody on the phone to go back and start redrafting all of this paperwork and making appropriate changes. How how is that interaction with, I guess, on the on the legal side of things like, is that a complicated or is that or is that a sticking point for you guys in your business, where sometimes the legal side doesn't understand what you guys understand on the tax side? Or how does that, uh, how does that work out for you? Michael Wiener (00:15:29) - I mean, and that's an important, uh, an important point is that the clients need to have for these types of more, you know, sophisticated deals. Michael Wiener (00:15:39) - You need to have a sophisticated team all around. And that means, you know, both tax and legal. So, so that when, you know, we go and we tell the legal team, well, this is what needs to be in the operating agreement. Um, and we get it back for review. That's actually in the operating agreement. They understand what we mean. They understand what concepts we're talking about, and they know how to draft those provisions. Um, and, you know, if need be, then I will go in and, you know, draft those provisions or correct them as necessary. Um, you know, as, as tax attorneys, we still do a lot of drafting. Sam Wilson (00:16:21) - I bet you do. That's really cool. I love to hear the nuanced layers to things that are, I think, generally seen as pretty cut and dry, such as the 1031. It's generally like, oh, okay, well, we 1031, we bought one or we sold one, and then we bought another one and then we moved on down the line. Sam Wilson (00:16:36) - But there's always, always another layer to, uh, to what it is we're working on. And it sounds like you, you go many layers deeper than what many of us oftentimes see. So anything else on the 1031 front, we should really highlight here that, uh, are things that either people get wrong, should be preparing for earlier, or are misconceptions anything else you want to hit on that front? Michael Wiener (00:16:59) - Well, yeah. I mean, I think when people hold real estate through a legal entity, through an LLC, through a through a partnership, and if worse, through a corporation. Um, I'll get to that in a second. Uh, you need to people need to understand that it is that legal entity. It is the, you know, if you have a, um, so just by way of background, if you have a, a multi-member limited liability company, it is by default treated as a partnership for tax purposes. For tax purposes, if you have a single member LLC, it is by default treated as, um, treated as a disregarded entity for income tax purposes. Michael Wiener (00:17:42) - In either case, you can elect to have that entity treated as a corporation for income tax purposes. That's very rare in the real estate, uh, industry. Um, but occasionally you see it. Um, and but the important thing is that it's that entity that is doing the exchange. So you have a concept called the same taxpayer principle, which I know, um, has been discussed on your show before. Uh. Which says that the. The legal, the tax entity, the entity for tax purposes. The taxpayer that sold the download property needs to acquire the uploaded property. And where that becomes tricky is where you have...
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Bridging the Gap Between Traditional Investments and Real Estate
12/20/2023
Bridging the Gap Between Traditional Investments and Real Estate
Today’s guest is Frank Hanna. Frank B. Hanna, Jr., ChFC®, Private Wealth Advisor, is a leading specialist in Estate / Tax Planning, Private Real Estate Investment, and Wealth Management for a select group of individuals, executives, and privately held business owners. Show summary: In this podcast episode, Frank B. Hanna Jr. explains how they bridge the gap between traditional investments and real estate, offering sophisticated real estate deals to high net worth clients. Frank also educates clients on the benefits of Delaware Statutory Trusts (DSTs) for tax-deferred property exchanges. He shares his optimistic perspective on future economic opportunities, attributing it to maturing debts and banks' reluctance to lend. The episode concludes with Sam appreciating Frank's unique approach and valuable insights. -------------------------------------------------------------- Intro (00:00:00) Introduction of Frank B. Hanna Jr. (00:00:52) Frank's background and current business (00:01:16) The 1031 Exchange Solution (00:09:45) Delaware Statutory Trust as an Alternative (00:11:13) Diversifying with DST Programs (00:16:29) The debt situation and upcoming opportunities (00:22:00) Taking advantage of opportunities in the market (00:21:16) Contact information and resources (00:23:31) -------------------------------------------------------------- Connect with Frank: Facebook- Instagram- LinkedIn- Web- Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Frank Hanna (00:00:00) - You know, we manage north of $1 billion for clients. And, you know, when things get rough, you know, the advisor in me, you know, worries for my clients because I know they they get concerned and they get upset. But for me, as an entrepreneur and a real estate investor, I, I get excited to take advantage of some of those opportunities that are out there. And I think, I think there are going to be a ton of opportunities over the next, the next 18 or 24 months for the groups that are well positioned, that are well capitalized. And, um, you know, have, you know, the iron gut to take chances and, and, you know, pursue some of the opportunities that are out there. Sam Wilson (00:00:39) - Welcome to the how to Scale commercial real estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:52) - Frank B Hanna junior is a leading specialist in estate and tax planning. Sam Wilson (00:00:56) - He also specializes in private real estate investment and wealth management for a select group of individuals, executives and privately held business owners. Frank, welcome to the show. Frank Hanna (00:01:06) - Thanks for having me, Sam. Sam Wilson (00:01:07) - Absolutely. The pleasure is mine. Frank. There are three questions I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now? And how did you get there? Frank Hanna (00:01:16) - Um, I started in the, uh, hotel restaurant business. Did that for a number of years, managing, um, family owned businesses. My my family and businesses did that for, you know, 15, 20 years and got out of that and was doing a little bit of, you know, single family home construction, house flipping type stuff and, um, then diversified into some, some other sectors of real estate and, um, you know, wasn't in love with the restaurant business, ultimately had a lot of good relationships from that and had an interest in real estate and basically packaged that into a kind of hybrid financial planning consulting business with a real estate arm. Frank Hanna (00:01:59) - And, um, I, uh, currently live outside of Philadelphia. My partner and I have been working together for, um, about 15 years. We started, uh, Revolution X years ago. We rebranded recently, and, um, you know, we've got a, uh, a nice footprint, um, you know, probably on East Coast primarily, but we do business across the United States. Sam Wilson (00:02:21) - Wow. That's a lot of moving. Uh, a lot of moving pieces there. You 15 or 20 years in the family business and. And how did you. I mean, it sounds like a strategic shift when you got out of the family business and said, okay, we're going to go into wealth advising, planning all those things. Like what? What was the the evolution of that? Yeah, I'm sure there's a lot there that I just. Frank Hanna (00:02:42) - Yeah, yeah. No, it's a great question. So yeah. Uh quick quick turn there. So I, it's funny my um, I, I had had a little bit of background in real estate, um, through my family. Frank Hanna (00:02:54) - So my father had done restaurants for years, and he had kind of taken some of his successes and, um, and, and, and wealth from that to get into real estate. So I learned a lot through him and through some of our relationships there. My partner was actually doing like high level financial planning for some recognized individuals. Um, where I was living down near Ocean City, Maryland, and he actually was calling upon my father to try to do some financial planning. So we we connected. My dad actually pawned him off on me, and we got talking and started brainstorming and said, hey, you know what? He he's got a lot of good tools that his toolbox on the financial planning side of things. And I think, I think he can help us and help some other people. And I had a good background on, um, you know, business management, tax planning, um, you know, real estate. And we said, hey, look, let's, let's kind of package what we're, what we're both good at and see if we can, um, capture some market share and focus on a certain type of client. Frank Hanna (00:03:56) - Um, and we, we started from there and, uh, you know, from the ground up. It was a tough, tough fight, but we're, uh, we're rolling pretty good now. Sam Wilson (00:04:06) - Wow. Okay. I mean, and this is one of the things I think that we've see in the real estate world is that there's people who are like, you know, I'm only real estate. That's it. They they're only going to invest in real estate. And then you have people that are, you know, the typical stock and bond brokers, financial planners, that that's all they know. And the two seem to not very often intersect where you find some of the understands business and understands real estate that understands traditional kind of investing channels. Is this kind of what you've done, has been able to blend all of those? Frank Hanna (00:04:36) - Yeah, I think so. You're right. You're right. So you have your you know, typically, typically most of your high net worth clients or our high net worth clients have have some wealth in real estate. Frank Hanna (00:04:45) - Maybe they're doing that on their own. Um, and but yeah, you're right. Some people just love, love the, the thrill of kind of that real estate deal. And they put every last dollar into that segment and sometimes don't get, um, you know, many dollars over to your more traditional investments. And then you have the other people that, you know, save into their, you know, 401 KS or the brokerage accounts. And, and that's how they kind of grew up and, and were taught that way. And, um, ultimately those people, you know, never really, um, you know, transcend into the real estate space because they don't really know where to start. So what we've done is, is taken some of those more sophisticated real estate deals and packaged them in a way where they are securitized and people can invest and get access to some of those deals. And yeah, we've kind of bridge that gap where you can have the best of both worlds. So most of our clients, um, you know, will typically, you know, dabble in both spaces. Sam Wilson (00:05:46) - Walk us through that, like, how are you packaging those up and presenting those to your clients? I know that there's a lot of times there's they're just from the. The brokers I've spoken to in the, in the you know, the financial planners, they say, look, you know, we can't we can't do this because their, their hands are typically tied, especially by the bigger shops that they work with. They just can't simply touch that sort of thing. So how are you guys doing that. Frank Hanna (00:06:08) - So so we really like so in the in the financial advisory space, you have to, uh, you know, hang your flag with a broker dealer. Right. So everybody has to have a broker dealer that, you know, supports you, um, make, you know, make sure you guys are doing things the right way and, and, yeah, some of those bigger broker dealers, they're just, you know, like, they're the, the massive ship moving in the night. They don't typically want to invest the resources for all those different advisors. Frank Hanna (00:06:36) - And and some of those type of alternative products can be somewhat sophisticated. So um, we moved away from there. We used to be with a big, large broker dealer that was not favorable. They didn't want to do anything that was out of the, uh, you know, quote unquote vanilla or the norm. Um, and now we we work with a broker dealer, um, that their sweet spot is in the alternative space. They focus on a high end advisor, um, you know, high net worth clients, and they give us access to some of the best stuff that's out there. So between us and them, we we basically, um, vetted the marketplace across, you know, the continental US and basically found some of the biggest players that had the most sophisticated offerings and, you know, their kind of sweet spot or asset class. And they do real estate syndicated deals. And some are some are designed for people that have cash on the sidelines and they just want to diversify or get away from, you know, some of the volatility in the stock or bond market. Frank Hanna (00:07:40) - We have a lot of other deals that qualify for like 1031 exchange planning. So people will sell their hard real estate and they can't find a replacement property. They don't know where to go next. Or maybe they're just over the headache of, you know, property management. So there's there's a solution there that a lot of people take advantage of through us. And then we have a lot of deals where we do, you know, cost segregation studies. So people that either have a large, you know, passive income or maybe they, um, qualify as a real estate professional. They'll invest in our deals, uh, you know, not only for cash flow, but primarily for that accelerated depreciation to, um, you know, offset of their offset, some of their federal and state income taxes. Sam Wilson (00:08:24) - What what I see a lot of I would put myself in this category as the deal sponsor. Like there's they're the people like us who are the deal sponsors. I know the deals we do. And that's kind of where my expertise stops. Sam Wilson (00:08:37) - But for you, you kind of have to take a holistic approach to people who are, you know, for me, it's like, okay, hey, you know what, Frank? You're you're a accredited investor and you got $100,000. You want to invest. Okay. Come on. No, not not not a not a high hurdle. But for you, it sounds like there there's a there's a certain client type that really is looking for what you do. Who would you say is your kind of ideal client? Frank Hanna (00:09:00) - I would say, um. You know, I kind of look at it two ways. So. So we have we're really attractive for like, the younger entrepreneur that maybe is, is, you know, a relatively high income, you know, I'd say, you know, six figures and up a year, um, that, that is looking to enter the market and they just don't know where to start. Right. So we can, um, you know, assuming they qualify as accredited investor and have some assets elsewhere, um, they could we get a lot of, a lot of people that are maybe a 30, 30, 40 years old that are just entering the market and they want to get their their toes wet, and they'll get into one of our one or more of our deals, and it typically goes from there. Frank Hanna (00:09:45) - So that type of client and we have some, some, you know, ultra high net worth clients that have all type of planning needs that are maybe, you know, in their 60s and 70s, 80s, and they're looking to kind of simplify their life, or maybe get some of their financial freedom back, and they've started to divest of some of the holdings that they've had over time. Um, you know, they're they're obviously tax focused. Um, but we get a lot of those type of clients that say, hey, you know what? I've had a ton of success, but I don't feel like managing, you know, dozens and dozens of properties anymore. I'd like to sell, but I don't want to get whacked with, you know, massive cap gains taxes. What can I do? So we educate those type of clients on, hey, you can, you know, sell that real estate, you know, do 1031 exchange planning. And if you don't want to go out and buy another hard piece of real estate that you want to manage, you can use, um, you know, a technique or a solution we typically use like a Delaware statutory trust. Frank Hanna (00:10:48) - And, uh, it qualifies for the 1031 exchange. So we get a lot of clients that are selling real estate and using our solutions, um, to execute a 1031 exchange. Sam Wilson (00:10:59) - What? And I think you've just mentioned one of those creative solutions, but what what are some of the, uh, and maybe you can give more detail on that if it's relevant. But some of the creative solutions you guys feel like you've crafted, maybe that are kind of lacking in the marketplace. Frank Hanna (00:11:13) - So I think, um, you know, the I'll, I'll just start on that Delaware statutory trust. So that's that's nothing new. But for whatever reason, a lot of people are unaware that it's out there as a, as an alternative to a traditional 1031 exchange. Um, or, you know, there's misunderstandings of how they operate. Um, you know, it really has nothing to do with Delaware. But, um, essentially we we take a lot of our deals and I'll use the Delaware, uh, statutory trust tax wrapper just for those 1031 exchange dollars. Frank Hanna (00:11:47) - And those people that need, need, have that need. Um, so the Delaware statutory trust is a trust where you can, you know, utilize, sell, sell your hard piece of real estate and do a complete tax deferred exchange into one or more offerings, um, and get a tax favored monthly income. We do a lot of deals and, and a variety of different asset classes, um, you know, multifamily, self-storage, industrial, student housing, you know, everything under the sun. We're focused in, you know, markets that are, you know, high growth. They have a good story behind them. They're pro-business, tax favored. And, um, you can, you know, again, uh, relinquish the property management responsibilities and go into our deals. And, um, you know, the length of length of our deals are typically, I don't know, 3 to 6, 4 to 7 years hold. And again, when those deals sell, you can do another 1031 exchange on the back end as well. Sam Wilson (00:12:50) - No, I love that. That's, uh, and that's one step more sophisticated. I would, I would imagine, than just a straight 1031. Frank Hanna (00:12:58) - It's, it's a it's actually, um, you go through the same process as the 1031 exchange. So you're going to have your you have to hire a qualified intermediary to be your, like third, third party, unaffiliated, um, individual. That would be the middle man in the in the terms of a 1031 exchange. And then, you know, when you typically would follow that guideline of 45 days to identify and a total of 180 days needed to purchase that new replacement property. Um, our deals are already prepackaged. They're approved. They're ready to go at any given time. We probably have 15 different Delaware statutory trust programs that are available. Um, and you can list them right on your ID sheet and invest those dollars. There's no closing costs. We can settle in 3 to 5 days. So, um, you know, it's it's a little bit of a sophisticated product, but it's once you understand it, it's super easy. Frank Hanna (00:13:55) - Um, and I, I'd argue it's easier than you know, negotiating and, you know, settling in a hard piece of real estate so we can move quickly. We always have inventory, some really attractive deals. Um, so that's I'd say that's a huge part of our business. I, I'd say that was maybe 5 or 10% of our business. Um, five, six years ago, it was probably 50% of our business this year. Sam Wilson (00:14:18) - Wow. Wow. No, that sounds really powerful because people are looking for those types of things where one they can push the easy button. Yeah. Okay. You got 15 DST, DST programs that you can pick from. That's pretty impressive because then it's like, well, it just it's just a menu. Which one do I like? And then you're not responsible for it once you do that. Yeah. I mean, that's, uh, that's pretty powerful. I guess I got this just probably get into the weeds here a little bit. And so if it's too far in the weeds, tell me to just stop and part of it. Sam Wilson (00:14:44) - But it's in those in those DST programs you guys have, you guys are then going out and working with operators, deal sponsors, people that are actually boots on the ground doing, you know, the deals themselves. Unless you guys are running all of these yourselves, which I would be thoroughly. Frank Hanna (00:14:58) - Yeah. So so yeah. So we have some several layers of due diligence so we understand the deals. Um, so we have, you know, a number of partners that we've got some sort of track record with. Um, but we don't rubber stamp, you know, any deal just because of who's bringing it to the table. So we typically, um, you know, get word either that, hey, this is this is coming to market, or they're thinking about putting this deal together. And then we have our team do a very thorough analysis of the program. We visit the property through, you know, every type of study imaginable and look at the financials and say, hey, this is a deal that we think, um, has a high probability of success. Frank Hanna (00:15:37) - We're going to approve it and put it on our platform. Um, or we'll look at that deal and say, hey, it's not for us and we're not going to approve it. But, you know, we invest in almost all our own deals. So if it gets if it gets to our platform, we feel really good about it. Um, and then we can offer it to the market or relationships that we have that are, that maybe have that 1031 exchange need. Um, but it's yeah, it's nice. We can kind of layer that out, diversify the client. And, you know, it almost acts like a laddered bond portfolio where, you know, if you if you had $1 million deal and you invested in, you know, 3 or 4 DSPs, you know, once we get out to year three, it's it's rare that, you know, we're not calling you once a year and saying, hey, Sam, good news. Uh, one of your deals is going full cycle, and you have to make another choice. Frank Hanna (00:16:29) - Are you going to cash out, pay your taxes, do another DST with us or somebody else? Or you can actually go back into hard real estate. Um, and there's typically, you know, a nice income, some degree of appreciation. Um, but it's flexible. So we have a lot of people that, um, are using us now,...
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The Greatest Advantages of Investing in Rent-Controlled Properties
12/18/2023
The Greatest Advantages of Investing in Rent-Controlled Properties
Today’s guest is Larry Taylor. Larry Taylor is the founder and Chief Executive Officer of Christina. Mr. Taylor is responsible for vision, strategy and leadership. Mr. Taylor is a seasoned investor with over 40 years of real estate experience in the Westside region of Los Angeles. Show summary: In this podcast episode, Larry explains how his company identifies valuable properties and adjusts their portfolio in response to market shifts. He also discusses the expansion of Christina's investor base, now open to all 50 states, and the opportunities this presents. The episode concludes with Larry sharing his insights on the desirability of owning real estate in the Westside region of Los Angeles and the host directing listeners to Christina's website for more information. -------------------------------------------------------------- The perception of buying rent controlled properties (00:00:00) Larry Taylor's background and starting in real estate (00:01:11) The impact of regulatory environment on real estate business (00:04:53) The importance of performance certainty in property sales (00:12:14) Adapting portfolio strategy in response to changes in tax and securities laws (00:13:55) The benefits of real estate ownership and the government's support (00:16:17) The growth of investor base and potential for discounted properties (00:22:29) The vision of owning the best real estate (00:23:49) Contacting Christina (00:24:28) -------------------------------------------------------------- Connect with Larry: Linkedin: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Larry Taylor (00:00:00) - There's a perception amongst investors that buying rent controlled properties which have depressed rent rolls because those rents have not been allowed to go to market is a bad investment. And I say, oh no, no, no, that's a good investment. You're never going to have a vacancy. And the value can only go up because ultimately, no matter what, rents will rise because they have to rise. Sam Wilson (00:00:25) - Welcome to the how to scale commercial real estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Larry Taylor is the founder and chief executive officer of Christina. He is a seasoned investor with over 48 years of real estate experience in the West Side region of Los Angeles. Larry, welcome to the show. Larry Taylor (00:00:51) - Hello there. And how are you? Sam Wilson (00:00:53) - I'm great sir. How are you today? Larry Taylor (00:00:55) - I'm doing really great and I appreciate the opportunity to be on your show. Sam Wilson (00:00:59) - The pleasure is all mine. Larry, there are three questions I ask every guest who comes on the show in 90s or less. Sam Wilson (00:01:06) - Can you tell me where did you start? Where are you now? And how did you get there? Larry Taylor (00:01:11) - Uh, I am a self-made self-starter. Uh, started as a USC junior. I was a scholarship student. I formed the my first real estate company while I was a student. Uh, the premise of that was to buy real estate in the west side of Los Angeles during the, uh, Nixon wage and price level freeze. And, uh, today we're doing the same thing in the same location. Sam Wilson (00:01:40) - Wow. Most people. I would assume. Maybe I'm wrong, but. You know, the strategy shift over the years or the asset classes or the type shift. I mean, doing the same thing and the same location for 48 years. It sounds like you guys have either, um, just gone really, really niche or I just found a gold mine and just don't want to leave it. What? What's the story there? Larry Taylor (00:02:09) - Well, the West Side region of Los Angeles is like the Permian Basin. Larry Taylor (00:02:14) - Basin? Basin is to oil. It's drilling oil on a proven field. Sam Wilson (00:02:21) - Okay. Larry Taylor (00:02:22) - It's fully it's fully developed. It's highly desirable. It is the best year round climate of the United States. Has the highest concentration of millionaires and billionaires in the world. It's the center of tourism center of an entertainment center of technology, two largest ports, and the two busiest ports in the United States. I could go on and on, but, um, uh, if you're drilling oil in a proven field, you're always going to hit oil, right? Sam Wilson (00:02:50) - Right. I mean, you a lot of things have changed. I think maybe we maybe you said this off air. Maybe we said this, uh, at the beginning of this recording. I'm not not quite sure which one it was, but I think you said you guys formed your company in September of 1977. Larry Taylor (00:03:06) - That's correct. Sam Wilson (00:03:06) - A lot of things have changed in in your region, I would think in particular both socially regulatory wise. I mean, a lot of things have kind of come down the pipe that have have made, uh, a lot of people kind of steer away from California. Sam Wilson (00:03:20) - I know you just mentioned at least ten reasons. I think right off the top of your head as to why what you're doing is, is, is the right time and the right place to be there. But kind of give us, if you can, some of the history of how some of the changes of have have, uh, come about and then how they've affected the way you guys have done business. Larry Taylor (00:03:38) - Well, first of all, California is a huge state. Yeah, California, the the economy of California, if it was a separate country, would be the sixth largest economy in the world. Uh, there's a world of difference in California, where the northern part of California doesn't resemble the southern part. Um, it's a very, very huge area. And Los Angeles is a very, very huge geographical community. And so when people talk about California, you might as well be talking about southern South America, or you might as well just talk about Western Europe. I mean, California is a huge and diverse, uh, state, which is, you know, larger than most countries. Larry Taylor (00:04:28) - And so when people talk about California, I don't know what they're talking about, because I can only talk to you about the hundred square miles of the west side of Los Angeles. I don't know anything about the rest of California. Sam Wilson (00:04:41) - Got it. Very good. But can you. Can you give us a little insight maybe as to kind of the, the way the regulatory environment has shaped the way you guys do business, if it has it all. Larry Taylor (00:04:53) - Well, of course it has. And its constantly regulations are constantly are constantly being enacted, reenacted, revised. Um, and and that's just not just Los Angeles or just California. It's the entire United States. So the regulatory environment is, you know, again, it creates opportunities. If you look at it strategically, it's the regulatory environment that creates opportunities rather than, uh, acts to, you know, uh, restrict opportunities. Sam Wilson (00:05:34) - Can you give some insight? Larry Taylor (00:05:36) - Sure. For example, a couple of years ago, California passed Assembly Bill 330, which ultimately became Assembly Bill uh, SB eight, which basically was designed to stimulate the creation of housing because the state of California is generally considered to be lacking of housing. Larry Taylor (00:06:00) - So this was an idea that was passed by the state legislature to encourage housing and all the communities. And in California, however. There was an exception that was added very, very last minute to that bill which said, yes, we want to accelerate the ability to build housing by eliminating local restrictions or being able to expedite local over local restrictions. Unless what you're going to do is remove existing affordable, rent controlled housing, in which case, if you remove something that's already rent controlled or restricted in some fashion and you decide to build something on that site, you have to bring back that which you removed. At the same rent or less than what they were when you removed them. What that does is it takes away all of the incentive to remove existing rent control. So you can't really remove it. What happens is if it can't be removed, it can only become more valuable. So in a sense, what everybody's saying. Oh my God, oh my God, oh my God. This new regulation which was designed to stimulate housing, I'm saying, is all that did was it may stimulate the growth of housing in areas where there isn't already housing, but where there is protected housing, it is now protected from demolition into perpetuity, which means no more competition. Larry Taylor (00:07:43) - So if you have a fully developed area and all of these properties are protected and nobody will ever come in and tear them down and build new, that which exists can only become more valuable because the demand exceeds the supply. So in that situation, regulation actually made a rent control property more valuable, which. Sam Wilson (00:08:05) - I think entirely. I mean, that's that's all together. I mean, it's unique, you know, in the, in the just in the, in the concept itself. But let's assume maybe that you aren't the one holding those properties. How does that how how can that situation be made advantageous for an investor looking to get into that market? Larry Taylor (00:08:27) - Well, it's advantageous because there's a perception amongst investors that buying rent controlled properties which have depressed rent rolls because those rents have not been allowed to go to market is a bad investment. And I say, oh no, no, no, that's a good investment. You're never going to have a vacancy. And the value can only go up because ultimately, no matter what, rents will rise because they have to rise. Larry Taylor (00:08:56) - Period. Sam Wilson (00:08:58) - Right. They have to. And is that is that what you guys are? Let me ask this a different way. What are you guys specifically focusing on then? Are you guys building new or are you buying existing assets like what's your what's your core focus? Larry Taylor (00:09:11) - Our core focus is to buy existing. Properties from people that need to sell, not from people that want to sell. And we are not property specific. We are property agnostic, location specific. We like street retail, for example. That's been one of our primary property types that we focus on. We like pedestrian oriented street retail property. Uh, that's one of our hallmarks. We're not really specialists in any one particular property type, because rent is rent. Uh, space is space. Uh, doesn't really matter as long as you're buying in the right location. Location, location, location is going around is as a we've all grown up with location, location, location. They never said apartments, apartments, apartments only or they never said only the southern five states. Larry Taylor (00:10:08) - Miami, uh, you know, Florida, Arizona. Texas, right? No, it's always been location, location, location. And there aren't that many locations in any one particular state or country, uh, that are investable. And what I mean by investible is where development is restricted. Demand exceeds supply and the entry barrier is very, very high. Those are the components that add to success in investing in real estate. There's very few places in the United States or any country that are investable, right? Period. Sam Wilson (00:10:54) - That's wild, I love that. So you guys are. You guys are, um, you mentioned there you said asset kind of agnostic, and you want to find people that need to sell, not want to sell. Why are people needing to sell in today's environment? Larry Taylor (00:11:10) - In any environment, there's always death. Okay. And, you know, for anybody that has a net worth of over 12 or 13 million, uh, they have to pay a state taxes. So if they have a portfolio of real estate, they have to sell the real estate to pay the estate tax. Larry Taylor (00:11:31) - So death, divorce, bankruptcy, foreclosure, partnership disputes, there's always something like that happening, particularly in a vast environment like the hundred square miles of the West Side region in Los Angeles. There's always, I like to say, there's always someone dying. Sam Wilson (00:11:49) - There is. There is. Larry Taylor (00:11:52) - As long as it's not me. Sam Wilson (00:11:54) - That's, uh. That's that's a good idea. I like that, yeah. So you I mean, in being market or, I guess, asset agnostic, how do you how do you effectively weed through the. I mean, there's got to be just a ton of property coming across your guys's desk. How do you weed through that and actually find the assets that are worth pursuing? Larry Taylor (00:12:14) - Well, when you've been on the ground in the same location for nearly 50 years, they find you. Number one. If it's listed for sale, it's retail. We're not interested. Okay, so. But they find us. We have a long track record of performance. Certainty of performance to people. Larry Taylor (00:12:36) - Who need to sell is more important than price. Sam Wilson (00:12:42) - Can you clarify that? Larry Taylor (00:12:44) - Yeah. If you need to pay your estate taxes nine months from the date of death, okay, you're going to be more focused on selling a property to somebody who definitely is going to be able to close and provide you with the money that you need to pay your taxes. Yeah. So, I mean, certainty of performance is what comes from companies that have track records within a given geographical location of performance. Sam Wilson (00:13:14) - How have you how have you guys adjusted your portfolio over the years? I mean, I know, I know, you said, you know, the finding the assets that are it sounds like off market assets finding people that need to sell. You're not necessarily asset specific, but I would imagine I mean, you guys have gone through the savings and loan crisis. You've gone through the.com bust, you went through the GFC. I mean, you went through Covid. You guys have seen all sorts of of incredible market shifts. Sam Wilson (00:13:43) - I mean, that's that's a wild ride to have gone through the last 50 years. How have you changed or repositioned your portfolio accordingly along the way, if at all? Larry Taylor (00:13:55) - Well, we did change about ten years ago in response to changes in the tax law and changes in the securities law brought about by the, uh, Jobs Act. Um, it became very clear for real estate investors to be able to benefit from the tax treatment. They had to be able to own multiple properties because the depreciation and amortization, uh, deductions, which are non-cash deductions, which allows an owner of real property to actually earn a positive income. But after tax report a loss, those losses are suspended for most, uh, property owners, unless they own other properties that are producing income, which they can use to offset, they can use the losses to offset the income. So what we did was we formed private equity companies, and we said, we'll have one company that will buy ten properties, and we will allow our investors to invest in the company. Larry Taylor (00:15:06) - By owning an interest in the company, they'll own an interest in ten properties. And then as properties are throwing off income, other properties are throwing off losses and therefore they'll be able to use the losses within the portfolio and not have to pay tax. So and then we set it up as a private equity company, because a private equity company basically says don't expect great results in the first, second, third, fourth, fifth, sixth year. Real estate is a long term. Most of our real estate partnerships when we were syndicators had a 30 year to 35 year term. Wow. So our private equity companies on average have a 30 year term. Now, if you're lucky enough to own great real estate, the smartest thing that you can do is having purchased it. The dumbest thing you can do as ever selling it. My only regret in the last 50 years is having ever sold anything. Wow. So the government rewards you to keep it, and the government penalizes you by taxation to sell it. Larry Taylor (00:16:17) - So, you know, in the typical investor mind, which is different than the real estate mind, which is how much am I investing? How much am I going to get back? What's my cash flow? What am I going to get my money back? That works for stocks. That works for bonds. Maybe that works for businesses. Uh, works for a lot of things. It does not work for real estate. Hmhm real estate is buying the best property and the best location at the lowest possible price, and mining it for all of the tax benefits and the appreciation and value creation. Because the government rewards you by allowing you to continue to make money, build value and never pay tax. That's what makes real estate work. Sam Wilson (00:17:06) - I love it that that's that that's extremely clear. I want to kind of circle back to your greatest regret. Is selling it comet and maybe tie that back into the 30 to plus year hold that you guys project on this. What type of investor gets in and how do you attract that investor? I mean, you know we've got a fund right now. Sam Wilson (00:17:27) - It's an eight year fund. And people are like, oh, eight years. That's a long time. And I'm like, I don't I don't think it's that long. So obviously it sounds really short compared to what you just, uh, you just said it 30 plus years. How do you attract, attract capital that is looking at a 30 plus year hold? Larry Taylor (00:17:46) - Well, there's all forms of capital throughout the world, and there's all forms of investors who have different strategies and different requirements. But ownership of real estate is something that's been around longer than human beings. And and so, I mean, real estate has been around longer. And once you own something and you extract value, for example, if you own a property that you purchased for X amount of dollars, call it a $10 million, right. And over a 20 year period, it becomes worth $35 million. And you originally invested 5 million and borrowed 5 million. And then over the first ten years, you earned $3 million in operating income. Larry Taylor (00:18:33) - But in the 10th year, you had an opportunity to put a $15 million loan on the property, but you only paid ten and you only had five in, but you got three out. Now you have a loan for 15 million. You get three times or four times your money out tax free. And the interest that you pay is deductible at the property level as an operating expense. Now. Five more years go by, go down, and now the property is worth $30 million. And you have a financing opportunity to borrow $20 million. So you pay off your $15 million, put another $5 million in your pocket, and you still own the property. You still pay no tax. Then when you finally die and you have already set up your estate plan, that asset goes to your beneficiaries at a stepped up basis so that they pay little or no tax when they sell the property. You may have an estate tax issue, but in our structure, where you only own a portion with other investors in that in that private equity company, if you're...
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The Power of Growth Friends: A Game-Changer for Real Estate Investors
12/14/2023
The Power of Growth Friends: A Game-Changer for Real Estate Investors
Today’s guest is Jay Helms. Jay Helms is a financial freedom achiever, a real estate investor living a nomadic slow-travel lifestyle with his family of 5, founder of the W2 Capitalist and Amazon #1 Best Selling Author. Show summary: In this podcast episode, Jay Helms emphasizes the importance of having "growth friends" who are also focused on real estate investing, and making daily calls to expand this network. He also discusses the evolution of his W-2 Capitalist community, which now includes a hard money lending solution. Jay highlights the importance of strong partnerships in real estate investing and shares his criteria for selecting partners. -------------------------------------------------------------- The Growth Trends Exercise (00:03:33) Changing Who You're Talking To (00:07:12) The Impact of the Exercise (00:09:07) The W-2 Capitalist Community (00:10:03) The Importance of Consistent Networking (00:11:52) Partner Criteria and Building Partnerships (00:16:43) The W-2 Capitalist Community Growth (00:20:28) Listening to Community Members' Needs (00:21:26) Importance of Solid Partnerships (00:27:30) -------------------------------------------------------------- Connect with Jay: Facebook: Linkedin: Twitter: YouTube: Phone: 205-249-0248 Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Jay Helms (00:00:00) - So the easy trick to doubling or just growing your portfolio is changing who you're talking to. Now, I'm not saying that you should go out and tell your mom, hey. Or your, you know, your your brother or sister saying, hey, I'm not talking to you anymore, right? I'm not saying do that. I'm just saying take. Make two phone calls a day, right? Most people, if they're working a W2, they get a lunch hour. This is not going to take you 30 minutes to do. You're going to call somebody. You're going to talk to about those things that are where we're focused on growth. Intro (00:00:32) - Welcome to the how to Scale commercial real estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:45) - Jay Helms is a financial freedom achiever, a real estate investor living a nomadic, slow travel lifestyle with his family and family of five. He's a founder of the W-2 capitalist, and he's an Amazon number one best selling author. Sam Wilson (00:00:58) - Jay, welcome to the show. Jay Helms (00:01:00) - Sam. Thank you. Man, that was. Man, I don't I don't want to say this wrong. This is going to come out wrong. But you got a voice for radio. I got to be careful not to say. Somebody told me once you got a face for radio, I think what it was, I was like, I. Sam Wilson (00:01:13) - Probably got that too, man. You. You can hurt my feelings. It's all. Jay Helms (00:01:16) - Good. It's awesome. Thank you for having me. Sam Wilson (00:01:20) - Absolutely. The pleasure's mine. Jay. There are three questions. However. I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now? And how did you get there? Jay Helms (00:01:30) - Yeah. So where I started, uh, like most people who I put in the sophomore level, we started with a single family. Uh, buy and hold, just one, one bedroom, one bath rental property my wife and I bought with a homemaker line of credit. Jay Helms (00:01:43) - And we have scaled up from there. We've we've done almost anything and everything that does not involve wholesaling and flipping, although we've lived in a couple of living flips and burned a couple of properties. We've joint venture GG LPs. Uh, we're still in a lot of those deals together. That's kind of where we're going to stay, and that's in the small to medium sized multifamily space. And, uh, we've transitioned into lending and hard money lending. Um, and that's kind of where we're at today, even though we've got our portfolio, we've kind of focused on hopefully I see it as a graduation. So we're just, you know, we're lending to people, um, and we're earning a lot higher interest rates. We're not getting to tap into the equity, uh, unless someone a joint venture piece or a GP, uh, or LP deal, but with a lending piece, it's just it's so much more passive than, you know, other stuff. It's just it's incredible. But, uh, how we got there and we're going to talk about this is really through partnerships, right. Jay Helms (00:02:43) - And getting to know folks and really, uh, learning some, some lessons along the way, uh, about what a great partnership would look like. And, and, uh, you know, I hate that old saying that the only ship doesn't sell as a partnership because it's simply not true. Um, doesn't mean you're going to have some rough seas. Possibly. But, uh, one of the things that I've figured out along the way is not only with investing, do you have to have investing criteria and stick to those investing criteria. You also have to have partnership criteria, and you got to stick to those partnership criteria when an opportunity presents itself. Sam Wilson (00:03:17) - Man. That's great. That's absolutely great. There's a lot of questions I have probably about kind of that story that you told us, you know, from doing single family residents live in flips, uh, you know, small to medium sized multifamily. And there's a lot of management, I think that goes into that. Maybe we'll get to that partnership side of things. Sam Wilson (00:03:33) - One of the things that, you know, you and I talked about obviously before, uh, kicking off this show was really talking about a growth trends exercise, which you kind of find is something that I think it's been instrumental in how you've gotten to where you are now. So before we cover those, you know, finer points in your story, maybe we can start there on that growth trends exercise and just tell our listeners what it is and how it applies to them in you. Jay Helms (00:03:59) - Yeah. And so for clarity, let's give credit where credit is due. I did not create this. I stole this from Hal Elrod, who we, uh, most of us probably know is the author of the Miracle Morning, uh, series. And, uh, so how does this thing where, um, and I heard it from a third party. It doesn't matter where it heard from. I heard from somebody else. It wasn't strictly from Hal, but basically, you take out a piece of paper, right? It doesn't matter how big. Jay Helms (00:04:24) - Eight and a half by 11. And you draw, uh, two columns on it, right? The left hand column, you're going to label this growth friends and the right hand column you're going to label as maintenance relationships. And I do this exercise with almost everybody who comes to me and says, Jay, I'm having trouble growing. I don't know what what's going on. I'm doing the things like all the all the stuff that people in the podcast say to do. I'm doing this things I'm not growing. But I bet you're not doing this. So here's, here's the exercise is you get out your phone. Right. You got your sheet of paper, you got growth friends and maintenance relationships. For this exercise we're going to label. We're going to define what those two categories are right. Um, growth friends are people who talk about investing in real estate, building wealth, having a better financial future for for yourself and your family. How do you how do you grow your net worth? You're you're talking about growth, right? And the things that are important to you, in this case, real estate investing. Jay Helms (00:05:20) - Everybody else for the sake of this conversation falls into a maintenance relationship category. Okay? I don't care if it's your mom, your dad, your brother or sister. Everybody else falls into that maintenance relationship category. Okay? Now and I don't know where my phone is, but I was going to show it, like, grab your phone, right. Grab your phone, you scroll to your most recent phone calls. Right. And you're going to go through the top 25, maybe 30 most recent phone calls. And you're going to put folks based on those definitions we just talked about in one of those two columns. Just write down their first name or their initials basically. Once you've done that, now you're going to go to your text message. Because if you're like me, most of your most your conversations or a lot of your conversations are happening over text. Um, I was playing Halo with my son last night, and I'm getting a text from one of my partners. Hey, I found this 12 unit, and so my son and I, we're we're swapping the controller, we're taking turns in Halo and and, uh, while he's doing his turn, I'm sitting here trying to write a property on my phone, you know, as we're doing it. Jay Helms (00:06:21) - And so. But go through your text messages and you do the same thing, right? Go for maybe the top 2530 text messages. If it's about growing your real estate portfolio, it's about building wealth. Uh, how to, you know, better secure your future financial future for your family. Then those folks or those messages that you're talking to are going to go in the Growth Friends column. Again, everybody else maintenance relationships, even if it's a funny meme that makes you laugh and it's entertainment, it's going to go into the Maintenance Relationships column. And here's what happens when I when I have this conversation with a lot of people. When we go through this exercise, we get to the end of that exercise and in there complaining about, hey, I haven't grown, I don't know what to do. And I was like, look, and you don't even show me your piece of paper. I know what it looks like. You're really heavy on maintenance relationships, right? Like you may have a handful of growth friends. Jay Helms (00:07:12) - Everybody else is in maintenance relationships. Yep. Yes, that's exactly it. So the easy trick to doubling or just growing your portfolio is changing who you're talking to. Now, I'm not saying that you should go out and tell your mom hey. Or your, you know, your your brother or sister say, hey, I'm not talking to you anymore, right? I'm not saying do that. I'm just saying take. Make two phone calls a day, right? Most people, if they're working a W-2, they get a lunch hour. This is not going to take you 30 minutes to do. You're going to call somebody. You're going to talk to about those things that are where we're focused on growth. At the end of that phone call, you're going to ask them, hey, who else do you know that likes to talk about this stuff? Right? And you keep building it and you're just making two phone calls every day. Mhm. And you do that for six months and then you do that growth uh growth maintenance exercise again. Jay Helms (00:08:09) - And it's going to be switched. It's going to flop and your portfolio is going to look different. Your mindset is going to be a lot different. And it's just it's amazing what that little exercise can do and that commitment to making those two phone calls a day. It's incredible. Sam Wilson (00:08:25) - I love that that's that is brilliant. And it's it you. Of course, I'm sitting here thinking through it while you're talking about it. I'm like, man, I wonder. I mean, because because that even because even and I'm thinking through maybe the last 20 phone calls in my phone, it's I mean, it's everybody from, uh, lenders to distributors to I mean, the list just goes on, but none of those would be classified necessarily as great. Jay Helms (00:08:52) - Yeah, yeah. Sam Wilson (00:08:53) - Yeah, yeah. You're a supplier. Okay. That's still not a growth phone call. Yeah, it's work, but it's not like it's. It's a maintenance relationship. That's, uh. It is that's convicting because you got to look back at that and you go, oh, like, man, I need to work more on my growth. Sam Wilson (00:09:07) - Uh, my growth, um, phone calls every day. So I love that. What what why was there? How was this impactful? May I ask a leading question here? You can be like, well, that's a stupid question, Sam, but like, how was this impactful for you? And obviously, you know, like you're saying this can have, you know, wild impacts for everyone else, but what did it do for you implementing this? Jay Helms (00:09:27) - So the the reason why I started this W2 right is I fell into this category of I didn't grow up in a family of investors. I didn't have friends who were investors or didn't work with. A lot of people, um, didn't work with anybody who was investing, you know, investing in real estate. And we had bought a few. My wife and I, we had bought three properties and, uh, we're like, all right, we're on to something. We're seeing, you know, income come in. And I'm using passive and air quotes passively, even though we were self managing and um, like we're on to something. Jay Helms (00:10:03) - But I just we've kind of tapped out our resources. Right. Like if we want to grow past this, I've got to get comfortable with partnering with folks. And how do I do that? So I started reaching out to folks and I started, you know, changing the conversation. And come to find out, there was a lot of people just like me who fell in the same boat, right? They didn't have friends or family who were interested in investing. Matter of fact, they looked at them like they were crazy, you know, like, uh, you know, and it was like, hey, let's start having these phone calls frequently, like, I want to talk to you, Jay. And I was like, I want to talk to you because I'm getting excited just having this conversation. And, uh, and so that just kind of kept steamrolling into what we now know as the W-2 capitalist community. And, you know, you're talking about I get challenged on this sometimes when I, when I ask people to go through this exercise, like, all right, let's go through your phone, mister. Jay Helms (00:10:54) - You know, Mister hotshot, you know, like, I was like, all right, let's go through my phone. I have no problem. And I'll go through it. And it's like, mastermind member, community member, uh, banker, you know, and it's all these things. And I can go through every almost every one of the conversations is about, uh, growth and about how we can grow our portfolio. Matter of fact. So we're we're, um. Uh, we're recording this at 130. I got up around 630 this morning. Had about an hour to myself. I had about 30 minutes to lunch. And I've been. We homeschool our kids. Everybody's home. Um, and so I've had about 30 minutes of interacting with them as I go to the bathroom or whatever. Take a water break, whatever. And so there's there's a couple of hours where, uh, was that? About three hours or so since I got up roughly. And, and the rest of the time it's been on the phone with partners, it's been on with, uh, with, with other, uh, investors who are looking to grow and just, just constantly and I get more out of that. Jay Helms (00:11:52) - And a lot of them don't understand this, but I get more out of folks when they call and complain and say, hey, I'm having trouble growing. You know, we kind of walk through it. I get more out of those conversations. They probably they probably do, and they don't understand that. But it's just regurgitating and reciprocating what we've learned in the past. And it's also serves as a reminder because. I started this process a long time ago and I drifted from it, right? Life got busy, I still had a W2 and we kind of get stuck in this spot where we're like, hmm. I'm not really growing. And it took a mastermind member who came in his and, uh, he was getting really excited. It had a lot of momentum. I was like, how do you what are you doing to get this momentum? What are you doing, man? I'm making two phone calls every day at lunch because it's something you taught me a couple of years ago. I was like, oh yeah, I did okay. Jay Helms (00:12:39) - So I was like, so I drifted from it, right? And we all do that from time to time. And it was a good reminder that it really comes down to who you're talking to and who you're spending your time with. Now, I don't mean that. You know, you again, you don't you don't kick the family to the curb, but you just change your conversations that you're having. Sam Wilson (00:12:58) - Yep. No, I love it. That's fantastic. Uh, fantastic insight. And it's it's it's. Easily implemented, but difficult to do. Is that the right way to say what? Jay Helms (00:13:10) - Yeah. You're correct. It's the the discipline to do it. And even even today, like, I know uh, like I have time blocks on my calendars to make sure I connect with a certain amount of people a day. There are days when that reminder goes off. Hey, you got to make 2 or 3 phone calls. I'm like, ah, I'm just not feeling it. I'm not. I'm not feeling it. Jay Helms (00:13:30) - And that some days I'll skip it and then some days I'm reminded of, um, this line from um, oh man, I can picture his face. Extreme ownership guy, Jocko willing. Uh, is that he's asked, you know, on days where you don't feel like going to work out, what do you do? And he goes, well, I go anyway because at least I'm going to go through the motions, you know? And and so I, um, I am not perfect in making my phone calls and doing my reach out, but I am consistent enough where it is producing an incredible result. Right? And incredible enough for me to come on here with such passion, energy to make sure your audience is doing the same thing, because it really is the key to to grow and otherwise, you know, rewind back to where we just had those three properties and we were. We were buying about one property every year, maybe. And, uh, there's no way we could have grown the way we have, um, with just because basically what we're doing is we're taking the, the, the earnings from those properties, putting them into an account, taking some savings from my W2, combining all that up till we had enough for another down payment, going and buying another one. Jay Helms (00:14:42) - So it took us about a year right to do it. And um, and there's just there's just no way there's no way we would have been able to get to where we are doing that. Sam Wilson (00:14:52) - Tell me about your business. Like what? What is your business look like today? Jay Helms (00:14:56) - Yeah. So that's that's an open ended question. Right. So which business W2 Coppolas the real estate. Our portfolio. Like which which one. Sam Wilson (00:15:04) - Whichever one you want to talk about or both. Jay Helms (00:15:07) - Yeah. So um the our portfolio we've got a mix. We've got a little mix of, we've got my wife and I, we've got a fourplex ourselves. We got a short term rental ourself. Uh, and then the rest of the stuff we're in is through partnerships, either through joint ventures or limited partners. We're not a general partner on anything right now. Um, so joint ventures, limited partners. And then we also do some hard money lending on the side. Uh, and so all kind of real estate focused and then the W2 cap is what feeds a lot of that. Jay Helms (00:15:41) - So a lot of our partnerships came from the W2 cap. Because back to that investing or partnership criteria is one of the things that I do is I've got to know you got to know you not for just six. You know, I use a rule of six...
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Is Industrial Outside Storage the Future of Commercial Real Estate?
12/13/2023
Is Industrial Outside Storage the Future of Commercial Real Estate?
Today’s guest is Matt McLennan. Matt is an industrial CRE broker in the PNW with multiple running years top producer status and specific knowledge of IOS marketplace. Show summary: In this episode Matt McLennan explains the benefits of IOS, its impact on the industrial market, and how it is influenced by port activity. He also discusses the challenges in valuing IOS sites due to lack of data and the importance of local market knowledge. Despite current market uncertainties, McLennan sees opportunities for investors in IOS properties. -------------------------------------------------------------- The Industrial CRE Market and Tenant Base (00:00:00) Matt McLennan's Background and Career Journey (00:01:00) The Current State of the Commercial Real Estate Market (00:02:18) The rise of industrial outdoor storage (00:09:05) Size and value of IOS properties (00:11:10) Market research challenges for IOS (00:14:14) Tech advancements in industrial outside storage (00:18:23) Impact of port activity on industrial outside storage (00:19:32) Uncertainty of cap rates in industrial outside storage (00:21:34) -------------------------------------------------------------- Connect with Matt: Linkedin: https://www.linkedin.com/in/mattmclennan/ IG: @mattm.cre Twitter: @MattmCRE TikTok: @mattm.cre Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Matt McLennan (00:00:00) - Think of iOS as things that need to be stored over time, but don't necessarily need to be under a roof. And that's that can be trucks, that can be containers, that can be metal piping, that can be your plumbing contractors, 30 fleet vehicles that he needs to park somewhere. Um, all that stuff. That's kind of part of doing business and all these other sectors. But iOS is attractive, especially for call it the tenant base, because, you know, paying for space under roof is exponentially more expensive than paying for just, you know, a gravel lot. Welcome to the how to scale commercial real estate show. Sam Wilson (00:00:36) - Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:45) - Matt McLennan is an industrial CRE broker in the Pacific Northwest. He has multiple running years as a top producer status and has specific knowledge of the EOS marketplace. Matt, welcome to the show. Matt McLennan (00:00:58) - Thanks for having me, Sam. Glad to be here. Sam Wilson (00:01:00) - Absolutely, man. The pleasure's mine. Matt. There are three questions I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now? And how did you get there? Matt McLennan (00:01:09) - I started falling into commercial real estate by happenstance. Hung out with some buddies. I was working a different career and they they talked me into coming here. So I showed up, didn't know what to do or how to do it, but I just cut my teeth and started, you know, working as hard as I could to figure it out. Uh, fast forward to today. It's been seven years, and, uh, things are going great. I'm still learning a ton, but feel like I've got a good knowledge base under myself. Great client base. It's an awesome industry and things have been really good so far. So just trying to keep that train running and and looking ahead really, it's it's continuing to take care of my clients, build the book of business and keep up with this market. Matt McLennan (00:01:46) - I mean, it's been changing a lot. So that's, uh, that alone will keep you busy. Sam Wilson (00:01:50) - Absolutely. You are coming off the tail end of a bull run there in space. So tell me where we are today. For those of you who are listening for recording this on November 7th, 2023. So when this airs, it might be 60 days later. And hopefully things don't change that dramatically in 60 days. But you never know. So just to get a time stamp on this here, but tell me, uh, you know, tell me about I guess maybe you can go back and give me the seven year run up to the day. Matt McLennan (00:02:18) - I started in 2017, and we were already on the call it upwards inflection curve when I started. So admittedly, all I've ever really known is a good market. Um, the old guys in my office and industry loved to remind me of that. And with that in mind, though, I mean, things are changing, right? And I think anybody who's been paying attention, you can pinpoint exactly when that change came. Matt McLennan (00:02:39) - And it was that first interest rate hike back in early 2022. So we've been in this new environment for the better part of call it 18 ish months. And what does that environment look like today? Um, keep in mind I work specifically on industrial commercial properties, albeit I keep a good pulse on the entire commercial real estate industry. As an industry, all things considered, I think we're actually in pretty good position. The only one I could sit here and knock would probably be office space, you know, large high rise offices and a lot of the metros and core markets. But setting office aside for a minute because that's a whole nother conversation. Most of the product types are doing pretty well. Leasing activity is generally healthy. It might be down here and there. I feel like it's down a little bit in the Puget Sound region where I'm at. Um, values are questionable. And why I say questionable is with the new cost of money via these rising interest rates, everyone's trying to figure out how to make investments, particularly pencil. Matt McLennan (00:03:39) - And that's really hard to do right now when we're in this changing environment. So we've seen transaction volume fall pretty dramatically. And so and cap rates are a big question mark, which is another, you know, typical measurement of investment performance. Right. And so we're kind of just in this flux time at the moment where everyone's sitting a little bit on the sidelines. It's still very interested and eager to participate in the market. Not sure how to participate in the market. So I'm spending a ton of my time educating my clients and trying to give them some of those kind of what I'm seeing at the ground level and some advice. But really, put very simply, at this date, you know, in November of 23, we're all just kind of sitting, sitting and watching and seeing how this whole thing is going to play out. Right? Sam Wilson (00:04:19) - Absolutely. Yeah. It's uh, certainly I've seen a lot of capital sit on the sidelines as well. So you just it's it's kind of a wait and see game. Sam Wilson (00:04:26) - I was even having a conversation with somebody yesterday and they said the same thing. They're like, well, we're just selling stuff off and really going to sit and watch and just kind of, you know, see what happens. So that's that presents an interesting opportunity, though, does it not for those that want to participate in the market right now and if so, big time that. Matt McLennan (00:04:43) - We were talking about this this morning. Actually, it's a good timing for your question. Debt has been the driver of all investments. If we're talking investments specifically, right? I mean, we all have our performers and and it's it's I want to say it's not simple, but it's not overly complicated to figure out if something's a good investment or not. Right. Based on your, your underlying investment criteria. But that's the big question mark. Right. And so what I'm looking at right now is there's a lot of properties that I believe based on that are being evaluated on current debt or the ability to go get future debt on that. Matt McLennan (00:05:18) - And that's driving the value down. For example, the office building that I'm sitting in today, it's one of the better performing office buildings in our downtown market. I think if it were to sell today, if they needed to sell today, it would sell below replacement costs. And it's a great building. And but part of the problem with that is the appetite to invest in a downtown core office building. I mean, sounds scary, right? And and banks think it's scary, um, big, you know, call the biggest investors life insurance, pension funds. They think it's scary because no one knows what the future of office really looks like at this point. So but for those who have a plan and kind of have foresight, I think, into the future, I think there's going to be some fantastic opportunities to pick up property below. Realized value. Value is always measured at the point in time. Right. And and so you could argue that you're paying today's value for said property. But I think things are going to appreciate if you can pick up some of these, these properties now at kind of what I think is current or under realized value, I think appreciation in the future is going to be pretty good. Sam Wilson (00:06:24) - It is. And it's interesting, I think about this a lot. And again, I don't have like the data in front of me to to substantiate this claim. But certainly real estate in the 60s and 70s was a lot cheaper maybe than what real estate is today. And it's like, you know, and of course, you know, most of us don't have a 60 year time horizon for an investment to become a, you know, to become meaningful. But it still just kind of proves your point where it's like, hey, you know what? If you can buy today? And I also think part of this is, is the, you know, the inflation of the dollar. Like, if you're able to borrow today in dollars and repay and dimes over the next 25 years, I mean, I don't think anybody's predicting that the dollar is just going to have some miraculous bull run in value in the near term or even long term future. So sure. Anyway, that's a it's but that's kind of obviously theoretical. Sam Wilson (00:07:12) - And, and uh, you need to have just a little bit more, um, courage probably now to, uh, get out there and keep acquiring. So yeah, I like that. I really like that. That's let's talk a little bit, um, the types of industrial. This is a question I had for you, and it's kind of a loaded question because again, here in Memphis, industrial is incredibly hot. But I had lunch with two industrial brokers last week, and we were just talking about the types that are leasing. I want to hear what it's like in your neck of the woods, the type of type of stuff that is still, uh, highly in demand. Matt McLennan (00:07:43) - Yeah. So the Puget Sound market is comprised primarily. If you look anywhere on the map, everyone thinks of us as Seattle and Seattle specifically. We have two ports here. It's the Port of Seattle and then the Port of Tacoma. Tacoma is a sister city to Seattle, about 35 miles south. And a lot of our industrial activity happens between those two ports. Matt McLennan (00:08:01) - And because we're a port driven market, uh, we're a heavy distribution market. So think containers coming in overseas, those containers are getting picked up the ports, they're going to these warehouses. The product is coming into the warehouse being stored eventually, then go elsewhere, whether that's local or anywhere else in the country. So we're a heavy distribution market. We have a pretty good manufacturing presence as well. Um, Boeing has always been probably one of our top, one of our top employers up here in Washington state. And consequently, I mean, they have a huge manufacturing base. And then there's a lot of those subcontractors of Boeing that also occupy space and have manufacturing jobs. So I'd say we're distribution first, manufacturing second, uh, one sector that I spent a lot of time in is, is what we commonly referred to these days as EOS, which stands for Industrial Outside storage. iOS is basically a derivative of port activity, probably at its at its finest. And really what that means is it's think of iOS as things that need to be stored over time, but don't necessarily need to be under a roof. Matt McLennan (00:09:05) - Right. And that's that can be trucks, that can be containers, that can be metal piping, that can be your plumbing contractors, 30 fleet vehicles that he needs to park somewhere. Um, all that stuff. That's kind of part of doing business and all these other sectors. But iOS is attractive, especially for call it the tenant base, because, you know, paying for space under roof is exponentially more expensive than paying for just, you know, a gravel lot. And consequently, the investor base called at the institutional level the again, the pension funds, the life insurance companies, the REITs, they've started to take notice of this iOS sector, which has been really interesting to watch. Because it's almost funny because iOS is not new. I mean, there's always been semi-trucks have always needed a place to park. Containers have always needed a place to live outside of the port. Um, but what the investment market figured out, and I've taken advantage of this a little bit personally, too, is that owning these iOS sites, the barrier to entry is relatively low because you're kind of paying land value or slightly above land value. Matt McLennan (00:10:05) - If there's some improvements, the maintenance a.k.a the money that goes into tending the property pretty minimal. I mean, a lot of them, it's fencing, gravel, lighting. Maybe you have a small building on there that you need to maintain, but it's not like going and buying a piece of land and building a new concrete, you know, tilt warehouse. That's pretty exorbitantly expensive. Um, so a lot of people and then meanwhile, the rents have gone up pretty dramatically because tenants need this space and the institutional money has come in and driven rates up as it typically does. So in any event, that's that's been really interesting. But I think if you pegged to answer your question simpler, Seattle's market, it's it's distribution tenants. It's manufacturing tenants and it's iOS groups. That's that's kind of the meat and potatoes of our market. Sam Wilson (00:10:48) - iOS. This is a fun conversation. I've got many, many questions on this. So yeah, I mean how do you let's let's start with the size of properties that were typically seeing people use this for maybe maybe we'll start there. Sam Wilson (00:11:01) - And then I got two questions on how you value these. Um, you know where they're located, like you said, maintenance I got. Yeah. So let's start on size and how you value them. Matt McLennan (00:11:10) - Size is probably it can vary quite a bit. Um, I'd say the sweet spot is kind of 1 to 5 acres. That's where let's use the 8020 rule. Probably 80% of the tenants live in that 1 to 5 acre space. And and frankly, leaning towards the smaller side. Um, but part of that smaller side has to do with where rental rates have gone. And, and so tenants can't afford these huge yards. There are a lot of them that want to lease, you know, these mega yards think like the big the the Walmarts, the masks, the use and logistics, the targets of the world to have just huge fleets of vehicles and trucks and all that. I mean, they need the big yards and they're happy to pay for it. Um, but if but then at your most basic sense, the, you know, Joe's plumbing down the street that needs a little office, a little maintenance shop and somewhere to park their 30 vehicles that they go to show it, you know, that their service guy shows up to your house and fixes your toilet at home, right? So how do you value these? Um, location wise is a big one, and a lot of times depending if it's if it's a port driven activity, they obviously want to be near the ports. Matt McLennan (00:12:18) - The other one would be close to population centers, because if you're Joe's Plumbing, for example, you know, you want you don't you don't want to be way out in the boonies where it takes your service guys an hour to drive to any of your customers you're facing. So location is a huge driver, probably the number one driver in price. And then I'd say the the biggest one is the utility that the yard provides. And what I mean by that is. Quality and really buildings, I would say, because a lot of these yards in their most simplest form and we iOS, I usually use the term yard to describe it. That's that's another phrase we use. A lot of these yards can be very simple. It can be literally a square lot with a fence around it. And it's gravel, no buildings, no utilities, nothing. And for some guys, that's all they need. But there's a lot of guys that have staff that need at least some kind of, you know, small, even if it's just a simple Job Shack trailer all the way up to a full on office space. Matt McLennan (00:13:13) - They need a building to set up a desk and occupy, right? They need a bathroom, right? At the end of the day, if you're gonna have people working on this site and you don't have a restroom and it's just a gravel lot, all that yard, really, the utility it provides is just somewhere to park stuff or lay down material all the way up to a lot of groups. Want at least a small warehouse building like a shop, is what we'd commonly referred to as something that you could go do some basic maintenance, store some parts in, store some goods in all the above. So as you start adding these things to these iOS sites, they start, in my opinion, gathering a lot more value. They command more rent, they lease faster. And that's that's been a trend amongst the market as of late. So it's it's it's really location utility. That's that's what's driving the equation. Sam Wilson (00:13:58) - Okay. So how do you how well that's just some uh, how do you do market research for that. Sam Wilson (00:14:02) - Like how do you and obviously you said location is important, but how do you even begin to determine who the tenant type would be. And if they want to come to your yard? Matt McLennan (00:14:14) - The simple answer is you call me. But no jokes aside, actually, I make that joke because there really isn't a formula for it. I mean, it's it's a property sector. I mean, you go, you pick any of the big research firms, CoStar, CBRE, you know, whatever it is, right? I mean, they capture infinite amounts of data on industrial markets, apartment markets, vacancy rates, absorption, um, anything. Right. No one's doing that for iOS. And it's and it's particularly because it's been kind of a forgotten quote unquote. I mean, I legitimately think you could call it an asset class these days, but it's still it's in its infancy, so there isn't a ton of data on it. Tracking it is difficult. So really, for me, doing a lot of iOS work in my market, it's it's it's up to me. Matt McLennan (00:15:00) - It's it's putting my boots on the ground, researching zoning codes, tracking down lease comparables. What are what are what's land trading for? What can you do on that land? What utility is it provide? Like I mentioned, I have a checklist that I use. They kind of helps me work with my clients to determine what those values are. Um, so I've kind of come up with a little bit of a proprietary method to doing it, but that but that's really what it is, is it's it's still very subjective. Sam Wilson (00:15:26) - Right. Yeah. That's, that is that is interesting. So you really need to find somebody, you know, if you're not looking to invest in the Pacific...
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Effective Strategies for Scaling Your Real Estate Business
12/11/2023
Effective Strategies for Scaling Your Real Estate Business
Today’s guest is Gino Barbaro. Gino is the Co-founder of Jake & Gino, a Multifamily Investor, educator, and Operator with over $280,000,000 in assets under management. Their students have closed over 71,000 units and have $4 Billion in Deal volume! Show summary: In this episode, Gino Barbaro shares his journey from the restaurant business to real estate investing, emphasizing the importance of understanding the business before scaling. He discusses the benefits of using your own capital, the current market conditions, and the opportunities that arise from motivated sellers. Barbaro also highlights the importance of education, partnering with experienced individuals, and creating a strong organizational culture. -------------------------------------------------------------- Intro (00:00:00) Gino Barbaro's real estate journey (00:00:55) The pros and cons of syndication in real estate investing (00:02:54) Opportunity in Seller Financing (00:08:36) Challenges with Seller Financing (00:08:52) Targeting Mom and Pop Sellers (00:09:14) The surprise lessons from people in the coaching program (00:16:44) The type of people they attract to work with (00:17:20) The importance of managing and scaling a real estate business (00:18:24) -------------------------------------------------------------- Connect with Gino: LinkedIn Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Gino Barbaro (00:00:00) - Bigger is not always better if you don't know what's going on underneath the hood. So thinking about it as not just an investment, not just a piece of land or a piece of real estate you have out there, but that is a business you have right there and learn how to run that business. And once you learn how to run that business, then go on to the next one and start learning how to scale and put systems in that real estate business. Intro (00:00:21) - Welcome to the how to Scale Commercial Real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:34) - Gino Barbaro is the co-founder of Jake and Gino. He's a multifamily investor, an educator and operator with over $280 million in assets under management. Their students have closed over 71,000 units and have $4 million in deal volume. Gino, welcome to the show. Gino Barbaro (00:00:49) - Sam thanks for having me on, brother. How are you doing? Sam Wilson (00:00:52) - I'm great, I'm great. It's good to have you back on the show. Sam Wilson (00:00:55) - It's been only 700 episodes ago or so that you were on the show. For those of you that didn't get to listen to episode number 137, go back and check that story out or that episode out, and you'll get to hear Geno's kind of introductory story where he tells how he got involved in real estate. Gino, I won't ask you to rehash all of that today, but there are three questions that I ask every guest who comes on the show in 90s or less. Can you tell me, where did you start? Where are you now and how did you get there? Gino Barbaro (00:01:21) - Before I do that, please don't go listen to 137. I probably sucked five years ago. I'm not that great now, but I was really bad back then. I'm assuming. Anyway, the answer to your question, I completely forgot because. So who am I? Name is Gino barbaro I was in the restaurant business for 20 something years. I met my partner Jake Cinzano back in 2009. We partnered up in 2011. Gino Barbaro (00:01:42) - We bought our very first deal. 18 months after we did that, we bought a 25 unit. Since then, we've been able to scale the majority of our own capital only three syndications. We own 1800 units right now, so we've had an amazing journey. Just 1 or 2 great deals of the year refined those deals being very boring because creating wealth is not a dopamine hit every day. It can be really boring for weeks at a time. And then all of a sudden something happens and it's just being steady. Creating a business, creating processes, creating systems, hiring great people, having a great team is what has allowed us to scale to over 1800 units. Sam Wilson (00:02:16) - That's really cool. I love the what you've said there about only having three syndications and doing a lot of this with your own money. That honestly is something, and I know it's probably not in the cards for me in the near term, but it's something I've thought a lot about where it's like, man, the not having the responsibility of needing to report to investors, tell them what's going on, or even even being responsible to make sure that they get their returns hit, because I'm probably willing to accept some risk and maybe some downside that maybe I'm not willing to accept for my investors. Sam Wilson (00:02:47) - So what's been your thought process behind keeping that? Only to three syndications with investors. Gino Barbaro (00:02:54) - Sam, when we started back in 2011, there was no raising capital. The economy was terrible. We know we didn't know syndication was that was not that buzzword. So we bought our very first deal using seller financing. And that's what's going on in the market right now. Seller financing is back. So for those of you that say, hey, I like to use my own capital, maybe buy a couple of smaller deals. I mean, people out there will tell you, well, you got to go big. You got to get economies of scale. That 25 unit property that we bought ten years ago for $600,000 is currently probably worth a little over 2.5 million bucks, right. It's it's generating between 8 and $10,000 in cash flow every month. And the reason why it's doing that is we bought it, right? We refinance it. There's not a ton of debt on it. And when you look at it, rents went from 325 bucks back in 2013 to over $1,100 today. Gino Barbaro (00:03:44) - So it is, it is it's a little bit of a waiting game. But that's okay. You wait. But that's 125 unit little crappy deal that I own. 33% of it because Jake and my brother Mark are partnered up on that deal. So that one deal has put my first child through college, my second child is graduating, and it's my third child and everyone's out there. It's only a 25 unit deal. Do one of those a year for the next three years, and then by year five you'll be thanking, you know, going I've only got 75 units but $200 profit per unit. You're talking a nice 15,000 bucks in cash flow. You don't have to be overwhelmed by the numbers in this business. And there's no right or wrong answer. I'm not here to tell you to syndicate or not to syndicate, because syndication allowed us to build that business with investors, allowed us to get on a platform. It allowed us to create some kind of acquisition fees where we put back into the deal. Gino Barbaro (00:04:32) - We saw that that model wasn't for us, because all of a sudden we had capital to do our own deals and we're vertically integrated. So we're not looking to buy 5000 units a year. We're looking to do 2 to 300 units. Really good. Jake and myself, at this point in our lives now, syndication is an awesome tool if you're looking to scale, if you have very little capital to start out with, or if it's part of your overall strategy, you can still syndicate deals and you can still go buy 25 unit deals, 75 unit deals, JV with somebody. Why can't you do them all? Because I'm going to tell you right now, Sam, it may be difficult to syndicate in the next 12 to 24 months if you've got capital calls, if there's investors out there who are skittish, it may be hard to raise money. So this may be the time to jump in and say, hey, I've got my partners here, let's JV on a deal, let's do a seller finance deal. Gino Barbaro (00:05:17) - So learn all of the strategies in the multifamily, know when to use them and know what your goals are. And make sure that every deal that you underwrite aligns with those goals. Sam Wilson (00:05:27) - Yeah, absolutely I like that. And you know, raising capital is getting immeasurably more difficult. I mean, I've not heard anybody come on the show here in the last six months and they're like, oh, man, 2023 has been just super easy to raise money. People are just flush with cash. No, people are holding it tight and they're going, oh, crud, we don't really know what's coming down the pipe. So let's, you know, let's let's sit tight with our cash and just wait. So that's that's a really interesting point, Sam. Gino Barbaro (00:05:53) - You say people are flush with cash. There are a lot of people with cash. They just don't want to give it to you and me. Sam Wilson (00:05:58) - That's it. Yeah, yeah. Let clarify. Yeah, exactly. You know. Gino Barbaro (00:06:01) - And I don't mean to cut you off, but I think that's an important thing. Gino Barbaro (00:06:04) - That's what happens when you go into recession. People are become afraid. That's why asset prices drop because there's less money in circulation. People are holding it then that's why the government doesn't like that. That's why they like lower interest rates. They want more euphoria in the market. When there's more euphoria, one of two things happens. Asset prices do go up, but it is easier to raise capital. You can't have it both ways. You can't have a ton of deals and easy cash. You know one of them is going to be lacking. So right now it may be the capital is lacking, but go out there, continue to make those relationships. And long term you're going to be all right with raising capital. Sam Wilson (00:06:36) - Absolutely, absolutely. But while we're on this, let's talk about what your views are in the market. I mean, you mentioned, hey, you should have all the tools in your in your tool belt ready at your disposal, from seller financing to syndication to using your own money to whatever it is. Sam Wilson (00:06:51) - But what are you where are we right now in the market, in the cycle, and what are the opportunities today? And what do you see coming coming ahead? Gino Barbaro (00:07:00) - I can tell you what we've done over the last year. In January of this year, we closed on 132 units in Knoxville. It was we had $450,000 seller finance note as part of that purchase. July we closed 105 units, and now in December we're closing on 96 units. So for us 300 units this year, excellent. Last year we had a total of maybe 80 units spread out over 4 or 5 deals. We had like a 16 unit deal. We had a 22 unit deal. So now we're seeing the opportunities are in these larger assets. Years ago, the last two years, they've been more difficult for these larger assets because you had private equity, you've had a lot of people come in with bridge debt and take a lot more risk. We're not bridge debt for us is buy right, manage right and finance right. And that finance right component is if you're trying to do short term debt, you've got to be very, very careful. Gino Barbaro (00:07:49) - Because when interest rates do rise, if they have their there's there's a problem. And that that's what's leading into the opportunity. There haven't been a lot of deals out there over the last 6 to 12 months. They're going to start coming because right now there's a lot of distress. A lot of people are just saying to themselves, here, here's the keys back, back to the bank. And there's a lot of quiet. There's a lot of hush hush going on right now. But I think from what I've been hearing from a lot of operators, a lot of people in the business, that there is going to be a wave of distress coming, and that's a good thing. And that's a bad thing, because the bad thing is, it may be hard to go out into, you know, get debt on these things because debt starts pulling back. So you may have to come up with more of a down payment. Terms may not be as great. But then there's the seller financing component, which we've already used once, and we had a second deal in the contract that had seller financing. Gino Barbaro (00:08:36) - So. The opportunities are self-financing, and I think the opportunities are that deals will come. And it all comes down to a seller's motivation. If a seller is not motivated and can hold on, they're not going to sell. But the ones that need to sell, that's where the that's where the the opportunity is going to be. Sam Wilson (00:08:52) - The ones that need to sell, I would imagine, to have debt terms that are not favourable. So how do they do seller financing if the debt they have is just bad? I'm going to call it bad debt, but that's the wrong term for it. It just has terms attached to it that are no good. So how does a seller do seller financing with debt attached to that property? That is not favorable. Gino Barbaro (00:09:14) - They won't that's that's not the type of seller financing deals that you're going to be looking for, which you're going to be looking for are the mom and pops that have been holding on to these deals. We've got a deal that's coming up in January. We've been hunting these people for three years, and all of a sudden they decided we want to sell in January. Gino Barbaro (00:09:28) - Well, why January? Well, what's going on in the world right now? We've got a war in the Middle East. We've got Ukraine that's been going on, we've got inflation. I don't believe the GDP numbers for a second. I don't care what you tell me. So I'm looking. All these people are seeing things. Two years ago they were saying to themselves, Jake and Gino, go fly kite. I love this real estate thing. I don't need to sell because if I sell, where am I going to put my money? Now the paradigm has shifted to like, oh, Jake and Gino, we still have health problems, but I think we want to sell because we just want our capital back. We don't want to continue to lose. And that's where I think the mindset is. And these these owners have owned the property for a long time. Their mom and pops, they're about $200 to $300 below on market rents. They haven't kept up. And they're the ones who have a lot of equity in this deal. Gino Barbaro (00:10:12) - That's where the seller financing are going to come in place. So when you're out looking at deals, make sure you look at those kinds of deals that you know what? They've got some equity in them. They've been they've been held by the same individual for 7 or 8 years. The deal is you're talking about they're going to be worked out by the bank or the banks taking those things over, or you go in as an operator and say, let me work directly with the bank, see if we can create some new types of bank terms so you don't get dinged on your foreclosure. I can take the property over. And oh, by the way, your LPs, they may get written down on this thing. So it's one of those things where it's going to go deal by deal specific. How do you provide value to that transaction? How can you help that general partner team without losing everything? And how do you help the bank by keeping this deal going. The problem is a lot of these general partners didn't operate these properties properly. Gino Barbaro (00:10:58) - So if you're a team that can actually manage these properties, run these properties and get them back to where they were, I'm sure that banks want to work with you, and I'm sure that general partnerships that have been sunk and having problems, they'll want to have that conversation with you as well. Sam Wilson (00:11:10) - Yeah, absolutely. Here's here's an interesting thought from a broker actually, that just interviewed this before I jumped on this show with you in New York City. And he was talking about how a lot how this kind of downturn, slash potential downturn is very different than the last ones, in the sense that he said the way that banks are handling distressed debt is very, very different right now. And maybe you can give some insight or some color to this from what you're seeing is that previously it was like, okay, hey, you know, we'll get this off of our books, we'll foreclose, we'll then sell this off, he said. Because of SVB. And what was the other bank that went belly up thing that sure. Sam Wilson (00:11:49) - There you go. Yes. Those two banks. He said, you know what we're seeing a lot of banks do now is it's real hush hush like and things that are distressed, like things are things are trading kind of, you know, under the radar. If you see any of that go on right now where banks are working stuff out with really, you know, flying the flying the flag. Tell everybody what they're doing. Gino Barbaro (00:12:07) - That's a great point. I'm not sure. But I know I've been talking to a lot of individuals in private equity. I spoke to somebody the other day. He has a quote unquote, what he calls a rescue fund, but more of a philanthropic where he actually keeps the GPS in on the deal, cuts them out drastically, but but keeps them in. Right. And I think he says he's underwritten over $1 billion worth of transactions in the last three months, underwritten. And he says there is a lot you he says you'd be amazed. And what happens is when people are in a general partnership and there's three or 4 or 5 general partners, the communication start breaking down and then they wait till the last second and then there's nothing that they can do. Gino Barbaro (00:12:43) - And that's what he's seen over and over and over again. And it really comes down to the health of the bank. If the bank is healthy, they can work it out. So they can work something out with you. They can take it back. But if the bank is not healthy, they're going to foreclose on you. They're going to get that thing off their balance sheet, and they're going to get rid of it one way or another. They want to be made hold of this thing. Banks don't want real estate. They're in. They are in the best business on the planet. They're securing their loans with an amazing piece of real estate, and they're making ten times on their money and lending out money that they don't even have in their vaults. On top of that, why would they want to own real estate? You know, that's that's the way I look at it. I've learned that real estate is not a good business when you're a bank. Sam Wilson (00:13:23) - I like that. That's funny. That's absolutely funny. Sam Wilson (00:13:26) - A great way to put that. And you're right, it is not a good business when you are the bank, because that's not the business they are in. Very, very cool. You've given us some insight, both on the way you guys have been taking down deals, the way that you can buy 25 units a year and really make a meaningful difference in your financial and your life future. We've talked about kind of your views on the economy and where things are heading. What what are some what are some other things here that we should really talk about, kind of relevant to what you guys are working on right now that you feel like listeners should hear? Gino Barbaro (00:13:57) - Well. Gino Barbaro (00:13:58) - I've really been stressing to people that if you're going to get into multifamily, are you going to get into any kind of investing? Please invest in your education. I've had that Maserati Mike moment where I always share with people. Back in 2005, I met a guy. His name was Mike. He drove into my parking lot at the restaurant. Gino...
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Insights from the Broker Who Sold NYC
12/07/2023
Insights from the Broker Who Sold NYC
Today’s guest is Bob Khakal. Bob has sold 2,283 buildings, totaling $21B+ — the most ever for an individual broker in the history of NYC real estate. Bob previously cofounded Massey Knakal Realty Services, which grew from 2 to 250+ employees and was sold for $100M. Show summary: In this episode, Bob Nicoll shares his experiences transitioning from running his own company to working at JLL. He discusses the challenges and opportunities in the New York City real estate market, particularly in land and multifamily properties. Nicoll also talks about the changing behavior of lenders in economic corrections and highlights the differences between the current correction and past ones. He recommends two books that have influenced his career. -------------------------------------------------------------- Intro (00:00:00) Bob Nicoll's career journey (00:01:16) Selling his company and transitioning to JLL (00:03:59) Lender Behavior in Past Corrections (00:10:52) Different Performance of Product Types (00:11:58) Opportunities in the Land Market (00:14:07) Book recommendations for productivity and delegation (00:21:44) Closing (00:22:33) -------------------------------------------------------------- Connect with Bob: Email: Linkedin: Twitter: Instagram: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Bob Knakal (00:00:00) - The class back office building market is really facing a lot of challenges today, but the values of those buildings are the same at the same price per square foot that they were 20 or 25 years ago. If you believe the market is going to come back, if you believe in New York, that would seem to be a good investment. I think the land market also significantly below where it could be the peak of every cycle, is greatly exceeded the prior peak. Sam Wilson (00:00:29) - Welcome to the how to scale commercial real estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:42) - Bob Nicoll has sold over 2283 buildings totaling over $21 billion in volume. He's the most, which is the most ever for an individual broker in the history of New York City real estate. Bob, welcome to the show. Bob Knakal (00:00:56) - Hey, Sam, great to be with you today. Sam Wilson (00:00:58) - Man, that's a crazy statistic. I'll just I'll just say that 2283 buildings, as we commented here before the show kicked off, who's actually keeping track? But that's that's actually amazing. Sam Wilson (00:01:08) - Bob. There are three questions, however. Ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now and how did you get there? Bob Knakal (00:01:16) - Well, I started as a college kid at the Wharton School looking for a summer job that would look good on my resume. I wanted to get into investment banking. Investment banking jobs weren't available for college kids. Ended up walking into a Coldwell Banker office thinking it was a bank. They offered me a job, took it even though I didn't want to get into real estate, loved it from day one and went back my next two summers. And then started with CCB in Manhattan when I got out of school, met Paul Massey there. He had just gotten out of a training program. We both were starting in sales day two. On the job. We said, hey, let's work together, see how things go. We'll split everything 5050. That was the start of a 30 year partnership. Bob Knakal (00:02:04) - And, you know, I've been doing it for 40 years in New York now, for 26 of those years, Paul and I had our own company, which we sold in 2014 at Cushman Wakefield. And, you know, I'm the head of New York Private Capital Group at JLL now running private capital sales in New York. Sam Wilson (00:02:24) - Wow, that's a colorful career. I mean, there's so many different parts of your story I'd love to love to dig into, but why do you let me start here? Maybe let's start with today. Why do you do what you do today? Like why are you still so active in real estate? You've got an awesome career behind you. You've built a huge company. You sold it. What keeps you going? Bob Knakal (00:02:45) - Sam, I love it. It's something that I. I truly enjoy. You know, I tell folks it's not only a job for me, it's my hobby. I have a wife and a 14 year old daughter, and they're the most important things in the world to me. Bob Knakal (00:02:58) - But if they were away for the weekend, on a girls weekend, I'd be working all weekends. So I just really enjoy it. And I think that's the thing that that keeps driving me. And with each, you know, each day brings new opportunities to get wins. I'm addicted to winning. And and that's one of the things that really drives me. Sam Wilson (00:03:22) - That's really cool. I love that answer and good for you. There's very few people I think that can say that what they do is both their built their career and their hobby. So that's that's really fun and it shines through, I think both in your in your smile when you say, hey, this is what I'm doing and I and I enjoy it and this is, this is why I'm doing it. So that's that's really cool. Good, good for you. Let's talk a little bit about the company that you sold for what was $100 million that you sold your company for. Yeah. What was that transition like? I mean, you're, you know, your knee deep into your own business, you sell it. Sam Wilson (00:03:56) - And then what did you transition into? Bob Knakal (00:03:59) - Well, you know, the we sold the business in 2014. We almost sold the business in 2007 for a variety of reasons. We didn't sell it then. We had been offered 50,000,000 in 2007, and that deal didn't happen. But what it did teach us was that when we did sell the business, we would be on five year contracts with whoever bought us. So we actually decided in 2007 that if the market was not really bad in 2014, it would be a great time to think about selling, because in 2015 Paul would be turning 55. We thought the perception would be that our contracts would have more value if we were in our 50s than if we were in our 70 or 80s. So we we get to 2014, the market's chugging along, we hire an investment bank, sell the firm. And in hindsight, it was the absolutely perfect time to sell. 2014 was the peak year. Still, historically, 5534 buildings were sold in New York in 2014. Bob Knakal (00:05:12) - That was an all time record by more than 10%. That still stands, and it was a perfect time to do it. So we we went to Cushman Wakefield and ran our, our business as a, as a division of of C and W. And then there were some moves that the company made that were not congruent with our contracts. So we shorten our contracts, negotiated some other things. And. And the you know, I left in 2018 to go to jail with 53 people that had been with me at Massey Narco back in the old days. We actually the company, when we sold it had over 250 people in four offices in New York. And, you know, I took 53 of those people with me when I went over to jail. Sam Wilson (00:06:04) - Wow, wow. That's really that's really a wild, a wild story. And you're to this day still with JL. Bob Knakal (00:06:11) - Yes. Sam Wilson (00:06:12) - What's it like over. Bob Knakal (00:06:13) - Five years now? Which I can't believe. Right. Sam Wilson (00:06:15) - It happens fast. It happens fast. Sam Wilson (00:06:16) - What what what's it like now being housed under JL versus running your own shop. And what are some things that you like and maybe, you know, just some things, maybe if you had gone back in time that you would reconsider. Bob Knakal (00:06:31) - Yeah. Well Sam, I think you, you always look at the difference between having your own shop and working somewhere else. Working at a small company, a medium sized company, a big company. And I tell people there are pros and cons to everything. You know, clearly, if you're running your own shop, you call the shots. There's a lot of freedom associated with that. But then if you're at a big company, you're you're one of 102,000 people and there's somebody who's an expert at everything within that platform. So you have tremendous resources available to you. And at the end of the day, it's all about helping our clients achieve the best results that they can achieve. And when you have all those resources behind you, it just puts you in a different position to to create more value for those folks. Sam Wilson (00:07:23) - I would imagine that. That's great. Thank you for clarifying that. That's super helpful because I know there's people out here are listening to this wondering, do I do I start my own shop? Do I go work for somebody else such as JLL or any of the other big name shops? But I guess at this point in your career, you can pick who you want to work with. I would imagine, as a client as well, because I'm sure that you are well sought out as a broker there in New York City. So what's what's an ideal client or an ideal product type maybe that you're working on right now that is exciting for you. Bob Knakal (00:07:57) - Yeah. Well, I've been a generalist selling all kinds of properties my entire career. I think now dovetailing more into doing land sales and multifamily, a lot of the office and retail stuff that were that have come my way. We have actually gone on and and handed that off to other folks in the office that have that as a specialty. But, you know, we've seen that that by specializing in one particular type of property, it allows you to leverage your time a little more. Bob Knakal (00:08:31) - And that's always a positive thing, because as a broker, you have two main assets. You have your knowledge and your time. You're always trying to to increase your knowledge base, and you have to use your time as efficiently and effectively as you possibly can, because they don't make any more of it. Sam Wilson (00:08:47) - That they don't, that they don't. Well, let's talk about that land and multifamily. What what does that look like in New York City right now? Yeah. Bob Knakal (00:08:56) - Well, as you can imagine, there's not a lot of rolling pastures available in New York City. So most of our land deals consist of of acquiring small buildings, demolishing them to create a pad on which to build a new building. And so land really consists of, of taking older buildings that are not in good condition, knocking them down and creating a development site on which a new building can be built. Sam Wilson (00:09:31) - Is that is that slowing down with the rise in interest rates? Are there any headwinds that are being faced in that particular strategy? Bob Knakal (00:09:40) - Yeah. Bob Knakal (00:09:40) - Well, you know, everything has slowed down. If you look at where the market is in terms of number of buildings sold. The market is down about 34% from where it was last year, and down almost 70% from where it was at the peak of the market. So clearly things have slowed down. But interestingly, in this downturn, every product type meaning multifamily, office, land, retail, hotel, every product type is, is performing differently based upon dynamics that are going on with respect to that particular sector. So it's a very, very different downturn relative to the past four big ones that we've had. But you just have to look for opportunity. Keep doing the fundamental things. I always tell people brokerage is a very simple business. It's just very difficult. And you have to do those very simple, mundane things over and over again, day after day, week after week, month after month. And and then you eventually get to your, your objective. Sam Wilson (00:10:48) - When you say that this downturn is different. Sam Wilson (00:10:51) - In what ways? Bob Knakal (00:10:52) - Oh well, it's different. Number one lender behavior in the past, corrections will go back to the savings and loan crisis. In the early 90s, lenders went through a 2 or 3 year foreclosure process, took title to the property, and and then hired brokers to sell it in the in the early 2000 and again during the GFC. Lenders didn't want to go through that process, so they would just sell the debt. Hired brokers does that. This time around, they've been a little more covert about the way they're dealing with their issues. Mainly, I think, you know, Silicon Valley Bank and signature Bank going down created a lot of concern in the marketplace about what their books look like for existing banks. So, you know, they'd be playing everything very close to the vest today. But if banks or any type of lender has been active making loans in the past five years, they have problems on their balance sheet. There's no way you cannot have problems on your balance sheet. Bob Knakal (00:11:58) - If you were lending in the last five years and they just, you know, are trying to do it in as covert a way as possible, so far, that may change as we get further into this, but so far lenders have been behaving differently than they have in the past. And then the fact that in the past, corrections we've had, every product type was heading downward just to varying degrees. This time, each segment, as I said, is operating and performing kind of autonomously. You look at the retail sector, for instance, I believe the retail sector is on the upswing in New York today because rents have stopped going down. Rents have been on the the downward path for over six years now, but they've stopped going down, leasing activities picking up, and an investor demand is coming back for retail. Now clearly cap rates are up across the board because lending rates are up. But each of the different product sectors is performing differently. That's the other big difference between this correction and past corrections. Sam Wilson (00:13:07) - Yeah. Sam Wilson (00:13:07) - And that's that's an interesting one I think to to discern, you know, where is opportunity? I mean that's what a lot of people I think are thinking about. Okay. Well, and we're seeing people pivot out of one thing into the next. You know, maybe they were all into multifamily and maybe they're going into retail, as you're suggesting, or anything else. But I think that's that's one of the questions I have for you is like. What do you see as the best opportunity right now? Bob Knakal (00:13:31) - Yeah, I think it really depends. You know, I think that if you look at certain asset classes like the the class back office building market is really facing a lot of challenges today. But the values of those buildings are the same at the same price per square foot that they were 20 or 25 years ago. If you believe the market is going to come back, if you believe in New York, that would seem to be a good investment. I think the land market also significantly below where it could be the peak of every cycle, is greatly exceeded the prior peak. Bob Knakal (00:14:07) - We hit a peak in in the beginning of 2022. That was less than 50% of the peak of the cycle before that. So I think there's pent up value in the land market. But I think you have to really be wise about what you're buying, how you're buying it, and really know the market. As is always the case with real estate, you have to know the market. But I do believe there's a lot of opportunity out there tonight. Sam Wilson (00:14:31) - There really is. What are people doing with office space? I mean, I've talked to a few other guests here on the show. It's been maybe, oh, probably 3 or 4 months since we've talked about New York City office space. But what are people doing with that right now? I mean, what's the what's the what's the play there, if any? Bob Knakal (00:14:47) - Well, number one thing, and I think it's important to also differentiate between new construction, Class-A office and everything else, new construction Class-A is doing pretty well. The buildings are just incredible in terms of what they offer a tenant, but it's really the secondary and tertiary space that is facing the biggest challenges. Bob Knakal (00:15:08) - Some of it is being converted to residential use. I think the city needs more of that to occur. We could very easily have over 100,000,000ft of empty office space in New York, and we desperately need housing, so conversion would be a good thing. But we're also seeing values get to the point where the value of the building and the cost to demolish the building together are less than the land value. So a lot of these buildings, I think, will be demolished to make way for new construction. So again, need to know each sector of the market, each neighborhood, figure out what drives each. And I think there is a lot of opportunity. Sam Wilson (00:15:51) - That's really, really great. Thank you for taking the time to shed some light on that. Let's talk a little bit about the private capital group that you run. What what what's the story there? I know private is probably the key word, but what's the story there. And I guess what, you know, what are people looking for today from an investment perspective. Bob Knakal (00:16:09) - Well, the private capital group in investment sales, you have institutional work which is done with the largest corporations in the city, in the in the country, and then private capital. That generally describes high net worth individuals and families who are active in the market. That's where I spend the overwhelming majority of my time. And, you know, what people are looking for is a a reasonable return in a market that, you know, has dynamics and metrics that are moving in the right direction. So we've seen our multifamily market has probably seen the biggest change. The apartment building market here is very closely correlated to public policy. We have rent regulation here, rent stabilization and rent control. And those policies have shifted so far against owner's interests that a lot of the old line New York investors that for decades only bought here are now buying in Florida and Texas and Tennessee. And you know, they won't touch anything in New York anymore. And consequently, that has driven cap rates down around the country. And folks are selling buildings in those areas and coming here to buy in New York, because for the first time ever, cap rates are actually higher in New York than they are around the rest of the country in the apartment building sector. Bob Knakal (00:17:35) - So really interesting to see how the market ebbs and flows and what folks are looking for. But, you know, people are always looking for something that will provide a good return with relatively low risk. And there are still some folks that are willing to take big risks with opportunistic type of investments. But for the most part, folks are looking for something that can provide a stable return. Sam Wilson (00:18:03) - Absolutely, absolutely. That's that's really interesting, talking about things that, you know, just watching kind of the psych, not the cycle, but the the path of the money. Like you're saying, the money leaves, it goes to the south. You know, it's heading to Texas, Florida, places where they can get a better return. And as it leaves,...
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Using Technology and Data Analysis to Help Scale Investments
12/06/2023
Using Technology and Data Analysis to Help Scale Investments
Today’s guest is Christian Gore. Christian Gore is the Founder and Managing Partner of G1 Capital Partners, a private capital firm specializing in multifamily and industrial real estate investments. Show summary: In this episode, Christian discusses the company's focus on multifamily and industrial real estate investments. He talks about the importance of technology, data analysis, and a strong team in decision-making. Gore also shares insights on entering the hospitality sector, the impact of capital markets, and the state of the multifamily real estate market. He highlights the role of preferred equity in the market and discusses potential distress in older properties. The episode ends with Gore's predictions for the market in 2023. -------------------------------------------------------------- Intro (00:00:00) Focus on multifamily and industrial real estate (00:01:54) Challenges and opportunities in the current capital market (00:08:55) Performance of multifamily (00:12:05) Preferred equity (00:13:03) Multifamily distress (00:15:23) -------------------------------------------------------------- Connect with Christian: Web: Linkedin: Instagram: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Christian Gore (00:00:00) - As long as there was a longer time horizon. In terms of your investment period, it really shouldn't be any issues. There's, you know, there's dips and. You know, peaks to the market. But ultimately, if you have a longer term view and a sound capital structure, you should be able to weather the storm. Intro (00:00:17) - Welcome to the how to Scale Commercial Real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:30) - Christian Gore is the founder and managing partner of G1 Capital Partners, a private capital firm specializing in multifamily and industrial real estate investments. Christian, welcome to the show. Christian Gore (00:00:42) - Appreciate it, Sam. Thanks for having. Sam Wilson (00:00:43) - Me. Absolutely. The pleasure's mine. Kristen. There are three questions I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now? And how did you get there? Christian Gore (00:00:53) - Poor thing. So I started as a young little kid coming up in West Texas, ultimately worked my way through the system, got involved with a significant real estate guy by the name of Andrew Farkas, was kind of my first gig in New York, really kind of drinking from a firehose in that environment for for about four years post post GFC, which was quite interesting and ultimately worked through a handful of buy side and sell side shops, you know, over the years, and founded One Capital Partners in 2018, and we've been operating since then. Sam Wilson (00:01:37) - Yeah. What do you guys do at G1 Capital Partners? I know you said there in your intro you guys are into multifamily and I believe it was industrial, but give me give me kind of the breakdown of what you guys have done over the last five years and where you're going for things. Christian Gore (00:01:54) - Yeah. So we I would say primarily spend our time in the multifamily and industrial space. That being said, we we are agnostic to product type. So for example, we've we've got a hotel deal in front of us right now. So really just looking for the right opportunities and the right markets and less so focused on product. Historically speaking, I will say what 80% of 90% of what we've done is in industrial and multifamily. We do have some retail holdings as well and currently don't have any hospitality, but we'll likely have hospitality by Q1 of of next year. So we kind of have the whole spectrum of the four major food groups, or at least we we screen it, but but ultimately spend most of our time in multifamily. Sam Wilson (00:02:44) - Got it. Okay. That's really an interesting thing. How do you how do you effectively grow or manage your team and your investor base when kind of bringing a new asset class into the mix? Christian Gore (00:03:00) - Sure thing. I would say first and foremost, we're we're extremely technology focused. So that takes a lot of pressure. And quite honestly, you know what I would call biases away. So it not only helps our processes but it also helps our team internally kind of select the investments and really get behind them. Um, but but ultimately I mean it's math. You know, we we're integrating a lot of data that effectively is taking an AI and machine learning. And we think that's that's a little edge that we have there. But but at the end of the day, it's math. You know, in this business it's relationship driven and really just utilizing, you know, what we have as a team. The team is probably the biggest component, I think, in in our business to success. I'm a I'm an ex you know, college athlete. Christian Gore (00:03:59) - And I look at it no differently. And kind of our industry as, as it is in sports, I really do think the best team ultimately ultimately wins and gets gets the best opportunities across the finish line. Sam Wilson (00:04:10) - Yeah, undoubtedly. When you say team and especially as it pertains to let's use multi excuse me hospitality as an example, are you guys scaling internally or are you scaling with external partners in hospitality. How do you engage a new asset class. And maybe without having to go through the attendant learning curve that taking on new asset class generally requires? Christian Gore (00:04:37) - Sure, sure. That's a great question. Um, you know, so historically we have about 2 billion in experience in the hospitality space. That was primarily post GFC. But our kind of thought process and business model internally is right now we're a team of five. You know, over the next year or two will probably get up to a team of maybe ten, 15 Max. And the way we're able to scale that is one like like I mentioned through technology, but two, leveraging our partners so we we don't manage any of the assets, you know, boots on the ground. Christian Gore (00:05:15) - We we bring in an operator in this case for a hotel. You know, it's a very niche product type. So we work with the top three large hotel operators and kind of leverage their expertise in that space. So it's not to say it's the marriotts of the world, it's the operators or the property management team on site that's kind of below that, below that umbrella. That makes sense. Sam Wilson (00:05:39) - It does. It does. Okay. No, that's that's great I love that and I don't want to stay here I guess too long. But I am curious. I mean, you guys are making hospitality. One of the potential things that you guys are getting into either end of this year or first of next year. Why now? I guess we'll we'll start there. And then I have some follow on question to that. Why hospitality? Why now? Sure. Christian Gore (00:06:03) - So I wouldn't I wouldn't market too much in the hospitality space. Kind of the three buckets we're playing in right now is multi industrial. And then what I would call special situations and in this case this hotel opportunity that we have in front of us is a special situation, has a great story behind it. Christian Gore (00:06:21) - You know it's a post post-Covid REIT effectively blow up. So very low bases needs a lot of TLC, a lot of CapEx really a lot of work put into it. But we like the story behind it and it's extremely core asset. Right in our backyard. So headquartered in Dallas, it sits a rockstar away from our office, so we know the asset very well. Sam Wilson (00:06:45) - Got it. Okay, that makes sense. So you guys aren't necessarily out saying, all right, we're going to we're going to put a full fledged team together to go out and acquire hospitality in mass. It is hey, here's a great opportunity right in front of us. So why don't we see if we can make this work. Christian Gore (00:07:00) - Exactly, exactly. And then we obviously allocate the right investor profile for that kind of product. If that makes that makes sense. Sam Wilson (00:07:07) - It's it does, it does. And that's, that's a that's an interesting thing to be able to go, okay, let's take advantage of this situation without necessarily wanting to develop all of the resources to go out and go long in that space. Sam Wilson (00:07:24) - Is that a fair kind of analysis of what it is that you guys are dealing with right there? Christian Gore (00:07:31) - 100%? Yeah, we're not going to be growing a massive hospitality platform anytime soon. It's it's more so, hey, we know this deal really well. We can put all the pieces together. We have the right partners on the equity side to execute. And ultimately, you know, our whole team is really just a bunch of deal junkies. So it's it's really fun to put, you know, hotels. There's a lot more moving pieces. So it's a lot of fun to work on. Sam Wilson (00:07:59) - I bet it is. I bet it is. Yeah. And that's I mean, I'm with you on the opportunity side where it's like, okay, there's a great opportunity. How do we say no? I mean, those are hard to pass up when they're right there in front of you, and especially if you don't have to build all of the necessary parts that go into, you know, taking that one particular niche business to scale, it's like, okay, we're going to buy this and you can plug an operator in and it's not not the end of the world for us to acquire that. Sam Wilson (00:08:28) - So okay, definitely I won't beat you to death on the hospitality industry then. But you did mention something. You said you have the equity behind you to take down that deal. But let's talk a little bit more about capital markets as a whole. How is that affected what you guys are doing? How has that affected what you guys are doing in multifamily? In industrial, maybe you can compare the two, give us some insight what you see there and how you guys are navigating 2023. Christian Gore (00:08:55) - Sure. So I will say it's been 2023 has been tough. I mean, you know, the fastest fed rate hikes we've ever seen in terms of speed. So it's really a shock to the entire system. Right. So we've been you know working to try and get stuff done. Have not been successful this year just mainly due to rates moving that quickly and continuing to move. That being said, we do see a bright spot starting in 2024. There's obviously going to be a lot of pain. That being said, we're very focused on scaling the multi side of the business and and to put more. Christian Gore (00:09:40) - Strategically the affordable multi side of the business. So we're all in on that. That's that's you know our scaled growth product for the next two years. Industrial still is not pricing to where we think it makes a lot of sense. And candidly you know from a lending perspective which is quite honestly the biggest challenge in today's environment, the beauty about multifamily is, you know, the fact that we have two large government agencies that are still lending on that product and that's, you know, what I think is has been fruitful for the multifamily space compared to all the other four major food groups. That being said, nothing's easy in this environment. Sam Wilson (00:10:24) - So no, there's no there's no giveaways. What about distress? Let's talk distress there. In multifamily, I hear a lot of people. Even even shops that I'm a little surprised at that previously weren't in multifamily now going, hey, we're getting into multifamily because we feel like there is either currently pain that we can take advantage of and or they see a coming theoretical wave of multifamily opportunities. Sam Wilson (00:10:52) - Talk to me about that. What's your view? Sam Wilson (00:10:57) - Yeah, that's. Christian Gore (00:10:57) - That's the million dollar question, right? You've got folks raising distress funds. Um, you know, it's it's tough to say we're we're tracking it as well as we can and other folks can. Um, you know, I think there will be some opportunities probably in Q3 of next year. But what we're seeing live in the market right now is a lot of pref equity flooding the space and plugging a lot of gaps. And, you know, we we we don't currently and have not put out any pref equity in this space primarily due to where valuations were going in that we we still didn't really feel comfortable. Um, you know plugging plugging a lot of the, the gaps at that basis. But um, you know I think there will be some pain. We're seeing some, we're working on some. But I don't think it's going to be as bad as everyone thinks. If you look back to zero eight and the GFC, you know, like I mentioned, you know, we did my my first gig was working for us Lehman guys post GFC and we did a lot of workouts. Christian Gore (00:12:05) - We did about 6.5 billion. And you know, I'll be honest with you, I think I'd have to look back at the deal sheet, but maybe 1 or 2% of of all of those deals that went bad were multifamily and the rest were other product types. So, you know, I think there's there's definitely pain, but there's there's a ton of liquidity still still out there ready to take over. So a long winded way of I don't think it's going to be as bad as everyone thinks. Sam Wilson (00:12:33) - I don't think it'll be as bad, or at least I hope you know, it won't be as bad. Primarily one, because I'm not a I'm not a buyer of multifamily personally, so it doesn't on that front. It doesn't affect me one way or another. Although I'm an investor, I'm not a personal buyer presently of multifamily also because I don't want to see a lot of our friends in the industry go through that hard times. But regardless of what I want or prefer, it still happens. Let's talk about pref equity a little bit. Sam Wilson (00:13:03) - I mean, that can fill the gap for a while. But then what happens when when that. And maybe you can give our listeners that might not understand what pref equity is, what it is. And then my follow on. So so first question is what is pref equity. You define that for us. And then secondly you know what happens when that pref equity runs out. Are they just you know kicking the can down the road. Christian Gore (00:13:26) - Yeah. I mean, so the short answer is, you know, definition, I would say it's, you know, it's called pref equity, but kind of operates more like a debt product. So you know, you have your common equity and then ultimately your pref equity what's coming, which is coming in behind it that have that has preference over the common equity. And and so ultimately you know once. Let's say cash flow gets low, you know. You know, groups are plugging in pref equity and to yeah to your point kick the can down that you know down the way. Christian Gore (00:14:00) - You know ultimately it's going to be the performance of the asset on on whether or not that pref equity stays in place. So there are instances for example, that, you know, we're aware of that groups have plug pref equity. And at this point in time their pref equity is already completely wiped out. So ultimately it's come down to the senior lender or the original, you know, originator of the initial loan on the asset level. So it's it's you know, it's challenging out there. It's very deal by deal. It's market by market. It's very, very specific. So it's it's interesting time. Sam Wilson (00:14:41) - It really is I mean because I think about about some deals I'm aware of that are doing terribly. And then and then I know about some other deals that I'm both that I'm personally invested in that are I mean, just killing it. I mean, there's like, you wouldn't even know that there's any stress in the market. It's the we're still above pro forma across the board there, 99% occupied. Sam Wilson (00:15:02) - It's like I mean life is good. Life is great. Like how is this possible I don't know, but but it really is. It's on I think like you said, on a deal by deal basis. Are there any, any types or should I say classes of multifamily that you're saying, hey, this is where we're going to see the most distressed in your opinion. Christian Gore (00:15:23) - Yeah, I would say, you know, the generally your older, you know, 6070s, even 80s vintage product where the kind of the peak of the market folks were getting, getting very aggressive on pricing, very aggressive on leverage and, and ultimately solving for, you know, not so ideal capital structures. And those are the folks that I think will have the most pain. But for the most part, you know, is as long as there was a longer time horizon in terms of your investment period, it really shouldn't be any issues. There's, you know, there's dips and. You know, peaks to the market. Christian Gore (00:16:02) - But ultimately, if you have a longer term view and a sound capital structure, you should be able to weather the storm, which, you know, I think everyone's saying survives until 25, which it seems to be the timeline here. Sam Wilson (00:16:15) - Seems to be and and I except for some people, unfortunately, it's probably wishful thinking is that things will turn around and get better for them by 2025. But again, getting there is step one and two having a meaningful business when you get there. Step two. So we'll just see how that shakes out. I don't be all doom and gloom here on the show today. You guys have been that sellers for what, the past 12, 18 months or so. Christian Gore (00:16:38) - We have. Yeah we've we've been net sellers. We had some assets trickle into 22 that got a little challenging to execute. But but definitely net sellers. Sam Wilson (00:16:49) - That's awesome. I mean it seems like it seems like you you timed things fairly well you know. And then we talked about a little bit off show. Sam Wilson (00:16:57) - So you guys have been net sellers. You said this in the beginning that you really haven't found much here in 2023. That's made a lot of sense to buy. We see a lot of shops that are in asset management mode. You guys are obviously in buy mode, I guess. Talk to me a little bit about that. Like how do you ride out the storm? How do you remain patient? What are some things you guys are implementing in your core disciplines that are kind of keeping you true to what you're trying to do? Christian Gore (00:17:23) - No, that's a great question. I mean, you know, I would say we're we're just trying to keep a pulse on the market. It's, I mean, it seems to be moving on a weekly basis. Um, you know, but internally and kind of in-house, our view is that, you know, capital will start coming back to the market next year. And we are pretty bullish that rates are going to drop pretty significantly post-election of next year. So from a timeline perspective, that's that's kind of how how we're thinking about it internally. Christian Gore (00:18:00) - But but to say that it's still very difficult to be patient. Right. When you're, you know, looking to buy and so on and so forth. And quite frankly, the model we run is, is what I'd call a kind of a separate account model. So we go to equity partners, you know, on on any given deal...
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The Greatest Solution for Monetizing Unused Space: Neighbor
12/04/2023
The Greatest Solution for Monetizing Unused Space: Neighbor
Today’s guest is Joseph Woodbury. Joseph Woodbury, Founder and CEO of Neighbor.com, is redefining the $500 billion self-storage landscape by empowering individuals and businesses to monetize their unused space and generate tens of thousands of dollars a month in passive income. Show summary: In this episode Joseph Woodbury explains how Neighbors started as a manual process and evolved into a software company that builds trust in the shared economy. Woodbury highlights the various customer groups that benefit from their platform, including homeowners, small businesses, and large real estate portfolios. He also shares the story behind acquiring the domain name "neighbor" and how Neighbors stands out as the first hyper-local marketplace. -------------------------------------------------------------- Intro (00:00:00) The early days of Neighbors (00:01:14) Scaling the business through automation (00:03:08) The $300 Monthly Increase (00:09:43) Investing in Neighbor Properties (00:09:43) Small Businesses and Ancillary Income (00:10:54) Acquiring the rights to Neighbor (00:20:50) The significance of the Neighbor brand (00:22:05) How to get in touch with Neighbor (00:23:25) -------------------------------------------------------------- Connect with Joseph: Web: FB: IG: @tryneighbor TW: @neighborstorage LI: LI: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Joseph Woodbury (00:00:00) - This space is sitting there totally unused. Whether they're a small business or a homeowner, or even a large commercial office. They're not earning any money off of this space. So we can go to them and say, look, this is an ancillary revenue opportunity. You could earn meaningful cash every single month. Let's post your space. Intro (00:00:19) - Welcome to the How to Scale Commercial Real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:32) - Joseph Woodbury is the founder and CEO of neighbors. They are redefining the $500 billion self-storage landscape by empowering individuals and businesses to monetize their unused space and generate tens of thousands of dollars a month in passive income. Joseph, welcome to the show. Joseph Woodbury (00:00:49) - Hey, thanks for having me. Sam Wilson (00:00:51) - Absolutely. The pleasure is mine, Joseph. There's so many questions I have as we looked at. If you're listening, if you've not checked out, neighbor, go check it out. But as I even looked at your website, I'm like, oh man, this is going to be a fun episode and I'm really looking forward to this before. Sam Wilson (00:01:05) - But before we jump in, there are three questions I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now and how did you get there? Joseph Woodbury (00:01:14) - Yeah. So we started from having the problem ourselves. My co-founder needed a storage unit and had the same experience. I think most people have where, you know, all the facilities close by were full and they were expensive. So he found a friend that let him store in his garage. And four months later, when he picks his items up, he just thought this was such a better experience. I saved a bunch of money. I felt a lot more, you know, security, having it in a nice neighborhood than in a dirty storage facility. There's got to be empty space in every neighborhood in the country. Why doesn't someone create a directory or a marketplace where you can go find it? So we started working on it. It turns out a lot of people have the same problem, and now we're the only storage provider in the country that offers storage in all 50 states. Sam Wilson (00:01:58) - Wow. And that's really cool. I mean, so you say you're the only storage provider and yes, you are providing storage, but what you guys have built really is, is a software company more than necessarily storage, is that right? Joseph Woodbury (00:02:12) - Yeah, that's a great point. And that's something we talk about internally is actually our hosts. They're the ones running a business and renting storage. Our business is trust. That's what we sell. Sam Wilson (00:02:25) - Got it. Yeah. And it goes back to the shared economy sort of idea between Airbnb to Uber to whatever it is. I mean, all of these different. Services like what you guys have built. It's just this happens to be in the storage space. Well, tell me about it. I mean, how do you go from. All right. Cool. Hey, you know, I want to store stuff in my buddy's buddy space. And then I think that was an easy deal to. Now you own a full fledged website. I mean, you even had to buy the domain neighbor, which I want to hear. Sam Wilson (00:02:56) - How in the world you secured the rights to that one? Because I'm sure that was an inexpensive purchase. But, you know, how did you go about turning this from just a, hey, great experience into the business that it is today? Joseph Woodbury (00:03:08) - Well, you know, like a lot of businesses, we started with a super manual process. Those that wanted to use our service, we literally would call them and ask them how much they wanted to rent their space for, and we would connect them with renters who we called as well and ask what they were willing to store. And over time, as we got more customers, that became non scalable. So then we had to build in software processes. We built a, you know, a map where they could find each other and and know what the price is day one. And they could book it all without ever talking to us. We built full payment systems in place. We built all sorts of trust and identity verification systems. We, you know, took over all of the customer support between the two so they don't have to worry about dealing with anything. Joseph Woodbury (00:03:56) - We're happy to to help facilitate any conversations they need to have. We actually built a full messaging platform where they could easily talk back and forth without ever having to leave our platform. And so just over time, what I'd say is we took things that we were doing. With humans, and we automated them through software. And that's how it's scaled nationwide. Yeah. Sam Wilson (00:04:17) - No, I love that. I mean, so in the early days, you guys were manually calling potential hosts and manually calling potential people to rent that space and seeing if you could pair them up with the right spot. Joseph Woodbury (00:04:31) - Yeah, yeah. In the very early days when we were only focused on homeowners and residential, before we moved into commercial, we were processing payments through Venmo. The renter would Venmo us and we would Venmo out the host. And and that's how it worked. And and of course, now we use major payment providers. We use the same payment provider that Amazon does to process payments. Sam Wilson (00:04:55) - Sure, sure. Wow. At what point in time or what at what point in time did you know you were on to something? And maybe if you maybe if the answer to that is day one, was there ever a point in in building this business that you're like. Sam Wilson (00:05:07) - Man, this isn't going to work. Joseph Woodbury (00:05:11) - Yeah. Joseph Woodbury (00:05:12) - Definitely. Marketplaces in general are very difficult businesses to get off the ground because unlike every other business where you have one customer in a marketplace, you have two customers. And if you can imagine a city, I think you said you're in Memphis. If you've got a host on one side of Memphis and a renter on the other side of Memphis, those don't work for each other. And so a host has no reason to join the platform if there's no renters, and a renter has no reason to join the platform if there's no host. So how do you ever even get that started? And in launching new markets, there was always this thought of, how are we ever going to get these, these people to trust us and join our platform with no promise of any success until we can get critical mass, and then the platform really starts moving. Sam Wilson (00:06:07) - Right? How did you do that? Joseph Woodbury (00:06:10) - I mean, we, you know, we go after the hosts first in these markets because the hosts, this space is sitting there totally unused, whether they're a small business or a homeowner or even a large commercial office. Joseph Woodbury (00:06:25) - They're not earning any money off of this space. So we can go to them and say, look, this is an ancillary revenue opportunity. You could earn meaningful cash every single month. Let's post your space. It may be a while before you get your first reservation. And then we start driving the renters to their space, and then the flywheel starts and later hosts that we acquire in the market. We don't have to tell them that, because we know they're going to get booked very quickly, because consumers have found out in that market that we're the best, cheapest, safest, closest storage option in their city. Sam Wilson (00:06:58) - When you enter a new market, what is that ramp up period or what? Have you seen it historically? Maybe you're over that hump where you don't have to worry about it as much anymore. Joseph Woodbury (00:07:07) - Yeah, we we are pretty much in the early days, we would launch markets individually where we had a market launcher and a GM in the market, very similar to how Uber launched City to City. Joseph Woodbury (00:07:21) - And we did a lot of kind of guerrilla marketing in the city, you know, just getting the word out flyers, door mailers, events, things like that. And we were able to continually accelerate that process. We got to a point, kind of, as you hinted at, where we became well known enough that we stopped launching individual markets and we just pursue a nationwide strategy right now. So we do we do large marketing campaigns across the country, and we actually have a lot of word of mouth on the platform as well. It turns out if you're a small business and you're in $50,000 a year on neighbor, you're probably going to tell your friends about. Sam Wilson (00:08:02) - It, probably going to tell your friends. Absolutely. You're going to tell your friends about it. How long ago was it that you guys launched NBA.com. Joseph Woodbury (00:08:10) - We launched in 2017. So that's what 5 or 6 years ago. Sam Wilson (00:08:14) - 5 or 6 years ago. And now you're in all 50 states, which that's I think that's that's fantastic. And I mean let's talk a little bit about just the opportunity, I think I think we all get the idea of maybe an unused driveway or something like that where it's like, okay, so somebody wants to maybe it's not covered, but they can park a boat, they can park an RV, something along those lines. Sam Wilson (00:08:34) - But your business has gone way beyond that, I would imagine. So break down some of the other kind of ancillary revenue streams that you guys have figured out in this business. And yeah, just just give us some color on that if you can. Joseph Woodbury (00:08:47) - Yeah, yeah. I think we have kind of four different types of customers. There's the residential hosts that you talked about renting out a garage, an RV pad, a bedroom, and we'll put someone's boat or someone's boxes from your neighborhood mean it's very close proximity in your space. And you may earn 200, $500 a month. You're earning several thousand dollars a year. Then the second would be real estate investors. These are individuals that buy rental properties. They're kind of investing locally. Maybe they have ten, 15 rental properties, and they're kind of capped on how much they can make mean they can increase the rents at the end of the contract each year, but that's about their ability to increase prices. If you think about a property, you know, in Salt Lake, if you own a townhome, you may make the mortgage is $2,000 a month and you make 2300 a month and rent off of that. Joseph Woodbury (00:09:43) - Your delta is $300 a month. So if you can earn an additional $300 a month on each property through neighbor, you've now doubled your net returns on every single property. So it's really meaningful for those guys. In addition, some of them start even investing just in neighbor properties. I'll use another Salt Lake example. $500,000 would buy you roughly a townhome here. Um, and you maybe make 2530 K in rents off of that a year if you did it for short term rentals instead, like Airbnb, you can maybe earn 40 K a year off that property. If you instead took that $500,000 and bought an empty lot, that would get you about an acre and a half to two acre lot here. That would earn you $100,000 a year on neighbor. So we're talking meaningfully more returns. So we get some investors. They just start acquiring neighbor properties. That's the second group. The third group is going to be small businesses, gyms, nail salons, uh, where they're they've got space inside in the back they're not using. Joseph Woodbury (00:10:54) - They would love to rent that out to another business to small store their business inventory. It's closer anyway. They've got parking spaces that the city required them to build, but no one ever parks in them, and half of them are in the back of the store. They love to rent those out for long term vehicle or even fleet storage and and they can earn, like I said, you know, we've got a gym in LA that earns $50,000 a year just renting out space around their gym. That's game changing for that small business owner. And then the final category would be large real estate portfolios, large multifamily groups, large retail groups, large office groups. We work with most of the large most of the billion dollar retail REITs in the country. We work with the largest owner of multifamily in the country. And similarly, we'll go to them and we'll say, hey, you've got properties in 50 cities. Give us the 10% of your spaces that never rent out. You've they've all got those two retail pads in the back that no one wants, or that office space on the ground floor that no one wants, or those storage lockers you built in your multifamily unit for the residents, but they never rent them. Joseph Woodbury (00:12:08) - And so we can rent them out to the community. And then all three office, they've got empty parking garages because no one's coming to the office multifamily. They've got space around their building that the city required them to build. And for a large portfolio that can result in millions of dollars in ancillary income, which is a game changer to your IRR. Sam Wilson (00:12:30) - What are people doing? Let's go back to your $100,000 on two acres in Salt Lake City example. What are they doing with that to drive that amount of revenue on a two acre parcel that's on a vacant two acre parcel? What? What are they doing? Joseph Woodbury (00:12:47) - Almost nothing. So they've got to sometimes make improvements like if it's a if it's just a dirt lot, then we'll recommend putting down gravel or even asphalt, which is fairly cheap. We're talking a dollar to a square foot. We also recommend putting up a fence around the perimeter that's not required. We have we have literally empty dirt lots that are fully occupied because there's such a demand for vehicle storage. Joseph Woodbury (00:13:12) - There's we get millions of renters a year on our platform that we are unable to service because there's not enough space for them in their location. Sam Wilson (00:13:22) - I mean, are they storing what types of vehicles are getting stored? I mean, is this all tractor trailer storage? Is this I mean, what's that? Joseph Woodbury (00:13:30) - It completely depends on the market and it also depends on the host. So some hosts are very particular about what types of vehicles they want to store. And so they can select on our platform. They can say I only want RVs and boats or I'm in a downtown area, I want only cars. Or, you know, I like dealing with the fleet guys because they're bigger. I only want the semi trucks or the box trucks. Most hosts though, they just want to earn as much money as possible. It's an empty lot. So what we fill it up with is first come, first serve. We're just renting out their spaces for the highest price possible and getting their lot full as fast as possible. Sam Wilson (00:14:09) - That's kind of wild. Yeah. I mean, and that would go again. I'm going back to the to the, to the vacant lot idea. Like you would think that you would have to have dedicated tractor trailer parking or dedicated box truck parking or dedicated. But it sounds like you're saying you fill it up and then figure out what you're going to put in there and how you're going to. Joseph Woodbury (00:14:27) - We actually have this really cool tool that we built for these people. We call it blueprint. You can go on our website and you can put in your address and some specs about it, and we will actually pull up a satellite view of the lot. And we have a tool that allows you to drag out parking stalls and select the length of those parking stalls, so you can put some ten by 50 over here. For large tractor trailers, you can put some ten by 20 over here. For cars you can put some ten by 30 for for like camper trailers and boats. And our system will automatically tell you what you should price each space at. Joseph Woodbury (00:15:09) - And it'll sum it up and we'll say here's how much you can expect to earn on this total lot. And then you can push publish on that. And we will literally take what you what you designed through our blueprint tool, and we'll just publish all those spaces for you so you don't have to do anything. Sam Wilson (00:15:27) - Oh, that's really, really cool. Do you have a background in software or tech? I mean, is this is this just second nature to you or how did you guys how have you successfully scaled all of these different aspects of your business? Joseph Woodbury (00:15:43) - Yeah, I have absolutely no background. You know, my backgrounds and, you know, a little bit of an investment banking and private equity. And then ultimately I worked for a consulting firm called Bain and Company. So, you know, boring professional services. Super grateful to our, you know, the engineering team, the software engineering team that we've built out. You know, our VP of engineering. He was long time, worked for Microsoft for a decade plus, ran the largest genealogy organization in the country website, worked for the largest edtech company in the country. Joseph Woodbury (00:16:21) - So he understands software like the back of his hand. And that's how we've been able to build the really cool software that we have. Sam Wilson (00:16:29) - Man, that's awesome. That's very, very cool. I love what you're doing. What are some applications or some problems you guys are solving that I haven't thought about yet? Joseph Woodbury (00:16:40) - I mean, just generally I kind of touched on this, but a lot of, a lot of real estate industries are seeing decline right now. Office is is really in a world of hurt, especially with term loans starting to come due. You're you're literally getting a lot of these office buildings just handed over to the...
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The Importance of Goal Setting as a Passive Investor
11/30/2023
The Importance of Goal Setting as a Passive Investor
Today’s guest is Spencer Hilligoss. Spencer Hilligoss is a passive investor who deployed 7-figures of his own capital into passive investments in the past 6 years. In 2019, Spencer retired from a 13-year tech career to fully focus on Madison Investing, his passive investing club. Show summary: In this podcast episode, Spencer shares his personal journey from working in technology companies to retiring in 2019 to focus on his passive investing club. He emphasizes the need for clarity and vigilance in investing, advising investors to thoroughly vet teams and operators before investing. Spencer also provides advice on how to communicate with and motivate investors during challenging times, using two investor profiles as examples. -------------------------------------------------------------- Intro (00:00:00) Spencer's background and retirement (00:01:26) Clarity and vigilance in passive investing (00:04:25) Twists and Turns in Investing Journey (00:14:05) Positioning for the Next 12 to 24 Months (00:16:10) Investing at the Wrong Time (00:19:19) Motivating Investors to Invest (00:20:06) Understanding Investor's Circumstances (00:20:41) Educating Towards Future State (00:21:16) -------------------------------------------------------------- Connect with Spencer: Linkedin: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Spencer Hilligoss (00:00:00) - The goal setting process, like if there were to be. What is the most active part of being a passive investor? Because there are active parts. Right? And this is the misnomer. I think it is sitting down and just gut checking with the financials. What is your true north? Or I'll take out the platitude like what is your financial target you're aiming for? Just like if you're inside of a business, if you're going to use to work in the corporate world, anyone who's in a W2 world, if you manage a profit and loss, if you manage a financial plan, you got to go and sit there and say, hey, last year we thought the target like a win would be that dollar amount. Well, this year is looking a little different. So let's revise like what are where is our bearing here. Sam Wilson (00:00:44) - Welcome to the how to scale commercial real estate show. Whether you are an active or passive investor. We'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:58) - Spencer. Helios is a passive investor who has deployed seven figures of his own capital into passive investments in the past six years. In 2019, he retired from a 13 year tech career to fully focus on Madison investing his passive investing club. If you don't know, Spencer also came back on the show. Gosh, what was that? Spencer episode 274 I think. So sometime early 2021. We've done about 600 episodes since the last time you were on the show, so it's a pleasure to have you back on the show today. Spencer Hilligoss (00:01:26) - Yeah. Wow, that's a fast two years. Sam. Thank you for having me back on. Absolutely. Sam Wilson (00:01:32) - The pleasure's mine, and it is a fast two years. Spencer, before we get into the heart of the show, though, there are three questions I ask every guest who comes on the show. You have answered these previously, but we're going to have you answer them again in 90s or less. Can you tell me where did you start? Where are you now and how did you get there? Spencer Hilligoss (00:01:48) - Oh yeah man, there's still fun questions. Spencer Hilligoss (00:01:50) - Now I'm probably going to get a different lens on it though, as always, as life evolves. So where I am now actually, let's go back. I started growing up as a punk rock and metal kid playing in bands. My dad was a real estate broker for 30 years. I was working for him as a kid, which is why I ran screaming into technology companies. I live in Silicon Valley in the Bay area, California. I have, you know, grown up for 13 years professionally building and leading large operations and sales groups for fintech companies, financial tech companies. As you mentioned, Sam, I retired in 2019, five months before Covid, and that was not part of the plan, but I would say grateful now more than ever to be leading Madison Investing, which is our passive investing club, as you mentioned up front, where we help other folks walk the same path that we have. You know, I know that right before we hit record, I was sharing a quick story about highlight of the year so far. Spencer Hilligoss (00:02:45) - We just got back from spending six weeks in Portugal as a whole family, that type of thing, that type of lifestyle decoupling from a geography, taking our kids who are six and nine and Jennifer and I are both living and working abroad with that flexibility. That's what's enabled by passive investing done right. And of course, it's not always like turnkey. Across the the journey. There's a lot of twists and turns. You got to pull out your figurative machete and hack through the the forest, as it were, and find clarity along the way. But hopefully I didn't exceed my 90s on that one. Sam Wilson (00:03:17) - No, I think shoot, if you weren't, if you were, if you were over 90s, it was worth listening to. So I appreciate you giving us that. That recap yet again and again. If you didn't hear Spencer's first show, go back and check that one out, because I know we're going to cover some very different things. Maybe then what we covered there on that show. You know, I think one of the things and I'm not going to hopefully offend you here by saying this, but I feel like everyone has these grandiose ideas of what passive investing is. Sam Wilson (00:03:44) - So they're like, oh, man, you know, we're going to be a passive investor and we're going to just cash checks all day long, and it's going to be amazing. But I think the experience is wildly different. I certainly know it has been for me, as I look at all the different passive investments I have, I go, okay, you know, there's some there doing well, some that are doing but not doing well, and then there's some that are performing very poorly. And I look at that and I go, gosh, that's that's it's kind of painful in some respects to look across all of them go, not everything's doing great. What would you say a current investors outlook and kind of mood should be about passive investing right now, because it doesn't always necessarily translate into six weeks in Portugal. Spencer Hilligoss (00:04:25) - Oh my gosh, what a killer question to open with and for people listening. Sam didn't prep me for that question ahead of time. That's just a hell of a good question. Clarity and vigilance. Spencer Hilligoss (00:04:36) - You know, I think clarity, first and foremost, it comes down to goals. And everyone out there hopefully is starting from that point. As a quick refresher, Sam, clarity to me means sitting down 2016. I'm working full time, deep into my career and climbing that ladder, making great W-2 income. Jennifer Morimoto, who is my my spouse, my wife, and my co-founder and, you know, co-pilot in life, you know, mother of our kids across the board. We work together in life and work. And we sat down and took a whole weekend to literally sit down and say while working full time, both of us in separate careers, what is the dollar amount per month that we could that we need to hit? Full passive. To cover our needs. And that was a scary exercise, man. That was a scary exercise. And it's something that I think I don't go into lightly, because that weekend had tears that we can had reconciliation and had laughter, and we had to get a sitter to get the kids out of the house just to do it right. Spencer Hilligoss (00:05:37) - But that's where it started. We set that goal with a 15 year time horizon to remove all excuses. And so by clarity, what I mean is it sounds so clean and simple to say, I'm going to hit 8000 bucks in passive income, which I believe at that time was our monthly income, passive income target. And, you know, I'll qualify it by saying everyone has different expectations in life. Like, we don't want to we don't I don't need a jet. I'm a pretty simple dude. Like I got some guitars. I like plucking a guitar, but I don't need a boat and no judgments on those who want more. But that was our goal back then, and we hit that goal in the last about year and a half, two years ago, we hit that goal in full passive. And we're we're so proud of hitting that. That was hard. But we said 15 years on, the original goal came back shortly after that exercise in 2016 and said, well, that's just too long. Spencer Hilligoss (00:06:29) - You know, you and I were chatting about our kids right before we hit record today, Sam. And I'll say that like, we wanted to catch some of the magic years, as it were, spending time with our boys while they were still pretty young, and being able to have that type of lifestyle where we could spend more time. And that is what got that clarity for me. So thanks for listening to that context. I just think it's so key for people to sit there instead of saying, man, look at that great looking Facebook paid ad that presents this two x equity multiple, right on a killer looking deal, a beautiful marketing deck. And you're like, that's my ticket to financial freedom. Be like, slow down, get clear. Get clear on why you're looking at this thing. And then don't worry about asset class yet. Come back to it later. Those are the lessons I wish I could impart on myself earlier on. One other thing I'll say is like 2023 for sure has presented some challenges, right? And you hit it earlier. Spencer Hilligoss (00:07:19) - I'd say that things like understanding the basics of what is the purpose of this one investment, what's the goal for the money? Is it a growth play? If a person is working, like talk to one of our investors in our club who's actively investing with us, has for years, and he says, well, in 5 to 7 years I want to get X dollar amount. By fully passive, you know, 5 or 7 years out. And that's a very thoughtful, responsible goal for that investor. That's a cash flow investor who is making killer W-2 income at a day job, doesn't need it now, wants to have it later so they can still potentially afford to go and invest for growth. They don't need the cash flow now, but if that same investor puts a bunch of money, puts 100 K into a deal, and they have a pot distribution right now. And they're going to get great growth on the back end of that thing. But they don't have a distribution coming in now for a monthly income. Spencer Hilligoss (00:08:13) - That's a mismatch. So I'll take a pause there. But just wanted to kind of cover at least the vigilance on the clarity. Sam Wilson (00:08:18) - No I think that's great. I think that's really, really great. You touched on the term goal for the money, which I think is is a it's a powerful. It's a powerful idea because even though we have financial planners and we have people that lay out again all the, hey, you know, this is what you're going to have if you invest. And of course, we've all been through that drill with with our stockbrokers and everybody else where they show, you know, projected where it's going and what it's going to do. I think a lot of times we missed that same exercise. At least I have personally in my own and passive investments around the country in commercial real estate because it's like, oh, that's cool. Like you said, that's a cool deal, I like that. Why not? Let's throw 50 grand or 100 grand at it and see where it goes. Sam Wilson (00:08:59) - Like, this is going to be fun. But then you look at it and you're like, wait, did that actually line up with what I wanted to do in 5 or 7 years? Because that requires discipline and time. It requires those weekends that you're talking about going, okay, you know, getting a spreadsheet of everything, or maybe it's even more complex than that. But if everything where it's going, what you're expected, payouts are getting them. I mean, that's hard work. I've got a sheet like that. It's hard work. Comparing zero eight. We got a distribution this month. Did it line up with what was pro forma? Which of these are doing what they say they're going to do. And that's that's just it becomes its own kind of animal that. I don't know. Speak to us on that front if you can. Spencer Hilligoss (00:09:37) - Oh, man, I love this topic. I would say you're nailing it. And by the way, I'm so guilty of the same thing. You know, you see a great looking deal. Spencer Hilligoss (00:09:45) - Or maybe you just love the team, like, like, oh, I love that operator. They have such a tight operation. Their reporting is killer. Their financial reporting is transparent. They have experience. They've got repeatable process. They've got the exits, full cycle deals, all the works. Right. And I'm like, oh cool, let's drop money. And then I'm like, well, that wasn't so much of a cash flow play. I mean, it reminds me of the very first property we bought is a duplex sitting in 45 minutes from our house, where I'm sitting right now in Vallejo, California, and that thing costs 430 grand. And that's a California property for you. We bought it years ago, cost us six figures. It's down payment and a cash flow is $200 a month. That is not a cash flow win by any measure. That's a quick way to use the player capital, right? But I bring that up as one example of like where we started to where we are now. Spencer Hilligoss (00:10:35) - And I would say now actually we're going through a refresh of this very exercise. And it's related, I think, to what you brought up a moment ago, Sam, you know, the goal setting process, like if there were to be what is the most active part of being a passive investor? Because there are active parts, right? And this is the misnomer. I think it is sitting down and just gut checking with the financials. What is your true north? Or I'll take out the platitude like what is your financial target you're aiming for? Just like if you're inside of a business, if you're what I used to work in the corporate world, anyone who's in a W2 world, if you manage a profit and loss, if you manage a financial plan, you got to go and sit there and say, hey, last year we thought the target like a win would be that dollar amount. Well, this year is looking a little different. So let's revise like what are where is our bearing here. Spencer Hilligoss (00:11:28) - And so we're going through that now to say well you got to track it in a spreadsheet. You've got to sit down and say what's the monthly income expected from this. Are we up? Are we down. How much do we need? Are we off track? Do we need to reserve some capital because our family is going to face some some headwinds or maybe tailwinds. Maybe there's good news coming in. You know, just got some unexpected great news on, like, an exit from a deal that is like a mobile home park refinance that's coming in. And I was like, wow, that's the first, I think, capital event that's occurred in 2023 personally. So like that was that was quite unexpected, you know. So I'm like, woo, that's great to see. And we'll see a lot more of that hopefully between 20 and 24 but most likely 2025. So it's tracking and knowing where you're at on that figurative map and sitting down and saying, let's put some financial assumptions behind it, like, what are we going to get out of this deal? Exits, cash flow. Spencer Hilligoss (00:12:18) - What does take work? It takes some work, you know. Sam Wilson (00:12:22) - It does take work. And I think it takes work. And it also, like you said, figuring out, you know, what your true north is in this and then and then picking the right opportunities that kind of make up that matrix of deals that you should or should not be investing in. So I think that's just knowing just knowing what it is you're looking for. And again, not being guilty of following my footsteps and just going, oh that's cool. Like I love the sponsor. I love the deal. I mean, why shouldn't we do it? Like, because maybe it doesn't fit the plan. I was having a call with a with a. Friend slash business guy here in Memphis yesterday. And he goes, he goes, Sam. He goes. My answer should be to, you know, he goes, it's no. Because for these two reasons he goes, but yet I just can't help but talk to you about it because this is really fascinating. Sam Wilson (00:13:11) - So let's keep going. And I'm like, Bill, you know exactly what your answer should be. And I appreciated that. It was it was just a funny response. He's like, my answer should be no because I don't know anything about it and it doesn't fit my box, but I want to hear more like so anyway, we all. Spencer Hilligoss (00:13:27) - Do it. Sam Wilson (00:13:27) - We all do it, but we all do it. Yeah, we all do it. Not falling into that trap. So that's really cool. We've talked a little bit about defining temperament in our in our investments, being a tempered investor if you will, finding out goals for the money currently. Tell me tell me a little bit about this. Like what you said that there's two things. One, you said you've experienced some twists and turns in your investing journey. I think you said since 2019. So maybe if you can give us a couple examples of what those twists and turns are, and then tell us how you guys are positioning yourselves to really take advantage of the next 12 to 24 months. Spencer Hilligoss (00:14:05) - Yeah. Happy to. So. Twists and turns first. Abbreviated version. I can define this in three quick phases. This is not how it felt. Real time. Of course. Life has crazy chapters. You don't know where you're at on the map sometimes until you come out the other side of it, right? So phase one still working full time. This is back in about 2016. We bought that rental that pricey for 30 K rental. I just told you about California and we're like, wow, we're going to run out of money real quick this way. Not in line with our cash flow goals. We then got more comfortable to really took our time and looked at more rentals. Still didn't hadn't quite moved on beyond that rental phase. And rentals are fine. They're a great wealth builder, but. They are semi passive at best. Right and I will happy to debate anyone on that topic. Anyone who's owned rentals can attest to that, property manager or not. They're semi passive. So we got up to five long distance rentals and they were out in Kansas City, Kansas City, Missouri and 60 K average purchase price 250 bucks a month. Spencer Hilligoss (00:15:08) - Average cash flow. That's a heck of a lot better economics than the first one. Those were maybe, at best, C-minus neighborhood. Um, you don't really learn what that means till you do it. Sam Wilson (00:15:21) - Right? Spencer Hilligoss (00:15:22) - And, you know, you get you get it. So we learned that way in terms of overhead, you know. That was more work than we expected it to be. Even with property managers, the economics got a little bit kicked every year because the tenants would beat up the place a little bit, and then we had turnover costs, etcetera. So we sold those properties, and then eventually we started investing as passive investors purely as LPs and some multifamily deals. And we're talking in Alabama and in Texas and a few other great...
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Unlocking the Hidden Value in Underutilized Properties
11/29/2023
Unlocking the Hidden Value in Underutilized Properties
Today’s guest is Alan Siebenaler. Alan has flipped over 250 units, homes, apartment buildings, and condos. He has made SINGLE transaction profits of over $1m, and has bought and sold in 9 different states. His projects have been featured on HGTV. Show summary: In this episode, Alan talks about repositioning industrial properties into flex spaces, flipping homes, and exploring opportunities in the boutique hotel model. He also shares his current projects, including a luxury flip with ocean views. The conversation also covers the potential of converting office spaces into storage units and the shift towards experience-based retail. Alan emphasizes the importance of adapting to changing market trends and meeting the evolving needs of end users in the real estate industry. -------------------------------------------------------------- Intro (00:00:34) Alan Seaborn's Real Estate Background (00:01:03) Alan Seaborn's Current Projects and Strategies (00:03:28) The Industrial Property Trend (00:10:29) Economies of Scale in Commercial Properties (00:12:39) The Shift in Retail Experience (00:16:35) Converting Office Space into Storage (00:21:27) The Future of Office Space (00:21:55) Conclusion and Contact Information (00:22:34) -------------------------------------------------------------- Connect with Alan: YouTube: Instagram: @alansiebs Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Alan Siebenaler (00:00:00) - But let's say you take an industrial property, just a large, maybe warehouse or something like that, and you divide it up. So you take 10,000ft² and you change it into five 2000 square foot spaces. You give each space their own roll up door, high ceilings, maybe a little bit of office space, but mostly what we'd call flex industrial. So high ceilings and a little bit of office, and then the amount of clients you can attract to that type of space right now is huge. Welcome to the how. Intro (00:00:34) - To scale commercial real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:46) - Alan Seaborn has flipped over 250 units, homes, apartments, buildings and condos. He had made single transaction profits of over $1 million and has bought and sold in nine different states. His projects have also been featured on HGTV. Alan, welcome to the show. Alan Siebenaler (00:01:03) - Thanks for having me. Sam Wilson (00:01:04) - Absolutely. The pleasure is mine. Alan. Sam Wilson (00:01:06) - There are three questions I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now and how did you get there? Alan Siebenaler (00:01:14) - Where did I start? So I started with the desire to have some financial control over my future. I got a hold of the book Rich Dad, Poor Dad. This was over 23 years ago and I decided to start in real estate, and I got my real estate license and started in commercial real estate because I wanted to learn from real estate investors. So those were my clients. I was helping them buy and reposition retail centers, office buildings, industrial complexes, apartment buildings, and I just learned a ton. I didn't make a lot of money starting out as a commercial real estate agent, but I the the wealth was in the knowledge that I picked up. Um, what was the second question? Sam Wilson (00:01:57) - Where are you now? Alan Siebenaler (00:01:58) - Where am I now? So now I am 23 years down that journey. I started personally as an investor with one fixer condo, and we moved into it and fix it up. Alan Siebenaler (00:02:11) - While living in it, my wife and I and somehow survived that and then moved out of it, rented it out, and then just kept moving forward. Eventually bought a four unit, fixed it up, rented it out, then started doing some 1031 exchanges up into larger properties and then into apartment buildings. And then during the Great Recession in 2009, commercial deals stopped. So I started raising capital and then flipping homes. We were buying them on the courthouse steps in Los Angeles, and we started buying these homes off of banks, repositioning them and selling them retail to like first time home buyers. And so now I have moved up in that portfolio. I've actually, ironically, sold most off. Fortunately, I sold my largest multifamily last February, which I think was kind of at the peak of the multifamily market, and I'm repositioning to re-enter the market. We actually just bought our first construction project. It is a bit of a flip. It's a multimillion dollar flip, and now we're going to be repositioning ourself back into the market, kind of taking advantage of a lot of the buyers sitting on the sidelines and having less competition. Alan Siebenaler (00:03:28) - So we are actively looking right now. Sam Wilson (00:03:32) - Is that the actively looking right now that's back into the multifamily space. Alan Siebenaler (00:03:38) - Uh, that's a good question. It depends. I now I'm only I'm in California based out of Santa Barbara, California, and I'm not going to go long distance unless I have a multifamily. First of all, that's large enough. Meaning? Well, north of 100 units, be able to have a really good management company and a full time presence on the property. And also I'd want it in an A location but with value add, right. So that I can get really good demographics of tenants by adding value to the property, repositioning and improving it, then I might go out of state. In terms of in our area, we're on the coast, so prices are really high. But I really like the model of repositioning industrial space into flex space and breaking it up into smaller spaces, which we can talk about when we talk about industrial and flex. But I'm looking for that. I also like the boutique hotel model. Alan Siebenaler (00:04:34) - I've done a lot of short term rentals, Airbnbs, furnished corporate rentals in our apartment buildings over the past 15 years, and so transitioning that into a hospitality model like boutique hotels in wine country, looking up and down the coast here in wine country. So that's kind of fun. Sam Wilson (00:04:54) - Absolutely. How do you decide? I mean, there's there's you've done so much. You've seen so many aspects of this business. How do you decide what it is that you're going to focus on for the foreseeable future? Alan Siebenaler (00:05:06) - Man. That's a good question. I'll do my best to answer it. One is based on the team of support I have around me. Real estate's a team sport, so there's no way I can pull off what we do on my own. So I have to have the right team. And that's everyone from. It could be my my investors that I have on board. It could be the contractor and renovation team because typically we're doing value add. You know, we're not just buying something that's already completely turned around. Alan Siebenaler (00:05:39) - So I have to have the right team in position in that area to know and have confidence. And we can build a team fairly quickly. But my team here, my home base, you know, we can only go so far and then we're out of range. And then I'd have to build a whole new team. So a lot of it will depend on that and of course on the opportunity. Sometimes when you find the right opportunity, you can quickly build a team around it. But that's high, higher risk. Because when you're using a new team that that's not seasoned, a lot more things can go wrong. And typically you'll have turnover and you'll have to get to the point where you actually have a good team, if that makes sense. Sam Wilson (00:06:21) - It does indeed. Yeah. No, I appreciate appreciate your insights there on that front. So just to clarify, I mean, you've done a lot of different things over the years. You've got a high end construction. You said a project flip I think you mentioned that. Sam Wilson (00:06:34) - Yeah, they're in the things you're working on right now as well. What type of a project is that? Yeah. Alan Siebenaler (00:06:40) - Right now it's really a fun project. We are working on basically a luxury flip. It's full ocean view, 180 degree view of the ocean and city. It overlooks the city of Santa Barbara Harbor views. You can see the sailboats going in and out, and we purchased it for 2.5 million, and we're putting about 400,000 into it. And we're repositioning it into like a modern beach feel. When I say modern and beach, those two terms kind of clash. But so it's not modern modern. It's like a modern beach. So wide plank floors, lots of whites and woods and and we're creating this feel to it that'll just modernize the property. And with that view, we can afford a lot of upside if the project's done right. Sam Wilson (00:07:34) - Yeah. No. Absolutely. How do you go? I mean, I'm just really curious, you know, when you when you say luxury ocean flip, I'm thinking like, okay, 2.9 million. Sam Wilson (00:07:43) - Why would it seems like that seller could just sell it open market as opposed to selling it probably to somebody that's looking to renovate it and flip it? I mean. Alan Siebenaler (00:07:51) - Yeah, it was a motivated seller. It was, you know, it's what you're looking for is a motivated seller. It was a divorce and the property had been neglected for years. And so the inside of it looked like it was dated 1980s. The outside is like 1970s stucco. So we're just modernizing everything, the stucco, we're turning it into a smooth plaster. We're adding a bunch of custom features to the property. You know, everything cosmetically is changing on the property. And then we're doing some value add where we're making because it's up high with the view, there's not as much flat yards. So we're adding a retaining wall and adding some more yard space, which is huge to have yard space with an ocean view. So there's just certain things we're doing that they would have never done because they were divorced. And you know, unfortunately fighting. Alan Siebenaler (00:08:42) - And so we were able to come in and solve those problems and reposition it for a higher end buyer to come in and say, that's my home. I want to live the rest of my days in and purchase it at a, you know, at what would be a good return for us, right? Sam Wilson (00:08:58) - No. That's awesome. I love that I don't know where you live currently or what your house looks like, but when you see projects like that with, what do you say, 180 degree ocean views, is it tough not to be like, man, I should just move in here instead? Alan Siebenaler (00:09:11) - Yeah, I think about that every day. I'm thinking, how do I keep this property? You know, maybe one of the exit strategies as well is that we'd keep it and we'd rent it out as a what you call mid term rental. So 30 days or more. Because in that area, like a lot of areas right now you can't do short term rentals but you can do mid term. So I could have someone come down from Canada or you know Memphis. Alan Siebenaler (00:09:37) - And then in the wintertime you're going to come out here and get some sunshine and look at the ocean all day. You might rent it for a month or three months, and we can get a really good rental rate from that. And so that that is another exit strategy, is just to hold it and rent it in mid term furnished. Right. Sam Wilson (00:09:53) - Oh that's cool I love it. Those got to be kind of fun projects there to work on, which is not necessarily, you know the the standard. Just basic flip. It is something where you get to use your creative skills and actually see a fun project come, come full circle. That's awesome. Let's talk a little bit about so. So that's the construction project flip you mentioned right there. You said something about industrial to flex. Yes. What? I don't even know what that means. Can you break that? Alan Siebenaler (00:10:22) - Yeah, that's that's a really exciting strategy. You've seen it I know you've seen it. It's it's happening across the country right now. Alan Siebenaler (00:10:29) - But let's say you take an industrial property just a large maybe warehouse or something like that, and you divide it up. So you take, you know, I'll just use the analogy of 10,000ft² and you change it into five, 2000 square foot spaces. You give each space their own roll up door, high ceilings, maybe a little bit of office space, but mostly what we'd call flex industrial. So high ceilings and a little bit of office, and then the amount of clients you can attract to that type of space right now is huge. You have everything from CrossFit gyms to every contractor. You could think of plumbers, wood floors, you know, tile, Hvac to, you know, I'm even seeing wine bars going in our area. You know, we live in a little bit of wine country and you have wine bars going into these industrial spaces and, you know, setting up a tasting area and, and breweries going in. And, you know, so we're seeing all this kind of just intersection between retail and industrial happening. Alan Siebenaler (00:11:41) - And just for that cool sort of feel of high ceilings and a roll up door, you can do a lot with that. And that's a very popular trend right now that I'm pretty excited about. Sam Wilson (00:11:51) - Oh yeah. No, I can I can certainly see the appeal because they're so like you said, there's so many different uses for it that it's even even for some of the stuff that we're doing. I'm like, gosh, you know, that'd be that'd be fantastic. If you know your little 2 or 4000 square foot, I mean, that that would just you can serve a lot of customers that way, each in their own, I think, unique way. And they're probably not limited in from a zoning perspective. I mean, you're probably not fighting the I mean, if it's if it's zoned industrial and they're putting a wine tasting bar in like. Who actually cares? Alan Siebenaler (00:12:25) - Yeah, yeah, usually you're okay, but you have to work with the government. But the most exciting part about it for the investor is that when you're dividing up that space, you're now going to a much higher price per square foot because of economies of scale. Alan Siebenaler (00:12:39) - Right? Because now you're not leasing a 10,000 square foot space, now you're leasing five 2000 square foot spaces. So you can imagine what that does to your income on the property at the end of the day, not costs you something. I mean, we looked at one just yesterday where we realized that if we did this on this property, we divided it up. We estimated, let's say it cost us 300,000 to do it. You know, just because it needed the ceiling's blown out. It needed a lot of stuff. But let's say it cost us 300,000 to divide up this industrial property. We ran the numbers on what the new rent would be. And because these commercial properties, the value is determined by the rent and by the leases that back them, we ran a cap rate analysis and figured out that that property would go up in value by $1 million. So spending 300 to go up by buy a million, we're like, man, that's a that's a green light, right? That's a good one. Alan Siebenaler (00:13:36) - And so that's where it gets really exciting. Is that much more than residential residential. You can improve and you kind of have to fight with the price per square foot and compare it to other residential properties where commercial you can improve. And if your income goes up, the value goes up accordingly. So it's that's a pretty exciting strategy to use. Sam Wilson (00:13:56) - Absolutely. No, I think that's really, really cool. Is there are there certain types of assets or certain, I guess, profiles of buildings that people should be looking out for, or even locations in general that people should be looking out for to say, hey, these would be the types of assets that this could work in or that strategy could work in. Alan Siebenaler (00:14:16) - Yeah. Good question. I think, you know, you have to put on your hat of what would it be like to be the end user of this property. Right. So if I'm the investor, I'm thinking if I'm going to divide this up, who are my end users? And we just went through some of them. Alan Siebenaler (00:14:34) - My end user is a contractor. So what's important to a contractor? Well, they want probably as big of a rollup door as possible that I can get away with in my current zoning. They probably want ceilings as high as possible. They want some storage area. They they might want some power. If I can upgrade the power, that would be great. Um, you know, and then they might want a little bit of office space to be able to go in there and close the door, or have someone go in there and do the books and close the door. So just thinking through, what would your end user want? And some end users won't want any office space if it's going to be, you know, the CrossFit gym or the wine bar sort of space, they might just want as big and open as possible. So just thinking about what an end user want and maybe giving them a few options. Sam Wilson (00:15:25) - I like that. No, that's absolutely great. Let's talk about some other opportunities that are out there right now. Sam Wilson (00:15:30) - What are you seeing in maybe the retail. And then if you can talk and touch on the much probably looked down upon office space right now. Alan Siebenaler (00:15:41) - Yeah. Yes. I'd love to talk about both of those. So retail right now, even if you just look back, maybe the past 1015 years, it's been really interesting to watch. Somewhat painful as the Amazons and the, the online businesses came in. And then you saw all these smaller stores just go out of business, and it's been a little bit painful to watch. But what's been exciting is some of the new life that's coming in, especially over the past few years in that retail experience has shifted to become more of an experience based business than just buying a widget. Like if you want to buy a widget, your Radio Shack type of widgets, you're going to just click a button on your phone and that widgets going to show up in right 1 or 2 days, right? But if you want an experience, you want to go and have a drink or you want to go in for kids, it's the Build-A-Bear thing. Alan Siebenaler (00:16:35) - Or you know, you want to build a toy, your kid wants to build a toy, or you want to throw an axe. You know, axe throwing is is a new chain that's spreading across the country. Any of those sort of retail experiences, wine tasting, brewery, all of those are bringing in new life into retail. But it's also changing. You know, it's hard to take what was a RadioShack, which were just but ugly on the inside and make it look really, you know, for an experience. We wanted to have a certain feel right now would be more typical to have higher ceilings and beams and lots of window or natural light or whatever. And so there is a bit of a painful transition going on, but there's a lot of excitement there as well for the just the experience based retail, I think. Sam Wilson (00:17:24) - Experience based retail and then also the I mean, the type of retail that we're seeing, not go places, is like even down to I'm just thinking in here...
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The Importance of Building Relationships in the World of Capital Raising
11/27/2023
The Importance of Building Relationships in the World of Capital Raising
Today’s guest is Salvatore Buscemi. Salvatore is currently serving as the CEO and Co-Founding Partner of HRN, LLC, a private multi-family investment office, Salvatore Buscemi has demonstrated a keen eye for successful investment strategies. He started his career at Goldman Sachs. Show summary: In this podcast episode, Salvatore discusses the importance of networking and building meaningful relationships, especially in the investment industry. He shares his journey from considering medical school to raising $30 million for a fund at 29, and his ventures into life sciences and commercial real estate. Buscemi emphasizes the need for genuine interaction and understanding investors' preferences. He also discusses his upcoming book, "Investing Legacy: How the 0001% Invest," which offers insights into the current state of investments. -------------------------------------------------------------- The importance of networking (00:00:00) Salvatore Buscemi's background and career journey (00:00:53) Investing in defaulted loans and impact-driven investments (00:02:38) Networking and Building Relationships (00:09:29) Being Busy vs. Being Meaningful (00:10:11) The Law of Reciprocity (00:15:52) Importance of building relationships with investors (00:18:20) Helping investors by saying no (00:19:06) Introduction to the book "Investing Legacy" (00:20:44) -------------------------------------------------------------- Connect with Salvatore: Twitter: Instagram: Facebook: Amazon: LinkedIn: Book: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Salvatore Buscemi (00:00:00) - Your network is so important. It really is. And and the most extreme example of this is when somebody loses their job, they don't have a network. So they're groveling to all their friends. Right. And so, you know, there's no excuse for that today especially in LinkedIn. You have to treat your you know, you have to treat people like friends. You know, like really. And I think that there's been too much of an institutionalization that's been normalized now where, you know, coming after the pandemic, a lot of people are they're looking for that warmth and that intricate connectivity. Intro (00:00:26) - Welcome to the how to Scale commercial real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:39) - Salvatore Buscemi is currently serving as the CEO and co-founding partner of Hrn, LLC. They are a private multifamily investment office, and he has demonstrated a keen eye for successful investment strategies. Sal, welcome to the show. Salvatore Buscemi (00:00:53) - Sam, it's a pleasure and privilege. Salvatore Buscemi (00:00:55) - Thank you. Sam Wilson (00:00:56) - Absolutely. The pleasure is truly mine. Sal, there are three questions I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now? And how did you get there? Salvatore Buscemi (00:01:06) - I started out after college not wanting to go to medical school because I passed out holding a tibia in the cadaver room, and I wound up networking because of the work I did for that doctor before I passed out. He had introduced me to his brother, who had just made partner at a firm that I would later work at called Goldman Sachs. At the age of 29, I left and raised $30 million institutionally from a Park Avenue investment manager. I was young, I was looking back. I was very driven. But there was an opportunity with Bear Stearns that collapsed, that was able to utilize my skills and network to be able to put together a $30 million fund institutionally, which a lot of people don't do unless you have that Wall Street pedigree. Salvatore Buscemi (00:01:46) - And we had a lot of fun. The market's changed in about ten years ago. I started because of some of the families that I've worked with. They we went into like sciences because I was introduced to two partners of mine that have very illustrative careers in life sciences, managing money for the Rockefellers at the age of 26, 6 billion for them. And, you know, it's the same for Texas State Pension Teachers Pension Fund two as it related to the life sciences. So the deal flow that was coming in is great. And we built a whole consortium around that because a lot of people want to a lot of people have discretionary income and not only looking to place it into things like real estate, but also the other things that are a little more impact driven. Sam Wilson (00:02:29) - That is a wild ride. Let's go back to the 30 million you raised right out of the gate on your own. What was that into? Salvatore Buscemi (00:02:38) - That was into it was. It was interesting. It was sort of like the Big Short, but not really. Salvatore Buscemi (00:02:42) - We were buying whole loans, right? Where if you look at the Big Short, they were looking at buying, you know, they were creating synthetics and then they were shorting them or trading them. So we were basically the kitchen sink for Bear Stearns. A lot of the stuff that came through, and this is during 2008. Now, a lot of people time thought that you couldn't short the housing market. Well, movies and books have been written to show otherwise, but it was really me connecting with someone who was a little older than me, but could see the fire in my eyes. I guess enough so that, you know, we were we put together this, you know, this, this, this fund that we were able to buy a lot of defaulted assets from Bear Stearns and some other banks that were going out of business. Sam Wilson (00:03:21) - Got it. And what what did you do with them? So you bought all these defaulted loans and then what? Salvatore Buscemi (00:03:25) - We bought low and sold just a little higher. Salvatore Buscemi (00:03:28) - So what we were able to do is that we were able to clear title on these, the ones that we were going through the whole foreclosure process and then just selling them off to rehabs. Right. And they had as long as, you know, and the key to make it that really made that work, Sam, was to make sure you understood the metrics that they wanted as far as a profitability. And then this way that would affect your investment basis. So if, you know, these guys had to have a margin of like, I'm just saying 35%, for example, it makes it a lot easier for you to go into these deals knowing exactly what these guys want. And it was high velocity and we were able to do that. And then later I did it out in Las Vegas, too, with with commercial real estate, with private lenders. And I actually wrote my first book after that called Making the Yield, because a lot of people didn't know what hard money lending was, or private lending. Salvatore Buscemi (00:04:09) - If you go to making the yield, you know you can get a copy. But and then after that, I wrote another book on fundraising because that was important to as well. People wanted to know, well what was the right way of doing this. And raising real money was actually came out about a year after that. Sam Wilson (00:04:23) - What are so you've done a lot. Let's just start there. I hear, I hear, I hear the last 20 years and I go. Salvatore Buscemi (00:04:29) - I like to say busy. I like to say busy. Sam Wilson (00:04:32) - You've been busy. Okay. And it sounds like it's busy by choice. What drives you today to keep doing what you're doing? Like what's a what's a key motivator for you? Salvatore Buscemi (00:04:43) - So we're not we haven't really done much in real estate. We do have 166,000 square foot Class-A industrial building we did in 2020, which has been performing very, very well because it's logistics and, you know, warehouse, light warehouse. But what gets me out of more out of bed in the morning right now is the impact that I've made. Salvatore Buscemi (00:05:01) - And the track record that's starting, especially from this year. We've seen a lot of our, again, life science companies make a lot of improvements and strides as it relates to getting FDA approval for artificial defibrillator devices that every mother now will carry in her purse. Right. You can charge it with your iPhone. That is a big deal. And that came out in February. We also have a few other things that are happening to where people were. The ability to to really impact humanity is great to a lot of these wealthier families. And the ones that I'm talking about are over $100 million in net worth. They they're not looking for an extra zero, really. They're looking for that impact. They're looking for the bragging rights to go along with something. And we've been involved in a lot of deals right now where even outside of life sciences, we've had a tremendous impact on society. If you think about it, there's 260 million soccer players worldwide. We invested into a company alongside another large family called AI. Salvatore Buscemi (00:05:53) - Scout. And Scout is a preeminent recruiting tool, and you'll hear some announcements, but they've already been chosen for Chelsea Football Club and a lot of the other Premier League sports, Premier League football teams in Europe, to be used for recruiting. And, you know, the impact that that is made is that in a town in East India where there's only one cell phone for 45 people, one kid was able to get recruited to Burnley, I think. So these are premier soccer clubs that are doing a lot of recruitment and the impact and the democratization of people through technology to be able to improve their lives is something that, you know, really, really draws to me. You know, it's like somewhere I don't have any kids and I'm not married, but at some point you got to look back and see who did you help, you know, what did you really do? And I think most people look at it from the altruistic standpoint where, you know, but look, I like to think big and I like to be alongside people who think just as big as I do to get into opportunities and to and to really communicate the strategy in a way where everybody can get their their hearts and minds around it. Sam Wilson (00:06:50) - That is amazing. What do you do to put yourself in? Maybe at this point it just it's just the network that you've built. But how do you put yourself in front of these types of opportunities? Because those are pretty nuanced. Salvatore Buscemi (00:07:04) - They you know, these are not my rule of thumb is the wider an opportunity is made available, the less valuable it is. Think about it. Everybody during the cryptocurrency days, do you buy Bitcoin? Why not everybody sneaking into your, you know, your DMs? I suppose it's a function of your network, but mostly your reputation. If I do not do what I was supposed to be doing with this one company, I would not have been invited to invest in space actually this past August. Right. And so that was an opportunity where I had to move fast. People could depend on me that we could move fast to do this. And we come to the table with money. So I think it's more or less a reputation, whereas people are looking for that certainty of execution, that you're actually going to write a check, you're going to do what you say you're going to do. Salvatore Buscemi (00:07:44) - You are who you say you're going to do. And it's backed up by pedigree, too, as we talked about. And that gives people the creature comfort to say, hey, let's let Sal into this consortium. Let's let you know. Let's let them have a look. Now, that doesn't mean I'm going to invest. Don't get me wrong. I mean, I get invited to things all the time, but even more so than that, what I like to do is I like to keep the networking on a very high level and a very active level. Tonight I'm invited to three things I don't want to, you know, cigars and cognac mean I'm just going to meet with a bunch of people real quick. You know, it's like a gathering here in Miami. But, you know, if I meet one person of consequence or somebody who I can help, it's worth it, right? And it's just a short walk. And it's a very cool day in Miami today. So it's not like I'm going to be sweating on the way over there. Salvatore Buscemi (00:08:25) - There's other events too. And I moved to Miami because and this is something I want your listeners to really understand. Your network is so important. It really is. And and the most extreme example of this is when somebody loses their job, they don't have a network. So they're groveling to all their friends. Right. And so, you know, there's no excuse for that today, especially in LinkedIn. You have to treat your you know, you have to treat people like friends. You know, like really. And I think that there's been too much of an institutionalization that's been normalized now where, you know, coming after the pandemic, a lot of people are they're looking for that warmth and that intricate connectivity. And, you know, that's a whole other, you know, a whole other conversation we can have on that. Sam Wilson (00:09:01) - Right? No, I think that's great. That's absolutely great. Yeah. I mean, I'm reading here on your website or on your website, actually on your LinkedIn profile view or profile, it says, you know, you guys are multifamily office Advisor and you put a bunch of things in there. Sam Wilson (00:09:13) - And one of the one of the phrases I think that was unique was it says in other, not unique because you actually use the word in it, but was catching was in other unique invitation only opportunities. And so I started thinking about like, okay, so what is Sal doing to get one of those unique invitation only opportunities? Salvatore Buscemi (00:09:29) - Yeah. You're networking. You're always out there. And for people at home who don't live in Miami or New York City, where I'm from, you have zoom today. There's it's there are people I know who open up their calendars just so they can sleep. You know, where they're meeting with people all over the world. It sounds kind of crazy. And there are people who are eccentric who do that. You don't have to go that crazy. But it would be great if you could meet some people over zoom just to, you know, to continue to build a network meaningfully, not just clicking and accept and, you know, people will forget and also be interactive. Salvatore Buscemi (00:09:58) - I'm always interactive on people. Whenever I'm on a on a podcast, I always repost it. I always talk about the good things that are going on. I talk about a lot of things that are going on, but that interactivity is more important not just on LinkedIn, but also through email as well. Sam Wilson (00:10:11) - Right? Absolutely. Let's let's talk about the something that we mentioned here in the beginning of the show. I said, you've done a lot, and you said, I like to define it as busy. How do you make sure that you're busy is also meaningful? Salvatore Buscemi (00:10:26) - I have two that's a very good point. And you have to look at it and find out what's the highest and best use of your time and how do you leverage that activity. So I like to first of all, number one. Today. We live in a digital age, right. And so you have to continue to attract attention, whether you're me, whether you're someone else or the worst case scenario, politicians, they're constantly attracting attention. Salvatore Buscemi (00:10:49) - Right. Because attention is the new oil. And, you know, there's there's there's a lot to be said for that. So what I do is the highest and best use of my time are two things. Number one, creating content to post on LinkedIn I like LinkedIn. Twitter for me is like a nice site. Like every time I post something, somebody, you know, I think people are drunk on Twitter, to be honest with you. I just don't understand it. But it's, you know, it has it serves this purpose as far as democratizing the voice. The second thing, too, is that I'm always talking to investors, whether they're current or new. That's the highest and best use of time, current or new. And I'm being very careful about what they're telling me. If it's a new investor, what do they like to invest in? What don't they like to invest into? Sometimes they like investing in stuff we won't touch. That's fine. We can still be friends. But he's not going to get my email distributions maybe. Salvatore Buscemi (00:11:37) - Right. So I mean it's it's you just have to be meaningful and thoughtful about it because there's just so much noise out there today. And if you really are looking to build those relationships and you're sending out the emails and you're continuing to do things that really set you apart from everyone else, you're going to start to build a brand for yourself. And your brand really is your promise. When you think nobody tells you that they all have these great. You know, if you ask Madison Avenue what a brand was, they say it's a nice logo. And I've been down these road. I know exactly what it looks like, but at the end of the day, people are investing in you in a brand first before they invest in any sort of entity. Sam Wilson (00:12:10) - Yeah, absolutely, absolutely. And we talked about that a little bit before we started hitting record, which as you said, that we've moved into this transactional sort of capital raising environment where people have lost that relationship edge. How again, you know, maybe I'll just ask the question again, maybe in a different way, but how do how do you. Sam Wilson (00:12:30) - That's a lot of high touch. I'll just say that in raising capital, in maintaining those relationships, how do you do that in a way that is scalable? Salvatore Buscemi (00:12:39) - Yeah. Um. Today, I think less is more. When I moved to Miami a year ago, it was off of the. It was still during the tech hype and ether and a lot of people around the tech ether. And then Silicon Valley bank happened. Right. What happened is, is that everybody who I'd meet would be a founder, and it would scare me because they come and they'd have their iPad underneath their arm. And I'm like, oh, no, I'm going to be pitched like, this is terrible. I have to sit through this guy's PowerPoint. And what I think happened is, and you could actually maybe chalk it up to the, to the Bitcoin era when that was supercharged was that people became very transactional. And when you're dealing with people, you know, if you're selling something like a book or, you know, even a car, you know, it's very transactional. Salvatore Buscemi (00:13:26) - You don't really have a relationship with your used car salesman, right? However, when it comes to getting money from people, people will never give you their money without first giving you their time. They want to get to know you. And this is something that goes back to biblical times that, you know, getting someone to part with their treasure for a higher calling is probably the highest calling is in sales. When you think about it, you know, funding. Look at what we're doing now raising money, bundling for politicians, war companies, whatever. There's a lot of power there. And that's the highest and best skill set you could have is not necessarily being a sales person, but being very social and...
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How Measuring Progress Transforms Real Estate Investing
11/23/2023
How Measuring Progress Transforms Real Estate Investing
Today’s guest is Sean Tagge. Sean is a Biomedical Engineer turned REI. He uses a data and science approach to investing. 1500 SFR and 750 MF doors. Show summary: Sean shares his journey from flipping single-family houses to multifamily syndications, discussing the importance of measuring progress and accountability in real estate investing. He also talks about the challenges he faced during his first multifamily project, the benefits of investing in Nashville, and his recent acquisition of a 206-unit property. Sean emphasizes the importance of using a data-driven approach in real estate and shares his strategies for securing deals and managing properties. -------------------------------------------------------------- Intro (00:00:00) Sean Tagi's Background and Real Estate Journey (00:01:13) Analyzing and Investing in a Multifamily Property (00:07:24) The cost of living in Nashville (00:10:01) Using a scientific approach to investing (00:10:59) Renovating and raising rents in the property (00:16:11) The phone answering race (00:20:01) Measuring and reporting data (00:21:27) Simplicity of focusing on one trade (00:22:40) -------------------------------------------------------------- Connect with Sean: Linkedin: YouTube: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Sean Tagge (00:00:00) - What gets measured gets done. And then I think add on top of that what gets measured and reported on the rate of improvement increases. So it's just having that accountability is like, hey, you know here here we're at in the project and every week we're just following up on the numbers. Here's where I'm on our budget. Here's how much is completed. Here's the goal I mean, like you don't even really need to say much after that. You just look at the data and the person who's responsible for it can just see, oh, I'm ahead or not on this. And then it gives you a lot of opportunity for coaching and help and giving them tools to succeed. Welcome to the how. Intro (00:00:36) - To scale commercial real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:48) - Sean Tagi is a biomedical engineer turned real estate investor. He uses a data and science approach to investing. He currently has 1500 single family residence doors and 700 and multi 750 multifamily doors. Sam Wilson (00:01:02) - Sean, welcome to the show. Sean Tagge (00:01:04) - Hey Sam man. Super excited and honored to be on the show with you. And yeah, excited to dive on in. Hopefully, you know we can get some good golden nuggets for the audience. Sam Wilson (00:01:13) - Absolutely Sean. Appreciate you coming on today. There are three questions I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now and how did you get there? Sean Tagge (00:01:23) - Yeah, started in Memphis, Tennessee. I moved from Utah to Memphis and joined on with some partners and started doing turnkey single family flips. So flipped 1500 single family houses. I came on as a VP of operations and got made partner after two years. Ramp that up a lot. That business. We're up to doing about 320 houses a year at one time in the heyday, and then about 3 or 4 years ago started doing multifamily syndications and syndicated about five different complexes in $750. And we currently have 650 that were still in the operating phase. Sam Wilson (00:01:59) - Wow. Okay. So you came on as partner there at a firm here in Memphis, and you guys did your you helped do 1500 single family residence flips and then you guys and you're doing more. What did you say on average I guess 320 a year. Sean Tagge (00:02:14) - Yeah. The highest we did in one year. But yeah 250 or so a year to three, 320. Yeah. Sam Wilson (00:02:19) - That's rolling. I mean that's a house every single day almost. Sean Tagge (00:02:23) - Hey we were yeah that was our goal house a day. You know it keeps the doctor away. We were trying that got up there. It gets a little hectic after a while. Sam Wilson (00:02:32) - Yeah no I can't I mean I don't even want to imagine that. Right? I mean, like there's some businesses where you're like, oh my gosh, someday, like, maybe we'll grow to that size. Like I have no aspirations of that. When I think about that, I'm like, no, man, I'm already bald. Like, I don't I don't ever want to do a house. Sam Wilson (00:02:46) - Yeah, I don't care what the payoff is. That's that's a. Sean Tagge (00:02:49) - Lot. There's only a few in the whole country that even do up to there. I mean, I only knew maybe five that were in the 300 plus in the whole country. And yeah, it's for a reason. And that's kind of why we started flipping. Had rather do 100 houses one time instead of 100 houses 100 times. Right. So multifamily. Sam Wilson (00:03:07) - Right. So you got a new multifamily and did you do this on your own or there with that firm here in. Yeah, with. Sean Tagge (00:03:11) - The same partners. We kind of had a lot of big investor lists. I already had rental crews and everything. And it's a lot easier for them to do 20 doors in one little area instead of 20 kind of spread out. So yeah, it just really helped out from that, that perspective and just kind of started slowly growing. Sam Wilson (00:03:25) - That did there's because was there a shift in the model? Because in the turnkey residence model, you know, it's it's for most turnkey providers at least it's buy the house, renovate it, put a tenant in place and then sell that individual home off to an investor. Sam Wilson (00:03:41) - But when you're doing an apartment complex, the model is typically as a syndicator, raise the money, buy the apartment complex, hold it in house, execute the business plan, and sell it later on down the road when it makes sense to exit. What was the model in the multifamily space? Sean Tagge (00:03:56) - Yeah, so like I said, the single family, yeah, we were done with them in 90 days or so. Just a quick flip with the multifamily. Yeah, there are more a year or two hold and then a couple others. We're doing a five year old model with a refinance in it, and the first one we just did with our own capital, you know, played around with our own money first, made the mistakes and learned. And it was very successful. So then the other four we brought on investors, put in a lot of our own money as well, and one we hope to be selling maybe summer of of 2024. That would be like a two year. I guess a flip for a multifamily is probably that's like the timeline for multifamily flip. Sean Tagge (00:04:34) - And then the others. Yeah. And then two others we refinance pulled out like 70 to 85% of the investors capital, and we'll hold on to them for another three years completing like a five year total hold. Sam Wilson (00:04:45) - Right. Okay. Cool. Sean Tagge (00:04:47) - So you said so just kind of yeah. Just kind of depended on the, you know, the the investment, the area, you know, the, the IRR we could achieve if we think we could flip it quickly or hold on longer. So we just kind of analyzed each deal and had a different plan. Sam Wilson (00:05:01) - Got it. Okay. So you said you made some mistakes in the first one with your own capital. What would you say some of those mistakes are. Sean Tagge (00:05:08) - Yeah. So this one we bought during Covid time. So underestimating and really not predicting inflation and rehab costs and material costs just going through the roof through all that. And then we had a plumbing issue where we had like 2030 grand. We had to dig out a plumbing line and fix all that. Sean Tagge (00:05:30) - And it just took a while. Also working with the city through Covid, when a lot of their employees are, you know, whatever, working from home or whatever. And it just took a while to get all that done. So it's like some things like that, you know, just some are unforeseeable, but some we could have planned a bit better. Sam Wilson (00:05:46) - Yeah. And build. Thing in. I guess that margin for those unforeseeable things is probably just something you do guess, probably naturally at this point. Correct? You're right. Yeah. In getting inspected, I don't know. Were you guys part of the zoom inspections? Did you guys have any of that stuff? Sean Tagge (00:06:02) - No, we man, we weren't lucky enough to get those. I think yeah some the. Yeah. Like the what is it, the section eight. They would just have us like inspected ourselves. So we're like yeah it looks great. You know, it looks you know, there's a few things we're going to fix. But yeah right. Sam Wilson (00:06:18) - But no, everything else is perfect I swear. Yeah, yeah. We had we had some of that here. I'm surprised you guys didn't see that as well. So it. Yeah, there was some zoom inspections that occurred. I thought it was pretty funny. How are you doing a structural inspect anyway? Yeah, those those guys are behind us, but, you know. But none of those are things I don't hear, you know, you know, to right now, we're hearing a lot of pain in the market. We're seeing a lot of pain in the market where people are going, hey, you know what? They took out short term debt and now they can't refi. Or they, you know, they didn't, you know, capitalize the deal properly. And so expenses, you know, I just had another guest on the show today that their insurance costs in Florida have quadrupled since they acquired the asset a couple of years ago. And suddenly their cash flow negative just because of, you know, enormous insurance premiums. Sam Wilson (00:07:06) - Right. So it doesn't like you made any of those mistakes. It was just, you know, some of the more common ones along the way where you're like, oh, well, that that kind of stunk. But we figured it out and keep moving, right? Sam Wilson (00:07:15) - Yeah. Sam Wilson (00:07:16) - That's awesome. That's awesome. What is your plan moving forward? Are you still working with this same group? Because now you've you've even relocated back to. Yeah Utah. Sean Tagge (00:07:24) - Yeah. So I've exited the single family turnkey flipping. You know just just a grind. I'd rather do multifamily. So I'm off on my own. Doing Acorn Equity and Acquisitions is my company. And we are. Yeah we actually have under contract. So I've been searching this whole year for a multifamily, you know, tons of brokers and you know, seller expectations are still high. So we finally got one down to the right price where it fits our, you know, returns and business plan model. So we have a 206 unit under contract in Nashville Tennessee. Sean Tagge (00:07:57) - Simple value add C class 1970s build type of house multifamily and going to raise rents $200 a door across all the units with 2 million in repairs or so. Sam Wilson (00:08:08) - Got it. Okay, well, let's let's dig in to this particular asset because I think this is an interesting conversation. You mentioned C class. We're seeing a lot of C class defaults. We're seeing assets trade below what they were purchased for two years ago. Currently in C class. Why do you feel like now is a good time to buy a C class asset? I guess just tell me. Tell me why this asset in particular makes sense for you, right? Sean Tagge (00:08:34) - Yeah. So we're buying it at an attractive price. So about 20% below the previous years. And it's this group. Why. Well the group has they own thousands of units their larger real estate private equity firm. And this is their last one in Nashville. And most of their plans and their funds they have they're open for five years. And so they need to close the fund. Sean Tagge (00:08:54) - And this is like the last one in the Nashville area. Most of their other assets are in Texas. So I mean, they've owned for five years. So they're doing really well even at the price, selling it below market of two years ago or a year ago market. It's fine for them. So win for them and then a win for us because we're getting it down lower and attractive entry. And then I feel my data and research I feel very strong on Nashville, the headwinds and the sorry the tailwinds behind it of, you know, long term. Maybe there might be a down year in the next five years. I mean, I think there will be, but in five years, long term, I think it's going to average out good appreciation and rent growth. Sam Wilson (00:09:30) - Right? I think picking picking your market, it sounds like it's one of the things that plays into a big part of your data and also your research. Obviously you got to spend some time here in Tennessee, actually. How long were you here? You lived here for a decade. Sean Tagge (00:09:43) - Yes. Six years. Yeah. Sam Wilson (00:09:45) - Okay. Okay. You're here for six years. So you got a good feel for what the state has to offer. And Nashville in particular, you know, obviously has some tailwinds to it that, you know, a lot of cities don't. So I don't know where where Nashville ranks on the fastest growing cities in the US. But I think it's it's there. Sean Tagge (00:10:01) - Yeah. It's always up there with job growth and this. And then another thing nice about Nashville, I don't know if you want to dive too much into it, but it's it's still below the national average cost of living. And like if you've been in Nashville, you walk that city, you're like, this is this is a Dallas Houston. You know, this is you know, it's not New York yet, but this is up and coming city where it's going to be expensive someday. So it's still below the national average. Sam Wilson (00:10:24) - Cost of living, which. Sam Wilson (00:10:25) - I think in Tennessee in general, probably exactly. Sam Wilson (00:10:27) - Still trends, trends below that which is which is great for those of us that live here. We we appreciate the lower. Certainly. Sean Tagge (00:10:34) - Yes, yes, it's nice, but we can obviously see it's not going to be that way forever, I think. Sam Wilson (00:10:40) - I don't know, I think Memphis might be. Sean Tagge (00:10:42) - Yeah, maybe some specific city. Yes, maybe. But the Nashville. Got a new guy, you know, not, you know, Knoxville. Those are nice cities. Sam Wilson (00:10:50) - They are. They are indeed. What are some things you said you use a science and data approach to investing? What does that mean to you? Sean Tagge (00:10:59) - I mean, yeah. So it's, you know, data spreadsheets. So when I was doing biomedical, I did artificial heart research. And so yeah, learned a lot of just, you know, using the scientific theory data and spreadsheets and basically just, you know, getting averages and then looking at macro and micro micro trends. So yeah, just kind of see that with with Nashville, you know, the rent growth appreciation, everything like that. Sean Tagge (00:11:23) - Then also of course, you know, jobs coming in and all that stuff is what I use. And that's kind of how I picked Memphis about seven years ago is I just saw it had a high rent to value ratio, did did that across the whole country and is one of the top three consistently now. It's not quite so much so. So yeah. Sam Wilson (00:11:43) - Yeah. We've certainly seen a price appreciation here in Memphis again. You know compared to a national average it's still probably on the lower end of things. Are there anything though. But guess when when you. When you say you use data in a scientific method approach. I mean, is there anything that you say, hey, this is a this is a data point. I look at that many people wouldn't think to consider. Sean Tagge (00:12:05) - Of I mean man, it's so with with you got co-star and all the data. It's really just it's out there for everyone. It just really takes that work though, of gathering several cities, comparing them across one another and yeah, diving into that. Sean Tagge (00:12:20) - So I can't say I have a secret sauce I wish I did. Maybe I wouldn't tell it if I did, but I really don't, I don't, I swear I don't. It's just it's. Sam Wilson (00:12:28) - That. Okay. Sam Wilson (00:12:30) - Okay. I was hoping for something really random where you're like, man, you know what I consider the number of feet of, you know, plumbing at any given, like, weight, right? Yeah. But somehow you figured out that that translates into higher rents. I don't know, just throw in throwing things out there. Okay, so no secret sauce, but yet there's still opportunity out there. What did you do to make yourself an attractive buyer to this seller? Sean Tagge (00:12:54) - Right? Yes. So we you know what we were we were just there consistently. So is actually this broker relationship we've built up over several months. So that that really there were two other 2 or 3 other offers. We were actually a little bit lower. But the fact that we were consistently showing up, you know, and making offers and other deals, maybe getting outbid a little bit and just showing that we're here consistently. Sean Tagge (00:13:16) - And then the fact that we own, you know, so I'm partner up with Compass Capital, Sam Brower and Michael Wheatley. They're kind of my my I've known them from college as well. Good, good buddies of mine. We've talked for six years wanting to do a deal together. So this is one we're finally on together. And yeah, so that as well as we own 200 units nearby and was able to perform on those raise rents and execute on the business plan. Sam Wilson (00:13:39) - Got it. Okay. No that's super cool. That's super cool. So Compass Capital those are they going to be your boots on the ground running it. Sean Tagge (00:13:47) - Yeah they're the boots on the ground. And then a property management company as well over there. Sam Wilson (00:13:51) - Got it. Okay cool. Because that's gonna be my next question was going to say okay. So you're now living in Utah. How are you taking this down? How are you selecting contractors? How are you getting this thing, you know, on the ground? Sean Tagge (00:14:01) - So I already performed the property management company has a rental company in-house, which I like that as well, you know, and they actually they actually hit the budget on the other 200 units, which is that was like that's some of the first questions like can they perform on the budget? And that's usually the roll of the dice when you're starting a new market. Sean Tagge (00:14:18) - Is your contractor because I mean, us, whenever we try a new contractor, we're just like, hey, it's a third chance. We keep them for a year or longer. You know, it's just something that risky take. So it's nice to know that we already have tested that and they've proven and they have thousands of other doors they performed on. Sam Wilson (00:14:36) - Repetition is so much easier than starting over and trying to figure it out in the beginning, I think. Yes, the stat you used there, which is there's a one third chance that you'll still be working together in a year when it comes to the general, which is unfortunate, but it's just it's a reality of things. Sam Wilson...
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Unlocking the Potential of Syndication
11/22/2023
Unlocking the Potential of Syndication
Today’s guest is Jim Lee. Jim began his investing journey of a 2 bed/1 bath condo and now, through real estate syndication, he has invested in over 600 units in the past 2 years where he has participated as a general partner/limited partner. Show summary: Jim Lee discusses his transition from managing a two-bedroom condo to syndicating large-scale properties, and the importance of education and networking in this process. Lee also talks about the challenges he faces in the current market, such as rising insurance costs and managing capex and reserves. Despite these challenges, he emphasizes the importance of transparency with investors and shares strategies to mitigate risk. He concludes by stressing the importance of relationship-building in the real estate community. -------------------------------------------------------------- Intro (00:00:00) Transitioning to syndication (00:01:59) Insurance Costs and Financial Struggles (00:11:41) Strategies to Mitigate Risk and Increase Revenue (00:14:39) Lessons Learned and Future Investment Approach (00:15:58) -------------------------------------------------------------- Connect with Jim: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Jim Lee (00:00:00) - We're the one making the decision. The LPs have no saying in it, so we should be taking full responsibility on this. Only if we'll go to LP, only if we really need to. Only we're going on on on the verge of default, you know. So hopefully that doesn't happen. But you know, that's, that's, that's that's you know, that's that those are the people that we look for. We that share the same value as we do. Sam Wilson (00:00:21) - Welcome to the how to scale commercial real estate show. Whether you are an active or passive investor. We'll teach you how to scale your real estate investing business into something big. Sam Wilson (00:00:33) - Jim Lee began his investing journey of a two bed, one bath condo, and now, through real estate syndication, he is invested in over 600 units in the past two years, where he has participated as a general partner. Jim, welcome to the show. Jim Lee (00:00:47) - Thanks for having me, Sam. Sam Wilson (00:00:48) - Absolutely. The pleasure's mine. Jim. There are three questions I ask every guest who comes on the show in 90s or less. Sam Wilson (00:00:54) - Can you tell me where did you start? Where are you now? And how did you get there? Jim Lee (00:00:58) - I started working at Loop Net. I graduated 2010 back in 2000 right after the subprime subprime mortgage crash. 2008 followed by the European debt crisis. It was really difficult for me to find a job, but I was fortunate enough to land a job at Loop Net, working as an inside sales rep. Um, that from there, it kind of taught me everything I need to know about real estate. Spoke to property managers, real estate investors, lender agents on a daily basis, learned the importance of having multiple streams of income. So I got in myself into investing in a two bedroom, one bathroom condo. 600ft² did everything from A to Z. Was very actively involved. And then I transitioned to become a syndicator because I realized that, you know, I started to build system around just making my first investment more passive, where now I'm just doing it on a bigger scale with economy. With syndication, we're able to do to economies of scale. Jim Lee (00:01:59) - We're able to just scale it a lot easier with, you know, what, the team that's going to be managing your projects and basically, you know, with more helping hands, I think it's we're able to create a bigger pie for everyone to split. Sam Wilson (00:02:16) - What year did you buy that first condo. Jim Lee (00:02:20) - 2015. Sam Wilson (00:02:21) - 2015 okay. Very cool. And what year did you decide to get into Syndications? Jim Lee (00:02:28) - 2020? Sam Wilson (00:02:30) - 2020. So you bought a condo in 2015. What did you do in that five year window where you just operating as a broker in that time frame, or what were you doing in that five year period? Yeah. Jim Lee (00:02:41) - So for the first year I was very new to real estate. I bought the condo without knowing much, and after I bought it, I realized how much I didn't know. And that's when I picked up the the purple Bible that everybody Red Bishop ordered. And from there, I kind of started to learn more about real estate. And like you mentioned, I also got a real estate license on the side between 2018 to 2020, I tried that was my very first pivotal moment to shift from a W-2 employee to an entrepreneur. Jim Lee (00:03:18) - So I try to make a career out of it and it wasn't a good fit. And that's when in 2020, during lockdown, one of my investors introduced me to a podcast show called Real Estate Guy Radio Show. They talk about syndication all the time. So that's how that's what intrigued me. And I started to pursue that passion. Sam Wilson (00:03:35) - Got it. No, that's really that's really great. What when you when you became a realtor, were you doing residential brokerage? Were you doing commercial brokerage? What were you working on? Jim Lee (00:03:45) - I was focused on residential. Sam Wilson (00:03:46) - Okay, okay. And you figured out that wasn't a good fit for you? Why not? Jim Lee (00:03:52) - Um, part of it is because I came from a sales background. I've been doing that for seven years of my life, and being a realtor is you really you need to get. Well, for me, I had to get comfortable being uncomfortable with just going out and meet people face to face on a constant basis. And I was trying to get used to it, but I wasn't. Jim Lee (00:04:15) - It wasn't it was definitely not a thing that I excel on. And, you know, I realized that's something that I can do for the rest of my life. I can do it temporary, but it's not sustainable. And that's where I kind of shifted, because I'm more of a black and white type of person, you know, um, you know, I love numbers. If the number makes sense, it works. Whereas being a realtor, it a residential realtor, I feel like there's a lot of emotional sales, especially dealing with first time homebuyers. I'm not saying, you know, dealing with investors. There's no emotional don't but don't, you know, trust me, you still have to sell emotions. But not as bad as, you know, first time homebuyers. Sam Wilson (00:04:58) - No, it's a different beast. That's that's for sure. And hats off to you for even trying it. I got my real estate license, I don't know, ten years ago. And I never once thought that I had the skill set to deal with the general public buying residential real estate. Sam Wilson (00:05:15) - I was like, this, I just, I can't I don't have that skill set. So anyway, good for you for at least giving it giving it a go. But then you said, hey man, you know what? There's got to be a better way in Syndications. How have you broken into Syndications? What are you guys buying? And really just give us kind of your current business plan if you can. Jim Lee (00:05:33) - Yeah, absolutely. So how I broke into syndication is by just constant education since 2020 to, you know, going out to network with the right people, um, syndicating with other multifamily syndicators that been in the industry, doing it for a while. And I actually had to find a business partner. I believe he's been on your podcast show before. His name is Chad Zdenek. He's my business partner, and he I met him and I met at one of the networking event, and we clicked because there was a lot of value we can add to each other's life. And the part I was missing was, you know, the track record, the experience and so forth. Jim Lee (00:06:16) - And Chad has been syndicating out here in Long Beach, California for, you know, four years prior to we met. So that's how we're able to connect. And then we both syndicated the two deals together last year. They're both in Florida. 1111 deal is 200 unit in Orlando, 400 unit in Jacksonville. And um, the business plan is, you know, to operate out of state for the time being. We like to be the lead sponsor in our deals, um, in California. But right now it's just very difficult to syndicate deals out here. And for the returns to return on investment to make sense for our investors. And on top of that, with all the regulation, the you know, it's just not a politically, you know, tenant friend, you know, landlord friendly state, so to speak. So we had to explore out of state and partner with other lead sponsor out of state to basically, um, leverage their, their network and their boots on the ground to be able to syndicate out of state because in, in the deals out of state, that's where we find that, you know, we're able to mitigate risk for our investor as much as possible. Sam Wilson (00:07:27) - Yeah, absolutely. So you found a sponsor you wanted to work directly with out of state. What's that relationship been like and how did you vet that particular sponsor? Jim Lee (00:07:40) - So the relationship we've met these guys. Like I said, you know, we've been going consistently going out to networking. We go to multifamily investor nation events. We go to real estate guy events. We go to that summer event, think multifamily. And it's the people that we constantly see over and over and over. And that's where I think we start to begin to build more trust. The more we see each other, the more we're able to communicate and get to see what they're doing and kind of just speculate, you know, over the years, and what we typically look for is, you know, people that share the same mission and value as we do. That's the most important part, taking care of our investor, putting our investors before anybody else. And I'll give you a good example of the first deal. We partner in Orlando, the lead sponsor. Jim Lee (00:08:28) - We had a capital call recently. And um, basically, instead of putting the pressure on onto the limited partner, the lead sponsor decides to put it amongst the general partners, you know, to put the pressure on ourself because we're the one making the decision. The LPs have no say in it. So we should be taking full responsibility on this only if we'll go to LP, only if we really need to only work going on on, on the verge of default, you know. So hopefully that doesn't happen. But you know, that's, that's, that's that's you know, that's those are the people that we look for, we that share the same value as we do. Sam Wilson (00:09:04) - Well, let's dig in on that. I mean, there are there is pain in the marketplace. You know, we're seeing we're seeing things such as what you just mentioned, you know, internal capital calls, maybe not necessarily with us, but we are seeing this across just the general market. There is some pain existing, you know, with rising interest rates, with short term debt coming due. Sam Wilson (00:09:24) - You sounds like you've picked some great assets in great markets. What is happening? I guess that maybe if you can get I'm not asking you for the inside. Down to dirty is probably not things you want to talk about at, you know, in depth. But maybe what are some things that are happening in the market right now that are causing you guys to currently have a capital call? And then what's the plan to really turn that around? Jim Lee (00:09:48) - Yeah, absolutely. So, um. First off, you know, there are $2 trillion of commercial debt that's expiring in the next year. That tells you a lot of people are, you know, going to need to refi like we do or, you know, just at this high interest rate. So what can you do in this circumstance? Right. Well, you have options. You can either cash in refi, you know, raise more capital and then get a new loan. Or you can, you know, sell the property at a loss. Depending on if we sell the property as is right now, we'll still get 75%, 80% back. Jim Lee (00:10:26) - But that's not the goal. The goal is to push the deal forward to to 2025. Survive until 2025. Um, and I'm talking about in terms of people is on variable interest rate. Now if you're on fixed rate, maybe that's a agency debt. That may be you're better off at this moment. But both my deals are very aggressive because my first two deals, you know, I tend to want to be aggressive. I'm targeting value at classy multifamily apartments building 1970s. So there's always that value add component to it. So it's it's basically how you manage your your CapEx and your reserves on top of the rising debt costs. What's happening with our deal is that, um. Like you mentioned, Orlando, Florida is a very, very strong market growing cop population. Job growth is growing. Everything is growing. Economy is growing. Um, our rent before taking over the project was $850 on average per unit. It's gone up to 1350 for the renovated units. So 55% increase. It's great. With all that being said, um, the insurance has pretty much killed us. Jim Lee (00:11:41) - Yeah, right. So like we have I think our insurance went up by, I think three times or nearly four times of what we used to pay on top of that, like you mentioned, that just keeps going up. So we're upside down by 10,000, even though our occupancy rate is at 94% occupancy rate right now. So 10,000, I'm talking about 200,000 per month. And our debt, uh, our expenses at 2000, 10,000 210,000. So so that's what's going on. You know, I think amongst the GP, we can definitely cough up the money. That's not a problem to push us over. But we do. We we do try to be as transparent to our investor as well. Hey, you know you're not going to see any distribution anytime soon. You know, because we syndicated this property last July, everybody was, you know, everybody thought that they were going to get the distribution sometime around this, you know, this year, a year later. Right. That's what we've been telling them at Valley. Jim Lee (00:12:44) - Yeah. Takes 3 to 6 months to stabilize the property etcetera, etcetera. But at the end of the day it's the market condition that that also, you know, hold us back. But we, we want to let them know that we're doing everything possible to mitigate this risk as much as possible, basically by cutting down, you know, the simple things that, you know, what an asset manager would do is just cutting down costs, increase revenue in any way, evict a tenant that's not paying. Um, coming up with, you know, strategic plan, you know, creative ways to make more revenue by maybe inserting, like a car washing machine or pet washing station or, you know, just give priority parking spots to the carports, the garage that charge a little extra, you know, just think of creative ways to make more revenue. Sam Wilson (00:13:36) - That's right. Drive revenue. One of the things you mentioned there, I was kind of you know, it's always interesting, I think, to look at deals that have, you know, some stress on them. Sam Wilson (00:13:46) - I'll say that and say, okay, what what of this could we have foreseen? What of this? Did we not foresee in some of that being, you know, either either bad bets and or just market forces that you can't control one of those I think that you mentioned, that's probably a huge one is your insurance. I mean, we've seen insurer after insurer after insurer drop the Florida market entirely. So what you have and I think we brought some some insurance agents or brokers here, commercial brokers on the on this show or they've talked about the Florida market and how you have all these insurers that have left, which leaves the only few remaining that are there just taking rates and just, you know. Sending them skyward. How? Other than increasing revenue mean is there is there anything else you can do on that front to kind of help absorb some of that unexpected cost? Jim Lee (00:14:39) - Um, well, the main thing is just right now, in our massive management call, all we are trying to figure out is how to, you know, cut down bad debt, um, the evictions and basically people not paying. Jim Lee (00:14:55) - And that's, that's the only that's the only strategy moving forward is to to increase revenue and cut costs at this moment and then explore some good refi option because our occupancy rate is high. Ah, we've renovated two thirds of our apartments already, so 150 units out of 200. So we're we're really in a good shape. It's just the market condition that's, that's, you know, crushing us at this moment. Sam Wilson (00:15:24) - Right? I mean, yeah, to get a 55% rent bump is is impressive. And to stay again 94% occupied, assuming that's, you know, that your economic occupancy is somewhere close to that is it's pretty great. I mean, that's pretty great for anybody, especially in a class C apartment right now, because that's the you know, those are some of the assets that are getting hardest hit when you look back on this investment and maybe just what you see in the in the market in general, what are what are some of the things maybe that you have extracted from this as lessons that you apply then to future deals you're looking at? Jim Lee (00:15:58) - Oh yeah, definitely diversify your portfolio. Jim Lee (00:16:00) - And that's what real estate syndication does for you, right. You can invest in different markets, different asset class and different syndicator. And I think moving forward am not always going to be bullish on variable, you know, variable interest rate. You know bridge loan debt I'm going to definitely explore those agency debt. Um have some of those in my portfolio in case the market shifts like this. Um, but yeah that's that's that's number one for sure. And then number two is don't get too aggressive with your renovation. And I think, I think what put us in this spot also is because we exhausted our CapEx. You know, we we we could use that money towards the towards, you know, paying off the debt. But instead we kind of went we kind of overshoot ourself. And uh, it was a little too aggressive on that. And yeah. Sam Wilson (00:16:54) - Got it, got it. Yeah. You didn't have enough in reserves is what I hear. Is that because you spend all of it on CapEx and then you go, oh hey, we still we still have debt to pay here. Sam Wilson (00:17:02) - So that's not going, which is interesting because it's like you want to improve a property. You would think as quickly as you can in order to raise rents. But it is that like it's that like one it's do something level out, then add a little more level out, add a little more and level out as opposed to just burning through it, getting it renovated, raising rents and then going, okay, because there's there's that short term liquidity crunch, maybe that, you know, you just have to try to avoid at all costs. So that's that's really, really interesting. Thank you for taking the time to break down some of those things that the lessons that you've learned. I mean, I think that's that's the name of the game is that there's, there's every education has a price. Right. And it's and it's this is just how did someone put it. They called it Wisdom's tuition. So it that's you can't you can't get around it. All of us are learning lessons all the time. Sam Wilson (00:17:55) - So that is wisdom's tuition....
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info_outline
Navigating the Current Market: Challenges and Opportunities for Real Estate Investors
11/20/2023
Navigating the Current Market: Challenges and Opportunities for Real Estate Investors
Today’s guest is Whitney Ward. Whitney is the Principal & Fund Manager at CRE-Endeavors where she leads the strategic growth initiatives of the firm. Whitney oversees capital markets, acquisitions and dispositions with a focus on the firm's fund management, and real estate investments. Show summary: Whitney shares her journey from corporate America to real estate, her business plan, and her belief that real estate rates will decrease over the next three years. She also discusses her company's focus on 10 to 75 unit deals, their strict criteria for co-investing, and the challenges of raising capital in the current market. Whitney also touches on the importance of educating investors about market conditions and the opportunities they present. -------------------------------------------------------------- The Journey from Brokerage to Fund Management (00:00:58) Focusing on Niche Multifamily Deals (00:04:36) Seizing Opportunities in the Current Market (00:07:22) Opportunity for arbitrage and acquiring deals at higher rates (00:10:08) Classifying deals as distressed and the impact on sellers (00:11:07) Selling assets at a discount due to high cost of debt (00:12:54) -------------------------------------------------------------- Connect with Whitney: LinkedIN: YouTube: Web: Connect with Sam: I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns. Facebook: LinkedIn: Email me → SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts: Spotify: -------------------------------------------------------------- Want to read the full show notes of the episode? Check it out below: Whitney Ward (00:00:00) - I mean, a lot of our, our business plan is derived from our belief that, you know, in the next over the next three years, we'll see rates decreasing. They might not get down to where they were in 2020. Right. But we see an opportunity where some people might be fearing we're seeing lower, lower values. More deals come into the market as an opportunity for us to acquire these deals. Sam Wilson (00:00:24) - Welcome to the how to Scale Commercial Real Estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Whitney is the principal and fund manager at CRA endeavors, where she leads the strategic growth initiatives of the firm. Whitney, welcome to the show. Whitney Ward (00:00:46) - Hey, Sam. Thanks. Thanks for having me. Sam Wilson (00:00:48) - Absolutely, Whitney. The pleasure is mine. There are three questions I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now? And how did you get there? Whitney Ward (00:00:57) - Sure. Whitney Ward (00:00:58) - I started in corporate America. I've entered the real estate business in 2016 through, you know, starting in the brokerage business focused in multifamily assets at this, which since 2016, I've done everything from multifamily brokerage transactions to some passive equity investments into deals. I'm currently now, like you said earlier, the principal and fund manager for my own firm that I launched in 2019, which since then we've done over 100 million in acquisitions and sales transactions and multifamily investments. And we are now dipping into the fund management space. Sam Wilson (00:01:38) - That is awesome. I love the the journey there. It's pretty fast, really. I would think, you know, going 2016 brokerage. I mean by 2019, did you feel like you had really understood everything you need to understand and just decided to pivot or why why did you go? Maybe that's even a better question. Why did you go from brokerage into then becoming your own principal and run your own deals? What what happened then that made you say, this is a good time to do that? Yeah. Whitney Ward (00:02:03) - I mean, good question. So we've kept brokerage. We're still in brokerage. So CRE endeavors is a licensed brokerage firm in Georgia and in Maryland. So we that's something we kept. Um, I would say the real reason I pivoted, I was at a national brokerage firm in 2016 through 2019, and my real reason for pivoting was just the autonomy to do more deals in the way that I wanted to do it. You know, most brokerage firms want you to focus just on selling, you know, doing transactions. And, you know, we look, we understand that investing is very important in building your portfolio. And so the, you know, brokerage business allows us to service our active clients. But then we also are able to invest in deals. And we have that autonomy that not every brokerage firm allows you to do. Sam Wilson (00:02:47) - How do you decide when a deal comes across your desk that maybe is off market, what what you're going to list, and then what? You're going to actually take a stab at yourself without making your brokerage clients upset, seeing you kind of cherry pick off the top. Whitney Ward (00:03:04) - Sure. I mean, multifamily is unique, right? Because all the other asset classes you really have, you represent a lot of buyers and you represent a lot of sellers and multifamily. It's really focused on having the relationship with the owner of the property. So we don't we never really have a host of buyers that are like, hey, we need deals, right? Because there's so many outlets, you can sign up for all the big firms and get a bunch of deal flow, right? So not to say we don't have deal flow for those buyers, but we don't we don't necessarily say, hey, we're going to be your source for finding those deals for you necessarily. So that that in itself kind of takes away some of that conflict. But with with the fund itself, it has a very strict criteria. We are we co-invest with experienced managers and developers, so they tend to already have that deal, and we co-invest with them when there's a deal that we're, you know, right now, my commercial real estate advisor, she's brought, she's sourcing some deals off market. Whitney Ward (00:04:02) - And those deals would be directly what we would market to, to, to the public. So unless there came a situation where we market a deal and nobody was interested in it, which highly unlikely that would happen, that we would then buy it. But then, you know, then we could consider buying it. But the, the, the types of deals that we get as a brokerage company are typically smaller deals. I mean, we're we're a niche shop. So our deals are anywhere from ten to on average 75 units. So we service a specific clientele. So we're not really competing. You know. Sam Wilson (00:04:36) - Right now that's an interesting segment to focus on. The 10 to 75 units. How did you decide to focus on those size of deals inside of the brokerage firm? Whitney Ward (00:04:48) - Well, I mean when you think about like every market's different, right? So I said we're licensed in Maryland and we're licensed in Georgia. A lot of our deals in Maryland, we do in Baltimore. And that markets is a little bit smaller. Whitney Ward (00:05:01) - And so as a smaller firm, market share is relatively easier to gain than in a market like Atlanta, where we're headquartered, where the large the top three firms, they're getting 80% of all the market share, especially over 100 units. So if we're going to, you know, eat and then be able to live and take care of ourselves, we had to figure out what's a niche that, you know, those large firms are taking, that there's opportunities that a lot of times residential agents will will we'll get some of those leads for, but not really understand what commercial real estate is and how to service those clients. And so we're able to kind of make us a niche specialty in that space. Sam Wilson (00:05:41) - Got it. Oh, that's really, really cool. Well let's talk about the transition in 2019 when you guys said, okay hey we're going to go out and start doing our own deals. It's been an interesting run 2019 to today in multifamily. Tell us, give us some color on your guys's journey and kind of how your how you've changed over the last, I guess four years. Whitney Ward (00:06:03) - Well, I mean, I tell people I was like, I've actually been through like three market cycles, you could say, before Covid and then whatever we're in right now. So it's it's been a heck of a ride. I'm not going to lie. It's been very difficult. But it's also exciting because we're we're all where we are right now. We're seeing a lot more opportunities, like when I first launched the firm in 2019 and we were prospecting business, we were hearing a lot of no's because people were comfortable, right? They were used to their brokers. There's nothing, there's no need to change. Why go to CRE endeavors now? You know, people have either debt maturities coming up or they need to find liquidity in some in some way. And they're they're more open to entertaining what we have to offer. And quite frankly, being a niche firm and having our own source of lenders and equity providers outside of the fund, it has allowed us to be able to position ourselves to serve service clients pretty much the same way that a larger firm would just on a on a smaller scale and more boutique focused. Sam Wilson (00:07:08) - What about the stuff that you guys are buying in house? You say that now is a great time. Of course, you mentioned a few reasons why now might be a good time to be investing in multifamily, but what what is that journey been like for what you personally are buying and acquiring? Whitney Ward (00:07:22) - Well, right now, like I mentioned, we're I'm raising capital right now. I'm raising capital because we are seeing valuations down 26% versus last year. We're seeing transactions have slowed down, but they're starting to pick up. And they're expected to pick up here in Q4, especially in Q1. But we're raising capital. And we're telling our investors, listen, you invest alongside us. We're going to we're going to we're going to have a pipeline of business that comes in not only through our leads, through our managers and developers, but we're already boots to the ground. We already know what's kind of going on. We already have a pipeline of business of of some owners that are going to need liquidity over the next 6 to 12 months. Whitney Ward (00:08:00) - And so we're just having those conversations now. But for the as far as the fund goes, and on that investment side, I mean, we are looking generally for, you know, 75 units to 150 units on size, so we can have a third party property management company in place. And, you know, your typical value add opportunities that you've heard a lot of groups say, we just think there's going to be more value add opportunities to look at. Sam Wilson (00:08:25) - Yeah, absolutely. No. And I want to touch on I guess a couple of things. Let's talk about the you mentioned the term need liquidity groups that need liquidity. What are some situations that people are finding themselves in that need liquidity, that don't necessarily mean that they have a bad investment? Whitney Ward (00:08:42) - Sure, I mean mean. So liquidity in its sense, like if you if you invest in real estate, the only way to generate liquidity is to sell or refinance the property. So there's there's like I mentioned earlier, you have some owners that have purchased properties with short term debt in 2021, 2022, and they have debt maturities coming up. Whitney Ward (00:09:04) - And they're going to need to sell. Whether the market, whether the interest rates are high the way they are today or not, they are going to be forced to sell or refinance, and not everybody's going to be able to refinance if they if they haven't been able to generate enough income to service that refinance, then you have people that might be fund managers that have their funds expiring, and they have to close out that fund. And so they're going to be looking to exit out of the deals that they have to end their funds. You've got developers, you know, people who have constructed have construction loans out. They're going to need to refinance out of those and put stabilized debt. So you have a variety of different scenarios right now that are foresee that show people needing liquidity. Sam Wilson (00:09:46) - So what's the I guess, what's the opportunity for you in that? Whitney Ward (00:09:50) - Well, we want to be there to say, hey, we want to buy it. Right? So so I mean, with rates as high as they are and valuations down, we're we're projecting or we're seeing first of all values are down the lowest they've been since probably I would say 2016 at least probably earlier than that. Whitney Ward (00:10:08) - Right. And so for us we just see that as an opportunity. You know maybe some groups are like, hey, the interest rates are high. I'm scared. But we see a potential opportunity for arbitrage. I mean, even the institutional investors are looking at possibly acquiring deals right now at higher rates, right. And maybe even doing a short term type of floating debt, putting a rate cap on it, and being able to refinance because we believe rates will be down in 2025, 2026. And that'll be a space where you can, you know, refinance or, you know, exit a deal however you want to, whatever your strategy is. So I mean, a lot of our, our business plan is derived from our belief that, you know, in the next over the next three years, we'll see rates decreasing. They might not get down to where they were in 2020. Right. But we see an opportunity where some people might be fearing we're seeing lower, lower values. More deals come into the market as an opportunity for us to acquire these deals. Sam Wilson (00:11:07) - So would you classify these deals you're looking at as distressed and. Yes, I guess the answer for those of you were listening. Whitney shaking her head. Yes, they are they they are indeed distressed. And I guess what's happening to those sellers? I mean, they're taking a haircut on what they. Whitney Ward (00:11:25) - They got, they have to do. I mean, you have to you're going to have lower returns than what you expected. And that's the unfortunate thing about, you know, market cycles in some ways. I mean, you know, many people believed that we were in a low interest rate market forever. And, you know, it's just it's just kind of the way the, the cookie crumbles. And and that's why we want, we're, we're saying to our investors, listen, we've been in this market and we're seeing trends that we haven't seen in a long time. And I think, you know, you know, in scary times presents opportunities. And yes, to your point, I would say it's it's stressed and distressed owners because anytime you're forced to do something that you don't have a decision to make, I consider that to be somewhat stressed. Sam Wilson (00:12:08) - Right. For sure. You mentioned that valuations are down 26%. I guess that's probably a maybe a nationwide percentage there that we're using. Would you say that even valuations are down 26% even on performing deals? Or how are performing deals working out right now? I mean, let's, let's, let's use your scenario and say, hey, they have a short term debt. You know, they've got debt maturation coming up and they need to either sell or refi. Are we seeing deals that are doing really well? I'm thinking of one I've got and we're not looking to sell. We don't than the debt's not maturing on it. But it's doing really well. It's like 99% occupied were way above pro forma. But if we had to sell that, is that also something that people are selling assets like that at a discount because they have to. Whitney Ward (00:12:54) - You're going to have to I mean, the cost of debt is too high. I mean, I mean, the bid is spread between what buyers are, are able to pay and make it make sense for their investment and what sellers want to sell at, you know, it's it's shrinking, but it's still there. Whitney Ward (00:13:08) - It still exists. So I mean, with with right now with you come if you get in the market and you really you know, place agency debt on a multifamily property, you're looking at probably 6.5% interest rate on a good on a good on a good deal. I mean, I mean, if someone's trying to sell it a five cap, you're immediately at negative leverage. I mean, there's like a buyer can't make that work, you know what I mean? And so it's now the decision on you guys, if you guys put your property on the market, which I'd assume if your property is performing, why would you sell? Why wouldn't you just hold it? You know what I mean? Like, there's no reason for you. Sam Wilson (00:13:40) - Well, unless, you know, and I was using our property as an example, but unless we had, you know, debt maturities coming up that we just couldn't avoid, and it's like, okay, well, we're gonna have to refinance this or sell it. Whitney Ward (00:13:52) - Or are you knocked it out of the or you knocked it out of the park. And even if you sold at a six and a half cap or seven cap, you still killed the returns that you were projecting, right? Yeah. Right. Right. Sam Wilson (00:14:02) - That's interesting. So you mentioned something there I hadn't really thought about and didn't plan on going down this, this rabbit trail, but I've seen some deal sponsors advertise buying it negative I guess negative leverage is that the term is there. Yeah. Where they're where they're buying it at a six and a half cap. But they're going in cap rates of five cap. What do you think about that strategy. Whitney Ward (00:14:24) - I mean I mean you know, I was just up in New York last week. I global had a global leaders and commercial real estate conference. And it was just a bunch of institutional investors. And personally, I think anytime you can get in front of institutional investors and just compare notes and listen to them, they're the smartest in the game. So and just hearing their feedback, I mean, it depends on the strategy and how long that negative leverage lasts. Whitney Ward (00:14:50) - Most most people are most institutional investors would say no. Right. But it also it's going to depend on your business plan. If you could if you go in at a five but you think you can exit at, you know, an eight, I don't know. It really just depends on your arbitrage. Like, um, you know, for us, I'm not we're not looking at anything like that. We're being patient because we think there's going to be situations where a buyer or a seller is not going to have the option to continue to push their price. Right. It's going to come down to they're going to have to sell. So, you know, whoever is going to be positioned well capitalized experience as closed deals. And that's one of the reasons our fund is is a 506 C fund. So it's accredited investors only. But that's one of the reasons why we're partnering with managers and builders that have done deals and have taken them full cycle. Because, you know, I think with that, having the equity, having relationships with lenders, obviously, you know, those experienced sponsors would have those. Whitney Ward (00:15:50) - I think it'll be easier to transact and get those sellers to agree to prices that they may have not normally agreed to. Sam Wilson (00:15:56) - Right, right. Tell me about the fund and raising capital in well, in today's market and today's economy, what's that like. And yeah, give us some insight on that. Whitney Ward (00:16:07) - Yeah I mean it's tough I mean everyone's afraid right. And so one of the things...
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