J Darrin Gross Podcasts -

Property Management Technology Systems with Julie Blank – CRE PN #364

Julie Blank 0:00

That’s when we started realizing what is it that we really need that we’re doing still manually, right, we’ve got three different people doing it manually to get us the information we need. So it’s been, it’s been wonderful to say, oh my gosh, you can automate this, these are the five different pieces that sometimes we just do without because it’s takes so long to pull together manually, but it’s so critical to helping us make decisions instead of guessing. So that’s really been helpful and working through this analytical platform that we’re using in this platform also communicates with our property management system. So it’s, it’s pulling a lot of information out of that system as well. So we’ve been able to really pull information because we’re a renovated renovation company, that’s what we do. You know, we really try to track closely our interior renovations and what’s the bump that we get from old lease, you know, rent to new lease rent and what’s the market piece versus renovation piece? So all of this we’re trying to build into the system so that it’s, again more automated streamline the integrity information is there and it’s providing us with real quick information so we can make quicker decisions, and it’s creating efficiencies because we’re not manually doing it anymore.

Announcer 1:18

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:37

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate, investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Julie Blank. Julie serves as the chief operating officer at new standard equities, where she leads the firm’s corporate multifamily operations, Investor Relations and asset management. And in just a minute, we’re going to speak with Julie about the role technology plays in bringing multifamily teams together in a geographically dispersed industry. But first, if you could help us out a little quick reminder. If you like our show, CRE PN Radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we encourage you to leave a comment we’d love to hear from our listeners. Also, if you want to see how attractive Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Julie, welcome to CRE PN Radio.

Julie Blank 1:18

Thank you, Darrin, it’s a pleasure.

J Darrin Gross 3:04

I’m looking forward to our conversation today. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Julie Blank 3:12

Sure. Well, as I say I’m an accountant by trade but not by personality. My, my career was as an auditor, starting with Arthur Andersen in back in Cincinnati, so I graduated with my accounting degree my CPA started as a public accountant realized early early on that, again, I’m a combat type of personality. So I really wanted to get into operations. And when I moved from Ohio to Arizona, that’s when I decided to make a career change. However, no one would hire an accountant to do anything other than accounting. So I was a couple of months without a job. So I decided to go ahead and do get an accounting job ended up in a company doing property management. So that was really my first introduction into this industry was as a property accountant doing accounting for a third party management company. And that was many years ago. And here I am now you know, living the dream, I guess you could say. But it’s been great. I’ve I’ve worked in with some of the large institutional firms in the industry. And I’ve been with new standard equities now for about six years as the chief operating officer but I’ve really worked in all different segments of property management and real estate.

J Darrin Gross 4:35

That’s great. The the the numbers mean a lot in real estate and and having them all in their correct categories and and accounted for properly. I mean, it’s amazing me you know, the the, just the, the depth of accounting that you can get into with with real estate, not just your not just your rent and your you know your mortgage and as, you know, the rent in the mortgage job and payroll and, and all that, but then you get into cost segregation studies and all sorts of things that can really make tax. You know, I guess a tax savings and tax advantage really amplify the tax advantages, I would think that you were uniquely qualified to really recognize that and be able to explain it to anybody that’s got any questions for you?

Julie Blank 5:27

Yeah, you know, I think having that balance of, you know, the, the numbers and operations certainly has helped around me out to be a great resource for my company, and the companies I’ve worked for, and really, you know, in a lot of different factors as it relates to looking at underwriting and market analysis, you know, in right now, with the market the way that it is, and the interest rates, you know, increasing, you know, some of our assets, we have floating rate. And so it’s being able to do that, that forecast to say, hey, what point, you know, are we going to, you know, find some challenges, and what do we need to do now to prepare for that. So it’s certainly as has come in handy. And even though I didn’t care for accounting, I certainly we do it all over again, because it’s got me where I am today, and I love where I am. So it was, it was good.

J Darrin Gross 6:20

Oh, that’s good. So let’s talk a little bit about new standard equities. Tell me a little bit about the firm. And what’s the, what’s the, what’s it all about?

Julie Blank 6:34

Yeah, so we started about 2010. And we are a vertically integrated, value add multifamily firm. So we are strictly focused on West Coast. And by being vertically integrated, you know that we have our own property management and as property management, construction management, asset management, and, of course, our investment management team. And focus on the West Coast, we’re in Washington and California right now, with the goal of expanding into Colorado and Utah, we basically said in, you know, we want to be within three hours of all of our properties, planes, trains, or automobiles, we want to we like being close to the assets. Not that we’ve ever had to jump on a plane and be at one of our assets in three hours. But it allows us to make sure that we’re physically at the assets across all of our different divisions. So that’s important to us. And we’re private, privately held firm. We have about 2000 units right now. And because of our business strategy, you know, we we acquire, we dispose, so we’re constantly in that cycle of acquiring properties and disposing of properties. So we’re looking to expand double in size, which is a little challenging when you’re disposing and acquiring a lot of times we, we kind of net net at the end of the year, but it’s in the last six months, we acquire two deals and dispose of one and we’ve got about three that we are actively in due diligence with right now. Got it?

J Darrin Gross 8:22

The couple of questions for you. The investment strategies is basically value add, improve and and dispose of that. I hear that right? That is correct. Yep. All value add multifamily. All right. And then as far as what’s an average hold time for you guys.

Julie Blank 8:38

We’re about four years. Yeah, there’s some assets we’ve you know, because of market and, and value we’ve been able to dispose of in three and sometimes we hold until five. Couple properties. We’ve had six that were about an average of four.

J Darrin Gross 8:55

You mentioned goal of 2x in your your, your company or I’m just curious, is that based on doors or equity or how do you how do you measure them?

Julie Blank 9:09

Based on doors. We’re about 2000 units right now and so we want to try to get to 4000 and we’ve recently engaged in new relationships with institutional partners which you know is going to help us get there a little quicker as well.

J Darrin Gross 9:27

Got it in you mentioned you guys are private in you also mentioned partners are you are you are syndicating these properties or how are you?

Julie Blank 9:39

Yeah, we have a few syndications. But most of our assets are joint ventures

J Darrin Gross 9:49

All right, and then you mentioned your territory Oregon or not Oregon. He specifically did not say Oregon, you said California and Washington and looking to go into Colorado and Utah. and being vertically integrated? Are your Do you have multiple properties in in the same location? Or same town? Or how are you? How are you set up there?

Julie Blank 10:14

Yeah, we do. So we have properties in the East Bay area, we’ve got six there, we have two in the Inland Empire in Southern California. And then we have five, in like the greater Seattle area. So we are a bit concentrated in the different regions we’re in. We’d like to have boots on the ground for both of the property management and construction management purposes.

J Darrin Gross 10:42

Got it? Well, you’ve clearly demonstrated, you’ve got lots of moving parts, between the geographic locations and, and all the different people and and, you know, even with the joint venture investors. So let’s talk a little bit about how you are able to communicate with everybody and keep everybody moving on the same page.

Julie Blank 11:10

Yeah, you know, the intrinsic nature of our industry creates natural barriers, because of being geographically dispersed, so we do really rely on technology in order to, to bridge that gap. So we have a lot of the portals, we’ve got investor portals that help us communicate with our investors, we have resident portals to help communicate residents employee portals to communicate with our employees, training portals, I think this is probably very common in our industry, we’re not the only ones that obviously have geographically dispersed properties. We use all those pieces of technology as well as some analytical platforms to to help communicate, teach, learn, train, educate. And then of course, for reporting purposes, but we will we still really focus on the face to face engagement, because real estate is still a lot about relationship building, whether you’re at the site level, building relationships with our residents and your prospects or, you know, relationship building for with brokers with investors, you know, there’s only so much you can do when you’re via via zoom or, or Google meats or something, it really still is about physically being together. So we we tried to create that balance, where we still have company events for our employees, where we still really try to get face to face with our brokers in our equity partners and our potential investors. Because, you know, it’s it’s real estate. And we also like to still get to our, our assets as well. So even though you can do a lot of it remotely, there’s still a missing piece, because it’s a physical asset. So we That’s why I said, we have to be within three hours of our assets, because we, we think it’s important that we’re on the asset, looking at it, feeling it, seeing it, making sure our business plans are being properly executed, building relationships with our employees for tenure. So we do really try to have that balance, and really looking at technology as a as a supplement, but not a substitute for our business is really how we look at it.

J Darrin Gross 13:27

Got it. And when you talk about the different types of technology, I mean, you mentioned zoom and and meet, I think it was a meet today with the Google one as it used to be. Okay, so they’re funny how some of these things, they’ve had different names at different times, so I can’t keep track them at all. Beyond that, are there other? Are there other technologies that you guys employ to you know, or is it due to kind of limited to that in that that, you know, the, as far as the video conferencing, are there other platforms that you guys utilize to you know, restored as far as technology goes, that could help you out?

Julie Blank 14:13

I think as far as like video conferencing and seeing people is mostly zoom, you know, we’ve got the Zoom screens in our in our different corporate offices, so that we can have our, our regular meetings with our on site teams with our other corporate team members. We’re based out of Encino in the valley. And we have a regional office in Orange County and then of course, all of our satellite offices and where we operate. So really, it’s I think Zoom is the one when we want to see people in and engage. But we’ve we have other platforms like an analytical platform that we use as a communication tool, between site and in corporate and we So how to select the employee portal that is a communication tool. So really, it’s it’s really finding the different ways to message out from corporate and receive information from the sites in order to make sure there’s open communication as much as possible when you’re geographically dispersed, I think a lot of times is there’s a breakdown in communication when when you’re spread out, but we have the employee portals and the the analytical portals that we use for those communication purposes. In addition to the zoom for the face to face,

J Darrin Gross 15:36

I’m curious if for the different portals, is there a common entry point for management? Or is it is that is it an exit this one, get into that one exit this one to get into that one kind of thing? Or?

Julie Blank 15:51

question because I think we’re probably split, we’ve tried to integrate our systems as much as possible. So there’s like a, you know, a single entry, single sign on. That’s what we’ve really been focused on most recently is okay, we’ve got these, whatever 20 Different platforms are probably exaggerating, but we’ve got 20 different platforms, and you know, 10 of them, you can all get in through this one portal, but then the other ones are all individual sign ons. So we’re really trying to figure out how do we create a better efficiency with the different platforms we have. And even right now, we’re actually migrating a couple of our stand alones on to a more global platform to eliminate multiple silence. So we’re trying to be very aware of that, our onsite teams probably feel the most impact from all the different pieces of technology, because they’re the ones that are really, it’s more day to day. For data entry purposes, we’re into it more just for reporting purposes. So the more that we can streamline the different pieces of technology, the more efficient that they become on site, too. And the more that they adopt it, the harder you make it for the onsite teams to gain access to go here go there, the less that they’re going to engage with it and use it properly. And really hold themselves accountable. So that’s what we’re really focused on now. Because we do have a lot of different pieces of technology that we need to really pull together and streamline and almost bundle.

J Darrin Gross 17:30

So let me ask, I’m not really super tech savvy, I’m understand a few of the concepts. And, and the one that always caught my attention was single entry input was like, you could put it in one time, and it would populate all these things. And, you know, I’ve never found that to be the case, it seems like you’re constantly we’re constantly inputting data, because the this platform doesn’t speak to that platform, blah, blah, blah. And you’re and so it’s very frustrating from that standpoint. But, but I’m curious, you were talking about, you know, just the, the, the, I guess, resistance, if a if it’s not easy to use, and then trying to consolidate or, you know, get get to a point where there’s like fewer entry points, have you found that either there’s a platform that makes it available to you, or that you can get multiple platforms to, to talk to each other to where it’s more of a, you know, a saint or a fewer entry points? Or do you find that the different platforms are there? No, that that’s, I mean, what I find is a lot of resistance wherever they want to fee in order to make that to happen kind of thing, and then it doesn’t work. You know, we’re just kind of curious if that’s what you find, or if you found a secret way to make that all work together.

Julie Blank 18:56

If I had this secret, I’d be making a lot more. Yeah. I wish I had a secret I was sharing to make all of our lives easier. But I think I go back to what I was saying is really being able to look at all the systems we have right now that some of them promise that they’ve communicated with other systems that were existing. And then we found out they didn’t really have to pay more, or the communication still require too much manual attention. So those are the ones that we’re looking to eliminate. But we have two systems right now once a property management platform and one is it as an analytical tool. These are the two we’re really trying to say, Okay, we want everything to feed into these two systems. And that’s it and if it doesn’t feed into these systems, then we need to decide how important is it to our core business to keep it or to let it go? Because we spend a lot of money on technology right and we buy it and we set it up it’s it’s a lot of you know, a lot of labor cost a lot Time, and not just the technology but people’s time, just to find out that when you roll it out, it’s either not being adopted or it doesn’t integrate well. So that’s where we’re really pulling back to say, okay, these two systems are the two we’re going to use, and can we get everything we need from it. And I’d say, by the end of the year, we’ll be where we hope to be, if it does everything we want to, and will really just be using these two systems, which also talk to each other, that we can be more efficient, more streamlined, will have more accurate data, less manual inputs, you know, the garbage in garbage out. So the more automated we become, the more integrity of the information we have, that we’re relying on to make business decisions. So yes, I think we’re, we’re really looking at these two systems to be the ones that allow all the integration we need that are supposed to communicate with all the different systems we have, that we can rely on going forward. So I’d say about a year we’ll probably draw, anticipated three or four pieces of technology that we’re currently using as we streamline around these other two platforms.

J Darrin Gross 21:12

So I’m curious, with multiple properties, and multiple platforms, have you been able to kind of test different platforms against each other to find? Which one? is the best fit for you? Or is it been more a matter of kind of migrating to just one that was recognized as doing more, or how have you gone about making your decision,

Julie Blank 21:36

we actually have a focus group that we get to that we pull together depending on the software, but a lot of times, we’ll pull property manager members into the focus group asset management, we have a head of innovation director, Senior Director of Innovation we pull in, and then if we need to pull our marketing team in whatever, we have a focus group. And so we say, Okay, this is the piece of technology we want to look at, they will go out and look at all the different vendors that provide that technology, that through the different system options. And then we really decide on the one, we rarely find an opportunity where companies will allow you to test, you know, for too long, and so you’ve got to already make a capital investment in one or both of them. So really, what we try to do is say, okay, how can we minimize a mistake, by maybe we just phase it in, so we say, okay, we’re not going to roll it out to all of our properties, we’re just going to choose Northern California, and then we’re going to, you know, to use it there, see that works. work out the kinks, if we’re happy with it, then we will go to the next phase and enter into a contract portfolio why. So we have found that it’s, it’s more manageable to phase it in like that. And it’s less costly or more cost effective. Because if it doesn’t work, then we’ve committed ourselves to a smaller piece of our portfolio. But that’s really how we we’ve tried to work through it. And that seems to work for us to use, we get the buy in from all the different groups that are going to be a part of working in this system. And then we get to kind of test it out. And on a smaller scale that’s more manageable.

J Darrin Gross 23:19

Got it? I was just in there thinking as you were talking, in that you guys are acquiring properties on a regular basis. Have you acquired any properties that had a system that that you weren’t aware of that worked really well that that you stayed with? Or has it? Has it been kind of the system that you’ve had from corporate to you’ve pushed out?

Julie Blank 23:44

That’s actually a good question. And I have to say maybe it’s because of the class of property, we buy the size of properties we buy, but we really haven’t purchased a property that we were introduced into, you know, to a new system, and that we adopted, a lot of times they might have the same systems we do. So it’s actually easier, we just kind of roll it over and we keep going. And now know, I can’t say we have so what we do is we just you know, use the systems obviously, that we have in place and we you know, plug and play into the new acquisitions that will take over.

J Darrin Gross 24:26

So, the sounds like you you’re getting down to two systems, which is sounds to me, like amazing compared to you know, the, just the multiple options that I have, I just find it so frustrating the amount of time it takes to get a result, at least in our industry that the you’re inputting this system that you got to input that system, that input in that system, and it’s essentially the same information over and over and over again. Which it seems to me then if somebody was really to come to this problem, and it’s not unique to, to property management or or insurance or anything, it seems like it’s everywhere. But if you could just create the portal that everybody plugged into, and you could create the face of whatever that is to where the technologies came in and populated the bill or the from the one common and went out or something like that just seems like it just seems too simple, that we continue to have this problem, but it just, it’s an aggravation of mine that I just gotta let go. But But I’m glad to hear that you’re, you’re moving to at least more of a, I guess, fewer systems. And I would assume that that based on having fewer systems and having the testing that you’ve done that you’ve got buy in and you know, the more people use it, the more familiar they are with it and how to use it. And they’re more likely to use it to give you the data that you need, so that you can make the decisions that are critical to your business. So that kind of the endpoint there?

Julie Blank 26:03

Oh, absolutely, because most of the information that we rely on is from property management, feeding information into the system. You know, we obviously have Asset Management who’s doing their piece of it, but a lot of the information starts at the site level, you know, that it’s impacting them your operational information and your financial information that you’re making your business decisions on. So it really is about the adoption of the on site teams. But what we’ve found is it’s not so much training them on the system itself. That’s a huge piece, yes. But it’s explaining to them, whoever the end user is explaining to them why, like, why are we capturing this information? What do we do with the information? Once you’ve put it into the system? Why is it so important? Let me explain to you why what you do in this system matters to the overall business plan and how we use it to make decisions. I had one recently that I went through this, I was in our Washington area. And I went to all of our assets. And I was, you know, as we walk through the property information and the operations and walk the property and the financials, and, and I realized that just by being there and talking to them about the system that was in particular the information in it, you can see that they were like, I get it like now I know why you’re asking me to push this button every day, you know, so shame on us that we didn’t kind of have this bright light before. But after visiting that region a few weeks ago, that’s when I realized that we need to spend more time explaining to them why they have to work into this system and enter the information they do. Because this is what how what you do impacts the performance of the asset and the decisions that we make. So it adds value to themselves as well, that what they’re doing actually matters.

J Darrin Gross 28:04

Now, that’s that’s a really good point. I’m curious, you know, this is all ventually or it’s all data. I mean, big data is basically the mean, we’re, we’re we’re finally to a point where we’re we’re able to or we’ve got enough data that we can make decisions that that are somewhat predictive based on, you know, the past kind of thing. With, with the the data you’re collecting heavy, have you been able to recognize certain data as not useful and and and also recognize other data that would be useful? And is it if you have any examples of that that that you’ve you’ve had over the years?

Julie Blank 28:56

Yeah, actually, really great question. I think my first focus point is, what did we realize we needed in working with this, like this analytical platform, this contractor we’re working with? We’re he’s really helping us build the platform. For us. It wasn’t like, hey, choose, you know, Platform A, B, or C. It’s like, okay, here’s kind of our basic, but we’ll help build you what you want to be specific for your needs. That’s when we started realizing what is it that we really need that we’re doing still manually, right, we’ve got three different people doing it manually to get us the information we need. So it’s been it’s been wonderful to say, oh, my gosh, you can automate this. These are the five different pieces that sometimes we just do without because it’s takes so long to pull together manually, but it’s so critical to helping us make decisions instead of guessing. So that’s really been helpful in working through this analytical platform that we’re using. And this platform also communicates with our Property Management System. So it’s it’s pulling a lot of information out of that system as well. So we’ve been able to really pull information, because we’re a renovated renovation company, that’s what we do, you know, we really try to track closely our interior renovations, and what’s the bump that we get from old lease, you know, rent to new lease rent, and what’s the market peace versus renovation fees. So all of this, we’re trying to build into the system so that it’s, again, more automated, streamlined, the integrity information is there and it’s providing us with real quick information so we can make quicker decisions. And it’s creating efficiencies, because we’re not manually doing it anymore. There’s still been a lot of manual reporting that we’ve been doing, for different reasons once to save money. Technology’s expensive, right. And because of the size of company we are, we’re not small, but we’re not large. So having those economies of scales to really get this big technology has been challenging for a company of our size. So we’ve always had to weigh technology versus I guess, payroll, right, you know, a few hours of someone’s time versus spending 1000s of dollars, you know, till we scale up. So that’s been a challenge for us, too. And then the other part of that question, you said is other things that we’ve been eliminating? I don’t think we’ve eliminated information that we’re like, oh, we don’t really need it anymore, but never really looked at it, don’t use it. I think it’s actually us adding information we need into these new systems so that it is automated versus being you know, a manual report. That’s where we get our biggest benefit, I think.

J Darrin Gross 31:43

Gotcha. I’m curious. With property management, how granular do you get with the data? Can you give kind of a an example of what your property management team is? is collecting or inputting?

Julie Blank 32:01

Oh, yeah. Every Tuesday, we have our revenue management call. So this is a very granular example. And we have Asset Management and property management on those calls for the specific region. And we’re looking at everything from lease trade out numbers down to how many days vacant, or the units that have been sitting there. So in everything in between lease renewals, going down to actually looking at the individual, and do they have balances due because we’re in COVID. And so there’s still this this COVID collection issue and stuff. But it’s very granular. And I think that’s why it’s so important for us to have our in house property management team, because it allows us to stay close to the asset, it makes us very nimble and quick to make decisions. There’s not you know, a lot of red tape or or, you know, toes, we have to step on, and you have a third party management company, but it does allow us to stay close to the asset to make decisions quicker and making sure that we’re aligned with the business plan. So, yeah, we were looking at days vacant, and then we’ll talk about staffing, you know, why is it they can, you know, that hasn’t been ready in 60 days? Why is it not ready in 60 days, while we don’t have a maintenance team, and we’re having trouble with, you know, contracted labor, because they’re having the same issue in our, you know, economy where, you know, it’s labor markets short, and supplies are hard to get. So these are all the things that we’ve talked about. So we do get very granular in those discussions, so that we really understand, you know, what is the root cause? And how can we fix it? And, you know, it’s a collaborative approach to making sure that, you know, every team is successful in executing the business plan.

J Darrin Gross 33:47

Appreciate your turn. What about with the tenants? How, how are residents how the tour technology integrates with them?

Julie Blank 33:58

Yeah, I think we’re pretty consistent with the rest of the industry where we have the resident portal and prospect portal so that they can pay their rent online, they can put in a work order online, of course, they can email the the office. So I think everything is there, we have, you know, self guided tours, if someone wants to do a self guided tours and option, the virtual tours, I think I think we’re pretty competitive with the offerings that are out there for residents, you know, everyone these days, they don’t want to really engage with a human if they don’t have to. So we want to make sure we give those people the options to never speak if they don’t want to to us, but you know, we’ve got the chat bots and everything as well. So I think we have to be that way for this. This generation we’re in because we’ve all been kind of conditioned, you know, to go through technology to communicate, it’s quicker and if you don’t respond in that time have already lost them, you know, you’ve got like a couple of minutes, and then they’re gone. And we’re done. So we have to have that in place, but we still have our staff on site. So that those that you know, want to engage, we’re there and available. And you know, we have to be available. There’s some people who don’t want to use technology, there’s some generations who, you know, still want to talk to people. So again, it kind of goes back to that balance of, yes, we have all the technology that you want, if you don’t want to ever speak to us. But if you do, we’re here as well. So you can come see us or pick up the phone.

J Darrin Gross 35:32

I think I’m crossing over from the technology to the like the people human contact, and it’s sometimes the I mean, technology is great when it works. I think that’s one of the frustrations with it is that, you know, I think that in a platform that you’re in daily, you’re familiar with the ins and outs and how to do things. The frustration, I think I find is more often with the the app that somebody told me that I had to have a download that I use once every so often that every time I go into it, it’s needing to update or they’ve changed something or I can’t remember my login. So I think there’s there there is a frequency of use, that I think has to be taken in consideration for actually making it you know, something, but I mean, somebody who if you’re paying rent, or you know, communicating with landlord property management, or whatever, it seems like that’s a frequency that’s regular enough that that should shouldn’t be a resistance. Have you had much resistance? Or do you percentage wise, you mentioned there are some that still like to talk versus some that are, you know, more than like the technology? Is there a percentage number if you had to guess what that might be that, like the technology versus the still in person?

Julie Blank 36:52

would be a total guess, you know, I just recently was looking at our online payment penetration rate. Right. So how many of our residents are paying, you know, online, whether it’s through credit card or ACH? And I was actually shocked by the the low percentage, and, you know, we’re about 50%. But again, I think, you know, just the, the geography in which we’re in, I think, maybe leads to that, to that. That being said, I think people I think maybe 50%, because I think people still, you know, some people are just comfortable with the connection, you know, the talking to someone and feeling like you can rely on them, and that they’re honest, they have some integrity. And that, you know, there’s emotion that comes out of speaking with someone and seeing their you know, why to their eyes, I say, and that means something to people, I think there’s probably part of part of the process, whether you’re a resident or a prospect is fine to do through technology. But I think at some point through any piece of the of the process, there has to still be that human connection. So, you know, maybe maybe half of our residents still want to communicate face to face. And maybe the other half, you know, we’d rather just do it through technology or an app. But we still require of our on site teams to no matter what standard operating procedure, what process we have in place, we still put a touch point in there of a human contact, so that we create that sense of resident tenure, you know, resident retention, that we’re not just a chatbot or robots or AI that we’re, you know, we care, and that’s one of our values is accompanies, and one of our core values is we care and, you know, we care. So we are we’re available for you and really to build that relationship is through face to face interaction to so that’s important to us through, you know, all this technology is great, but like I said, it’s a supplement and not a substitute for what we do. And, you know, again, real estate is a relationship building industry, I think, and we like to keep it a main point of our focus.

J Darrin Gross 39:15

No, I agree. I’m curious on the 50% that aren’t utilizing the ACH or credit card for for rent payments, any sense of percentage that are unbanked? Is that a low percentage with with your, your residence or maybe

Julie Blank 39:41

20%? Yeah, okay. Some people still are a little hesitant to give out their banking information. They don’t want to automate it in case there’s a dispute, you know, over the rent or a charge. I still think that there’s some skepticism out there among individuals. was okay. So, you know, we we still allow them to, you know, give us a check or money order? And that’s what they’re comfortable with.

J Darrin Gross 40:09

Yeah, no, it’s it’s interesting. That is what about with your vendors? Is there a URL your vendors plugged into the platform, so if you need something new, you are able to communicate with them, or is that an outside platform.

Julie Blank 40:31

It’s, it’s a platform rolled up into our property management system, that they you know, as far as invoicing and everything, certificates of insurance, that’s all automated so that that communication is through automation. You know, there’s, we have a small percentage of our vendors that are outside of that program, not the insurance piece, that’s always important piece. But you know, some of them are really small kind of family run businesses that are a little less technically savvy, that, you know, sometimes run outside of our of our platform, but I’d say we have about 85 90% of our vendors that we use through the portal.

J Darrin Gross 41:21

And I’m curious, with the platforms and stuff, designed to use your IT department, or who’s responsible to make sure that are the monitors to make sure things are working the way they’re supposed to, as far as a communications.

Julie Blank 41:39

That would be me, and my Director of Innovation are the two of us are kind of the it for the company. And again, it’s because of scale, right? I mean, we’re, I’d love to have an IT division. But it’s, we’re not quite there yet. So it’s myself and our Director of Innovation, that really makes sure that the technology that we choose, you know, we bet it well, that it’s going to integrate that we have a good relationship with the with the with the vendor, the contractor. And then she’s responsible, our senior director is responsible for understanding the integration in the communication among the pieces of technology, and carrying on the training, the rollout and the relationship with our contractor, which is extremely important. So you know, there are moments we have to reach outside and get an IT consultant, it’s rare, that we’ve been able to usually figure it out ourselves and just working with our contractors.

J Darrin Gross 42:44

Well, I think the key to that, that, that I’ve come to recognize is that if nobody’s paying attention, or there’s not somebody that’s, that’s kind of, you know, looking over it and making sure that it’s doing what it’s supposed to do or you know, left on and others, some famous quote out there talking about whatever you whatever you fail to inspect or whatever. You have to constantly stay on top of in order to make sure it works week, you know, you’re getting what to expect.

Julie Blank 43:13

Absolutely. And that’s what our Senior Director of Innovation does. I mean, I can’t do that every day in my role, but that’s what she’s really tasked with is ensuring that what we’ve signed on for is working the way that it’s supposed to, from the vendor side, but then also internally, are we doing what we’re supposed to be doing to make it work as well as opposed to? And are we using it to full capacity as the other way? It’s like, example, like my iPhone, I probably use 20% of this 100%.

J Darrin Gross 43:43

Remind me of that.

Julie Blank 43:44

Exactly. I have teenagers as well. So I know, I’m not using 20% of my phone capacity. But that’s the same thing with the technology we have in our in our firm, we you know, are we using it to its full capacity and getting not just our money’s worth, but really using it to help us continue to be more streamlined, automated and help us make better business decisions quicker, with more integrity of information.

J Darrin Gross 44:14

And I think one of the frustrations I have with that is that I think there’s a lot of people that understand how to push the button, but don’t understand what the what the information behind the button means kind of thing. And I’m still a mold. I’ve been doing this long enough to know that before there was a button, I had to know how to do that to get results kind of thing. And so, you know, there’s a part of me that I know how to do the work as opposed to just push the button that gets frustrated with the people that don’t understand the work that’s been done when you push the button and so but anyway, it’s kind of a I mean, if the work gets done and it gets done the way it’s supposed to, what’s the difference between push a button or you know doing the work if you’re still getting The results you need. But I think there’s, there’s I guess for myself, it’s kind of just that that reconciling and recognize that hey, look, you know, we’re getting what we need, you know, what do you carry God and kind of thing so, but no, I I applaud your efforts here, you know, being spread out the way you are and all the transactions and the people you have the different moving parts and, and trying to find your way through these different systems that, you know, it’s, it’s a chore. And, you know, I think that the thing that I recognize it’s, it’s not like technology is going to go away. It’s just in it’s a constant update. Thanks. So I mean, just because something’s working today, you would expect that the next iteration will work better. However, I’ve seen that that’s not always the case. But there’s usually there is a progression period. And so I guess we’ll get used to it. Julie, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk, and determine what to do with risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And if that’s not an option, and we look and see if there’s a way we can minimize the risk. And if we cannot avoid or minimize the risk, then we look to see if there’s a way we can transfer the risk. That’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation. frame the question, however you choose to whether it be your clients, investors, technology, employees, the market, politics, how are you whatever you you think might be the the biggest risk, but see if you can identify what your your biggest sort of skills. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Julie Blank, what is the biggest risk?

Julie Blank 47:24

Well, a couple of months ago, my answer might have been different than now that you know, the market has been changing so drastically with the I think with the speed and magnitude of the interest rate increases, it has, you know, spooked investors, it’s you know, put some weight in the cell of borrowing. But there’s still a lot of capital out in the market. You know, investors want to do deals, they, they need to place capital. So deals still get done. But I think the the risk that we’re looking at now is being able to continue to do deals, but looking at the severe impact that the interest rates will have on your cash flow. You know, especially for us what we do, we’re value add, so our, you know, our cash on cash is, you know, already a little low, we’re more about, you know, when we when we dispose of the asset. So when you are in a area that we are and interest rates are increasing, we have to really step back and really scrub the underwriting be a little bit more conservative, educate our investors, you know, some investors have stopped investing, some have become a little bit more cautious, rightfully so. And then, you know, we have other investors that are still going, Hey, let’s figure out how to make it work. So it’s really just being able to realize that the market is changing now, and that it might continue to be that way for the next, you know, couple of years, not only on the acquisition bid on our existing deals, like I mentioned earlier, in our conversation is, you know, some of our deals, we have floating rate so it’s being able to step back and forecast and look at what the risk might be, how do we overcome the risk and be more proactive right now. So I think a lot of it’s going to come down to just kind of protecting cash flow and being able to underwrite new deals, and realize that we’re not going to get to the, you know, 1819 20% returns that we were able to underwrite, you know, a few years back and be be satisfied that we might get 11 or 12%, which is still really good as a return and that you know, apartment investment is still the top You know, real estate investment type. And we’ve been in difficult cycles before in real estate, and we’ve survived. So yes, there’s a risk, we’re not going to be stupid, we’re optimistic, we’re cautiously optimistic. But we also know that real estate is still a good investment in apartments in particular, especially the asset class we’re in, we’re B class. So we’re right in the sweet spot that the markets are gonna are doing well, the economy’s doing well C’s go to B’s, when the economy starts to not go so well, the A’s go to B’s. So we were we’re a bit protected as far as the as you know, occupancy and rents and stuff. But I think we still have to realize that there, there’s going to be some risk and some hits on our cash flow because of the interest rate increase, but I think it will, won’t make us stop doing deals, we just have to be a little bit more cautious and, and work with our investors much closer. So that we you know, have a better understanding of where we are and where where it’s going to go. I don’t have a crystal ball. I wish I did. But it’s hard to say things are have moved so fast, that I think just taking a step back and looking at things closers is something we need to do. But at this point where we’re continuing to operate business, as usual, with continued focus on being aggressive, as much as we can with rents, which is going to help overcome the, a little bit of the interest rate increase in the inflation, and continuing to work in our technology platforms to get all the information we can to make good decisions. That’s where we are.

J Darrin Gross 51:47

I appreciate you sharing that. Definitely some challenging times ahead. But like I said, we’ve been here, done that and and, you know, survive, it’s kind of just a matter of, you know, changing the chapter here for a little bit and then go back to the chorus.

Julie Blank 52:05

So we didn’t know we’d survive a pandemic. Right. Right through it. I mean, we’ve been through worse. So we’ll get through it. We know we will

J Darrin Gross 52:15

have to. That’s the only way. Julie, where can listeners go if they’d like to learn more or connect with you?

Julie Blank 52:23

Well, we have a website, which is new standard equities.com. Scott information about the company about the executive team, all of our properties. And my information is on there as well. So, I mean, I can give you my email, I don’t know what you’re looking for. But

J Darrin Gross 52:45

knowing we can point him to the website and that we get there. So all right. Well, Julie, I can’t say thanks enough for taking the time to talk today. I’ve thoroughly enjoyed it. Learned a lot and I look forward to doing it again soon.

Julie Blank 53:01

Sounds good. Thanks, Jared. It was a pleasure. I had a good time too.

J Darrin Gross 53:04

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 53:24

You’re listening to CRE PN Radio. for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio.

Hotel Investor Syndication Deals with Kyle Tushaus – CRE PN #363

Kyle Tushaus 0:00

The current vehicle that my business partner and I are just now launching where the approach is taking the sort of institutional approach the, you know, commercial, commercial type deal or thesis that we might use for any of those product types, but putting it through a syndication model, which is more akin to what’s being offered for your individual accredited investor and so we’re keeping it below an $8 million or there abouts deal size and using a syndication structure to actually put the deals together. With the with the idea being we’re gonna offer the institutional type returns and see structure which is better than what the syndication landscape is offering investors in offered in that portion of the market.

Announcer 0:46

Welcome to see our adn radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:06

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Kyle Tushaus. Kyle is a partner with Pine Ridge capital. He has a background working for family offices under a sponsorship model focused on acquisition. And in a minute, we’re going to speak with Kyle about syndication and the current macro environment, and how that influences your micro investment decisions. But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest. Kyle, welcome to CRE PN Radio.

Kyle Tushaus 1:26

Yeah, thanks for having me to be here. This is actually the first first podcast ever I’ve ever done. So this is a interesting experience.

J Darrin Gross 1:26

Well, we’ll go easy with you then. But no, Kyle, I’m glad you’re here. And looking forward to our conversation. Before we get started, if you could take just a minute and share with listeners a little bit about your background.

Kyle Tushaus 2:02

Yeah, my my background, prior to commercial real estate actually got started as an engineer in the oil and gas industry, which is was interesting and highly technical and exciting. But it’s definitely something that’s more enjoyable when you’re in your early 20s. I’ll say I moved around a lot and eventually got to a point where that was either going to send me overseas, or I was going to need a change of change of scenery, so to speak. And I just gotten married. So I took option B and I had some opportunities sitting on my plate at the time. When I was given that option to try out some commercial real estate deals. They were kind of centered around the energy industry, kind of without going into too many details. A friend of a colleague had bought some properties that they wanted to redevelop and there’s some hidden oil wells on him that he didn’t know about. And so I got started by helping him mediate that issue. And that was kind of the impetus for getting into commercial real estate. And within the commercial real estate industry prior to this, I’ve worked for two family offices across all product types, heavily focused on hospitality, office and mixed use across both of those that was probably the bulk of the dollar amount that we were focusing on were those three. But like I said they both were opportunistic.

So just about every single product type we got into I think the only thing I can say I’ve never really touched is self storage or mobile home parks. Those are the two asset classes where we kind of steered clear, but following those two sponsored a few deals on my own. That was in 2020 which was a great time to go out as a GP. And, you know, got a few deals done. Despite everything that was going on in 2020 I was really excited because I thought I would get some some screaming deals, but you can even keep it pretty good poker face going when you don’t have to pay the mortgage and whatever and had their death pause. I think that was probably the toughest negotiation landscape. I Experience, just because nobody actually had to do anything. So you kept getting 2019 pricing on, you know, zero cash flow in some cases. And in that approach, most of the LP focus was on institutional firms. And so I was kind of mimicking what I was doing at the family offices where we build out the LP tranche with one, maybe three, at most capital groups. So I was rinsing and repeating that model, because that’s what I knew. But it came with a couple of issues, because when you only have say, one LP, they know they have a lot of leverage against you. And so I got retreated 100% of the time on all those deals. And that led me to the current vehicle that my business partner and I are just now launching where the approach is taking the sort of institutional approach the, you know, commercial, commercial type of deal or thesis that we might use for any of those product types of putting it through a syndication model, which is more akin to what’s being offered to your individual accredited investor. And so we’re keeping it below an $8 million or there abouts deal size. And using a syndication structure to actually put the deals together with the with the idea being we’re going to offer the institutional type returns and see structure which is better than what the syndication landscape is offering investors in offered in that that portion of the market.

J Darrin Gross 2:56

Got it? So one of the go back here to so you mentioned your experience in the institution, institutional investment world, and kind of a limited number of LPs that you dealt with and and how they treated you differently when you went out and tried to do some of the smaller deals. And then the retreat. I wonder if you can just expand on that a little bit. Because I you know, it’s funny, I hear I’ve talked to a number of syndicators. And I don’t know that anybody’s ever, you know, kind of shared the backside or, you know, what goes on behind the curtain kind of thing in those situations. But it was kind of fascinating when I heard you say that. Wow, that’s, that’s a that’s a surprise when those lessons you only learned by going through it, I suppose.

Kyle Tushaus 3:02

Yeah, I think we touched about it. We touched on this a little bit when we were face to face several weeks back anyway, when I was kind of talking about the hardware and I went through Yeah, so on those. Yeah, the, and again, I’ll caveat this by saying this is during 2020. So it was an interesting time where I feel like people were more keen to burn a bridge, maybe than they would have been in normal times, because they thought to hell with it, like, who knows what’s gonna happen. And maybe I’m just being too nice. I don’t know. But you know, the, I won’t, I won’t throw out any names, because that can come back to bite me. It’s a very small industry, despite the, you know, the dollar size of the industry that we, we operate in. But a good example is, you know, one we had a really clear thesis on, you know, what the returns are gonna look like, we were going to convert a hotel into apartments, which is now a thesis, I think, just about everybody has seen. But one of the last things I did in the family office direction was help launch a fund for that thesis and said, Okay, well, I learn how to implement this, I’m gonna go do one on my own, and had found one where there was several characteristics about it that led to, you know, you had to mess it up a lot to not make a good amount of money because it was by right zoning, the city already had tried to get this to happen in the past. So they rolled out the red carpet. For me, when I said, this is what I want to do with the property, they said, We’re going to fast track the approval on this, the property was 18 separate buildings. So I could actually renovate and convert them piecemeal, and not disrupt the operation. So it wasn’t even a hey, let’s take our cash flow down to zero and renovate this as fast as we can, I could still operate the hotel and turn over one building at a time on my way to the conversion. So there were all these things that were stacking up where it’s like, you know, despite it being 2020 Look at all these ways that we can protect our downside. And that’s not even just you know, speaking of the difference between the price we were paying for the hotel and what the rents were in that market and they were all extended stay too so it’s not even like I had to convince people to live in a shoebox they were already 520 square feet or above. So it almost looks like the stars were aligned and during 2020 My thought was oh, this is a this is a no brainer. This is going to be great and LPs are gonna love it. And so we got through DD is last week. And you know, this happened several times, but this one was particularly, you know, stung particularly bad because I had lined up all these contingencies. Closing on not closing but going hard on Friday. They call me on Monday and say, You think you can get a couple extra 100 Off $100,000 Off the park. Just price, we would feel better if this was at least $500,000 off, we’re already like at a good price. And so you guys are just kind of, you know, being mean, like, we should just do the deal the returns with great, why risk it. And they, they said, well see if you can make it happen. So pulled some strings, you know, kind of probably pissed off the seller a little bit, got the 500 within 24 hours went back said, Alright, let’s do this deal. Well, you think you can get another 750 off. And so what was actually happening is they just kept coming back with requests that we’re going to get harder and harder, and we’re not going to get fulfilled by Friday. So on the second request, I called them out on it, I said, you guys realize that any another dollar off on this deal doesn’t get it over the like, that’s not the crux of why this should or should not be done, we are far beyond the level of, you know, suitable risk adjusted returns. And they pretty much just blatantly said, Well, here’s the thing, you’re going to be 10% of this deal is the GP which is standard, we have your 10%. And we kind of just want to do the deal without having to pay you either any management fees, or promote or anything like that. So what we’re going to do is, either you take our terms, or we’re let’s get in unless you fall out of contract, because you only have three or four days before your money goes hard. And we know that’s not long enough to get another LP on board. So it’s either going to be this or we’ll let you fall out of contract. And we have the sellers number now we’ll just circle back with them. And we’ll buy it. So that was that was kind of the standard operating procedure, just about every single time towards the end of the deal. And when you’re in that position, you kind of just, you know, I used to have a kind of a mentor that said, look, at the end of the day, you should drop your ego and who gets paid wins in this game. And I agree with that. But then also, if something keeps occurring like that over and over and over again, you have to go reevaluate if you reevaluate your business model, and that’s, that was one of the experiences that kind of kind of highlights the the games that were being played maybe in 2020. Or maybe that’s just luck of the draw, maybe for me, but I’ll say that it, it was still a kind of a standard procedure or standard move. Even when I was at the family offices. The Retrade, when the clock was almost run out was was kind of the kind of everybody did it. Just because they knew they could it’s almost like, hey, once I tie up the property, I’m gonna ask for money off, because the worst thing the seller is going to do is say no, and then I’ll just say, Okay, well, I’ll still do it anyway. But you might as well ask. So that’s, that’s what pushed me in this direction.

J Darrin Gross 3:26

It’s fascinating to hear kind of the inside baseball talk there a little bit about, you know, some of the more the details and the nuances of the negotiation there. Do you find that to be or was it a case particular to one or two LPs? Or was it more just the time? Or do you think it was just kind of the way the big boys were? Were prepared to play?

Kyle Tushaus 5:20

Yeah, I want to say a lot of it had to do with the time in the market environment. I mean, everybody thought the world was gonna end, right. And I was kind of approaching this with I had just gone out in January of that year saying, Alright, I’m gonna do my own deals. I had no, you know, I, I was not in any capital stacks, I was pretty much all cash. So when COVID hit, you know, from an outside perspective, looking in, you can either think that was lucky or brilliant, because I had the liquidity and I thought, This is gonna be great, I’ve got flexibility, and I can go out and, you know, pick up, you know, bargains. And that’s not what panned out, because, like I said, No, you know, nobody had to pay their debt during that time. So they could kind of dig their heels in and say, Nope, you’re gonna pay me on 2019 numbers, no matter what’s happening. And I think some of that trickled over to the actual cash stack negotiations, where the LP said, you know, look, we don’t know, you know, what’s going to happen here. And even if you’re talking to us about something like multifamily, that should be safe. We’re, you know, the, the downside of doing nothing, in that time was zero. And so I think they probably thought, like, why not? Like, let’s see if this guy will say yes to just an egregious deal, because we can, you know, it’s certainly a benefit. And potentially, if you’re sitting in that position, trying to get a deal done, maybe a downfall of our industry, but there’s no called strikes here, right? So I can, I can look at deals all day, doesn’t really matter. I might have opportunity costs, but you know, the human brain being what it is we don’t really gauge opportunity cost correctly, and so the do nothing. The motivation was pretty high at that time. So I think that was probably the bulk of why that panned out that way, but I will say that, you know, was negotiating with LPS from Midwest or west coast, a couple on the East Coast. The These deals were all, you know, Detroit or westward. So this is not, you know, I didn’t look at anything on the east coast. But I would say that I had a similar experience with LP groups regardless of geography.

J Darrin Gross 5:21

Gotcha. And did you end up doing the deal?

Kyle Tushaus 5:56

Yeah, once you’re in that position, you kind of have to just take it on the chin. And so yeah, I ended up doing I mean, basically, for every situation where that occurred, I kind of had to just say, Well, you know, another thing you have to consider, it’s kind of sunk cost mentality, which, you know, I kind of just alluded to the human brain that gauging opportunity costs correctly, and then I fall victim to sunk cost mentality, or the sunk cost fallacy. And when you’re the sponsor, or you’re trying to occupy the GP tranche in a deal, you know, you’re paying for the due diligence. So in all these situations, I’m looking at, you know, 10s of 1000s of dollars of due diligence efforts that could either just evaporate, or you could just say yes, and do the deal. So, you know, 100% of time you say yes, and you do the deal. And like I said, you don’t necessarily get bent out of shape, when that happens, because the who gets paid wins, or who gets the deal done wins. You just change your business model, right? You say, Okay, well, you know, Stefan, the bear trap over there, I’m still alive. I just won’t stop there anymore. Right. So you got to find a different path. So yeah, did did every single deal and kind of dip my lap and just move forward. But, you know, going for future deals, looking to avoid similar situations. And saying, you know, it’s, it’s a lot safer. If you say, have the, say you got 20 people or entities making up your LP investment tranche, and you get one person that pulls that kind of move. And you can just look at the other 19 and say, Hey, does everybody want to increase their capital allocation by X percent, and just replace the person that’s saying that, and you have that flexibility? You don’t have that flexibility when you’ve gone to a single shop? To fill out your cap stack? So

J Darrin Gross 6:04

Yeah, no, he has the money makes the rules kind of thing, right?

Kyle Tushaus 6:04

Yeah. Yeah. So Elon Musk, just skirting every SEC Rule that you were I would be? Yeah.

J Darrin Gross 6:04

So you mentioned the the Pine Ridge Capital model, you guys are working with you? Were you were trying to get returns for your investors, similar to what they might expect on the institutional side? Can you kind of give us a comparison as to what you see in the the syndication model that that you see on the marketplace, as opposed to what you are experiencing? On the institutional? Side?

Kyle Tushaus 6:54

Yeah, and they so prior to this, I could not get anything past the underwriting phase, if I didn’t feel like we had a shot at getting above a 20% internal rate of return for a reasonable amount of risk. So that was kind of our benchmark, where we had to say, look, we can’t hit 20, at a deal level, there’s not going to be enough flexibility for what actually trickles down to the investors after you know, fees, and, and all of that, for it to be worthwhile. And obviously, you don’t go reaching for yield just to try to get over 20. Right, the 20 has to be, you know, with a stabilization plan that makes sense. It is, you know, somewhat expected, given the environment. Now, I would say the main difference. And again, I’ll say that I don’t have a massive amount of experience. In the syndication world, it’s more of having friends and family and colleagues, show me and tell me what kind of things they’re getting pitched. On the institutional side, there’s always some kind of give and take the deal might have. So if I have a really high IRR, first thing I’m gonna ask, is this predicated on the exit, right? Or am I getting a good cash on cash return and a kind of a light pop on the refinance or the exit price? Like, where am I on that spectrum? And where, what aspect of the cash flows in my giving up on to get the thing that you’re advertising to me, and it was very sort of cut and dry on that when we said, like, you know, we have to do XY and Z, like, let’s say it was a hotel renovation, and we knew that this property was trailing market rates, and here was the growth year over year, and it was in a market that was desirable, and you know, not subject to high seasonality, whatever the case might be, we’d say, Okay, we’re gonna spend x amount of dollars to renovate it, you know, I’m going to place it at this point in the market. And then if we can run it at this margin, right, because that’s going to flow through is very, you know, cut and dry. And you would say in that situation, well, what’s my biggest risk factor? How are you going to control the renovation? And so we had a particular firm, that I’m actually You know, speaking to we might have said, well, we bought a GC firm. So now we control construction costs. So there, okay, you’ve, you’ve solved for the biggest risk factor. So great, now I see what’s going on. But you couldn’t really, you know, I said, look, it’s going to be 6% cash on cash return until we can actually start popping the rates. And then after we pop the rates, right, it’s going to take some time to work through the market. And then we got to actually have things trickle down to the net operating income line. So this is what the timeline is going to look like. And then I compare that to the experience and say, This syndication world where I’m seeing deals that say, like in the hospitality example, come with an operating business. But then it’s an operating business that none of the sponsors have experience with. And it’s very new, what not very way very much might be people just reaching for yield, which is a very natural human behavior, especially when we’re at this point in the business cycle. But as the sponsors say, we’re going to take on a business model that we’ve never done before. And that’s how we’re going to get you to X percent cash on cash returns. And I question these models where it’s like, you know, I think I would take a lower cash on cash return, or maybe not such high octane returns in an investment where I’m not banking on you figuring out this business model for the first time. And then beyond that, you might be buying five properties that require this business model. You know, I’m speaking to some things that I’ve seen in the market.

And a lot of these returns are kind of predicated on you trusting that they’re going to just figure it out. And, of course, I’m the man with the hammer. So I’m looking at this through the lens of the you know, if I was on the other side of the table, pitching a 500 plus million dollar, Aum, institutional firm, they would laugh me out of the room. And so, you know, now when I talk to friends and family, if somebody says, Hey, I invested in Kryptos, a big one recently, right? They say invest in some kind of crypto fund, I would I always ask now, how often have they been distributing cash on that thing? Because I hear people talking about, you know, double digit cash on cash returns, and then oh, when we sell this thing, it’s going to be even more. And then I just say, when was the last check. And you know, of course, this is not a scientific approach, but it kind of seems like the marketing, my marketing beforehand, I had to sort of downplay the returns and over deliver, it almost seems like the tables are flipped in the syndication realm, at least what I’ve been exposed to where it’s like, you got to promise a lot and get people’s eyeballs on it. And then afterwards, like, if you don’t distribute, tell them why you didn’t supply issues or something like that, which, you know, from my standpoint, I’d be like, Alright, I’m not investing in you, again, if you if you tell me that kind of stuff. So but that’s, I might be too jaded from where I’m coming from. But that’s, that kind of seems like the difference where, yeah, pitching institutional money, I would have to like, I would just have to handicap the deal so much, and then say, we’re still at 16% IRR. Right. And I have just thrown everything I can at this thing. Like, you know, short of, you know, meteor hitting this building, right? Well, we’re not going to lose money. Where that doesn’t seem to kind of be the like the bar that I have to get over if I were to put together a syndication thing. And I’m sure there’s some syndicators out there that are listening to this saying, screw you, like we’re very diligent, but you know, there’s always outliers. And I’m saying that’s kind of what was pitched to me initially. And why I said, Well, why don’t we just take institutional model, pull it down market where I’m not competing with institutional capital, you have the same structure, right? Well, syndicate it, but Right, these crazy promotes where you got sponsors taken 50% of the cash flow. Like, I wasn’t, I would never be able to get that to pan out at the institutional level. So I’m not going to pitch that to any investor. So you know, we’ll, we’ll stick to reasonable rates of fees, and promote and then look for deals where I said earlier, heads, I win tails, we don’t lose.

J Darrin Gross 7:58

No, that’s, that’s, you know, enlightening to hear kind of the, you know, how you you were required to act on the institutional side versus kind of maybe what, you know, the less sophisticated or experienced syndicator may be promoting. So, talk a little bit about the Pine Ridge capital, what is your, your, your model, your thesis? What are you guys looking to do and go after?

Kyle Tushaus 8:03

So, outside of just saying lower deal size, trying to eliminate competition in that regard. And, you know, we consider they there’s enough tech tools nowadays to where you can manage a pretty disparate portfolio of smaller assets without getting bogged down. Now if I threw something like a hotel in there, obviously something like that if you’re if you’re in the portfolio building world, you hand that management off to somebody else. But for the most part, right, try an asset manage that much you don’t need, you know, if he told me buy one $50 million asset versus 10 $5 million assets, yeah, those are much more moving pieces. But I can systematize a lot of things, and I can solve for a lot of the friction. In the terms of the management, keeping up with the paperwork, that doesn’t necessarily mean I need to charge a crazy management fee to do that. But then outside of saying, we’re going to bring it down to a lower price point in the market to try to get rid of some of that larger competition, we don’t really have a product type that we’re focusing on, right, if we’re agnostic, and we’re really just looking for the right opportunities in the right sub markets, at the right price. With with the right stabilization thesis, I will say we’re only looking at the Pacific Northwest, because that’s where my business partner I live. And so I don’t need any more southwest rewards, points at this, at this juncture, the previous deals that I was doing, despite living in the Pacific Northwest, where none of them are in the Pacific Northwest. And so I was flying around a lot. These are all you know, our focus will be hyperlocal, you know, we gotta be able to drive to them same day if need be. But then, the way we enter any of these is looking for opportunities where we’ll have a thesis, usually we try to find one or two, maybe three avenues, just beyond the base thesis that we could go after. So things like, I think most people are probably familiar with a covered land play. So you know, one, we’re kicking the tires on right now, it’s got a building on site, where I could quickly lease it out to somebody for say, three years, get my ducks in a row, get my ducks in a row and go vertical plan for multifamily, while we’re getting cash flow, but the idea being, let’s ink that lease for three years with a clause that says, hey, we’re going to develop this thing, and we’ll go find you another property. So you get the tenant working hand in hand with you. And for the effort, right, they get a slightly below market rental rate. But that rate still covers your debt service and everything you need to do with the property, maybe distributed a little bit a little bit at the same time. But during those three years, right, we’re actively putting together, you know, a, a vertical multifamily development. And then when you’re ready, right, you go place that tenant and another property, so you actually turn the first deal into two deals, because you might actually go acquire the property that they’re gonna go be placed into. And then you can scrape the original building and go vertical there. So that’s a good example of one where we say, okay, day one, let’s say we just get in day one, we don’t do anything, right? Well, that lease was still cash flowing positively for us, right, and that development potential isn’t going away. And this particular case, I’m talking about sub market that has land use restrictions, where it’s making it a very, very tight market. So it’s very hard to find any dirt that you can build on. And it’s also in a market where we have contacts and colleagues existing that can do the construction. But even if we don’t decide to go that route, right, let’s say we just lock it up, we could turn around, maybe contribute that as 1015 20%, whatever the numbers come out to be as contribution into a go vertical plan. And we let a developer or some other group actually do that part, and move on to the next one. Or you could do it yourself. So it’s, it’s, it’s an approach where you say, look, day one, we’re covered. And then we’ve got, say, three different avenues we could go. And the macro environment, or particularly the market level details, given that sub market are screaming at us that, you know, it might make sense to go vertical, in this case today. But it’s certainly going to make sense three years from now, five years from now. And if you’re locked in with something that’s going to cash flow, right now, you can kind of pick which date you want, obviously, tomorrow would be the best day, you’re going to look at it from an IRR perspective and the time value of money. But if you got to year two, or three, and prices are still soaring, you might say we’re gonna wait for four or five, and it really doesn’t change your returns all that much to have to wait for that, but you haven’t yet pulled on construction financing, right? You’re not now making payments you have that optionality of when you want to move forward. So that’s kind of, I’d say, that’s a good, good example of how we’re looking at the deals we’re going into.

J Darrin Gross 8:49

Gotcha. And I think you might have said about I’m Are you will you be doing syndication, like one building at a time or will you be doing more of a fun approach?

Kyle Tushaus 10:08

So for the time being, we’re going property by property, and that is, I mean, primarily in phase one, we’re kind of testing out this thesis. You know, I might be able to pull up a notepad and say, you know, Why doing, you know, a light industrial play at 4 million makes just as much sense as 40 million. But we want to actually go through the machinations of doing that first. And then Phase two would be, let’s say, you put your head down and you get this, you start chipping away at these and you’ve got a portfolio of 10 or 12 would first go back and probably do a blanket debt refinance over the whole thing. Because obviously, you get better that in and of itself is kind of a strategy for return of capital is get a blanket term across, say, a dozen different portfolios. And at each property level, right, you get better, better debt terms for that reduce risks as far as a lender is concerned. And I think at that juncture, we would probably look at more of a fund approach, how we would incorporate that into still the syndication market, we’re not quite sure. Like I said, right now, we’re, we’re just testing out the property by property thesis. But the Holy Grail of this would almost be to say, kind of be like a crowd street or a Fundrise. Where, you know, I guess in fundraises case, you don’t really get to pick the properties, crowd streets, you do, maybe somewhere in between that, except we don’t want to necessarily be an online platform, I think it would be preferable to operate more like, like an old school Buffett partnership, where it’s kind of like, look, you can chuck your money into this bucket. And we’re doing X, Y, and Z with it. But, you know, scaling up to, you know, a billion assets under management is not necessarily the play here. It’s like taking this laser focused, like picking off the things that make sense and have this optionality. But in a manner that, you know, obviously, you’d want to scale it up to a point where you can move faster than say that one broke one property at a time, but not scale it up so much that you dilute the core approach and the core thesis. So yeah, I guess sort of, like, somewhere between a crowd Street and Fundrise. But obviously, on a much smaller scale, and, and not marketing on sort of like a yeah, just submit your information here. And then wire is 25. You know, okay, not not exactly that model, either.

J Darrin Gross 10:10

Gotcha. Do you have a minimum investment requirement?

Kyle Tushaus 10:10

Yeah, so right now we’re at $25,000. And we arrived at that one, because 25, kind of a typical minimum, anything below that, and you’re kind of just doing a lot, you know, too much movement for not enough contribution into a deal. But primarily, because the size of the deals we’re looking at, it’s pretty easy, just take a if I want to do a $5 million deal, and I have this minimum, divide the deal, but that minimum, and if it gets to be too high of a number of investors to juggle, then you might want to increase your minimum. And so 25 is a comfortable number, where we feel at that at that number will, will not have to be juggling the 99 Investor limit that, you know, we’ll have for that type of deal structure.

J Darrin Gross 10:10

Well, it sounds sounds exciting. I mean, the opportunities and the fact you’ve got a, you know, a model for you know, the funding and then the distribution and raising capital and, and kind of your thesis you’d like said you’re agnostic, but, you know, experience with the hotel conversion and, and kind of multiple exit points. I guess that’s kind of what I what I heard you I mean, it sounds to me, like more of a, you know, safety kind of a thing as opposed to the the one that you gotta hit. And yeah, if not, everything happens, like it’s supposed to, then, you know, what do you do? Yeah.

Kyle Tushaus 11:24

I mean, yeah, another thing that I feel like it’s kind of, it’s probably not completely lacking. But I haven’t heard in, you know, too many people pitch me on it so far in a syndication world, is this idea of sending it up the ladder in terms of investor risk appetites. And I think the closest thing that I’ve seen get in touch on this is, hey, let’s buy called 100 units of multifamily for easy numbers, and we’re going to renovate ATM and leave 20. So the next guy sees that there’s meat on the bone, there’s meat on the bone concept. I mean, I get that and that was something that entered the conversations in my experience previously, but I always thought of it more as like where certain capital resides in the lifecycle or the type of cash flow an investment might throw off and you could say the same thing not just about commercial real estate but just about any private investment. But you know, we did a couple of rows and columns and a couple were certain investors like the more risky like go renovated, get a bridge loan right to yours and pop the rates kind of thing, especially in the hotel world, right? You go do a PIP or what’s called a Property improvement plan. And you can now say, you know, they’re doing $99 A night, now we’re gonna do $160 A night. And once you get to that point, the investors that came along with you for that renovation period of that 99, to your, whatever your market rates were, they don’t necessarily want to keep that capital in something that’s now shelved, and you’re just sending out your distributions, they want to take that out and go find the next hotel, or the next, you know, property, whatever the thesis is, that’s gonna get renovated and mark to market. And so rather than worry about who’s going to pay me 100 bits less than my cap rate to sell this thing outright, we were thinking more in terms of how do we recap this project. So in that scenario, right, we renovate the property rates are going up, you know, property value was, you know, for easy numbers, let’s call it a $10 million property, it’s now $15 million, we’ve created $5 million worth of value, but it’s still cash flowing at X percent, that is still attractive to a passive investor, to say, Great, our investors that only want that renovation phase, you’re out, we’re gonna bring in new dollars at this new valuation, the new dollars don’t feel like they’re getting the short end of the stick, because we’ve already renovated and we already took the risk. And we can tell them, Look, you’re gonna get X percent distribution on a stabilized asset. And they would say, Great, that’s what we’re looking for. We don’t want to trust that you can swing hammers, and not screw it up. And so it was never really, I mean, obviously, if you can get somebody, you can buy something at like seven, do a little bit of work and sell it at a five. Everyone wants to do that all day. But we always talked about more in terms of recapping and it was less about, you know, what’s the new valuation, but what does the capital that’s in the deal actually want out of the deal. And so there’s always this preferred route and saying, like, well, it’s Nick, open market and pay 6%, to the broker to go list it and all this, let’s call the group so we already know that wants stabilized cash flow on this particular asset type, and just pull that tranche out, that was the opportunistic tranche and replace it with, right, the new stable cash flow investors. So that’s, that’s something where, obviously, we’re talking, you know, pretty early on out of the gate for this platform that we’re doing. But that’s another another avenue where, you know, if we can get sort of the more like cookie cutter bread and butter type investors that say, Don’t give me massive valuation increases, if you can tell me, I’m gonna make six to 10% a year on my money, and it’s going to be stable. But I’m okay with that. I don’t need a massive exit and a 20 plus percent IRR pop. So that’s another angle where I feel like it probably definitely exists. But from my understanding, it’s probably probably less focused on than, say, the institutional world where there’s always an option of just recapping your project with a different investment type.

J Darrin Gross 12:31

Got it. Hey, Kyle, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to try and assess risk and determine what to do with the risk. And there’s a couple different strategies we typically employ, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid or minimize the risk, then we look to see if there’s a way we could transfer the risk. And that’s what an insurance policy is that a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation. Could be clients, it could be investors could be the market could be politics, interest rates, however you however you would like to frame the question as to what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Kyle Tushaus, what is the biggest risk?

Kyle Tushaus 12:56

I think, right now everybody’s kind of afraid of inflation, which is an interesting business environment to be in for real estate, because everybody kind of gravitates towards this industry is a safe haven. I think you can kind of take that a step further and think if I’m going to de risk myself from inflation, and I’ll say inflation, I don’t think is actually the risk of getting at its eventually I think there’s a risk that I think a lot of people are not thinking about some are but I haven’t seen any media headlines about it. But within real estate, right, you might say okay, well what’s my what’s my best inflation hedge within an inflation hedge? Right. And that would be a property that I can mark to market more often, right? So the reason why consumer durables doesn’t do well, and inflation is because I can wait 10 years to buy my next car or washing machine. But bread and butter, I’m gonna buy that more often. And so that price can keep going up every time I transact. So how can I mimic that in real estate and well, the properties that get marked to market more often would be better and inflation environment. So hotels get marked to market every single morning. So it should be the best inflation hedge, but you’ve got the dual side of that sword, it says it’s also discretionary spending. So be very careful on that front. But then, so maybe I’m okay with every year, say in multifamily. You know, the, the triple net 25 year lease would probably be the worst, depending on how that lease got written. So there’s obviously a spectrum even within the inflation hedge that is our industry of commercial real estate. But the thing I haven’t heard enough people talking about, and the thing that scares me the most and influences a lot of how we’re going into these, these, this first phase of deals is that the labor risk that is kind of bubbling under the surface where you see a lot of these value add deals, I mean, people have been ever since 2008, value add has been kinda like the everybody, everybody and their cousin is getting into this idea of renovating a property and popping the value of it. But I think there’s going to be a massive moving target into how well you control those costs. And so for like an interesting data points since about the early 70s. Productivity, or I’m sorry, compensation has gone up 115%, since the early 70s, which sounds great hiring 10 or 15% increase in compensation. And that’s for non supervising roles. So the roles, the jobs that are actually doing the thing.

While productivity of the same jobs has gone up almost 250% During that same time, so there’s this massive difference in the throughput that’s being provided by somebody in our job versus what they’re getting out of it. And I look at the landscape of people now for the first time in four years even know what inflation is. Our socio socio economic landscape is not great, there’s a lot of political strife. And I feel like that gap is probably going to get closed to some degree. And so I see a big risk factor in those business models that are going to be very reliant upon labor as an input, because I think we’re about to see a compression of that gap. And I think rightfully so, I mean, you look at some of the numbers, and it’s just, I might be a little jaded, I came out of, I came out of school, after the Oh, eight collapse. And so I don’t, I don’t really have the, I don’t have that much of an experience through that run up. But, you know, you look at what was accomplishable with, say, your bass degree, or even no degree 3040 years ago versus now and how much you know, someone’s having to work to get the same throughput in terms of quality of life. I don’t see it continuing status quo for much, much longer, maybe, you know, we kick the can a little bit longer, but I don’t see people being willing to do it. And the great resignation might be sorted a first little cue of it. But yeah, I think I think what’s about to follow inflation is and we talked about energy prices going up housing prices going up, when labor prices keep going up. And right now it’s the remote workers that are driving, you know, the leverage in those negotiations, it’ll eventually get to all labor. And if your investment thesis is heavily dependent upon labor, I would think of some ways to lock that in ways that we mitigate that, right? If I if I see a value add deal. It’s got to be in a market where I’ve already got a pretty good relationship with the GC. And I can go to them and say, Do you want to be part of the GDP tranche? And so with that, I can say, you’re now going to have equity incentive, not just, you know, hourly rate, or markup incentive. So, you know, let’s put together a budget of do not to exceed and you control that cost, but you’re also in our cap stack. Now, you know, outside of that, I would be very worried about taking that GC risk, because I hear horror stories of colleagues having guys walked off the job for $2 more an hour. And, you know, it kind of sucks when you’ve already pulled the debt on the deal. And you got, you know, this bridge loan kind of clock ticking away at you, but then you look at the data and you’re kind of like, well, I don’t necessarily disagree with it. I mean, someone offered me more you probably do the same thing. And so I think it’s something that needs to be taken into consideration when you’re when you’re underwriting because I do think that’s the next big wave to follow in this. disinflation run up.

J Darrin Gross 14:33

No, that’s enlightening. They’re just the, you know, wage, wage growth and how it’s likely to affect A lot of things so I got it. Kyle, where can the listeners go if they’d like to learn more or connect with you?

Kyle Tushaus 45:12

So they can either submit something through the website, which is Pine Ridge cap.com at P I N E R IDG E CA p. So it’s cap instead of capital for the website. Or you could email me directly, just Kyle Kyl e at Pine Ridge cap.com. That’ll probably the quickest way to direct to the horse’s mouth so to speak. Yes, and we’re not on any. Not on any social, unfortunately. So I can’t tell you to follow our I’m not even on social personally. So I’m kind of behind the times in that regard.

J Darrin Gross 15:08

Gotcha. Kind of, I can’t say thanks enough for taking the time to talk today. I’ve learned a lot and enjoyed it. And I look forward to doing it again soon.

Kyle Tushaus 15:08

Likewise, yeah, well, I’ll definitely keep you in the loop on everything we’re saying.

J Darrin Gross 15:08

All right. For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 46:25

You’re listening to CRE PN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio

Storage Facility Investing with Tom Dunkell – CRE PN #362

Tom Dunkell 0:00

We’ve found a lane that we’re really good at. And that’s that’s where we’re gonna stick. We’re very selective about the facilities that we buy are not out there trying to cobble up every every single facility that’s for sale. As everyone out there knows it’s easy to buy real estate right? You can be paid cash, pay the asking price and close tomorrow you can buy as much of whatever real estate class you want. But for us, that’s not the that’s not our approach. We’re very diligent. We’re very disciplined about the kinds of facilities that we acquire. And it’s all because we want to do the best job we can do for investors want to reduce their risk increase their cash flow increase their returns.

Announcer 0:40

J Darrin Gross 1:00

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversation with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Tom Dunkel. Tom has a background in corporate finance, and over 25 years of real estate and investment experience. Tom brings extensive experience to Belrose storage group, taking the company from a startup to a world class organization. And in just a minute, we’re going to speak with Tom about self storage syndications. But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. And you can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Tom, welcome to CRE PN Radio.

Tom Dunkell 2:25

Thank you, Darrin, it’s great to be here. And I do hope listeners go to you too, because I wear my favorite shirt today and in honor of our conversations.

J Darrin Gross 2:34

That’s awesome. I appreciate you doing that. And I hope they do too. Hey, Tom, before we get started here, if you could take just a minute, and share with listeners a little bit about your background.

Tom Dunkell 2:50

Sure. So I was one of those annoying MBA guys. I got my MBA in finance and accounting and went into corporate America did CT corporate mergers and acquisitions and raising capital in the aerospace and some other industries. It was great training, I worked with some amazing people. It really did. And I and even though it was getting to be a long time ago, now I still reach back to that time for lessons learned from leadership and you know, just how to grow a business the right way and those kinds of things. So So I ran that out for a while and but always wanted to go and do something on my own. And so in 2006 My timing wasn’t great, but I left corporate America actually kind of abruptly because I got fired from my corporate job. But it was just the kick in the pants that I needed to go out and do what I had been wanting to do. And I and I feel like what I am meant to do.

So 2006 Obviously my timing was horrible. So learned a lot of tough lessons in his first few years in real estate. So I definitely still have the the battle scars and the lessons learned from from that tough time. But just had to keep battling through and grinding. And so I reinvented after spending some time in residential real estate started. When I had rentals and I was doing fix and flips and wholesaling and those kinds of things. I went into distressed mortgage debt, which ended up being a great business, just kind of the right place at the right time. I connected with my business partner, Joe downs, in 2010. And we started us mortgage resolution, which is still thriving today. Over the past 12 years, we’ve generated over $50 million of revenue in that business acquiring over $800 million of distressed mortgages. That’s on paper. It’s well balanced so, so we had a great run with that business which allowed us to do some other things including hard money lending. We have a we have a real estate, we have a rental portfolio, short term rental portfolio, and a vacation spot here in Pennsylvania and called the Poconos Pocono, mountains, with lakes and such up there. But our, our, our big push right now, and really what we’re most passionate about at at Belrose is storage. So we’ve we’ve gotten into storage, we started buying facilities, back in 2020, leading into 2021. And now we’re up to we’re about to acquire our 10th facility, we’ve got about a quarter million square feet of storage, and we just are big fans of this asset class.

J Darrin Gross 5:56

Awesome. So you mentioned kind of your start, and you would did you do single family? Start with? I mean, I heard that you got into the hard money or not the hard money, but the mortgage is is that but that your your initial start? Were you doing single family? Or did you jump into a different asset class or what?

Tom Dunkell 6:17

It was mostly single family, a few small multifamily duplexes, triplexes, quads, that kind of thing. But interestingly, I did start investing as a passive investor in multifamily in 2013. So, so I’ve had that’s been a great run as well, and a big, big fan of that industry. But just as a, as a passive investor there.

J Darrin Gross 6:40

Got it, got it. And how did you guys arrive at self storage? What What was the attraction?

Tom Dunkell 6:48

Yeah, great questions. There’s quite a laundry list of things that we really like about it. But the the highlights are. I mean, first of all, it’s real estate, right? So it’s a hard asset, it’s not going to zero. And like the old adage, says, you know, don’t wait to buy real estate, buy real estate and wait, so so we love that about it. And it comes with all the the tax benefits of being in real estate as well. Second, big thing is is cashflow. Our operating expenses at a facility are are very modest, typically around 30% of our revenue, give or take. So that gives us a lot of cushion to generate cash flow. And you know, in the uncertain times that we’re in right now, that gives us cushion. If the economy were to take a dip, we can we can adjust our rates, and still be okay and cover our debt and that sort of thing. So we love the cashflow aspects.

One of the other big things we like about it is is the capital expenditures are usually very low. When I know when I do invest in multifamily, I know there’s a lot of times that a big capital expenditure budget set aside to account for turnover in units because they need to go in and upgrade the lighting package or the countertops or the appliances and paint carpet what have you. In Self Storage, when a customer moves out, we can roll up that door and just sweep it out and put it back. For Rent, that’s pretty much that same day. And that does happen. So we do like to have our facilities looking nice. So we do spend a little money on landscaping, and of course keeping keeping the trash picked up and all those kinds of things. But those are relatively low dollar. We do for sure spend money on security, because we want our facilities to be secure when our customers feel comfortable doing business there. So we’ll put up video cameras and make sure that the the game is up to par. And that’s all working and all the fences are, are taken care of. But those are the big primary things we like about real estate, or about self storage if I could maybe throw in one more thing is that it’s becoming more and more mainstream self storage. It used to be that self storage facilities were these rusty dusty old boxes stuck in the back of, of a of an industrial area. But now it’s becoming more mainstream. You’re seeing like old Sears buildings, old Kmart buildings being converted into storage. You’re seeing new storage facilities being built in more retail convenient areas. And that’s all because self storage is becoming more and more utilized and more and more mainstream.

J Darrin Gross 9:56

No, I gotta get all that’s good stuff. Did I hear you right? Did you say that your expenses for on your cash flow for the Self Storage runs about 30%?

Tom Dunkell 10:09

Yeah, that’s about right on on smaller facilities and might be more like 35. But on larger facilities that can even be it can even be less than that.

J Darrin Gross 10:17

And does that include the? Are you guys actually managing these directly? I mean, do you have like the staff for that? Or do you do?

Tom Dunkell 10:30

We do? That’s a great question, Darrin. So one of the ways that we do keep our expenses down as we are shifting to more of a remote managed model. In some cases, it’s kind of a hybrid situation where we do have boots on the ground in that market, but they’re not spending all day every day, at the facility, they might be, you know, an hour to drive away in silico, by the facility, maybe once a week. But they’re still managing the facility from afar, because they’re fielding the calls from the customers. And of course, today, most customers are, you know, wanting to just do business on their, on their smartphones. So they can rent a unit on their smartphone, and then just move in at their convenience. So we’re finding at least the the way that that our management strategy works is that we don’t need an expensive body on site all the time. So we’re able to really keep that piece of the expenses down, which is everyone knows, headcount in any business is probably your biggest expense.

J Darrin Gross 11:40

Got it? With that are you guys able to do upsells? Or whatever? I know, like, I’ve talked with others about this. And whether it be the U haul vans, or the boxes, or the, you know, whatever. Additional things, do you have any kind of a storefront that allows for that? Or was it more of just the space? Rental?

Tom Dunkell 12:08

Yeah, our model Darrin, as far as upselling, we, we haven’t gotten into the U hauls, and the boxes and those kinds of things. That because that does take more, you know, attention and personal attention, meaning and other body kind of thing. And the boxes and those kinds of things is not a not a ton of margin there. But one thing we do apply is one of our value added strategies is protection plans. So we require our customers to purchase a protection plan from us and allows us to make a few extra bucks per month per unit. But as everyone knows, and if you’re familiar with commercial real estate, every dollar of revenue that you can increase or increase the net operating income, you get that multiplier effect on the value of the business. So you know, so a medium sized or smaller facility that where you’re offering tenant protection on top of your regular rent, it might increase the value of that facility on your noi. Because you’re getting that in a wide multiple by quarter million bucks with not a lot of headaches. No, it’s It’s pretty nice.

J Darrin Gross 13:22

That’s awesome. So your Self Storage asset class, is there a particular territory? Are you guys nationwide? How are you selecting where you locate these?

Tom Dunkell 13:37

Yes, so we’re trying to ride the the demographic trends, of course, we’ve got the Baby Boomers are selling their big houses up in the Northeast, and they’re moving to this to the southeast and salmon to store their stuff. So, so we’re focused on the Eastern US. Our facilities today are in Maryland, Virginia, and North Carolina, Georgia and Florida, are currently looking at a deal in New York State, which is like a super thriving growing market and wherever this you know, real estate’s all very local, right. So this particular area has a big Costco retail center that’s going in, it’s going to draw a lot of traffic to that area. And the facility we’re looking at is right across the street. So we’re excited about that one. And we’re looking to look the deals in Alabama, Ohio, but we’re very selective. We’ll make sure that our there’s a lot of value to add there. So that’s that’s our primary strategy is acquiring existing facilities and just running them better.

J Darrin Gross 14:42

And is it as far as the kind of the investment strategy are you do you have a particular hold time that you’re, you’re looking to hold these or is this forever hold or what’s your what’s your plan?

Tom Dunkell 15:00

Yeah, good question. So, first and foremost, when we go into a facility, like I say, we want to have a lot of value add strategies. And those are all meant to really increase the cash flow of the of the facility. And what that gives us the ability to do the luxury to do is, is be selective about our exit strategy. So if we’re if the facilities are running, the way that we want it to be running, we can hold it until there we maybe we see there’s an optimal time to sell. Or maybe it’s part of our portfolio, we sell the whole portfolio at once. But our in general, we’re, we’re not super long term hold guys, we’re typically in the, you know, I would say the two to five year range. Again, because we are acquiring existing facilities that are poorly run. So once we turn those facilities around, that’s our opportunity to capture the best return for our investors. And so we’ll typically look to be exiting at that time.

J Darrin Gross 16:10

So let’s talk a little bit about your your syndication model. Are you guys are the the GP that are finding the deals and then raising the money, LPs? Is that pretty much the strategy there? Or?

Tom Dunkell 16:28

Yeah, no, in a nutshell there. And that’s exactly right. So my partners, and I act as the as the GP’s, and we bring in the passive investors to be our limited partners and our passive partners. And so we do, we spend a lot of time and effort finding the deal we have, we probably look at hundreds of deals for every one that we buy. And then we’re doing all the upfront due diligence, we’re arranging for the debt financing, which me and my partners signed for personally, at least at this stage of the game, we’ve been using recourse debt, through credit unions and small local banks. That’s where we’ve been getting the best execution. And then once the deal is closed, we’re handling all the back office operations, all the investor reporting, everything lives in our investor portal. So our investors can have full transparency with what’s going on, we post all the management reports there and move ins and move outs and rent rolls and occupancy reports. And all those things live in our in our investor portal. And that’s where all of our investors get their, their key ones and their distributions are made out of out of our portal as well. So we’re really happy with that. It’s pretty slick feature that we just added in the past year. So we’re really liking that. But yeah, that in general, that’s, that’s, that’s the model.

J Darrin Gross 17:58

So one property one raise one, one syndication is that, as opposed to a fund where you basically have multiple properties under the same fund that that’s in there in that,

Tom Dunkell 18:13

Yeah, that’s exactly where we are, we’re a deal by deal shop. We seem to like it that way, we’ve kicked around the idea of maybe doing a fund. However, I know, as an investor, I’m more comfortable if I’m investing in a deal where I know exactly where the money’s going. And, and I can I can look at that specific property and make my own decision. So that I like that personally. So it seems to be that that’s the way that we’re heading with Belrose resource group is doing one one deal at a time.

J Darrin Gross 18:48

No, I like the monolight. Just curious, I know, I’ve talked to some people, and they it seems like some of graduates are and I say graduated, they if some, I guess it’s the issue of if you’re raising capital and you have deals, or you don’t have deals and you’re trying to you know, trying to match that up kind of thing, as opposed to there’s the opportunity to get in, you know, before it’s gone, kind of the thing is, is more of what I think the syndication model is, and if you’re producing results, I would think that it doesn’t really matter. If you’ve got Do you have investors and you’re producing results? I’m, I’m guessing, you know, what’s the problem here?

Tom Dunkell 19:30

No problems. Yeah, we I think if you get to a certain scale, you know, fun might make a lot more sense, but we’ve never wanted to be a big company. Darrin, we’re, we think of ourselves. In fact, one of our core values is here at Belrose storage group is SEAL team. And so we just want to be an elite, Premier fighting force that’s, you know, smaller but we go out and we execute with, with passion and excellence and And so we’re not looking to be the biggest but you know, we we certainly, to this point have executed really well. And investors are quite happy and they keep bringing in their friends and family to our deals, which is a great testimony for the what we’re able to deliver for them. So we’re really proud of that.

J Darrin Gross 20:19

You and you mentioned the lenders, you guys are currently using it your your, I mean, the partners are actually signing on the loan. What is the the lender appetite for? Self Storage? Is it pretty robust? Or is it pedal lender by lender?

Tom Dunkell 20:41

We’ve had lenders come to us for saying, Hey, I’ve got a mandate to fill up, you know, our portfolio with self storage. So you know, send everything you got to that. So now, those are those seem to be the kind of the more smaller regional lenders, like actually a good friend of mine is, is a is a commercial banker at Bank of America. But we’re just, it’s just too, I guess, too small for him. He’s used to doing these massive loans. And so I was given him a hard time about it one night, and he actually called his boss, and was like, Hey, how come we’re not lending and self storage. But I guess it was just just a scale thing like is typically Self Storage deals, there’s some big ones out there. But a lot of times they’re, they’re more on the on the smaller end of the scale, if you’re a Bank of America working to fill up your portfolio with, you know, 100 200 half billion dollar loans, and that’s just not going to happen in the Self Storage deal. Typically.

J Darrin Gross 21:44

All right, that’s, that’s pretty big self storage, I guess. Unless you had like a portfolio kind of thing. But even that, and I don’t know, that makes much sense. But so in your, your deals, what is an average deal size? For? You mentioned what I think he said, 10, you’re focusing on your tenant? And you said 225,000 square feet? Is that total? Or is that the one deal that you’re you’re focusing on focusing on right now?

Tom Dunkell 22:16

Yeah, so we’re at about 250,000 square feet across our portfolio. Right now, our average deal size is about two, two and a half million. So these are smaller kind of mom and pop run facilities. But that’s where we’ve been finding the best turnaround and value add opportunities. So that’s, that’s what’s driven us there. And we’re not running into, you know, any of the huge private equity firms that are, you know, thrown around huge money and, you know, super low cap rates. So we’re happy to just, you know, stay in our lane and stick to those types of properties. And just, if I can go back for a second make another point about what’s happening with the lenders, Darrin is self storage has quietly been the best performing asset class in commercial real estate for many years. And the default rate is super low. So lenders typically loving to lend on self storage properties.

J Darrin Gross 23:19

No, I would think that if the bank wants to lend you money, and and they recognize it’s a good thing, and I mean, your number, your 30% expense rate I’m selling Wow, that’s that’s pretty impressive. You know, and just the the easy turn. I mean, is there any kind of eviction? I mean, are you are you beholden any of the eviction laws that like multifamily house or, or things like that?

Tom Dunkell 23:48

No at all, not at all. And that’s, I mean, if at the beginning, if I can, you know, kind of gone on with my laundry list of things that we love about self storage that would have popped up pretty soon, but we live in the lien law world, not in habitational real estate, where it’s a landlord tenant situation. And as a lot of landlords out there know, like, I used to be a landlord, you know, the SU evict a tenant, you gotta get a landlord, tenant court. And in a lot of places, that court is very much slanted in favor of the tenant. And I lived through that personally. And it was it was no bueno for me. But in, in self storage, there was no eviction moratorium during COVID. And the lien laws are very, very clear. You are able to give notice, and then short time later depends on the state could be 30 days could be 60 days, you can put that facilities contents of that units contents up for auction, sell it online, that buyer comes over and they have to clean it out. And then we have now have a unit available for rent again. It’s really it’s not a big it’s not The big to do like it is in habitational real estate.

J Darrin Gross 25:03

So when you do have one of those, I’m thinking of that, what’s the reality show The Storage Wars there, whatever we’re the you sell the contents, who who owns the contents at that point, it’s still the tenants and then they they get the proceeds or you know, the owner of the contents.

Tom Dunkell 25:23

So what happens is, and this actually never happens, but it what happens is the proceeds first go to pay the back the delinquent payments, and then if there’s anything leftover, it would go to the customer, but that the unit’s contents go for very, very little money, and it usually doesn’t cover what’s owed to the facility. So there’s never any money left over for the customer. In my experience, in my experience,

J Darrin Gross 25:59

Yeah, no. And in those situations, is it kind of a blind auction? Or do people kind of look at us? Again, I mean, are they think it’s go through it? Or?

Tom Dunkell 26:11

Yeah, it’s honestly, it’s, it’s pretty crazy if you ask me, because, again, everything’s done online now. So our managers will go in there, and they’ll take, you know, a handful of representative pictures, but they’re certainly not pulling out all the content. So the buyer of the contents of that unit is really going on very little information. They might be able to zoom in on the picture and see something valuable, you know, piece of equipment or a tool or something that maybe they don’t extrapolate from, they’re like, hey, there’s tools in here, I’m going to invest in I’m gonna, I’m gonna bid more. But it’s it’s pretty risky. Because you roll up the door, and it’s full of stuff. You don’t know what’s tucked away in the back. Yeah, I don’t know.

J Darrin Gross 27:01

Definitely a bargain hunters. Doesn’t really interest me, but Me neither. Yeah. Not I like the tenants of pay there. There are the storage, you know, the people that pay their rent, and they keep their stuff. That’s, that’s the best one. What is the just kind of curious, talking about, you know, the how you recoup on somebody who doesn’t pay? What is the default rate of tenants, his fair national number for tenants who don’t pay their storage bills?

Tom Dunkell 27:38

Yeah, there are national statistics on that. And again, at Belrose storage group, one of the things we really focus on, because it is in our control, you can’t really control interest rates, cap rates, all that stuff going on out there. What we can control is how we run our facility. The national average for delinquencies is 10%. Across our portfolio were about 3.5%. And so what that does is that further increases the cash flow that we have available for our investors. So we’re very, very proud of that figure.

J Darrin Gross 28:10

That’s awesome. I’m in such a low delinquency percentage. And if you do have somebody that goes, delinquent minutes, I’m assuming is that 30 days? Is that kind of the what’s the what’s the point when they’re, they’re delinquent? And they do?

Tom Dunkell 28:26

Yeah, 31 days, they get a notice.

J Darrin Gross 28:29

All right. And so at that point, do they lose lose access to their I mean, with digital, you don’t have to, like go in and rekey the thing you undo their code or whatever kind of thing or so they can’t, can’t access their stuff until they make payment is that basically the

Tom Dunkell 28:46

That’s right, yeah, the, their gate code won’t work at the gate, and then they’ll also be an overlock on the, on the actual unit. So you’ll, they’ll have their lock on there, and then we’ll put a lock on top of that. And then they need to talk to us and get paid and get caught up before they can access their unit.

J Darrin Gross 29:08

I love that model. Just the the ease of compliance there as opposed to you know, being strung out for months or with COVID years or whatever it could be for you know, particular you know, yeah, get get back I think so. That’s awesome. So, the future here, what’s your guys’s plan? You mentioned you’re not looking to compete against the big funds and stuff but kind of the smaller Asia basically continue to find deals on the east coast there and and try and grow your portfolio or is that what’s the long.

Tom Dunkell 29:48

Yeah, absolutely. No, that’s that’s hit the nail on the head. Oh, we’re we’ve found a lane that we’re really good at. And that’s, that’s where we’re gonna stick. We’re very selective. About the facilities that we buy are not out there trying to gobble up every, every single facility that’s for sale. As everyone out there knows it’s easy to buy real estate, right? You can do you pay cash, pay the asking price and close tomorrow, you can buy as much of whatever real estate class you want. But for us, that’s not the that’s not our approach. We’re very diligent and very disciplined about the kinds of facilities that we acquire. And it’s all because we want to do the best job we can do for our investors want to reduce their risk, increase their cash flow, increase their returns.

J Darrin Gross 30:34

So it’s great. Your team who who was on your team, for your your partners?

Tom Dunkell 30:42

Yeah, so the core team is myself, my business partner, Joe Downs. For our self storage venture we brought in Tim Kaine, he’s an expert at lead generation, and also is really good in the in the expansion and construction aspects of our of our properties. We don’t, we don’t do big developments or anything, but we will do small expansions, if it’s warranted. So that’s where that’s where Tim comes in. He’s an extremely valuable resource there. And then, you know, we have the glue, every good company, you got to have the glue or glue has Gretchen for Shala. She’s our Chief of Staff, she makes sure that everything’s running smoothly, everything’s communicating, well, everyone’s sticking to our core values. So she’s been a great resource. And then we, we have a great accounting team. Cuz with every facility that we have new entities that are formed new bank accounts that are open, so that accounting aspect gets pretty heavy pretty quickly. So we’ve got a great team there. And then on further on the operation side, we have an outsourced expert counsel consultant that we work with, they’re named Katherine ease, she’s with elite Self Storage advisors. And she’s been in the self storage industry for 16 years now, and has managed and done turnaround and auditing work on self storage facilities around the country. So she’s a tremendously valuable resource as well. And she, what she does for us is she helps to transition the property from the prior owner, moving everything over to our systems and processes and methodologies. And then, as I mentioned, she does the auditing, and gets the marketing up and running and rolling. And then she also brings in someone from her team to manage the facility as well, or she’ll hire someone if there’s no manager convenient to that location. So she’s an outstanding resource as well. And that’s pretty much the core team.

J Darrin Gross 32:48

Call. You mentioned marketing a little bit there. Do you guys is the marketing outbound to prospective sellers? Or is this also marketing for investors to raise capital?

Tom Dunkell 33:03

Yeah, great question. It’s really all the above. So we have the lead generation and marketing engine that we turn on for reaching out to facility owners. So we have a VA that helps out there, and we’re reaching out to hundreds of facilities a week. And so there’s a whole process there. And that’s Joe Downes, my partner, he is pretty much running that aspect. On the what we call the capital servicing side of things, that’s when it comes over to my area of responsibility. So we do have a marketing program there as well are reaching out to investors and making sure we’re trying to add value all the time. So we anyone who signs up at our investor portal, I’ll be sending out articles that I think are interesting about, you know, what’s happening with inflation, what’s happening with cap rates happening with interest rates, how are rents, you know, trending in self storage, and even other markets, other commercial real estate markets just to try to be a thought leader and be have a finger on the pulse kind of thing. And then, and then at the facility level, there’s marketing going on there as well, because we’re reaching out we want to be in the top three on the Google search or that market. And we want to make sure that everything’s smooth for the, for the customer to rent that facility on their on their smartphone. And so we’ve got a lot of different ways that we’re reaching out to our different constituencies.

J Darrin Gross 34:39

Now, it’s important I mean, you got to you know, I, I’ve always been kind of reluctant to do the horn tooting, but if you don’t toot your own horn, you know, likely nobody’s ever gonna know you have a horn so

Tom Dunkell 34:54

well, it’s a good thing for us, I think on the cinema in my particular area of responsibility, the Capitol service thing. Like I mentioned earlier, our our investors tend to refer people to us, which of course, is the best way to get business, right? It’s, I’m sure it’s the same way in your business and insurance, you get that referral from someone who’s already done business with us that that has huge weight, right, so. So that’s why I really tried to go the extra mile and make sure our investors are having a good experience with us.

J Darrin Gross 35:25

That’s great. Hey, Tom, if we could, I’d like to shift gears here for a second. As you just referenced by day, I’m an insurance broker. And I try and work with my clients to assess risk and determine what to do with the risk. And there’s a couple of different strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And when that’s not an option, we’ll look to see if there’s a way we can minimize risk. And when we cannot avoid nor minimize the risk. And we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation, could be clients, investors, tenants, market politics, you name and however you would like to define the biggest risk? And for clarification, I’m not necessarily looking for an insurance related answer. So if you’re willing, I’d like to ask you, Tom Dunkel, what is the biggest risk.

Tom Dunkell 36:38

Like lots of business owners out there daring and we have a number of different different risks that we’re faced with on a daily weekly annual basis. In the, like, in storage, as I, as I mentioned earlier, we’re avoiding development projects, because we just see a lot of risk in those right now with with supply chain issues, labor issues, material cost issues, and it’s just not really in the DNA of our company. So we’re avoiding that one entirely. On the facilities that we do buy, we minimize risk by not over leveraging by being conservative with our projections. And of course, we use insurance to make sure that the physical plant is properly insured. But as far as our biggest risks our business there, and I would say, it’s really, it’s really me, it’s really me and our leadership team. The business can only grow and go so far as we’re able to take it. So we have to be the best that we can be we have to be we have to be educated and smart and and hire the right people and bring in the right partners. Because if any of those things get out of out of whack, you know, we’re not going to reach our potential and that’s what we’re we’re here to do or reach our potential and provide value to our investors. So we’re always looking for ways to improve ourselves and improve our business. As I mentioned earlier, we do have core values, we do have a purpose. And so we use those as our guideposts every day in our decision making. But you know, we’re always looking for better ways to do business to take care of our investors and just be good good members of our of our business community.

J Darrin Gross 38:36

Like it, that’s good stuff. Hey, Tom, where can listeners go if they’d like to learn more or connect with you?

Tom Dunkell 38:43

Yeah, so again, I’m Tom Dunkel, Managing Director and Chief Investment Officer at Belrose. Self store Belrose storage group, you can go to Belrose storage group.com. That’s b e l r o s e storage group.com. And belrose storage group.com. And I would encourage folks together whether you’re interested in ours, participating in our self storage, syndication deals or not, we do have a free resource there for investors. It’s something that I’ve developed over my years of investing, actually started investing as a kid but I’ve been high net worth investors since 2006, accredited investors since 2006. So I’ve made some mistakes along the way and learned some lessons and I’ve done some good things done some not so good things, but we compile them in an ebook that we call Safe Investing. And safe is is an acronym, s a f e. S is for sponsor gives you a list of questions to ask about who’s sponsoring the deal. What’s their background? What’s their track record? Are they criminals? Have they done this before? How long and then A is for assets? So what is the asset you’re investing in? It’s It’s incredible to me, sometimes people invest in things and you don’t really understand the asset they’re investing in. So here’s a list of questions to ask about that particular asset to make sure you understand it. F is for Financials, gives you a list of questions to ask about the projections, the returns, and also personally like, how much of your portfolio? Are you putting at risk here? And are you okay with that? And then E finally is for exit. How do I get out of this thing, you can’t go to schwab.com and click, click, click sell your position in a Belrose storage group storage deal because that money is going to be tied up for 2345 years, and you need to know that going in and be comfortable with that as an investor. And ultimately, they’re these all these questions are really designed to help an investor feel good about what they’re investing in and be able to sleep at night, knowing that they have their money tied up with this sponsor, and that asset and these financial characteristics and when they’re gonna get out of this, so I think it’s a it’s a valuable resource. I hope everyone goes to get it. It’s free. You don’t have to give me your name, email address or anything. It’s just, it’s just available for download on our website.

J Darrin Gross 41:17

Awesome. Well, Tom, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Tom Dunkell 41:29

Thank you, Darrin. It’s been great. Appreciate it.

J Darrin Gross 41:32

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening toCommercial Real Estate Pro Networks. CRE PN Radio.

Announcer 41:52

You’re listening to CRE PN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio.

Blockchain Applied to Real Estate with Neal Bawa – CRE PN #361

Neal Bawa 0:00

And what blockchain does is from the very beginning, it’s designed to be both extremely secure and extremely visible at the same time, and no one can manipulate it. It’s not a walled garden. It’s actually an underworld garden. It’s designed to never be walled. So now you have the capability of a property, basically, that has been sold. Once it’s sold, its title is on the blockchain. And because it’s on the blockchain, if you and I are disagreeing about who owns this property, our lawyers can spend 15 minutes in a room, go look it up on the blockchain and say sorry, Darren, it steals property. It’s very clear. That’s that’s what’s on there. That’s just a very tiny example of how blockchain can be used. But there are hundreds of discrete advantages that a future world where real estate is hosted on the blockchain compared to today’s world. And one of the biggest pieces the quickest pieces is tokenization.

Announcer 0:57

J Darrin Gross 1:16

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Neal Bawa, Neal is a technologist who is universally known as in real estate circles as the mad scientist of multifamily. Besides one of the most in demand speakers in commercial real estate, Neal is also a data guru process freak and announced an outsourcing expert. Neal treats his $1 billion multifamily portfolio as an ongoing experiment in efficiency and optimization. And in just a minute, we’re gonna speak with Neal about real estate, disruptive trends tokenization and property or prop tech.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network with add on welcome, I guest. Neal Bawa Welcome back to CRE PN Radio.

Neal Bawa 2:47

Thanks, Darrin good to be back on the show.

J Darrin Gross 2:49

So glad that we’re able to make this happen. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Neal Bawa 2:59

Sure, I’m a tech geek that is obsessed with the idea of disrupting real estate, using big data using analytics, using systems and processes that the industry typically doesn’t support. And also using an army in the Philippines. So using business process outsourcing, to create better, more powerful, more scalable systems. I am not running a real estate company, I run a technology firm that currently is interested in real estate, who knows maybe tomorrow will be interested in something different. So it’s a tech company that believes in scale, it believes in behaving just like any other Silicon Valley company. And big data is our holy grail. It’s our Bible. It’s what we go by, it forces us to do things that we wish it didn’t force us to do like moving from one city to another every goddamn year because the data points to a new city every every single year. And that means that we have to unlike most indicators that you interview, we have to rebuild our connections and networks every 12 months.

J Darrin Gross 4:07

I appreciate you sharing that the I was looking in my notes here and the last time or one of the last time we spoke was the beginning of the pandemic. And I think we kind of did a little little talk on, you know, what do you expect to happen? And in just listening to your introduction, are you kind of you know, sharing with listeners a little bit about your background, commenting on moving to the different cities. I’m curious, has that always been the case? Or is that more prevalent now? Post pandemic?

Neal Bawa 4:44

It’s more prevalent for the industry. For me it hasn’t changed at all. So, pre pandemic I was already in 13 metros, in the US. I had properties in 13 metros in the US opposed endemic I’ve only added four cities to that list. So I’ve always been following cities I’ve never bought the argument that small metros in the US especially the ultra small metros are far riskier, because while in itself, that argument makes sense, a metro that has 150,000 people is not as diverse as a metro that has a million people. So that makes sense, right? But the problem is that argument is made in a vacuum. And whenever you make arguments in a vacuum there, they end up being wrong. But here’s the other half of the argument that nobody’s talking about. Well, that 1 million person Metro, we’ll call it Phoenix, we can call it Austin, you can call it lots of different metros, those 1 million person metros have seen massive increases in prices, massive declines in cap rates that do not match the rent increases. So when people are paying 50% More for a property that where rents are only 15% Higher. There’s this risk that has been created there, that delta between 50 15% and 50%, that 35% You know what that delta is risk. And so as these these cities, as the risk is increasing, as you keep paying up and up and up and up, you have to compare that risk with paying a lot less in a smaller Metro. So what has happened over time is that, you know, starting the 80s 90s, when real estate made more sense, all of those smaller cities were far riskier. But today, the risks have adjusted, and the bigger cities have become riskier, and the smaller cities are still risky, they just haven’t gotten any riskier, right. So when I buy when I go to Idaho Falls, and I make a building from scratch that cost me $170,000 A unit. And it’s a townhome, and a family of three will live there for five years. I see that as less risk than paying $400,000 A unit for a value add apartment complex in Saratoga, Florida. I’m not talking about Los Angeles, right? I just saw a $406,000 dollar property built in the 1980s sold in Saratoga in Sarasota, Florida, right. So when you can see $400,000 unit prices in Sarasota and in Atlanta and Dallas. My question is, what does it cost to build that asset? And the answer is a lot less. But we were always taught to say, Never buy an existing asset at you know, more than 60 or 70% of its replacement cost. Because that gap, that replacement cost gap is the value that you’re creating. And it gives some headroom for the price to go up. But today, people are actually buying value adds at higher than the cost of replacing them. And that risk is not being factored in. So the answer to your question, Darren is I’ve always been more interested in smaller metros, I’ve just been more validated by by the pandemic, where Cap rates and all of those smaller metros have, you know, gone down

J Darrin Gross 8:09

Right now and just the the migration, you know, the the work from home used to be like the exception, whereas now I find it? I don’t know, that’s the rule. But I’d say you know, by and large, the majority are the number of people able to work remotely is, you know, exploded compared to what it was in 2019.

Neal Bawa 8:31

Yes. And that’s very fascinating, right, because everyone thinks they understand this work from home piece. And I don’t think people really do. One of the data providers that I love to track, right since the pandemic started is this company that basically measures key swipes, key swipes at offices. So this is a company that provides some kind of a keen key, you know, swiping digital application. And so what they do is just like U haul does a report of who’s moving and what state are they moving to this company does a report of what percentage of people who were in the office one day before COVID struck have come back? And the answer is in Texas, which you know, really, I’ve you would think everybody would be back in Austin 43% of the people that swipe their key the day before the pandemic swiped it last week. Only 43% in Texas in a red state or deep red state, right. So what most people don’t realize is that the office market in the US is going to undergo a very powerful but very slow meltdown. Now why are very slow because luckily a lot of their leases were five year and 10 year leases. So they’re seeing a massive meltdown happening they’re very nervous, because as leases are coming up for renewal, only 70 or 80% of those leases are getting renewed. Well office is not really set up to have 70% occupancy, I mean office set up to be a 90% occupancy market, and that’s what the prices were based on. So if they are indeed going to end up But 70% occupancy compared to where they were before, there’s going to be an enormous and massive meltdown there. And that should tell you how big this movement this remote work movement is. And maybe that 43% example is excessive, but I think it makes the point that we do not think two years after the pandemic, when, you know, people are vaccinated people have boosters, there’s even, you know, there’s drugs available, like Pax COVID that you can take, if you get COVID. Why are today not 90 or 100% of the people back? Because something has fundamentally changed in the psyche of both managers and employees. We don’t go back to that world anymore. And if you don’t go back to that world, yes, you are right there in the smaller metros are the ones that are gaining, I’m looking, I’m tracking population gain. And, you know, there’s a small Metro that I’m very active in called called Idaho Falls, it’s the second largest metro in Idaho. It’s, uh, you know, about a third of the size of Boise. And everyone that I talked to over there says, I’ve always wanted to come back to Idaho Falls, but I didn’t have the choice. The people that are going to Idaho Falls are coming basically from two directions. They’re coming from Salt Lake City, right? Because a lot of Idahoans are Mormons, and so they come from that Salt Lake City area. And then they come from Boise, which is getting very, very expensive. It’s the most overpriced city in the United States at this point of time. So they’re coming from those two directions. And they’re still seeing very reasonable price. And I’ll tell you what reasonable means, right? So, of course, prices in Idaho Falls are going crazy, right rents have gone up, you know, some crazy number, home prices have gone up 31%, but they’re starting from a low base. So I’m renting beautiful, brand new three bedroom, two and a half bath units that I just finished building in Idaho Falls, so they’re done. And I’m renting them for 6095. Awesome. So for 6095 Somebody can basically get into a beautiful townhome that no one has ever lived in before. It’s amenitized. It’s got dog parks, it’s got, you know, barbecue pits, it’s got a backyard, but it’s still at 1695 You see how much headroom there is?

J Darrin Gross 12:06

Ya know, no, and just again, you know, one of the primary reasons that that market is growing is just this, this fundamental shift and like, I love the fact that you found it or a different source, because I think, you know, most of most of the time, the source that’s quoted or cited is the moving the the U haul, kind of thing. And, you know, pre pandemic, I think the focus was always a metro area with jobs, metro area with jobs, jobs, jobs, jobs, right, that was kind of the needed to have X number of people X number of employers growth, you know, some sort of those are kind of some of the the measurements that that I think people, you know, typically use to determine whether or not you were in a grow population or a or a non grow. And, but just this this fundamental shift, where it’s not even, like you cited, we’ve got the vaccinations, we have everything we needed to get back in the office, but we’re not going back to the office, and people are finding these new places that, you know, whether it be for cost or just the place they wanted to live, you know, but it’s really, I feel like the, you know, where is the population going to, it’s not as predictable as it once was based on just large metros, lots of employers, lots of jobs kind of thing.

Neal Bawa 13:23

And I disagree on that a little bit Darrin. And so I’m going to come back to you and say my data doesn’t suggest that here’s what my data suggests, the big metros are still very important, the big jobs, that Job Centers are very important. What has changed, according to my data, is the radius around those. So in the past, the radius around the big metros was basically an hour right. You know, that’s how far you can basically Drive for Work. What we are seeing now is that the radius has gone from being one hour to two and a half hours. Because people are coming into the office twice a week. And so that radius is very expanded. I mean, imagine two and a half hours, right? That’s a very, very large change in radius. So for example, somebody can actually work in Salt Lake City and live in Idaho Falls, right? That’s massive. That is huge. People can live in Tucson and work in Phoenix. And before that, this that was not even conceivable. So I still think that the big metros are important I still think Phoenix and Austin and you know all these superstar metros are very important. But the radius has expanded tremendously. And so what we’re doing is we’re now only exclusively looking at value adds between the one hour radius and the two hour radius. Right so this morning’s meeting, you know, we have full time staff for on the value add side and then we have full time staff on the development side. And so I do a one hour development meeting where I look at all the properties they are looking to all the land that they’re looking to buy and then I have another meeting with with the the value add people on what they’re looking to buy. And I was struck by the fact that today in the meeting ever any property that was discussed, was attached to a metro. But it was in every case at least an hour away from that Metro. So we had a property that was an hour from Knoxville from Nashville, an hour from Atlanta, and then an hour and a half from Phoenix. Right? Those are the sorts of properties I’m looking at and people go, so why aren’t you just looking in Phoenix? What’s wrong with Atlanta and Phoenix? My answer is, I don’t want to pay $300,000 a door, I’m still able to find properties at 130,000. A door. I have just purchased two properties this year. Okay, one of them. I paid 129,000 a door, one of them, I paid 130,000 door. Okay. And obviously, the rents there are lower, I get it. I mean, obviously, I’m not suggesting that these properties are cash flowing at 20 or 30%, nothing like that. My point is, I have headroom for further growth from 130,000, when the cost of construction has become so inflated, that I can’t even build new construction for less than 300,000 a door. Right? So my argument is, and maybe I’m wrong. I mean, who knows? Right? This is just This is what my my what data science shows. Today, when you buy an 80s property at $130,000 a door practically anywhere in the US that has growth. So you know, this argument only works if the this small city that we’re talking about that nobody’s ever heard of actually has growth, population growth, job growth, income growth, all those factors need to be present. And it’s not very hard to find those because I’m talking about 1000 small cities, right? You can eliminate 700 of them, 800 of them and just work with the 20%. That’s still 200 cities that no one else in Darrin Gross is ecosystem is looking at. Right? Right. So I can afford to basically reject a bunch of them. Well, when you buy an 80s property there, they especially if it’s brick property 430, my data shows that you’ve already got 20 or 30,000 in equity, because the syndication industry hasn’t figured out that the cost of construction in the last 18 months has gone from 200,000 a door to 300,000 a door. So that $100,000 door increase means that no one can ever build a property anywhere close to $200,000, even in that tertiary market, which means that there’s no construction possible at all in tertiary markets, these remote markets at all. And so that means that I can keep increasing my rents because I’m not going to have any incoming supply whatsoever. For years. For years. Yeah,

J Darrin Gross 17:30

No, and I think the you know, there was the I forget the name of the book was Sam Zell book, but one of the his mantras that I grabbed onto was exactly that if you can buy it for less than you can build it. You know, you’ve got some you got some value there. You’ve you’ve got a built in equity, like you’re saying,

Neal Bawa 17:48

Right. And to expand on that. What if you can make that gap bigger and bigger and bigger? That’s huge, right? So today 50, no one can build an apartment complex anywhere in the US for less than 250,000 a door. Even in a like remote market. I’m not even talking tertiary I’m talking remote. 250 is your starting point. If I can buy a property at 130 That’s only a 5053 54% of replacement cost. I think that’s to me, that’s looks less risky than buying the same property 100 miles closer to Phoenix at 250 a door, right? Because now you have a new construction property that can come in at 300 a door and completely outshine your 250 a door price.

J Darrin Gross 18:31

Well and even add to that what you’re seeing is this is the ring or the radius gets larger, those people in that metro area, they’re looking outside that area so that at some point, you’re going to have that, you know, the demand will shift because the you know, the overbilled or whatever that whatever that will be. That I mean, not, not that it will happen. But there’s there’s more likely that you could have more towers, more cranes, more more construction in that metro area. And like you said, if everybody’s having to pay $300,000 a door to build the rent, they have to charge just to make that work. Eventually, people are gonna say, you know, we don’t have to go to the office every day, if we only go like once a week, twice a week or whatever it is, what if we looked at IRL you know, and also now you’re Neil’s neighborhood, and

Neal Bawa 19:16

And you’re in a nicer area with nicer weather, right? Like, for example, Asheville has become one of these trendy new places. So I talk about these trendy new places Bend Oregon has become the kind of place where people have moved from San Francisco, there’s a plane that leaves bend at 620 in the morning, it gets to San Francisco at you know 745 The entire plane is filled with commuters. And they go on Monday and they come back on Tuesday and then they work from their home Wednesday, Thursday and Friday. And they have Ben’s gorgeous climate amazing, you know, amenities and homes in Bend are going completely insane. Same things happening with Asheville which has great quality of life. So what’s happening is each month some More and more people are coming to that conclusion. So it’s a triple it’s not a flood at this point in time. But each month there’s a trickle and that trickle is in favor of these remote locations.

J Darrin Gross 20:12

So you’ve identified the markets, which you you always have. You, you mentioned, and we’ve talked a little bit before we started recording how you’ve shifted some of your your work most of your your work from value add to now you’re you’re developing in these markets, were you finding these opportunities? Are you can you describe the percentage of of projects you have that are build new versus value add multifamily?

Neal Bawa 20:47

Right now, I think it’s about 70/30. So 70% of the time we build and 30% of the time to hold for value add. And some of it is, is also because, you know, our investors do not want 100% new development, they still want the tax benefits that come with value add property, they want the negative K ones, they want the cost, you know, segregation, and so to eat, to shelter, our own income. So I don’t think that that that ratio is ever going to go below 30% for value add, but I think the optimum ratio today is build in 70% of the cases and buy in 30% of the cases. And one of the things that we’re doing that people really like is that as some of these value add properties are selling, we’re actually transferring we’re 1030 wanting the money into new construction properties. So what’s happening is that we are going from a short term, okay, we did this, you know, we did the rehab, and in two or three years, we made you a certain amount of money. Now we want to put that money into a legacy property that we can hold for 10 years. And if we do new construction, that cash flow is high enough, so that for 10 years, we can hold it and take the cash flow to 8% 9% 10% 11%. And just hold that property for seven or eight years, as opposed to doing the typical two and a half year flip that we’ve been seeing in the marketplace. And so we have a lot of investors, the more let’s just call him investors with more white hair that really like that concept of I’ll start with value add and then move into new construction with my profits.

J Darrin Gross 22:16

Well, a new construction to your your capex is zero for those years. And when we want to have it fully developed there. I mean, that’s that’s kind of a beautiful, I mean, when,

Neal Bawa 22:27

Zero Cap X, low maintenance so that the first two to three years, the maintenance cost is very low. Most of the maintenance that happens in year one is basically just build back to the builder because it’s the property is under warranty. So we tend not to have much of a maintenance budget in year one year or two onwards, it starts to trickle up, but it takes a good 10 to 15 years for it to reach the level of a value add in terms of maintenance costs, right, because so many items in the property are under warranty. So and again, I’m not a huge fan of new construction. I’m not a huge fan of new construction, I’m a huge fan of value add, the question is is value add becoming an oxymoron, right? So why are people today buying a 60s property? That is, you know, completely, you know, in my mind that property is redundant and needs to be torn down, people are paying $200,000 a door for them. And I have a hard time trying to, you know, understand the value add story there, it’s it’s very difficult for me to wrap my head around it. So there’s, it seems that that price only works if cap rates continue to compress and they are decompressing, they are they are decompressing and rents continue to increase which they are so on the one side of the story is good we are you know, I just looked at the numbers for last month for for April 2022. And they looked very good. You know, it’s not like we’re gonna get the kind of rent increases we saw last year, but this year on its own looks very strong. So on the one side, the wrench story is very good. But on the cap rate side, I challenge anyone to come to me and say they have not seen a difference between, you know, today’s may 11. And what they were seeing on March 11. The answer is that if they’re saying that they’re lying, we are seeing more and more properties being rejected, especially the 70s and 80s product. Lenders that were at 75% LTV are now at 65 or 70%. LTV. We’re also seeing that people who are buying under cap for the lenders are simply not playing. They’re not playing and the cost of rate caps has gone through the roof. I mean a year ago, a $35,000 rate cap today costs $400,000. That’s 11 times the rate cap cost. So if your interest rates.

J Darrin Gross 24:47

Okay, gotcha, gotcha. Cap your interest rate there.

Neal Bawa 24:49

Right. So if you’re looking to cap your interest rate, it’s going to cost you basically a half a million bucks today compared to 35 or $40,000. Before so obviously that’s a cost that has To get added on, and everything goes towards the cost of the project. So my I’m very grateful that I am currently not engaged in the process of buying a value add property because this is a very, very difficult time, it’s a very sticky time to, to be there I am engaged in selling them. So I’m on needles and pennants and hoping that the sales go through.

J Darrin Gross 25:21

Right. No the other side of the coin there. So let’s talk a little bit about property. Tech, prop tech. I know you’ve you’ve been, you know, the technologist and and our big big proponent of remote virtual assistants and systems and and that and, you know, when we talked and I know that your your story from the standpoint of integrating that to increasing the occupancy and the follow through with the respective tenants and that, how do you see prop tech? Has it changed as a grown since that kind of a base? Are you? Are you using it in more in different ways? Or?

Neal Bawa 26:09

So I’ll give you an answer there that may not sound like a positive answer. So I am not seeing the industry use outsourcing substantially more than I was four years ago. So I’m kind of the unicorn in terms of how aggressively I use outsourcing. So I for every every one person full time that I hire in the United States, I hire two people in the Philippines, usually on the same day. And, and that, you know, one person in the US or two in the Philippines ratio has been consistent now for five years. So we haven’t changed that ratio. They haven’t seen any need to change it. And people ask us, you know, so what are those two people in the Philippines doing? The answer is everything they do, you know, operations, they do investor management, they call investors, they they help us, you know, build websites, they help us manage our properties, they make delinquency calls, and you might say, oh, so are you a property manager? The answer is no, we pay a regular property manager, we just basically build an efficiency layer on top of them. And that gets us a lot of noi, when I’m paying $6 to a trained Filipino who makes 10,000 delinquency calls across a portfolio of a billion dollars. That is a huge accelerator that no property manager in the US has ever been able to achieve. Not once, not a single property manager, I you know, take the biggest property manager in the United States, they still don’t have a call center like we do, right. So we’ve managed to do amazing things. And obviously, if you’re wondering, in terms of what have that has done to our returns, all you have to do is go to the end of the day, look at the logo behind me grow capitis.com Scroll down. And right there, you’ll see a track record. And I’m pretty sure you will see some amazing numbers there. So it has incredible benefits. But I haven’t seen anyone else in the industry build call centers the way that I have. I have obsessive belief in business process outsourcing and how it can completely revitalize a business or give you give you a advantage that nobody else can catch up to. I believe in that. And it’s been I’ve been validated by doing it over five years. But I haven’t seen the industry do it much I have not seen you know, I see people hiring virtual assistants to do basic work, but not the way we’ve integrated them into our into our flow. I mean, as far as we’re concerned, even right and yesterday, I was picking Employee of the Year awards, we just basically have two sets of them Employee of the Year in the Philippines employee of the year in the US Rookie of the Year in the Philippines Rookie of the Year in the in the in the US. We do as many summits in the Philippines as we do in the US. So we’ve integrated them so well that from our perspective, there really isn’t much of a difference between a person working in the Philippines or not. They have their own managers, their own directors, their own, you know, staffing people, they hire and fire on their own. So it’s a large service organization. I think it gives us tremendous, tremendous advantages. I have not at this point seen enough people in the industry do that. They’re doing it, they’re doing it a very surface level. So that part of technology. It hasn’t disrupted, you know what people are doing in real estate. Sure. There’s a few disruptors like me out there, the mad scientists that are out there, but we’re not having a big impact. I think the bigger impact of technology that we’re about to feel is in that tokenization realm that I also like to talk about, I think that one is far more disruptive and coming at a far greater speed than most people can.

J Darrin Gross 29:30

You say tokenization is kind of like the blockchain technology being applied for fractional ownership, or how are you? How do you see that?

Neal Bawa 29:40

That’s exactly right. I mean, so you think about real estate. Real estate is the largest industry in the world. So if you look at the total amount of real estate in the world is three times the size of the world stock market, right 326 billion. How is it that the largest market in the world is today you know? 50 years after the iPhone was invented, still can’t be purchased on a phone, you can go tap, tap, tap and basically do something. I mean, today I talked about Idaho Falls being a really good market, you’ve probably never heard of Idaho Falls, shouldn’t you be able to just whip out your phone and go to some app and go in there and say, you know, I want to buy $5,000 worth of multifamily in Idaho Falls $5,000 of single family, tap, tap, tap, tap, tap, right? Just like you do with stocks, because somebody gives you a tip when you’re at a party, and you whip out your phone and say, Okay, I’m gonna buy 50 shares or 100 shares of so and so stock because somebody just gave me a tip. That doesn’t happen. Real estate is simply not a digital economy. And yes, we’ve we’ve digitized pieces of it. But overall, we’re still buying real estate in much the same way as we were buying before. And one of the reasons was that the the the way real estate is bought and sold, the the counties are very involved, right. So there’s all this escrow and title and all these other processes that make real estate less efficient. And for the longest time, there was this need for a technology that would create transparency. So you would know who owns a property, you know, and all of the escrow and title pieces and make it transparent. Well, somebody built that technology back in 2009, for purposes that had nothing to do with real estate it blockchain was built to host Bitcoin. And as time went on, Blockchain became something much bigger than Bitcoin, it became much bigger than cryptocurrency because people realize that the the back end technology of blockchain was simply superior to the web technology we use today. Because if we are doing something with Gmail, we’re on a Google server. If we’re doing something with Outlook, we’re on a Microsoft server. It’s all walled gardens. And what blockchain does is from the very beginning, it’s designed to be both extremely secure, and extremely visible, at the same time, and no one can manipulate it. It’s not a walled garden. It’s actually an underworld garden. It’s designed to never be walled. So now you have the capability of a property, basically, that has been sold. Once it’s sold, its title is on the blockchain. And because it’s on the blockchain, if you and I are disagreeing about who owns this property, our lawyers can spend 15 minutes in a room, go look it up on the blockchain and say sorry, Darren, it steals property. It’s very clear. That’s that’s what’s on there. That’s just a very tiny example of how blockchain can be used. But there are hundreds of discrete advantages. There a future world where real estate is hosted on the blockchain, compared to today’s world. And one of the biggest pieces that quickness to pieces is tokenization. You can take a multifamily property that you bought for $30 million. And you can break it up into $100 tokens. And you can sell those tokens on the blockchain, on websites such as t zero, you might say, you know, how would I know where to sell it? You don’t? I mean, listen, when you buy an Airbnb property, you don’t go and build a website you just hosted on airbnb.com. Right? So people find you on airbnb.com. Well, the same sort of thing is going to happen for blockchain. T zero is currently the world’s number one website for this kind of product. So you can go to T zero and you can buy tokens of real estate right now. And this movement, just beginning, I mean, t zero just started hosting six months ago, started hosting multifamily property tokens. And a lot of people are thinking, but this is like Bitcoin and the price of Bitcoin went down 40% or 50%. Yeah, but Bitcoin doesn’t have an underlying asset, right? It is an underlying asset, its price, why would it change if the price goes down? 30% people are going to rush in and buy this property because it’s still the same property as six months ago when it was worth 30%. More. Right, right. So that’s why it’s actually far superior to buying cryptocurrency which can decline to half of its value, which is what we’ve seen in the last six or seven weeks. But that real estate is still there. So you’re never ever actually investing in a token, you’re investing in a property and rental properties ownership is held in a token on the right

J Darrin Gross 34:17

now, I think the whole tokenization thing and just the blockchain is just a I mean, it’s an amazing technology to be able to track you know, fractional and for you, Neil to make an independent transaction, irrespective of the sponsor of the deal, your your token, you can then fractionalize That token, can you not, if?

Neal Bawa 34:38

You can, but in practice, you can I think that it you do need the syndicator you do need the sponsor to host their property on a on an engine such as t zero. So, while while technically you could go and sell your shares on the web, I don’t think that’s going to happen for a decade. I think what is is going to happen is over the next two to three years. If you’re a major syndicator, and you’re, you know, selling or buying a $30 million property, you’re not going to be able to get money from investors unless you say, Yes, I am going to host a small number of my shares as tokens on P zero. And so if you need to sell your shares, you can go to T zero and you can transact independently, you can go to the property, and you can sell your tokens there, right. And maybe you can make extra money there. But for the moment, it’s primarily liquidity in the long run, I think that we will actually see values going up, we, you know, the stock market, when we got to the point where anyone could transact in the stock market, especially millennials with the Robin Hood app, we saw prices go up. And I think that will happen with real estate over the next three to four years as it becomes a truly liquid transactional asset class. Today, you cannot sell real estate in a day or a week or even a month. Yeah, but you’re about to enter a world where you cannot imagine not being able to sell it in an hour. And that’s tokenization. That’s it? That’s a sea change. That’s a enormous change.

J Darrin Gross 36:08

No, and if I just wanna make sure I understand, right, because I mean, what I what I vision and kind of heard you say, and then you said no, wait a second. So the having a property. So the syndicator lists the property on the t zero site. So that’s basically the host of the blockchain for that property. You have 100 tokens for a property, say and and you have one. And if you wanted to sell a portion of that, or or all of it, you could sell that that token independent of the syndicator. Could you not? Or do you have to wait for the syndicator. To sell the,

Neal Bawa 36:46

You definitely need the syndicator to do the listing on t zero for right because I mean, less expensive, right? So I think the listing is done, then you can go there and you can transact, right, so you can go to T zero and you can transact and, and to be honest, t zero is still evolving this process. So right now you can’t, you have to go to your syndicator. And this indicator has to be listed there. But that’s just it’s just software, it’s all going to get written out in the next year where you can basically go in there, you can get a key from the syndicator. And you can say this is your unique key, plug this key in. And now t zero knows that you actually own these tokens. And you can basically go through the process of you know, selling your tokens there. And I think right now the the location where the tokens are held, it’s, you know, called a digital wallet, it’s actually not on t zero. But in the long run, you’re going to be able to host the digital wallet in t zero itself, in which case, you just basically log into the t zero interface, just like you log in today to you know, get your que one, right, so you’re gonna be able to log in and go in there and click and sell just like you do for E trade or Robin Hood. So we’re moving in that in that direction. But I think that if there’s a number of steps that take 234 years, to get us to the final goal of liquidity where you can basically you just log into an interface and say, I want to sell half of my shares today, click List. And then you look at, you know, the offers that come in from people and just like you sell shares, and you can set a stop limit and say, I don’t want to shell them sell my shares below this number. That’s the kind of liquidity that people are looking for. And I think we’re going to get it and we would have never gotten to this point. If cryptocurrencies and blockchain hadn’t happened independent of real estate, because what that has done is it’s built the infrastructure, there are now hundreds of millions of digital wallets that are in existence with cryptocurrency in them. So people have become comfortable with this concept of blockchain being the backend that is moving all this money around. So now you basically created hundreds of millions of ready consumers.

J Darrin Gross 38:49

Somebody I was talking with earlier was talking about how even I think Visa and MasterCard or her now kind of greenlighted blockchain and the countries, right, I don’t know what the platform is, but it’s just because I was always wondering about, you know, from Bitcoin, I mean, this just a speculative type thing. If, I mean, if there’s no additional money, I don’t know how you can manipulate the currency like in, you know, the US dollar. I mean, that’s all about, you know, manipulating the currency, which is, as far as the, you know, the government that

Neal Bawa 39:24

We are seeing manipulation happened in the cryptocurrency market, we certainly are seeing evidence of that, you know, Bitcoin fell about 50% In the last four or five weeks. So I think that it has become a speculative asset, just like any stock, and, you know, big whales can move the numbers up, they can move the numbers down. So there’s a lot of, you know, challenges there. But keep in mind, one of the biggest reasons why it’s so speculative, why it’s so volatile, is there’s no underlying value. The only underlying value of Bitcoin is that other people believe it has value. And some there are days when people really believe that and there’s the is when they’re not so sure. And so you know, but with with real estate, the beautiful thing about tokenization is your your money is always going into a physical cash flowing property, that token is simply proof of ownership. So you’re just transferring ownership of the asset. So the underlying strength of the acid is truly what makes me believe that tokenization of real estate is, in the long run actually much more compelling than either cryptocurrencies, or these monkey NF T’s that I see on the web there that NFT stuff, in my opinion, is just bullshit.

J Darrin Gross 40:37

Yeah, I’m still having a hard time understanding exactly the value in that other than that it’s a novelty kind of thing. But I’ve always been in the slow ski kind of lanes. So hey, Neil, if we could I want to shift gears here just real quick. By day, I’m an insurance broker. And we tried to assess risk and, and determine what to do with the risk for our clients. And there’s a couple different strategies we typically consider. First, we look to see if we can avoid the risk. And if we cannot avoid the risk risk, then we look to see if we can minimize the risk. And then if we can’t minimize the risk, but let’s see if we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests if they can take a look at their own situation. frame the question, however you like with regards to whether it be you the market? You know, whatever situation you’d like to frame it. But answer the question, what is the biggest risk? And again, just to be clear, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. So with that, Neal Bawa, what is the biggest risk,

Neal Bawa 41:49

The biggest risk to the commercial real estate market. So I’ll stay away from single family. The biggest risk to commercial real estate family is that the jobs back in 2014, made it very easy to raise money raise have syndicators raise money. And what has happened today is syndicators have become such a massive percentage of the overall multifamily market, that they are inflating the market far, far beyond its fundamentals, not just beyond its fundamental fundamentals, but far far beyond, because their ability to raise money has accelerated far beyond, and far quicker than the property’s ability to raise rents. And so that has created a situation where there’s a very, very aggressive, all ships raising effect, that is making these properties go far beyond their fundamentals. And that is a very risky situation. We’re all in it. I’m in it, even though I’m doing new construction, I’m still in it. And so it’s something that we have to really watch very, very closely. I do not believe that it’s possible for this bubble to deflate, it has to burst. And so I’m, I’m just being very cautiously watching this to see if there’s any evidence of it bursting. And it probably isn’t ready to burst yet simply because rents are rising so fast. So to me, the point at which the bubble could burst is, you know, the Feds raising interest rates very, very quickly, they have to do their job because inflation is under control, which means and the Fed is only once out of 10 times succeeded in engineering a soft landing, which means that there’s only a 10% chance that we’ll have a soft landing, this time, there’s a 90% chance we’ll end up in a recession. So when that happens, rents could fall. And that I think is the point of greatest risk for the commercial multifamily market that has been flooded by syndicators including myself since 2014. So we’ve had eight years of crowdfunding and the syndicator flood, we have not seen the bubble bursts, all bubbles by their nature must first. I don’t believe in bubbles deflating. It happens sometimes I don’t think this one will deflate. So I’m curious to see what happens when rents drop a bit in a recession. And luckily, they don’t tend to go down a lot in recessions. Sometimes they won’t even go down at all in recessions, right? So most US recessions, rents haven’t decline. But if they do start declining, I’m, I wonder what happens to the industry at that point.

J Darrin Gross 44:23

Sounds like a recipe for keeping some powder dry. Just in case, right. That’s great. Well, Neil, thanks for sharing that. And, again, thanks for making the time to do this. Where can the listeners go if you’d like to learn more connect with you?

Neal Bawa 44:41

Well, I happen to be the only Neal Bawa on the World Wide Web. So Neal Bawa, hit Enter. If you’re interested in some of the typical topics I talked about talked about, you can type in Neal Bawa interest rates or Neal Bawa virtual assistants, or Neal Bawa, best cities in the US. We’re best known and there’s about 30 5000 people following us for publishing a list of never heard of cities that are astonishingly profitable. And we publish that list in January each year. We’ve already published it for this year, we picked dark horses. Some of those have done incredibly well, like San Antonio was picked as a dark horse three years ago. And now is the lowest cap rate market in the United States who had ever thought of San Antonio being the lowest cap rate market in the US, but check out the latest CBRE Market report. We said three years ago, this market is going to be extraordinarily low cap, and now it’s happened. So we pick markets like that every year. So check out you know, our website is multifamily u.com That’s multifamily, followed by the letter u.com. There you can see our 20 Plus webinars, I’d like to invite everybody to my latest webinar, which is on the 25th of May, which says what is the impact of inflation and interest rates on all of real estate, not just commercial real estate. And I believe there’ll be about 3000 attendees there. So the best way to interact with us is through our webinars.

J Darrin Gross 46:04

Awesome. Well, they all can’t say thanks enough. Always enjoy it. Look forward to doing it again soon.

Neal Bawa 46:11

Awesome. Thanks for having me on the show. Again, Darrin, thank you. All right.

J Darrin Gross 46:15

For our listeners. If you liked this episode, don’t forget to like share and subscribe. Remember, the more you know, the more you grow. That’s all we got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 46:31

You’re listening to CRE PN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio

Real Estate Creator Economy with Nobu Iguchi – CRE PN #360

Nobu Iguchi 0:00

What is creator economy? So you could see it’s a software enabled economy that allows people, including people in the real estate profession to make money producing content, such as you know, photos, video and so forth. And you mentioned YouTube. And that’s certainly one platform. And I think, over the last few years, what we’ve seen is obviously explosion with Instagram and Tiktok. These are also platforms that are very, very, very popular. And what we’re seeing is even in a very traditional industry, like real estate, and even construction, the audience that say people who are who to see in the case of buying homes, right, the people who are buying homes are, you know, it’s there’s a wide range of age, but a lot of Gen V. Folks and Millennial folks, in order to cater to them traditional ways of kind of advertising traditional ways of reaching out would obviously work to some degree, but there’s a sense in which if you’re not utilizing these content platforms, you’re in some ways missing out.

Announcer 1:07

J Darrin Gross 1:26

Welcome to Commercial Real Estate Pro Networks CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Nobu Iguchi. Nobu is the co founder and Managing Partner of Agya Ventures, prior to Agya, Nobu worked at Bridgewater Associates as a senior investment professional. And he holds a BS in chemistry from Yale and his MBA from Harvard Business School. And in just a minute, we’re going to speak with Nobu about the Creator Content Economy, and how it can help real estate investors.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on commercial or find us on YouTube at commercial real estate pro network. And while you’re there, we encourage you to subscribe. With that, I want to welcome my guest, Nobu. Welcome to CRE PN Radio.

Nobu Iguchi 2:55

Yeah, Darrin, thanks for having me. Great. Great to be here.

J Darrin Gross 2:59

I’m really looking forward to our conversation. We were talking just before we started recording about what we’re getting into here. But before we get started, if you could take just a minute and share with listeners a little bit about your background.

Nobu Iguchi 3:11

Yeah, happy to do so. I am a co founder of Agya Ventures real estate technology focused venture capital firm based in New York and San Francisco. We invest in early stage technology companies precede seed series A companies in real estate and construction space. So what that means Darrin is companies that have recently emerged that have been founded, usually over the last six months to one year, two years sort of timeframe, across many real estate asset classes, so commercial, you know, space to residential space to we look, you know, look at hospitality space, retail, space, logistics, Senior Living, so on and so forth. So we look at the disruptive technology companies across asset classes and real estate and construction and invest in those companies.

J Darrin Gross 4:12

Gotcha. And when you say disruptive technology, can you give kind of an example of what one might be or how it might be? Just I mean, because technology to me is such a broad conversation and disruptive seems like that’s what the world has been just one constant disruption here for the last, you know, especially with technology.

Nobu Iguchi 4:33

Yeah, actually, good point. And I think so. The word disrupt or disruptive is perhaps overused and people use it differently. So happy to clarify that. And I think I would say they’re sort of, in some ways to, to two different types of innovation. One is where company is in some ways augmenting the in real estate space augmenting In the existing roof that holding so a company we have invested in is called Sugar. Sugar is a platform, an app for residential properties and for tenants to you. So if you think of a multi family residential unit, you would open the sugar app, which is tied to a smart lock. So you would use it to enter your home. And the app also allows the tenants to communicate with each other. So if you have specific needs, you’re moving out, if you want to sell your furniture, you want the babysitter, and you’re gonna see whether anybody else in the building has a recommendation. Or you may want to pay rent, you know, traditionally, you would pay, you know, write a check, you can do all of that on your on your app. That’s an example of a company that’s augmenting the existing real estate assets. So you can call that as one type of innovation.

Another type of innovation, a Darrin could be one that’s somewhat quote unquote, disruptive in the sense that it might be changing the way that this is done right now. So there’s a company called Dorsey that we’ve invested in, they operate in the single family space. And essentially, it’s a platform for buyers of single family homes, to auction or bid for a home. So imagine, you know, right now, how would you buy a single family home, we say, you know, you see a property on Zillow, you know, you you contact the agent to see how it goes. And the process is honestly not very transparent. When would you agree? This platform makes that all transparent. by listing the platform, let’s say the the home in North Carolina, is the it starts at 3300 to $50,000, you have seven days left, and you can you can kind of put your own bid. So you know, 360 5k, somebody else created, and so on and so forth. And then whoever has the highest bidding with, with with buy the home. So that’s, that’s a very, you know, new way of operating in real estate. So there’s kind of two types of innovative companies. So you know, these are just examples, but I would I would put it that way.

J Darrin Gross 7:22

Got it. Got it. No, it’s interesting to see all the different applications for technology and the ways that we’ve done business, and then you find these new efficient ways that that, you know, and I think it’s probably more of the the, the, I guess, the the first time through or the understanding of how it works kind of thing. What, in the different technologies you’ve you’ve invested in? How do you look to? And how do you measure the adoption rate? Or what’s kind of an expectation? Is there a, is it something that’s new that like, takes off like wildfire? Is it is it something like you find that is, or I guess, maybe a better question is, if you found, like one thing that makes it something more apt to, to take off and grow, as opposed to? You know, maybe not so much?

Nobu Iguchi 8:20

Yeah, there’s no science to, to do that, and I wish they were in it. So it’d be easier to kind of invest in the right companies, I think one way to look at it is really, you know, look at we work at the early stage level invest in, oftentimes, the company has just started. So a lot of the times companies we invest in is post product, meaning the products already been built. And oftentimes post revenue, meaning that the company is already generating revenue, having said that, the revenue is minimal. So a lot of a lot of times Darrin what’s what’s very critical is, is to know the founder as well. Because ultimately, the business model could change. And you may, you may work on the product for a little bit, and you find out that, you know, it doesn’t work quite well, and you pivot, quote, unquote, people change to a different business model is very common, even among most successful companies. So a lot of times we, you know, one of the key things in early stage investing is talking to the founders, making sure they know they are they’re the types of people who can build new companies, a lot of times in real estate. Another thing to point out is they tend to have real estate experienced, real estate doesn’t you know, is an area where if you come from a totally different background, you know, how smart you are in software, for example, you may not necessarily be the best product in the industry. So that’s one thing I would say. Another is I think, oftentimes, for companies more in the way in the b2b space, early feedback is critical. So working with commercial real estate developers as customers, for example, what are they saying? Even they haven’t started paying yet? You know, he’s got a pain point, are they? Are they you know, doing pilots and some, you know, early feedback, positive feedback is always a plus to you when you make a judgement.

J Darrin Gross 10:11

I’m often the guy that creates all the solutions in my head on what would be great only and find out that I’m the only one that has that problem or, or that you know that it feels the pain. So I get ya there. So we were the, the topic that we kind of describe her and talk about today was kind of more about the Creator content. And so, I know in, you know, there’s not a day that goes by that I’m not like, on a YouTube. In fact, I think getting into anything Google Now is like, made me go to YouTube, just for the dual verification that it’s me trying to get in. And next thing you know, I’m watching the video, and how did I get here? But my point to this, though, is that, that I think more and more all, we’re all able to whether it be through subscription, or we’re seeking information or whatever, we’re finding these, these different individuals that have created these platforms. And I’m wondering if you can kind of speak to what you see is, is the you know, how people are creating content, creating the audience and able to leverage that into more than just a platform to disseminate information, but, you know, more of a revenue generating opportunity.

Nobu Iguchi 11:34

Yeah, great question. And I think having to dive into that. So I think taking a step back, you know, what is creative economy, you could say it’s a software enabled economy that allows people, including people in the real estate profession to make money producing content, such as you know, photos, video support. And you mentioned YouTube. And that’s certainly one platform. And I think, over the last few years, what we’ve seen is obviously, explosion with Instagram and Tiktok. These are also platforms that are very, very, very popular. And what we’re seeing is even in a very traditional industry, like real estate, and even construction, the audience that say people who are who to say in the case of buying homes, right, the people who are buying homes are, you know, there’s a wide range of age, but a lot of Gen V. Folks and Millennial folks, in order to cater to then traditional ways of kind of advertising traditional ways of reaching out would obviously work to some degree.

But there’s a sense in which if you’re not utilizing these content platforms, you’re in some ways missing out. So that’s why we’ve seen a growth uptick in creator economy in the in the use of these platforms to begin with. I think a little bit further, there’s one thing we’re seeing, which is, let me just two things. One is that there is what one could call a front end and back end innovation. So front end is kind of like Tiktok, YouTube, Instagram. So that’s kind of what people consume content on, right? In order to facilitate content creators, for people who want to, you know, create the content and communicate to the world. There are a lot of companies emerging to help with that. So you can call them back end innovation. So these are tools that would allow content creators to create better videos of themselves to use one click of a button, have the information available on their, you know, Facebook account, Instagram account dictum, particular candidates, what kind of phone support, so there’s a back end innovation that’s also happening to help content create.

Another thing, the second thing I’d point out is because of the rise of content, creator economy, in general, we’re seeing platform specific, or industry specific platforms emerging. So if I may give one example, there’s a company called a Playhouse. It’s in the residential space. It started out as a tick tock for real estate. So it was a it was an account on Tiktok that had a bunch of beautiful homes, sometimes by celebrities, and it had it went viral. So a lot of people clicked on them because it’s wonderful to see those homes with celebrities. And it’s kind of fun to scroll through. So what they have decided to do is to make it into an app specifically for real estate. So if you think about the existing platforms today, where you buy a home, it’s you know, you scroll through, usually through photos, and then you may read descriptions. It’s kind of a little bit of a boring experience. Instead, what Playhouse wants to do is to enable content creators, in this case broker agents, right? To post their homes, with abundant wonderful videos with a video content, so that people would enjoy just scrolling through and just, you know, a lot of times, it’s just a scroll, scroll, and sometimes the like, and then you may actually decide to buy, it’s just, it’s some of these platforms that are emerging, specifically, for example, in the real estate industry,

J Darrin Gross 15:27

No, I’ve seen multiple construction in the residential section or the sector, the realtors, and, you know, think, you know, just create content, but also create an audience and create a following, or just kind of constantly have a stream. And I can only imagine, I mean, it’s got to be very powerful if you’re in that market space to have an audience of potential buyers all the time. And if you’re, if you’re showing a property that, you know, somebody in your audience wants, oh, my God, that’s the one I want, you’ve got an instant flow of potential buyers. Now. I’m kind of curious, you know, with with the worldwide web, I mean, one of the things that, that you that I know that I even run into is that because it is worldwide, it’s not like a lot of his real estate is going to local kind of thing. So you have you have your audience that’s, that’s, you know, worldwide, but your your product is maybe local kind of thing. Is there, do you find are people able to more narrowly kind of navigate? Or is it? Or is that not a concern? Is the goal really to appeal to as many people as you can and hope that the people in your audience or our, you know, potential prospects or potential clients?

Nobu Iguchi 15:56

Yeah, that’s actually a question that different content providers have to have to kind of wrestle with, and the answer might be different from one plate one person to another. So in the case of certain real estate, agents and seller, the market literally might be global. So here in New York, you might be trying to sell a property where the buyer could be, you know, from Europe, from Asia. And, you know, so they’re, one could say that, actually, the web, and the global reach is a plus. Right. And, in fact, if you think about how previously you had to fly to see the properties, or you might be able to scroll through some photos that Max, and I have wonderful videos, and you know, that might lead to a Zoom meeting, and so on, and so forth. So, from that standpoint, having a global reach could be a huge bluff. On the other hand, to your point, it is true that, if you’re trying to sell a home in, let’s say, California, it actually may not be that advantageous to try to advertise to everybody, even across the United States, because the I mean, depending on the house, depending on the home, or the or the property of interest, it could be a commercial property, but the buyer likely isn’t the same reason. So from that standpoint, local targeted as and targeted outreach, might be more beneficial. So it really depends on the purpose, and, and there may be certain surprises to somebody from different continent, or different states would reach out and at least to at least do a deal. But other times, it’s more important that you focus on a geographic region.

J Darrin Gross 18:35

So for the content providers who have actually created an audience, they’ve, you know, they’ve identified whether they’d be a commercial real estate broker or, or you know, thinking of like Grant Cardone. And so he’s got a large following potential investors and in coaching and all that kind of stuff. When, when creating an audience, is there a magic number? Or is there a point at which your content is more valuable because of the the number of people in your audience meaning that there’s other people outside that would like to either advertise or, or, you know, attach themselves to your, you know, your brand? Because, I mean, I know, like, if you’re watching somebody on YouTube, I know, there’s like, all of a sudden you get the ad, you know, that pops up, but I’m assuming that’s all driven by the algorithm with with YouTube based on number of people watching and how, you know, how regular you put content up. But in general, or is it different for the different platforms? Is there a, is there any kind of a ballpark or kind of a?

Nobu Iguchi 19:54

Yeah, I think. Yeah, I think it could, again, it could depend on a few things. So on the one hand, you might want to monetize totally off of your content. So you have a line of, you know, like, really, you know, video content for real estate investors, you have certain other media, and if that’s exactly how you’re gonna monetize off of, you do need a certain kind of threshold of, of followers and viewers, and that would direct that will directly help you monetize. So in that case, I mean, there is no magic number, but let’s say 100,000 followers on Instagram, or what have you, right might be some of the numbers from I want to look for any leads to certain monetization, that that’s appropriate for you. Another way to think about it is it’s kind of a way for you to monetize off of something else. So you’re trying to sell a property, and then you have you use, you know, you mentioned YouTube, Tik Tok Instagram for that purpose. In that case, it’s less that you have, you know, 10,000 followers or 1000 followers or 100,000. Followers, what matters is the quality of the leads you will generate, right? So it’ll actually lead to a transaction, that, that, that that in from which you profit, so kind of different monetization models exist for that, for that, for that, depending on depending on how depending what you want to achieve.

J Darrin Gross 21:28

And so, so more about the leads that you could generate just from the audience who sees whatever it is that you’re speaking about, whether it be a property or, as opposed to like an actual revenue generating thing based on sponsorship, or that’s really the right, and that kind of goes, that makes more sense. Because it’s like the, I forget what it was, there was something that was some marketing idea, but it was, rather than having like a million subscribers, or whatever you need, like 1000, true fans was kind of wondering, you know, starting small, or you had people that were really, they were paying attention to what you’re doing, regardless of when wherever they were true fans kind of thing. And, yeah,

Nobu Iguchi 22:15

Yeah, exactly. So I mean, if you want to monetize off of views, you want to have as many views as possible. But if you monetize off of like, do have done transactions, you would want to have you want to do what matters is the quality of police.

J Darrin Gross 22:28

Got it? Got it. So in that, is there a platform that you think is more dynamic or more useful?

Nobu Iguchi 22:40

Yeah, I think the, the, the, this is so very deaf at the front end, the you know, the tick tock, tick tock, the Instagram, YouTube, some of these conventional platforms are, right now still the kind of the best ways for people to, to advertise, right. And then the, the example, I gave a playhouse in the residential space. And then there is also a company called Hammer, which is in the construction space. There are content industry specific platforms like that, that are that are emerging. This is a recent trend over the last year or two, since really, more like a nascent, you know, emerging trend, but we expect more of those things to to become prevalent as well. So we pay attention to both more the general, you know, platforms, as well as industry specific platforms that are emerging, which is very exciting. You finally also take kind of a step back and see kind of Why is this still happening? It’s kind of creative economy is very interesting, because on the one hand, at the beginning, you can say, there’s this economy in which there’s an employer and employee, to somebody is an employee for a company. And then I think we’ve had, like a gig economy. I think a good example that’s often used is kind of like ride sharing. There, you know, they don’t necessarily work specifically for that company. And one could say, well, yeah, you’re your own boss. But the fact of the matter is, you may be but also your degree, constrained by the company you’re working with, right? And then a lot of things are basically, it’s debatable whether you’re truly a robot. Content economy, and the creator economy has the promise to do more beyond that, namely, where you essentially create your content, and then you monetize off of your content. I won’t go into too much detail, but there’s also a concept called Web three that’s emerging. That’s pretty relevant for this now, where you know people are Part of the metaverse, you know, the Dow and FC, all of these things in a web three are very relevant for creative economy in the sense that if things actually materialize, and it might take a few years, several years, and we’ll see how it goes, there could be a world in which you create your own content monetize off of it, and it surely become your own become your content. And if you’re part of your, it’s a creator owned platform as well. So that’s kind of a badass, like a dynamic shift in like, at a macro level, what’s happening.

J Darrin Gross 25:34

That’s interesting, you mentioned that, you know, I was just sitting there thinking like you, you started off by saying the employer, employer employee relationship. And just as you were kind of going down the is the creator now, kind of is able to leverage their own platform are their own brand. I mean, you know, there’s a, there’s the, the NCAA and the, the student athletes. Recently, I’ve seen a couple of articles just about the, the problem that that’s creating, because the the old guard, the the coaches are, are frustrated down because the the players have money, and they’re not as easy to manage, you know, as they were when they didn’t have any money, and they didn’t have any resources. And it’s, you know, that relationship now, it’s, it’s, for those who want agency, they can create it based on their own, you know, their own efforts, and in the requirement of having a, you know, your, your ability to create income, that’s not necessarily limited to what your employer is willing to, because you may be, you may be more valuable to somebody else based on the audience you’ve created, or the the content you’ve created. But if you have, if you have agency over it. That to me, that’s, that’s pretty insightful to have that as opposed to, you know, only be limited to what your employer is willing to whatever the contract has been.

Nobu Iguchi 27:08

Yeah, I think your sports example, is actually kind of an interesting one, there certainly is, like an analogy there, right? whereby you’re part of a team, or, you know, you can’t earn earn money, or maybe there’s a threshold, versus you’re free to do things. I think, you know, it depends on the industry depends on it may not be a linear sort of, you know, straight line, but I think directionally things are going in the direction where individuals could be more empowered to, to have their own, create their own content, actually own their content. Bearing in mind, right now create economy, quote, unquote, a lot of the times when people publish their content, it’s still controlled by some of the giants companies, right? Tech companies, right. And that also could change. It’s TBD. We don’t know for sure. But I mean, that dynamics might also change in with the rise of web three.

J Darrin Gross 28:03

That’s interesting. I was gonna, just trying to think here, do you, you know, with the the ability to kind of create your content and create your brand. Do you see more people becoming more, I mean, it seems to me as kind of more independently between just the way work is done now. And, you know, the, the pandemic and kind of what it taught us about the place that we considered, you know, the workplace has certainly changed. And the, the, just the power that one has, with, you know, if you can create an audience, you have a following the value you you have, period. I’m curious on the, is there any rhyme or reason or, cause, you know, I think historically before the YouTube and all the abilities to and all the other platforms where you could, you know, create a channel and stuff, I would think that, you know, if you were to watch any kind of program on video, TV movie or whatever, you know, there was usually a an attractive person, there was a script, there was all these things, you know, now we’ve got this more like a reality. Then we got into like reality TV, which was supposed to be unscripted kind of thing, which I think we found as more scripted. You is, there a seems to be there would be a formula that would make sense for whoever was trying to create an audience. In that you a you have a topic that you’re you’re speaking to on a regular basis, which is kind of the you know, the the reason why people are tuning in what they’re searching for, too, would be that your presentation. There’s something about you that the audience identifies with. Is there anything beyond that? that, that you see that like, as a recipe for somebody to have success or to create an audience.

Nobu Iguchi 30:07

That’s one that’s very hard for, to to answer, but I will tell you this, which is I think you touched on kind of an interesting point about a scripted kind of show to the sound scripted, think what’s interesting nowadays with the creative economy is, in some ways, what’s not scripted, what’s more natural, is being preferred. So obviously, there is room for kind of like a TV show sort of setting and the very scripted sort of messaging and so on, and so forth. And that may still have its own place. But increasingly, for example, even videos, right. It’s an interesting thing where, you know, you know, some of the videographers and photographers we’ve talked to in the content, creator economy space, they’ve been increasingly asked by the people for, you know, who gave them the specific jobs right, to, to take the videos in a, in a very natural way, sometimes using just a phone camera. So they, they are not allowed to use, like professional camera. They, they’re specifically asked this photographers and videographers are asked to use their their iPhones to videotape. Because if you look at Pixar, I mean, all of it is basically kind of people using their phone. So there’s a sense in which the what’s preferred, is changing, whereby you’re not necessarily putting your best self, but you’re kind of putting your natural self, again, it depends on the content, I mean, that’s not always the case, when talking about the gonna present your commercial real estate assets, you might want to actually show your best, you know, polished videos, so that’s that, you know, you may don’t want to just take a random video, but again, it could be depending on the occasion, in the preference might be different.

J Darrin Gross 31:52

Ya know, it’s interesting to see even like, with pandemic, and all the Zoom calls and stuff, and how the, you know, the background and, and, like, almost how relaxed things have gotten to where there seems to be more of a genuine interchange between, you know, people participating, whether it be, you know, broadcasting from a spare bedroom, or you hear, you know, kids in the background, or, you know, just some of the life noises that, you know, distractions that happen and stuff, as opposed to an always a high polished kind of presentation that may lack any kind of real, genuine, you know, look and feel about it. But, so, let me ask you, so, you know, we were talking about the augmenting, and just how disruptive the technologies can be, is there one that you feel like has a chance to really, you know, grow greatly? And then I’ll ask you that the opposite is there one that you think is potentially threatened? Because of just the change in these? The, the just the use of technology and the platforms and, and, you know, the the ability to, to attract an audience?

Nobu Iguchi 33:22

That’s one that’s very hard for me to answer. But I think the, I think the next slide here is going to be pretty interesting already talked about a couple industry specific platforms that have emerged in real estate infrastructure and, and also actually another industry, it’s going to be a very interesting year, where some of these will pick up on we’ll see, we’ll see how it goes. And we’re supporting some of these companies investing in some of them, so very supportive of them. But we’d love to, so that’s one where, you know, I don’t have a quote unquote, bet on you know, hoping for and also, we’d love to see these content platforms, emerge, Memorial codes emerge. So that, in particular, a lot of ways, these platforms, what they’re doing is democratizing in an ideal world anyway, the the content creation platform where you don’t necessarily need a lot of budgets to do do things, but you can kind of, you know, people can create a content with videos and a little bit of, you know, software solution and support and they can become, potentially become their, their own bosses we talked about earlier. So, you know, that’s when we’re, you know, very bullish on the space and we’d love to see the seeds actually getting more adoption.

J Darrin Gross 34:37

Now, it sounds kind of limitless as far as what the opportunities are, especially in the web. Three 3.0 sound. I mean, I guess stay tuned. Right. That’s good. Hey, Nobu. If we could, I’d like to shift gears here for a second. By day, I’m an insurance broker and as such work with my clients to try and assess risk and determine what, what to do with the risk. And there’s a couple different strategies we typically consider, we first look to see if there’s a way we can avoid the risk. When that’s not an option, then we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize a risk, then we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation. Could be clients could be the technology could be government could be, you know, the market interest rates, how are we, however, you would like to frame the question as to what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Nobu, oguchi, what is the biggest risk?

Nobu Iguchi 36:14

Yeah, this very deep question, but I think the, let me try kind of the short term and the long term, if I may, I think in the short term, so, you know, this is this is May, right, May of 2022, the world is looking, increasingly uncertain. The economies looking increasingly after the inflation is through the roof. There’s no, no indication is subsiding. And there’s not a question that the Fed is going to keep raising interest rates. And even if they keep raising interest rates, which is basically I think, at this point, given, the question becomes, you know, is the interest rate? Is inflation actually going to come down? And what’s the, let’s say, stabilize the 4% 5%? I mean, is that acceptable to the Fed? And the likely answer is no, because they want the 2% interest rate, which is good for the economy, and that’s their mandate.

So if that’s not acceptable, they may have to keep bringing interest rates even further up, which is a substantial risk for the, for the asset for the assets, asset prices, in general real estate, and also public market assets and private market assets. And, and also, it’s an it’s a risk to the economy. So it could lead to more job losses, unfortunately, and so on. So in the, in the short term, that’s, that’s, to me seems like a huge risk. For many of us a different context, it could be about our jobs, let’s say, from an investor standpoint, for portfolio companies, the companies that we’ve invested in, I think there’s a huge risk, they should prepare for it. So you know, for example, having not just having six months of cash in the bank, but you know, 18 months of cash in the bank, just in case, you know, there’s a substantial food, our economy, they find it challenging to raise capital, and so on, and so forth. Real Estate operators. Again, it’s the same where, you know, even though COVID, you know, in the United States seems to be to a large degree, you know, not a big, big factor anymore, and people are coming back to the office, perhaps that’s going to have a substantially negative impact on our company’s willingness to have more office space. Right. So I think that, to me, seems like a short term, big risk of like, in as big as through what the buffer should be, in each case, in one’s case, to see it to prepare for the future. In the long term, what we see is an apology I have alergies today.

But in the long term, what I would say is, even though, let’s say with that sort of Outlook, technology companies, you’ve seen NASDAQ down a lot, you’ve seen venture valuation down a lot, right? And so on and so forth. But in the long term, we’re very bullish still in, in, in technology, on technology, and in fact, are some of the best technology companies, including the say, Airbnb in the in the in real estate space, came out of basically a recessionary period. So even though that seems like a huge risk to have technology exposure, in the long term, there’s a ton of risk in not investing in technology. So we talked about web three as one example. You don’t have to necessarily invest in every single web three company or like, you know, adopt anything that comes out, but is keeping track of what’s in the face. And even investing, let’s say, as a real estate operator or investor and so on and so forth. And some of these, I think, actually, in a lot of ways mitigates risk. because there is a risk of obviously investing in failing in that, but also also other risks, which is you don’t invest. And five years, 10 years later, you’re kind of left behind. Right. So I think saying the short term there is the kind of inflation risks that could lead to potentially a recession that could lead to asset price. Coming down even further, in the long term, long term, that the risk is not investing in technology, and thereby being left behind.

J Darrin Gross 40:29

So true. If you keep looking for yesterday to come back. You may never may never get there. So that’s good. Hey, Nobu, where can listeners go if they’d like to learn more or connect with you?

Nobu Iguchi 40:47

Would be great for any listener to to to email me at Nobu Nobu@agyaventures.com on ag y a ventures.com. There’s also a website I agyaventures.com. Also, you’re welcome to to ping me on LinkedIn and send me a message as well as mentioned that you watch this wonderful show with you and that you’re hosting and, and we’ll make sure to respond.

J Darrin Gross 41:15

Awesome. Well, Nobu, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it and learned a lot. And I look forward to doing it again soon.

Nobu Iguchi 41:26

That sounds great. Thank you for having me Darrin.

J Darrin Gross 41:28

Announcer 41:48

You’re listening to CRE PN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio

Distressed Commercial Real Estate Investing with Jake Harris – CRE PN #359

Jake Harris 0:00

When you’re having to convert and do heavy value add is like bring in new plumbing, bring in a kitchen, bring in that electrical load those, you know, it’s like the amount of construction work, the heavy value add component of it doesn’t make sense. And the only reason in the areas that it does is you’ve had such an uptick in values you can go buy those at $20,000 A key when everything else is trading at $100,000 $1 or $200,000. You’re you have enough margin to effectively get in there.

Announcer 0:35

J Darrin Gross 0:55

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Jake Harris. Jake is a best selling author on distressed commercial real estate with over 18 years of experience in real estate, construction and investment management, and has been featured as a national speaker on his expertise. Over the past six years, he has managed and developed and acquired over $200 million in projects and over 250 million in the development, or he has over 250 million in his development pipeline. In just a minute, we’re gonna speak with Jake about what to do before investing in distressed real estate. But first a quick reminder, if you like our show CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, we encourage you to subscribe. With that, I want to welcome my guest. Jake, welcome to CRE PN Radio.

Jake Harris 2:30

Thank you, Darrin, I appreciate that.

J Darrin Gross 2:32

I’m looking forward to our conversation. Before we get started, though, if you could take just a minute and share with the listeners a little bit about your background.

Jake Harris 2:43

Yeah, so a question I get asked often, where do I get started? And there’s a couple of different versions of that, that I’ve kind of reflected upon over my life. And you read that bio 18 years experience? You know, yes, but the reality is, is like when I was a kid, my parents had bought an old farmhouse it built in the late 1800s in the Central Valley of California. And it was the farmhouse of 1000 acre orchard. And by the time we bought it, it had been parceled down to I don’t know, I think an acre and there are some other, you know, multiple acre kind of parcels around our property. And we lived in a 16 foot camp trailer, a family of five. And we read, built or remodeled this house that was built in the 1800s didn’t even have a foundation, it sat on rocks. And we had to jack up the house and pour foundation and set the house back down. And so when I was at my mom’s the other day, I saw a picture of my brother and I carrying a sheet of plywood. And we were probably like seven, I was seven he was five or nine and seven were a couple years apart.

And so I looked at that. And then I looked at some other photos as we were taking like a bath and a wheelbarrow. Again, we’re on a 16 foot camp trailer. And so now I look at that as like how did I get my start? How did I get started? And I was like really I kind of feel like I grew up on a construction site. And it was that that epiphany of like, I’ve kind of been doing this my whole life led by my parents for the relevant in the last 20 years. I’ve gone off to the army. Somebody handed me a book 20 something years ago of Rich Dad Poor Dad, that purple and gold book and I read that and it was like a light bulb. And I think maybe I reconnected with that time of being that kid you know fixing up houses and I was like yeah, this is what I want to do. It took me a few years until I started getting an investing Myself, I after the army, because I didn’t know how to do this, I didn’t know how to get started, like the concepts were not, you know, too crazy and Rich Dad, Poor Dad is a pretty basic, you know, information, buy assets, not liabilities.

But it was like I didn’t know how to buy assets, I didn’t know how to even ask anyone. And so I got a job bartending at a country club, after I got out of the army. So I thought being a bartender and hanging around rich people, and I would ask them advice. And then they gave me some advice of getting into commercial real estate. You know, I illustrate this is because a contractor is involved in everything, real estate, I don’t care if you’re moving dirt in a subdivision, you’re remodeling your kitchen, you’re building a high rise, a contractor is involved. And so he said that the the people that come from the trades that know how things are put together, and it’s this interesting relationship between a contractor and an investor is you’re after the same dollars, what the material costs, what the labor costs, then you’re kind of after that, and so it’s a dance and your partner’s, but you’re also trying to get known keeping each other’s you know, honest and out of each other’s pockets, you know, as far as like, I want more as a contractor wants as much money as they want, the investors want as much money as they want as the owners. And so you have to balance that out. And so getting that foundational knowledge of going into commercial construction, was really what became my foundational experiences 20 years ago, of understanding how buildings were fixed up kitchens, baths, you know, building out an office building. And so my first projects were building industrial centers, doing tilt up concrete buildings, and then I got into doing some stuff for equity office properties. And that was how I cut my teeth 20 years ago.

J Darrin Gross 6:57

Well, it certainly sounds like you have been in real estate from the very beginning. And love the story about the, the farmhouse there and in California, that’s awesome. So if we can, if we can back up just one second here. And I wonder if you could define or give some definition to what you consider to be her what is a distressed property? Or how do you define distressed real estate.

Jake Harris 7:30

So distressed, and obviously, I wrote the book in 2020, I was anticipating a lot more distress, the government went out and printed $20 trillion dollars, and all real estate values tripled. So I was wrong. The distress that I thought was coming down the pipeline was that they kick the can down the road. But the principles in the book are still, you know, foundational, in really, your fundamentals of investing in distressed real estate have to be a lot more robust than when they are in a, you know, economy that is booming.

And so the reason being is you’re not going to be able to get all the information in a distressed property situation. And so when I say distressed is there’s lots of versions of distress, there’s distress, say a tenant has moved out, there’s distress economic factors like Detroit when the auto industry left an entire market, and then all the jobs got sucked out of there. And it may be such a negative distressed environment that is not even worth investing into, in distress in buying real estate and oh nine and 10 and 11 was even though there’s systemic job loss and values were falling, by the day, there was such a steep discount on what you could buy real estate for it was beneficial to buy and oh nine and 10. And so what you’re not trying to do is time the market and say, Wow, we’re in a recession or the values are going down, what you really need to do is have a fundamental understanding of how you’re going to manage this investment.

And where we would underwrite a declining value. So if we said hey, it’s going to take us six months to fix up this property or reposition it or do something to it because it has some functional obsolescence. So whether it was deferred maintenance or whatever it was, we could take it this and say today, it’s worth this and then in six months is going to be worked down here. We would only be willing to buy it if it was way down here on the price point so that we still have a profit margin leftover once we’re finished fixing it up. So that distress can come in a lot of different ways. In even in a booming economy. There can be distress, there’s death, there’s divorce, there’s you know, mortgages that are maturing commercial loans. You talked about this on your show that there are certain factors of risk is a lot of people that maybe took on bridge loans with very low interest rates, and then were anticipating that they could exit at even cheaper permanent rates.

And now all of a sudden, the rates have gone up 200 bips, you know, and now all of a sudden, they’re like, Oh, crap, what do I do, those things are causing distress. And so someone may be willing to get out of a property sooner, you know, do something along those lines. And where, obviously, I enjoy the title of the book, here’s his catching knives, is the the the, you know, economic saying is to avoid catching falling knives. While I was like, actually, in commercial real estate, a lot of these assets, trade once a generation. And so you have to be prepared for when they do trade, because it might be 10 or 20 years, the next time that asset actually does trade. And so if you have an understanding of a business plan, and how you’re going to structure that, and you understand the information of the, you know, interest intrinsic value of the sticks and bricks, you have the opportunity to invest into something. So lots of different ways in which distress can occur. And what you’re looking for is an understanding of that discount and providing a margin of safety when you’re investing.

J Darrin Gross 11:32

No, I appreciate you kind of going through that, because I think that, you know, when people say distressed you know, I think everybody has a frame of reference or a thought that comes to mind, you know, like you mentioned, whether it be it’s the property is all dilapidated, or, or like you said that the financing is coming due or the, you know, the plans didn’t go as, as they had originally planned. I think probably a lot of people think back to the, you know, the crash, oh 708 had a crash and just how much distress there was in the whole market, but not recognizing that in all markets. There there are properties and investors that are in distress and need need an exit. And so that’s, that’s good. So let me ask you so in just having said that, that the do you find that there are times when they’re when there are greater distress? I mean, like, as we’re looking, we’re facing a, you know, rise in interest rates? Do you would you expect there to be more opportunity as the as the change in the marketplace occurs?

Jake Harris 12:45

Yes, I think we’re already starting to see a little bit that some repricing in especially the secondary and tertiary markets, where people were, you know, really compressing down cap rates, meaning speculating on continued, you know, low interest rates, you know, profitability being there, I see that expenses are going to continue to go up, interest expenses are going to also go up and you hope that you’re also getting the rent appreciation or cashflow appreciation in excess of that as well. So when I look at that is there was a whole lot of buyers, and there still is a lot of dry powder liquidity in the market, you know, and so I don’t actually see a lot of massive market distress happening.

You know, I think the fundamentals of real estate are actually very, very strong, especially in an inflationary environment is you know, it goes up in value and all solid assets go up in value. Specifically, you know, some some conditions that you mentioned, I think there’s asset types and asset classes that are going to experience more discount and more opportunity to buy I am especially bullish right now in hospitality. We’re actually getting ready you know, we’ve been submitting some offers, acquiring some hotels, looking at roadside motels and hotels, in leisure oriented and markets. I have an investment thesis that that leisure drive to market is going to see an uptick, especially as let’s call it the work from home or remote work or a hybrid work environment. Once that, you know tube, you know that toothpaste is squeezed out of the tube it doesn’t go back in. I think office is going to be distressed a little bit more discounted more, depending on the market type and What, you know, the clientele is service there? I’m not really quite a buyer on office right now, because I haven’t quite seen this play out as far as how some of these hybrid work environments Connect.

But when I’m looking at it is we’ve already seen a significant uptick in road trips, RV sales, people are willing to drive more even though that the gas prices are more expensive. I think people are going to be more willing to revisit national parks, there’s been a big migration reshuffling on the country over the West Coast, California, Washington, Oregon have done a fantastic job of driving people out of the west coast, and they’ve gone in reshuffle do. You know, Idaho, Nevada, Arizona, Texas, Tennessee has seen a significant uptick, as people have relocated from other parts of the country also think that they’re going to check out the parts of the world that they move to, you know, the Smoky Mountains, and you know, the hot springs of wherever, they’re going to go to places that they haven’t historically gone.

So when I look at that those higher interest rates, the fluctuation of the pandemic, up and down, there may be some opportunities to acquire some of these if you have a strategy and a plan to get on the other side of this office, I continue to see as is some, some headwinds, some challenges, especially as interest rates go up, and vacancies are looking, you know, people just aren’t signing the long term leases, as much as they were, if you’re more pragmatic and willing to accept shorter term leases, or do some more, you know, co working environments make the environment, the office building, more engaging, there is possibilities to extract some some higher returns out of those. But, you know, again, every market is different, every sub market, you know, even in nuances of Portland, there’s areas that are doing really, really well and other areas that you’re you’re stocking and you probably wouldn’t want to buy at what the currently traded prices are.

J Darrin Gross 17:16

Now, no doubt who I wanted to ask you you commented on hospitality how you’re bullish on that. And if you’ve got some opportunities you’re looking at? Are those are you looking at those as hospitality in the you know, more of the temporary housing like Hotel Motel kind of thing? Are you looking at those as an opportunity to convert to multifamily or what’s your, your,

Jake Harris 17:47

I think hospitality as hospitality, I, so I see. So a combination is more of these hotels are being taken offline, because they’re being converted to apartments. And actually, very few I’ve seen makes sense from an economic standpoint, because oftentimes, you’re talking, let’s give you an example, a hotel room is typically about 250 300 square feet. That’s a little bit difficult for a lot of secondary and tertiary markets to make that as a viable unit. So what happens is, you oftentimes need to take two of those units and convert them. And so now you have a 500 square foot apartment, you can put a kitchen in there. If it’s already like a suites, and it’s already got a kitchenette, then it’s easier and the plumbing is already there. Those are the ones that kind of make a little bit more sense to convert that to kind of a micro unit, because the plumbing, when you’re having to convert and do heavy value add is like bring in new plumbing, bring in a kitchen, bring in that electrical load. Those, you know, it’s like the amount of construction work, the heavy value add component of it doesn’t make sense.

And the only reason in the areas that it does is you’ve had such an uptick in values, you can go buy those at $20,000. That key when everything else is trading at $100,000 $1 or $200,000, you’re you have enough margin to effectively get in there. Some of those are being converted to affordable housing or homeless shelters or other things. And so we’re seeing a decline. And that motel hotel class that the kind of roadside, nobody’s building that nobody’s building a new product of that there’s no you can’t build a $50,000 key hotel like it doesn’t exist. The sticks and bricks cost you $100,000 to build so like as they take more of these offline. I see that environment in those category of hotels and motels. actually be coming more profitable over time.

And actually I do my thing is to deep flag them, get rid of the Super Eight get rid of the Days Inn, get rid of the Motel Six, because they have a declining valuation, they you get charged 10 to 20% and franchise fees to have a Super Eight and be $59 a night, you know, and it was like your entire profit margins, you know, $8 what happens is you need to decouple from that $59 A night room, right, you need to do a remodel, but in the location becomes very, very critical to this is you have to have some top end ability to now rent those out for 139 a night or 159 a night and that’s going to be and you know, like Cannon Beach, you know, it’s going to be you know, in Morro Bay, it’s going to be in, you know, Yosemite or Santa Fe, New Mexico where some of these markets where you have a little bit more of fluency, major metropolitan areas that somebody will pay that.

And what I believe is as the rich are getting richer, as this inflationary and the money is flowing down from the government, people have a little bit more disposable income, they’re not willing to stay at the $59 a night hotel, they want to stay at the 139 or 159, especially as they’re doing kind of a road trip. So hospitality for the hospitality stake. There are people that are doing those heavy conversions. I’ve done some where I’ve converted office buildings and multifamily right now I’m a little bit I’m gonna say not shell shocked. But you know, construction sucks right now is like supply chain sucks, like every single day, it’s like a new problem of what material you can’t get. So for the fast low hanging fruit is doing cosmetic remodels of an existing hotel to a hotel is a lot easier than converting it to something else.

J Darrin Gross 21:58

Makes a lot of sense. And again, kind of your your thesis there about how you know as the the market loses some of this hospitality product because of the conversion that’s going on. And then you have the uptick of available, you know, renters or lodging or people seeking lodging based on you know, the the demand. It seems like that’s a that’s a good good spot to be in for a well placed property kind of thing in like your thesis you’ve talked about around leisure and drivability, the thing that makes it makes a lot of sense. I’m curious if you have any kind of a sense of what the possible outcome will be with Office. Can you come in and on some headwinds are facing Do you see any kind of a play or an opportunity for conversion to a different use? Or you have any sense of what what might look like?

Jake Harris 23:05

Yeah, I’m actually just finishing up a project right now I bought a 10 story office building in downtown San Antonio on the Riverwalk, and it was an opportunity zone. I know Portland has quite a few. There’s a lot of other cities that have opportunity zones. So you need to do a significant remodel to qualify for an opportunity zone investment. And so I think converting office to multifamily makes sense or converting it to a hotel or converting it to one of these other uses, but especially multifamily, it makes a lot of sense. Because the existing infrastructure of the building, I particularly like historic buildings, they have some inherent challenges with them, but they’re aesthetically a lot more pleasing. There’s some story in history to them, that you can take advantage of, versus like a 90s office building, that’s just one of those, you know, glass, you know, you know, got beige tinted glass curtain wall, those I think are going to be a little bit more challenging to convert to a multifamily than it is to a 1929 office building that has traditional type windows that you can configure in the right layout.

The reason I also like historic buildings is it opens up the possibility of financing them with like historic tax credits or renewable like we use PACE financing. We use some other mechanisms to create some structured finance or kind of almost like financial gymnastics to create, we’re gonna go buy this for 12 $15 million dollars, we’re gonna do a $15 million remodel on it, but when it’s done, it’s going to be worth 50 million. You know, it’s like that is the math that you need it to be able to get through and then again also that kind of margin of of safety. So it’s like most investors are looking for the multifamily sugarcoated, paint carpet clean up bumper and 50 bucks a month, and then we’ll just hope and move along. I’m not very good at those. Because a lot of speculation is in the future rent gross throw, when we’re doing those heavy value ads, we are looking at it, we’re buying the building for 75 bucks a foot, we’re gonna put $150 A foot into it, well, that’s still under what it would cost to build brand new. And so if it’s still under, it’s called 200 $300 a foot, you know, build cost, that makes sense. And we have some additional tools like the historic tax credits, or new market tax credits or low income housing tax credits or PACE financing or these other toggles that we can pull to make it financially beneficial to investors.

That’s where you can do that. Not a lot of these properties make sense to do that. But I also see that’s how you were going to also take some of the Office product. In some markets, it’s maybe been overbuilt, I haven’t quite figured out how to do that with the, you know, 80s, you know, REIT, office boom, you know, towers and Dallas and Atlanta and everywhere else, they got built during the REIT, you know, kind of boom days. But I’m sure, given enough money, or enough opportunity, someone will figure it out.

J Darrin Gross 26:32

Ya know, I appreciate you kind of given some examples there. Couple of questions that that wanted to ask you on that. You mentioned, PACE financing, and I’ve talked with a couple of different people that have used that. And other financing tools that you’ve been using? How important do you feel like those financing options are to the success of your project? Are those really kind of do they push it over the edge? Or is it is it profitable? If you just went to conventional financing, but this just sweetens it or how integral are those options to the success of a project like that?

Jake Harris 27:15

Yeah, so I’d say so PACE financing is, I think a good vehicle for or an alternative to like EB five money or mezzanine financing. So, you know, if you’re trying to use, you know, mezzanine financing, you’re, you know, typically going to be paying, you know, double digit interest rates, EB five, had a, you know, kind of a boom, and then it kind of pulled back as they tightened, you know, some of that, and then they added more, you know, hurdles that you needed to jump through. So the PACE financing, I think, is really looking at that as that alternative to pref equity mezzanine or EB five, and it creates and becomes a little bit of a sleeve in your capital stack that is in replacement of one of those. And I think any one of those could be interchangeable. I haven’t seen a whole lot of them where they’re, you know, senior pays and mez.

But again, from a return, you know, matrix is when you can secure long term kind of financing at a fixed rate. That is always beneficial because you understand what you’re going to be paying. Some of those are amortized, you know, 2025 years, it’s oftentimes married up to the life expectancy of the equipment or the energy savings that you’re putting in there a new roof, new windows, HVAC, something along those lines, and they’re trying to amortize them during the life of that particular equipment. So it creates, you know, can we lock in 5% interest on 5 million bucks for 25 years, okay? That’s less than mezzanine, that’s less than preferred equity at an eight preffer, something like that, plus some upside, it’s less than, not less than EB five, EB five, you know, has some advantages to it, but maybe you just get the deal done. And it’s an underwriting department. It’s not open to investors, you know, collectively interested in your project.

So, it is just one of those additional tools in which you can make a deal. Make sense? You know, there’s also ways just to come in and protect your downside by bringing in more money, you know, lowering your debt structure overall. And so if you have more money, you know, you may not need pace, you know, but when we see things, we’ve had some of those in particular, we’ve had some project cost overruns. stuff that, you know, two years ago when we signed this contract, and now they’re just like, sorry, your appliances are double, you know, sorry, your windows are delayed 689 months more. And so then it’s like, well, that additional carry cost, what is that do from replacing those? Well, now we can use those, you know, buckets of money, you know, to say to help cover those costs and not have to do a capital call or bring in more investors capital?

J Darrin Gross 30:31

Yeah, no, definitely. Interesting times we’re in now with I mean, it’s always a challenge whenever you have, especially a rehab project, where you’ve got, you know, your opening walls, and whatever you might find kind of thing, but definitely some some interesting times with supply chain demand, and interest, inflation, etc. going on right now. Just curious. So you mentioned kind of bringing in capital? Are you for the projects you’re doing? Are you typically syndicating? Are you doing these? Joint Venture? Are you buying hold? What, what’s your basic investment strategy?

Jake Harris 31:17

Yeah, so as a private equity company, we kind of do all of them. We and it really is we’re oftentimes structuring deals for clients, you know, high net worth, high net worth individuals that want access to alternative investments that want to be in real estate, sometimes that has been in a fund, so you’re going to get multiple property, you know, diversification and locations, some of those are going to be syndicated, or, you know, a single purpose entity, you know, fund or, you know, investing into, some of that is going to be, you know, maybe we’ve structured some jayvees In the past, because, you know, they really liked that deal. Or we said, hey, this is more than we can take on or our bandwidth of our team, it’s kind of outside of our expertise. So we’ve placed some capital with somebody else, and then created some JV mechanisms.

Again, what we’re typically, you know, seeing is, you know, kind of mid teen IRR is bumping up into mid 20 IRR, returns to investors, depending on what we say is the risk profile development projects have higher risks. So we want you know, higher returns and those typically start for us at like a 20% kind of IRR hurdle that we’re trying to get to because there’s going to be some ups and downs in that are unknownst. I mean, deals I think, you know, that are just coming finishing up right now we did three, four years ago, I had no pandemics, no epidemics and our underwriting like literally none of that. And so then just like, well, let’s figure out what we’re gonna do with this. And those are kind of a little bit. Of course, that’s a black swan type event, but I was like there is and almost with 100% certainty, I will say, no pro forma has been 100% accurate that I’ve ever done on any project and 20 years.

J Darrin Gross 33:15

Yeah. That’s always kind of a frustration you do the best you can with a budget. And try and get through it as quick as you can, so you can get the next one. Jake, I’m curious, how would you encourage investors to prepare for him? We talked a little bit about it, maybe this is kind of the answer to but you know, prepare to take advantage of a distressed situation. He mentioned, like, you know, just absolutely knowing the market is that is that kind of the fundamental kind of the cornerstone of, you know, putting yourself in position to be able to take advantage of, of a distressed property.

Jake Harris 34:08

So I think the, the number one thing is I have a lot of, you know, because people I’m on podcast, I do these, I have people reach out like, Hey, I’m looking for a good deal. I’m looking to get started in commercial real estate, like, what do I do? And I was like, you know, when somebody comes to me and says, I want a good deal. Or hey, can you look at this deal and help me underwrite it? Is it a good deal? And so when I say this, and I’m going to give you kind of an unpack this a little bit these because I don’t know, because it really, really depends on the person. And so something that’s a good deal for me, may actually be a terrible deal for you, Darrin, it may be because what it’s trying to do is offset this and fortunately, I’ve been had an opportunity so I went I went back to grad school as a lot of understanding of portfolio kind of management is, you know, because it was an international real estate degree in finance and knows, like, how REITs balance out their portfolios, how are you diversifying yourself so that you know, especially even this podcast, in general, mitigate risk.

So then when so something that may be a good deal for me, could be a terrible deal for you, because it is already over, you’re already overweighted in that in your individual category. So what I talked to people about first is figure out what you want to do. Who are you? What’s your, what’s your like? Mo? Like, what is it that fires you up? What excites you and stop looking necessarily for the good deal. And then what you can do is you can understand, like, what is it that you want to do in life? So for me, I was talking to somebody the other day, they’re doing rentals, and they’re renting out every single bedroom by to an individual tenant. And so they have, like, I got all these things I got, like, I don’t know, 60 different people that they’re renting out and all these individual rooms, and he’s like, look, I’m crushing it and making their turn, I look at that. And I like cringe, I’m like, like, that sounds like the worst version of hell for me. And I was like, There’s no way I could maintain that for a very long period of time, like, because that just does not interest me at all, like the returns could be double all the other deals that I’m doing, but it’s not sustainable for who I am.

And so that’s why I say figuring out yourself, and what interests you first, I like hospitality, because I like the interaction and the toggles of creating community and how that impacts people and creates a very dynamic ripple effect in social media and Instagram and driving direct booking and that, you know, bumps, your food and beverage and other things. Where there’s some people that are like, I don’t want to do that at all I’ve done manage Airbnb is no interest, I want an industrial tenant that signs a 10 year lease that I never talked to them. So they’re like, that’s more exciting to me. And so then again, what we can start doing is figuring out like who they are first. So then when you understand who you are and what you’re trying to achieve, because you have to have a goal that you’re aiming at a good deal. What does that mean? That’s a completely subjective to what a good deal means to you. And I also think words are very ambiguous. So what someone says is, I’m aggressive, I’m an aggressive investor, well, what does that mean? Does that mean, you’re willing to go put a million dollars into Dogecoin? And you’re waiting for it to go up to 10 million, or maybe zero? Or are you like, I’m aggressive, I’m looking for a 12, or 15%, return on a multifamily in the urban core of a major city, that, so aggressive is a ambiguous term.

And so like when we can start aiming at is I’m trying to achieve $200,000 A year passive income, because that’s going to allow me to quit my w two job and start traveling more. And let’s be honest, everybody wants three things, they want more money, they want more sex, and they want more power. Really, when you break it down, is all the things that we’re trying to do is achieve that is we want more free time, so that we can, you know, take care of our partner, so that we can, you know, have more power, we can have more sex, we can have more travel, we can enjoy those things. But what it is is like how and what those fundamentals are that get you to that point. And so like defining, okay, at $200,000 a year passive income is what I’m trying to achieve, then, and I don’t want to lose this, now we can start putting together a framework of this is the type of deal that works for you. And then that good deal, or that market, or that asset type is, is niche specifically for you. And now you can go in and invest into that. We see this a lot of times.

And I see this a lot of times as Dr. So and so this making a million dollars a year, they’re paying half a million dollars in taxes, and they want to start buying and owning real estate. And I look at it and be like No, you don’t you already work 80 100 hours a week, what you need to be as a passive investor, you need to invest in other people’s funds, you need to invest into their individual deals, or JV or do other things because you don’t have more time. You think because you’re super smart. You can figure it out and be like, but that’s actually a fool’s errand to go down and go buy a $2 million retail shopping center. What you need to do is throw some money into a $20 million fund have someone else that has already proved it out already has system already has models and maybe create some structure around what it is that you’re trying To achieve.

And so when I say that is that gives you some fundamental understandings of the things that you already are good at. And then you can start preparing in the areas that you lack. And sometimes that’s assembling a team. Sometimes that’s gathering information about a market that you’re interested in. And so when you have that information about a market, you’re ready to strike when that price hits, because, you know, hey, this is the return that I’m trying to get. This is the market I’m trying to be in this is the, you know, cash flow. And so like we’ve we some, oftentimes, like, identify like, this is our strike spot, it’s a 50 to 125 key in these markets at this price point, it does revenue, and then we get very, very specific, that Aim small, miss small, because then we know what is we’re good at and what we’re looking for. And then it also becomes a lot easier to say no to everything else. When you have that focus, and when you know what you’re aiming at, then you can actually start getting and diving into and creating good deals, I talked about some of these things in the catching knives, the book that I talked about, because it’s like assembling your team, I might have construction knowledge, but maybe you don’t have construction knowledge.

So you may be needing to develop relationships with a contractor, you may need to be developing relationships with a broker, you may need to be developing it with a lender, an insurance guy like whoever it is, like you need to understand the things that you’re already lacking. So if you’re going to be an owner, and that is your future aspiration of you is to be a real estate owner, then you can start putting out and I’ve been doing this for 20 years, I’ve read and I’m a broker, I’ve done hundreds of millions of dollars of transactions we’ve done, I don’t know 1400 transactions in 23 states. And I hire real estate attorneys, I hire inspectors, I hire contractors, I there’s so many people that collectively become part of a team that I go do and by thing, even though I have all this experience, the more that I realize and the more experienced that I look at these things, the less I actually realized I know. And it’s super easy to skip over very basic fundamentals. Did you get all the estoppels and all the tenants?

I don’t know. I mean, well, I checked the lease. Oh, we just looked at the leases extract. Did we review all the leases in totality? Like what? What is their out provisions? What if JC Penney’s leaves as an anchor tenant? Oh, wait, they’ve already left as an anchor tenant. So this tenant can cancel their lease whenever they want, if they want and walk away, but I’m investing into it based on that. That’s why like a real estate attorney, I’m not good at reading legal contracts. Like I kind of glossed over and hit the highlights and if it’s really somebody’s like, I don’t do that I hire a real estate attorney to review my loan docs review. My you know, Lee says to reveal those and then like give me the feedback and like protect my ass because I don’t like doing those things.

J Darrin Gross 43:10

That’s I appreciate you expanding on that because I think the the summary there is know what you want, I mean, know what you you’re looking for be specific, and you’re gonna be able to identify a good opportunity. When it when it does show up. I get that he Jake, if we could like shift gears here for a second by damn an insurance broker, and work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider. We we first look to see if there’s a way we can avoid the risk. If that’s not an option, then we look to see if there’s a way to minimize the risk. And when we cannot avoid or minimize the risk, then we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. And so I like to ask my guests if they can look at their own situation. And frame the question however they choose, you could be referring to clients investors, the market interest rates, on the political climate. However you choose to do so. And and look at it and determine what is the biggest risk. And again, for clarification. Again, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Jake Harris, what is the biggest risk?

Jake Harris 44:42

So, I mean, I’m gonna give you kind of It depends, because depends on who who you are, as an investor, an LP investor investing into a deal. I think your sponsor Are as your biggest risk. And so because they’re the ones that’s kind of captaining the ship, I think if you’re someone that’s buying real estate, your biggest risk is the purchase, actually, because and maybe you’ve heard this or maybe you haven’t heard this is you make all your money on the purchase. And if you overpay for an asset, it’s very, very difficult to correct course, and trim out the expenses. And then you’re kind of, you know, writing this, you know, failed investment out. And sometimes it takes so much more energy to even get out of it, then, you know, and you’d be like, all I’m trying to do is get my money back. And I see a lot of that right now. And alas, and actually, this morning, I was talking with a buddy, I realized I did not buy a single property and 2021. And actually, so far in 2022, I haven’t this is the longest period of time that I have gone without buying a property. I think in the last 20 years, I think this might be one of the only years I have not actually bought real estate at all, any property, and over a year time period. And so I was looking back at that. And I was like, Wait, I didn’t even realize that happened?

Well, because I have a very disciplined, you know, like buy acquisition model that I’m looking at. Part of it is because I lost my ass in the subprime meltdown, I became a millionaire. And then I had a negative network. I remember sitting on the street corner in Tucson, I was crying. I was like, you know, a grown adult, crying, and sobbing and praying, dear Lord, can I be worth no money. And there are so many aspects of my life that I look back at that moment of that rock bottom. And the least important of it was the losing the money. The least important of it was going from a millionaire to a negative net worth and wanting to start over at zero, I was 7580 pounds overweight, my relationships sucked with my family, the girl I thought I was going to marry it dumped me. You know, there was so many other things. And so lots of people focus on the money risk of things, and they forget about them 80 or 90%, that is the real life. What is your relationships like, you can make more money, you can’t rekindle the time of your relationship with your spouse, your kids, they kind of go away that opportunity to live those those, you know, Bucket List adventures, you grind, grind, grind, grind, and all of a sudden you realize you’re 60 7080 years old, and you don’t have the health to go travel and do those other things. Those are important. And so it depends on the category.

As a human, I think the biggest risks that we’re currently facing, is not pursuing the things that excite us that we truly, really want and living a very fulfilled life. And so I’ll give you a Maslow’s Hierarchy of Needs of premises. When you get and you’re trying to figure out how to pay bills, you’re just in a survival mechanism, you get to a levels of and I’m assuming that your audience members are starting to elevate up into that, because they’re thinking about investing is they’ve gone beyond some of those levels. And they’re starting to get into the self actualization kind of topper end of the pyramid of Maslow’s hierarchy of needs. And so then they’re trying to figure out what they are or who they are, what’s their purpose in life. And myself, and this is a constant struggle. And I think everybody has it is like they need to give themselves that validation or approval. Sometimes it might be a millionaire, sometimes it might be making the New York Times bestseller list. But what happens is you stop thinking about what everybody else wants for your life, and you start leaning into the purpose of what you are put on this planet for.

And then, because money doesn’t equate to happiness, your success and making money is not what makes you happy, you’ve elevated up to that. And I think there should be an extra category on Maslow’s higher hierarchy of needs, is when you’re living your purpose and life in the service of others, is when you unlock true happiness is when you unlock the ability to then really impact the world. Because what you’re doing is you’re serving people that couldn’t give you back and just not about a transactional equation of how do I make more money or know how can I benefit them? And they give me $1 back? How can I do this and you’re elevated out of trading time for money into an investment that you have a certain free, you’re living your purpose, and you’re pouring it into the world in the service of others is when you will unlock true true value and I think that’s what we’re all really Seeking, we have to get through some of these levels of validation, we have to get through this of self actualization we have to get through this. And again, this is also part of my own journey. So to me, the risk and the biggest risks that we’re all facing is not pursuing that. However, that mechanism looks for you.

J Darrin Gross 50:18

I appreciate you sharing that. That’s That’s some real insight. Don’t lose sight of the what’s really what’s really important. Appreciate that. Jake, where can listeners go if they’d like to learn more connect with you.

Jake Harris 50:33

So the main website that we share a lot of this content is catchknives.com. That’s plural knives. So catch knives.com You can sign up for the news list. We have like an insider list. We do some due diligence courses on PPE, people looking to invest into commercial real estate, especially first time or early investors. You can buy the book there at Jake.realestate on Instagram is where I’m most active that I managed. But we also have you know, a YouTube channel. I don’t think we have a Twitter, I might have a Twitter. I don’t know, my team might put out the content on Twitter, but I don’t manage that. So catchknives.com Or at Jake.realestate. And if you just type in Jake Harris real estate, you can pull me up on YouTube and Google and other places. I’m usually you know, near the top of those or maybe that’s just specific to me, because I google myself and it keeps populating myself. I don’t know how

J Darrin Gross 51:30

You’re gotta look up yourself some time when Google and see what’s there, so that’s good. Hey, Jake, I can’t say thanks enough for taking the time to talk today. I learned a lot. I enjoyed it. And I look forward to doing it again soon.

Cheers. I appreciate it. Thanks, Darrin.

All right. For our listeners. If you liked this episode, don’t forget to like share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 52:06

You’re listening to CRE PN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio

Multifamily Agency Direct Lender with Alison Williams and Ana Ramos – CRE PN #358

Alison Williams 0:00

And one thing to point out, you know, our requirements are obviously going to be a little bit different than maybe a bank. And that’s because the lending that we do is all non recourse. So you know, you are not actually signing any personal guarantees. There’s no contingent liabilities on somebody’s balance sheet, which is extremely important, particularly if they decide to go and build another property, you know, because that is something that lenders look at in terms of credit and financial strength. So everything that we’re focused on is strictly based off of the property’s performance. And then we supplement that with the borrower’s experience. And obviously meeting you know, minimum net worth liquidity requirements.

Ana Ramos 0:37

And you know, what you just reminded me like one of the biggest things that I hear a lot of and I did close a portfolio recently, the borrower refuses to provide tax returns, most banks require tax returns. And on the agency side, we don’t require that for qualified qualifications. So we do ask for Financials, real estate schedule, bank statements, but we don’t require tax returns. And I think that’s a big plus for a lot of borrowers.

Announcer 1:03

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you are an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:22

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guests are Alison Williams and Anna Ramos. Allison is the Senior Vice President and Chief Production Officer at Walker Dunlop. And Anna is a managing director for the West Coast and mountain regions. And in just a minute, we’re going to speak with Allison and Anna, about commercial lending strategies for multifamily.

But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see i tractive Our guests are Be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, we encourage you to subscribe. With that I want to welcome my guest, Alison Williams and Ana Ramos. Welcome to CRE PN Radio.

Alison Williams 2:43

Thank you for having us.

Ana Ramos 2:45

Thank you.

J Darrin Gross 2:46

Well, I’m really looking forward to our conversation today. Before we get started, if you guys could take a second and share with the listeners a little bit about your background.

Alison Williams 2:56

Absolutely. I’ll start so as Darrin mentioned, I’m Alison Williams and Senior Vice President and Chief Production Officer at Walker & Dunlop. I oversee the small balance lending department where we focus on smaller multifamily assets, usually loan sizes ranging from one to 15 million. I’ve got a team of seasoned professionals scattering coast to coast and Ana Ramos is one of our best and talented individuals out in the west coast and mountain region. And I’ll kick it over to Ana.

Thank you, Alison. Hi. And I am Ana Ramos. I’m a managing director here at Walker and Dunlop. And like we discussed I oversee the Western mountain region. I have currently a team of five and we’re here to definitely boost up the small loan production over the entire West.

J Darrin Gross 3:47

Got it? Yeah. Well, I’m excited. I’m excited to have our conversation and have a chance to talk with you guys today. The I guess the first question I’d have is Walker Dunlop. Are you guys a direct lender? Or do you go through mortgage brokers or not merge mergers but commercial real estate brokers?

Alison Williams 4:12

So I like to think of us as the best secret out there. So we actually are direct lenders. We were founded in 1937 and then went public in 2010. But we were actually one of the very first Fannie Mae approved just lenders that started back in 1988. So we are a direct lender for Freddie Mac and Fannie Mae and we also have our own proprietary lending programs. So if you know if there is a borrower out there that’s looking for direct financing or a broker that’s actually looking to access the direct lender than than we are that group. You know, historically, we’ve been top number one with Fannie Mae seven out of the last 10 years, and we are consistently a top five Freddie Mac lender and a top three husband are so dominantly playing in the multifamily lending space, just to kind of give you an idea of our scale and size in 2021, our company, you know, financed and sold over $68 billion in in commercial real estate assets, and the primary focus has always been multifamily.

J Darrin Gross 5:21

Got I was gonna ask you if it was limited or focused strictly on the multifamily or if you were across all asset classes, but

Alison Williams 5:31

We are we are across all asset classes. So we do anything that’s income, cash flowing or construction, that will be you know, cash flowing assets. So retail, hospitality, industrial office, self storage multifamily, but predominantly, our team when you look at, you know, the individuals in our origination, you know, they are truly focused on the multifamily space.

J Darrin Gross 5:54

Got it? In in in that I’m kind of curious, you know, the way the I was having a conversation with somebody the other day, and we got to the point of some of the pricing is getting hurt has been right, all until rates are starting to creep up, we’ll see what happens. But, but the price per door was getting so costly that look like the the construction, you know, option was looking more and more attractive. Are you finding that construction? Lending? Is? Is his or increased interest in that? Or is that that always been kind of steady out of your can? Yeah, yeah,

Alison Williams 6:33

I mean, I think construction lending, I’ve actually been probably it’s been more difficult actually. Because the in order to find vacant land, right, or repurpose land that’s extremely difficult and prime, you know, locations. So I think that becomes more challenging as cities and other areas get built out. And then obviously, with the rising cost of construction coupled with supply issues, we’re actually seeing more people hit pause on construction than ever before. And I think that they find that they can actually go buy an existing asset below replacement cost, and then do some type of value add and immediately add value to that property. And they don’t have to wait, you know, two to three years to actually have it built.

J Darrin Gross 7:18

Yeah, no, it’s always made more sense to me as if you can buy it for less than it cost to build. That’s, that’s a good option. I think Sam Zell, Sam Zell had that idea that was good. So Fannie and Freddie. In a small balance, you said under 15 million small balances at the range, kinda from one to 15 is where you guys define small balance.

Ana Ramos 7:48

Freddie Mac defines small and up to seven and a half, and Fannie Mae defines it up to 6 million.

Alison Williams 7:55

And then we have a proprietary program that goes up to 15. So what we find is that, you know, most of our clients that play and, and I use the to term loosely, small, smaller multifamily assets, typically are in you know, one to 20 million is kind of the asset valuation that they’re targeting. So it was really important that Walker and Dunlop for us to be able to serve, you know, basically all of those areas. So that’s why we we ended up rolling out a newly launched proprietary platform that could take us up to 15 million to make sure that we’re meeting the needs of the clients.

J Darrin Gross 8:26

Gotcha. No, I was surprised or not surprised. I guess, as you see, the values continue to increase. You know, what used to fit in the box doesn’t fit in the box anymore. And, you know, if there’s gotta be some sort of adjustment to the market, or to the platforms that are in play to make it still work, that’s good. Well, so let’s talk a little bit about, you know, the the the lender, the borrower lender relationship, and what you guys are looking for for or to lend on?

Ana Ramos 9:06

Yeah, I would say I’ll take it Alison, I would say on the Small Loan Borrower, typically the requirements that we look for minimum FICO score is 680. Or better than net worth, we’d like the net worth to equal the loan amount or greater and liquidity, we do ask for nine months of principal and interest payments of the existing loan that we’re about to refinance. And we also are looking for some type of multifamily experience, one year to two years is something that we really need to get comfortable depending whether it’s Fannie or Freddie to have at least that background and multifamily for the borrower to qualify, typically, we’d like for them to be local, but if they’re not local, we do ask for a third party management if they’re considered absentee, which is greater than 100 miles of the subject property.

Alison Williams 9:51

Yeah, and one thing to point out, you know, our requirements are obviously going to be a little bit different than maybe a bank and that’s because the lending that we do is all non recourse. So you You know, you’re not actually signing any personal guarantees. There’s no contingent liabilities on somebody’s balance sheet, which is extremely important, particularly if they decide to go and build another property, you know, because that is something that lenders look at in terms of credit and financial strength. So everything that we’re focused on is strictly based off of the property’s performance. And then we supplement that with the borrowers experience. And obviously meeting, you know, minimum net worth liquidity requirements.

Ana Ramos 10:28

And you know, what you just reminded me, Aly, one of the biggest things that I hear a lot of and I did close a portfolio recently, the borrower refuses to provide tax returns, most banks require tax returns. And on the agency side, we don’t require that for qualified qualifications. So we do ask for Financials, real estate schedule, bank statements, but we don’t require tax returns. And I think that’s a big plus for a lot of borrowers.

Alison Williams 10:55

Absolutely.

J Darrin Gross 10:56

Yeah. No, there’s a couple things that you said there that I hadn’t heard, I’d always heard, you know, non recourse was always like a preferred option, if you could get it based on you know, if things blew up, and there was some sort of a something unless you were committing fraud or something like that, that you weren’t necessarily on the hook. But for you to frame it in as much as that it improves your balance sheet to where if you’re going to develop another property or something. I mean, it sounds like that’s really probably the the real benefit of of having a non recourse loan there.

Alison Williams 11:29

Yeah, it’s definitely I mean, I think as people begin to scale and grow portfolios, they start to see, you know, the value and doing just non recourse loans, you know, not only from a liability standpoint, but also being able to give them access to more capital, and to be able to actually scale quickly. You know, like, as I mentioned, banks really are focusing on your contingent liabilities, what is your overall debt ratios look like? We don’t get into that we’re really just underlying valuing the property itself, and making sure that we’re comfortable with the cash flow that the property produces to meet our mortgage payments.

J Darrin Gross 12:05

And what kind of a cover ratio do you guys require with a debt debt service coverage ratio?

Ana Ramos 12:12

Typically are, you know, in larger markets, or minimum debt coverage ratio is 1.20? If not, across other markets were at 1.25.

Alison Williams 12:21

Now that’s up to an 80% loan to value so 20% down?

J Darrin Gross 12:25

Yeah. Okay. And what’s a typical term? Do you guys do interest only? Or is it pretty much?

Ana Ramos 12:33

All the time? Yeah, that’s I think that’s a big thing that differentiates agency with banks is out, banks are really comfortable doing interest on I mean, I’m sorry, fare agencies really comfortable doing interest only full term interest only that we have anything from a five 7 10 15. And we do have longer terms as well as you believe it or not, some clients do want to 30 30 year term, fully amortized. If they want to leave the property to their children never want to touch it. Again, we do have a fully amortizing loan, which is great. On the Fannie Mae side, we do sell that as well. But typically, I always very, is very popular with the non recourse. And cash out, I think that we see a lot of banks that some banks will definitely be aggressive in the pricing, they limit the cash out. For us. I mean, we don’t necessarily we don’t have an issue with cash out if the property is performing and the property is maintained, we don’t have an issue with cash out.

Alison Williams 13:27

Yeah, and that’s, you know, something that we see much a lot more common in the larger space than we do necessarily in a small, but I think it’s something that the borrower should be aware of, I mean, what typically happens in the larger space is somebody acquires a property, they improve it, and then three to five, maybe seven years later, they either sell it, or they actually then refinance it and pull new cash out, you know, immediately right there, and that’s treated as refinance proceeds, so it’s taxed differently. And so that is just immediate, you know, then they can pull proceeds out and then go buy their next asset. And that is really how you scale. So that’s what we typically see our clients do, you know, they’re, you know, but I wouldn’t say that some want to hold long term, obviously, for generational wealth and for estate planning purposes. But I think those that we see scale quickly and pretty large, they’re really improving the property’s creating value and then coming back in for another bite at the apple and that’s what you know, I think is just a really really strong business plan that has proven itself out year after year.

J Darrin Gross 14:30

You know, from experience speed wins and that thing faster you can get it improved and and get those higher rents and get that money back. That’s that’s really the way to do that. That’s good. So let me ask on the cash out refi same lending requirements or ratios and then we go to the 80 80%.

Ana Ramos 14:53

Typically on the cash our 75.

J Darrin Gross 14:56

Okay, and then same on the debt cover, or district

Ana Ramos 14:59

125 to 130 for the cash out. Okay.

J Darrin Gross 15:05

Okay, so that was the, her I guess the balancing act, I guess it changed a little bit there we go from go into go out. So talk about value add, are you able to provide any of the funds for the capital improvements? Or is that still required by the borrower to bring that

Ana Ramos 15:28

In terms of programs, we do have some smaller bridge programs that we that we can apply and see if the property qualifies them, there’s a structure and a plan in terms of what they’re putting in place today. So between our proprietary and some of our bridge capital, we do have some of that starting at least 3 million in loan size, and above that we can consider

Alison Williams 15:51

The agency’s job. So agencies are really looking for stabilized assets, you know, we have seen where 1031 buyers will come in, and they’ll purchase something, and then they actually want us to do a whole back for, you know, capital improvements, because it actually helps with their 1031 transaction. And so we’ll do that, and then we’ll fund those dollars, you know, as they’re spent. But the program itself isn’t structured to be like a true bridge program, as Anna was mentioning, those are more, you know, debt funds is some regional banks play in that space. And there’s also just some investment firms that play in that space.

J Darrin Gross 16:26

Got it. And when you do that kind of bridge thing, is it kind of like a construction loan anywhere you have a line and you draw it down? Based on the?

Alison Williams 16:35

Yeah, I mean, it’s it basically is an initial funding. So it’s usually, you know, maybe 75% of total cost. So you would do 75% of purchase price, and you would do 100%, hold back for any capital improvements. And then as those improvements are completed, then the borrower basically submits a drawl to take those funds back. And it’s all you know, tied to a set interest rate. But most of those deals are floating rate, typically, when you want to do you know, just as you mentioned, like a construction loan. Right? So construction, lending is always on a floating rate basis, as well. And that’s what we see in the bridge place. It’s also typically, you know, a one to three year term, it’s not a long term, five, seven or 10 year program, like we do with the agencies.

J Darrin Gross 17:18

And then there’s a bridge then do you convert that to permanent financing? Or are

Alison Williams 17:24

You do you refinance out?

J Darrin Gross 17:26

Okay, just refinance. Gotcha, gotcha. All right. So kind of talked about the different types of loans. What, what do you project when you are talking with a borrower as far as closing fees? What kind of closing costs should one expect? Ya know, typically,

Ana Ramos 17:48

I mean, depending on the structure of the transaction, but typically, closings fees will range anywhere between 3500 to 7000, just depending on the structure of the deal. Whether there’s a different borrower structure, more like a tiered structure, it’s a little bit more convoluted, versus straightforward, a single asset. So it’ll depend that anywhere between 35 to 7000. At closing, after the, we do collect an application fee that covers a third party reports, which is the engineering and the appraisal, and then that’s the actual closing fee that goes along with initially also we do have closing fees of UCC searches and Title and Escrow that the borrower does take care of.

J Darrin Gross 18:32

And for borrowers, considering, you know, are looking for financing for a multifamily property, what are some of the most important questions, you think that a borrower should be asking their borrower or their lender?

Ana Ramos 18:52

For me, personally, when I think the borrower and the typical questions that I get is, one, how much cash out do you do? How much do you service? What’s the servicing look like? What’s the timing cost? And obviously, the non recourse, so what are my proceeds that you’re able to do? I was a big one, and especially right now, in today’s environment, the costs and the timing, I think, given where interest rates are, timing is really important. One of the advantages that we have is that, you know, on the Freddie Mac side, we’re able to lock the interest rate at application. So once the borrower signs the application, the interest rate is set, which is really critical and important in today’s environment. On the Fannie Mae side, we can also accommodate an early rate lock, which takes about maybe three weeks, so it’s not as quick but it’s also quick in order to accommodate that. So borrowers are always looking how fast can you lock me? How fast can you close me? What’s it going to cost me primarily in the West Coast? What is it going to take to get it done, but I O is a big factor today. And now we’re able to accommodate.

Alison Williams 19:56

Yeah, Anna touched on to servicing so I think that’s something that people don’t Really think about but we do service all of our loans. That means we collect the mortgage payment, we hold the reserves, we’re the group that’s funding those reserves when you need them. So we’re we kind of view ourselves more as a partner and an advisor and the entire lifespan of the deal, rather than just doing the origination and then tapping out. And so you know, some banks do service their own deals, but some actually out service to another lender, or it might be sold post closing. And that’s just something that Walker and Dunlop does not do. Yeah,

J Darrin Gross 20:31

that’s great. The, that’s my dad was a banker, and I didn’t really understand what he did the borrower borrow money, but that relationship is definitely it’s critical to actually, you know, having the opportunity, I mean, when things do happen to have somebody to contact and be able to, you know, work through and that knows you or has a history, definitely important.

Alison Williams 20:57

I think the other thing, too, it just made me think of something is, you know, right now, obviously, there’s so much market uncertainty as well. And I think the other important piece is people are trying to decide which financial advisor they’re going to use to, you know, you know, finance their next deal, because they need to think about how often are they in the market? And what is their access to capital. And well, we are a dominant Freddie Mac and Fannie Mae lender, you know, last year, we closed with over 300 Different capital sources. So I think making sure you pick the right partner that actually understands the landscape, and also sees how the markets move very quickly, and you’ve got to react fast, and you’ve got to have a lot of windy relationships to make sure you get, you know, the best structure in terms for your client. So just making sure that you pick the right partner, particularly in some times that we’re in right now, where it’s a little bit uncertain.

J Darrin Gross 21:46

I was gonna ask you, you mentioned, her, again, had mentioned the questions that a borrower should ask, what what kind of timeline should one expect to you know it from application to? Presuming all of the information, you know, comes in as you need it, but is there is there a realistic timeframe that you can use,

Ana Ramos 22:13

it’s very realistic to say, 50 to 60 days, if we were going on the Fannie Mae side, and it’s an acquisition, and we control more of the process, just because of the model being a little more delegated to us. We can do something in 45 days, so just depending, but I would say average 60, but anything sooner that we can accommodate on a case by case and how quickly the bar does provide the information.

J Darrin Gross 22:38

So, Walker Dunlop, you guys are direct. How would you compare direct lender to a broker?

Ana Ramos 22:50

Well, that’s easy. The broker? I think we have? That’s a really good question. Because I do work with a lot of brokers myself, given my previous history, and where I came from, I do have a lot of relationships with brokers. But what I find here being at Walker is that, although we are definitely a direct lender, and our ratio is really high as direct business, we do have a lot of capital resources, a lot of capital available, because we do work with life companies, banks, with other institutions that were able to facilitate and help borrowers and direct them to the right structure and the right lending opportunity in order to get their loans done. So we are a direct lender, but we also have that capital resource. And like I said, I have experienced that I do have a lot of clients that are brokers, and we’re able to work with them as well, because we do work with brokers, and we’re able to structure deals and maintain that relationship as well.

Alison Williams 23:45

Yeah, I mean, I think the other biggest differences, obviously, when when we’re the direct lender, it’s our credit team. It’s our underwriting team that’s actually underwriting the deal and improving it. And when you’re a broker, you’re basically relying you’re the intermediary, so you’re relying on your communication with a group like us, that then is communicating with credit. So you know, you’re just one step removed. And like Anna said, we value our broker relationships are very important to us, you know, we we honor them, we pay referral fees, etc. Because we love that business. But you know, we predominantly are a direct lender, we have a lot of direct relationships, because they know that the individual they’re talking with, ultimately is a part of the group that’s making the ultimate decision.

J Darrin Gross 24:30

And as far as like a borrower that’s, you know, in the market for a property. We talked about, you know, from application to close, any recommendations for establishing a relationship with you guys for you know, Hawker Dunlop before they’re ready to make an application has a good, good rule of thumb as far as you know, getting in touch with you guys before that.

Ana Ramos 24:57

I would say yes. Today actually, we do see a lot of referral business a lot of from our quote app right now that we’re marketing and it’s on our website. So even if today what’s what’s great about the the regional model, what we have today at Walker and Dunlop is that, even if a borrower does not qualify today, we maintain contact with them, we continue to continue the marketing. And we’re also giving them guidance of if you don’t qualify today, or that or the deal doesn’t fit the box today, here’s what needs to happen in order to fit the model or to fit the box. And also for the borrower. What we do see a lot of is maybe lack of multifamily experience. So we encourage them to go and get a bank loan or credit union loan, get that first spend about a year or two, then come back to us. So we stay in contact with them in order to help them get ready for agency takeout.

Alison Williams 25:53

Yeah, but you can’t start that process too soon. I think a lot of times borrowers come to us when they’ve already signed a contract. And they’ve already said, you know, we’re gonna close in 45 days or you know, they’ve, they based it on a loan that they just thought it was going to be 25% down, because that’s how they financed their last, you know, home loan or second vacation property. And it’s just a very, very different dynamic and the non recourse lending. And so I always tell all of our clients come to us early, let’s have discussions, let us know what you’re bidding on, you know, what markets you’re in, depending on what market you’re in, it could change how competitive a lender might be. So, you know, we don’t get paid until the deal closes, we were, you know, for free consultant on the front end, reach out talk to us will guide you in terms of what we’re seeing in the market, what to expect how to underwrite the deal. And then as Anna mentioned, and I’ll share it with you here later, but we do have an online quota that actually allows borrowers to put in property specific information, including net operating income, and then it actually will tell the borrower what kind of loan they can get with very specific loan amounts and interest rates based on those assumptions. So that tool is there at all times, if they didn’t want to talk to somebody, but if they actually want to reach out and have communication with one of our bankers, you know, we can we can make that introduction as well.

J Darrin Gross 27:15

That’s nice to have the tool I find, though, that if you’re going if you’re really going to be serious, you got to have that conversation with the person that’s gonna give you the thumbs up or thumbs down kind of thing. So, but a nice to have the tool. I mean, I would think that, you know, to give you some sort of, of a budget process, or you know, some for an idea, do you ever engage or provide, like a pre approval letter that somebody can? I mean, depending on the market, I’ve seen, you know, that can be a something that tips the seller to consider you as opposed to the other guy who’s offering more that, that hasn’t been approved kind of thing.

Alison Williams 27:55

Yeah, I mean, well, we see. So obviously, the financing is contingent on the property’s performance, right. So if we’re going to put out a soft quote, you know, and actually provide that debt grid, it’s, it’s all based on the property that they’re actually acquiring. And we’ve already received financials, you know, a trailing 12 income and expense statement and a rent roll. And just with those two pieces of information, we can tell you exactly where we think the loan with shakeout, and we’re happy to provide that, you know, in a form that can be shared with a potential seller, but it’s not per se, like a pre approval that you would see in the single family world where you’re just approved for whatever loan amount based on your personal assets and income.

J Darrin Gross 28:33

Right now, I mean, commercial is obviously going to be tied to the property, but just I’ve just seen that, you know, give the edge to the to the one that is that has a relationship already with a banker, as opposed to the one that hasn’t. Yeah, so that’s good. So let’s talk about current market today is we are recording this on May 18 22. Rates, what do you what’s your crystal ball? Or what are your expectations with rates throughout the balance of 20 tail?

Alison Williams 29:10

So I’d say we’re gonna, I feel like we’re in a much better place today than we were 30 or 60 days ago, 30 to 60 days ago, we saw a lot more movement and the Treasury indexes, which is how we base our loan amounts, we base it over the five, seven or 10 year Treasury yield, and we started to see some normalcy in those. So we’re hovering the three tenure Treasury is hovering around 3%. It’s pretty much been, you know, plus or minus 10 basis points of that for the last 30 days. But prior to that, I mean, it jumped 100 basis points from December, you know, today, so we had a lot of uncertainty and a lot of, you know, just feelings of, you know, concern obviously in the beginning of the year, but I think we’re finally at the point where, you know, we can size appropriately we don’t feel like our loan receipts are going to change dramatically, we’re finding more borrowers are coming back in that were, you know, kind of putting their deals on pause and sitting on the sidelines, I think they, for them, it’s just managing expectations, if they can manage their expectation they want to be in the market. But when you see market movements as wide swings, as we were seeing in March, it was really hard to do. So I feel I feel much better today about where we are than I do 60 days ago, I think short term interest rates. So So for LIBOR prime obviously, is going to continue to increase. And that’s just based on where inflation is and what the Feds gonna have to do in order to combat that. But I think in terms of, you know, longer term interest rates, I think we’re in a pretty good spot, we’ll probably see a little bit of uptick, but I don’t know how great that will be. But we’re starting to see a little bit of settling in that area.

J Darrin Gross 30:52

Any sense of just the multifamily marketplace. You know, looking forward to the next 12 months.

Alison Williams 31:00

I mean, last year was huge. So just in small multifamily alone, the asset valuations went up 15% year over year, and then our debt originations went up 47%. So, in 2021, was $85 billion of financing for small multifamily assets in the US, which is just, you know, just insane. The entire multifamily market was 470 billion. So you can just see, you know, how big of a piece of the pie the small multifamily market is. And, you know, I think the forecast going forward, we haven’t really seen that much of a slowdown, as I mentioned, there was a couple people, you know, of our clients that were kind of on pause for 30 to 60 days, but it seems pretty normal again. So I think as long as we can continue to see rent increases, but that has to be justified by wage growth. And so in my mind, I go back to wage growth, what markets are we seeing wage growth, then where are we seeing corporate relocations? If we can kind of track those areas? I think we’re gonna see a lot of activity, just kind of following those pockets.

J Darrin Gross 32:09

Jobs, jobs, jobs,

Alison Williams 32:11

jobs. Absolutely. And wages.

J Darrin Gross 32:14

Exactly. Doesn’t pay enough? isn’t good enough?

Alison Williams 32:19

Yeah, absolutely. So,

J Darrin Gross 32:20

Got it. Hey, guys, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker and try and work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. When that’s not an option, then we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, then we look to see if we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests if they can look at their own situation. Could be your clients, investors, tenants, the market interest rates, political, however you choose to frame the question. But if you can take a look at your situation, and identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Alison Williams, and Ana Ramos, what is the biggest risk?

Alison Williams 33:35

Anna, do you want to start?

Ana Ramos 33:36

Yeah, you know, it’s interesting, because I think there’s a lot of risk in what we do. And I think I’m pretty aggressive. I think we underwrite our loans pretty well, we’re at a 125 120 debt cover over breakeven. Yes, we are a non recourse loan, but we vet it out the client. So when I assess risk, I’m looking at risk. It’s more for the borrower, the risk of capturing the rate in today’s environment, I the way we underwrite the way we get our values, the way we package the file. I think the agency when you look at agency, historically, our losses are very minor. So if being as in on the origination side, I would love to be much more aggressive and see more. But we don’t we don’t see that a lot. So it’s really hard to speak on that, at least for me, because we don’t see a lot of that the losses are there. They’re unheard of. And it’s very, very small. Just because of the way everything is packaged and the way everything is the way we underwrite the transaction, the property the sponsor, the management and we service the loans and how often we service and how involved we are with the loans from beginning to end and also through the life of the loan. So for me, it would be more the borrower side that today I think it’s really critical, especially in today’s environment is to lock that interest rate because of the risk and the volatility.

Alison Williams 35:08

I’d echo Ana’s comments, but I’ll take a slightly different take. And I think what concerns me the most when I think about today is affordable housing. There’s just a massive demand for affordability right now. And every market with the amount of rent and growth that we’ve seen in every city. I’m currently in Tampa, we had 25%, and rent growth year over year. And we’re just starting to see, you know, just the lack of affordability. And with a lack of vacant land and where you can build and raising, you know, construction costs and rising interest rate, it’s going to become much more challenging to build affordable housing to fit the needs of, you know, the average American. So I think that, to me, is when I think about the future, and my daughter and that kind of stuff, I just think about like, wow, we’ve got to tackle this affordable housing crisis that we’re dealing with right now.

J Darrin Gross 36:01

Ya know, the affordable housing, it’s kind of a Rubik’s Cube kind of thing. And everything keeps going up. And and I don’t know that we’ve got that figured out just yet. But definitely, an ongoing problem doesn’t does not look like it’s going to be solved here soon. So good. Hey, Alison, and Ana, where can the listeners go? If they’d like to learn more connect with you?

Alison Williams 36:27

Perfect. Yeah, you can go to www.Walkerdunlop.com. And then you can toggle over to small balanced loans from there. And we actually have a very in depth website that has a blog post on how to financing guides. It has an entire regional map where our entire team you can get bios and their location. You can also have access or quote up where you can do live sizing of a deal and also see lender term sheets.

J Darrin Gross 36:55

Awesome. Well, Alison, and Ana can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Alison Williams 37:06

I appreciate it. Thank you so much. All right.

J Darrin Gross 37:09

For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 37:26

You’re listening to CRE PN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio

Multifamily Investor Fear Mindset with Rod Khleif – CRE PN #357

Rod Khleif 0:00

Let’s talk about fear first. You know, the thing that you need to remember about fear is we all have it. But but when you take action and push through it, it mitigates and, and and it actually diminishes the fear. And I will say something else too. When you’re grateful it’s you can’t be fearful at the same time when you’re grateful you can’t be angry at the same time. So use gratitude as well. Just take a minute and look around it. You know your home and your family and go outside and look at nature and just be grateful. You can’t be fearful at the same time. So that’ll be really important through this next session.

Announcer 0:38

J Darrin Gross 0:58

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today my guest is Rod Khleif. Rod is a multiple business owner, and philanthropist who’s passionate about business highperformance real estate and giving back. And just a minute we’re going to speak with rod about the investor mindset.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe with that one. Welcome my guest rod. Welcome back to CRE PN Radio.

Rod Khleif 2:09

Good to see you. Darrin, let’s have some fun today. It’s crazy times we’re in right now. So I think we’ve had a lot to talk about.

J Darrin Gross 2:15

Well, I am. So looking forward to this. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Rod Khleif 2:23

Sure, sure, sure. And then for those of you that have heard this before, forgive me but I’ll be very brief. So I’m an immigrant. I was born in the Netherlands so you know wouldn’t choose when Mills immigrated when I was six to ended up in Denver, Colorado, we really struggled. You know, I remember eating expired food and drinking powdered milk with our sirloin in the morning, which sounds better than it is and we and I wore clothes from the goodwill and the Salvation Army all the way through junior high school till I lied about my age at Burger King and got a job when I was 14. And you know, and I’m sure there are people on listening now that had it harder than we did. But I knew I wanted more. And luckily my mom had an incredible work ethic. She babysat kids, so we’d have enough money to eat. And she was an entrepreneur with her babysitting money, believe it or not in she invested in the stock market successfully. And she also invested in real estate. Her first real estate acquisition was house right across the street from us when I was about 14 She paid around 30,000 When I was 17. She told me she made $20,000 in her sleep and I’m like what you make 20,000 You didn’t do anything. I’m forgetting screw College, I’m getting into real estate. So I got I became a real estate broker. Right when I turned 18 You could do that with education. I got smart now you need some experience, but I could have my own office right when I turned 18. And you know, my first year I made about eight to 10,000 my second year maybe 10 to 12,000 Keep in mind this is 44 years ago, but my third year I made over $100,000 So what happened between your two and year three that would cause me to 10x my income? Well, what happened was I was dating a girl and worked with her dad who was a broker who taught me about mindset and psychology, how not really 80 to 90% of your success in anything is just that your mindset and psychology only 10 to 20% of The Real Estate stuff. You know, Darrin and I talked about on our podcast, it’s it’s really taking action with what you learn not getting locked up in fear are caught up in limiting beliefs. And, you know, fast forward to today I’ve owned a couple 1000 houses that I’ve rented long term in three states. I’ve you know, I own 1000s of apartment units in 2006 my net worth went up $17 million while I slept. And you might say wow, I because I said Wow. And I got a little I got a little bit of an ego and thought I was a freaking real estate God and you know, barely fit my head through the door sometimes and you know when that happens, God or the universe will give you nice little smack Well, that was 2008 Nine I lost $50 million in 2008 Nine and so you know what I’m known for the most on my podcast, which is called lifetime cash flow through real estate investing is talking about the mindset it took to have 50 million in the first place and then more importantly the mindset It took to get it back. And, and I think in the times we’re in right now with, you know, rampant inflation, the Fed is promised five more interest rate bumps. And as of this recording, they’ve already gone up 50 basis points a couple of weeks ago, which derailed several of our deals. And, and so, you know, I think we are heading into a time where there will be fear. And so, you know, I’d love to maybe talk about some strategy with you, Darren, around mitigating that and dealing with it.

J Darrin Gross 5:35

Now, I think that’s exactly where the conversation needs to go. You know, you mentioned that you’ve been through, well, just the cycle, the the 07 09 period, or, 06 09 period, when, when, you know, nobody could see anything, possibly go wrong to where, you know, nothing was right to where opportunities were everywhere. And then the cycle rode back up. You know, when I’ve talked with people about this, in the past that the notion has been a cycles typically run, you know, somewhere between seven to 10 years, the from, you know, low to high. And that’s just kind of the, the, you know, the wavelength of a cycle kind of thing. Ever since I’ve been doing this, this podcast, there’s always been this kind of sense. Well, we’re kind of late in the cycle, like we’re in the second, second, double, you know, a doubleheader.

Rod Khleif 6:27

It’s kind of three, three years ago, they were saying that four years ago, there was no, right.

J Darrin Gross 6:31

No, I mean, every ever since I’ve ever since I’ve had that did the first interview. And so clearly, there are things that have, you know, we’ve gone past whatever the normal cycle is, and, and when we look back, you know, 10 years from now and look back in history, it’ll be just kind of like a curve that goes up and down kind of thing. But in, you know, at the end, they, they tend to, there’s always an upward line there. But it’s those those cycles, where we’re, you know, we’re where we are right now, and we’re probably headed, based on just all of the things that are in line to happen. And I thought, you know, given your experience, your work that you do with mindset, your coaching and the boot camps, and just all of your investment experience, who better than to speak about just the, you know, how to stay strong, how to keep your mindset sharp, how to be ready for what’s coming, ready to capitalize on what’s coming in the van in your course, you know, and your belief and recognize, you know, the opportunities are gonna come. And so I don’t know, what the what, you know, where the right place to start this conversation, but I mean, is that it’s just,

Rod Khleif 7:44

I can run with it, I can just run with it, because because I will tell you, it really ties right into what I had to do when I lost everything. Okay. Because, you know, when, of course, I had massive fear at that time. I mean, I thought I was set for life, you know, I $50 million net worth conservatively. And and it just imploded. And so, you know, I will tell you some of the things that I did to recover from that, because you can cross correlate those strategies to what you’re going to need to do moving into this in this recession. And I think, you know, there are some people were saying it’s going to be a big one. In fact, who was that that just said, use the word hurricane. One of the big CEOs, one of the big, big banks, I believe it was but you know, all many, many people have said, there’s a recession coming ahead of Fannie Mae, the head of JP Morgan Chase, think that think actually, he’s the one that said it could be a hurricane. So you know, but the bottom line is, when that happens, of course, the news, the media will be building it up and making it much worse than it is they’ll say real estate’s going to crash for 10 years. And, you know, don’t get me started on that fake news crap right now, but but the point is, you’ve got to, you’ve got to mitigate that in your own mind and recognize they’re not there to inform us, they’re there just to scare us and startle us and, and get subscribers so and who and, you know, forgetting the political agendas, but but the point is, you know, it’s important to first of all, to stand guard at the door to your mind during that time. Okay, keep that, you know, yes, scan the headlines, see what’s going on, but don’t get sucked into it. Because what, you know, focus is absolutely critical. During that time, in fact, you know, if you’re listening to Darrin, his podcast, you’re a leader, there’s no question, you’re a leader. And right now more than ever, the world needs more leaders. And to be a leader, you’ve got to manage your focus. And that’s what I had to do back when I lost it all because it would have been very easy for me to focus on the loss. And I did for a short while. I mean, you know, it was a big hit. For me, I thought I was set for life, like I said, But I recognize the fact that whatever you focus on gets larger, both positive or negative, you know, and so, you know, if you’re, if you’re focused on on that negative crap on the news, that’s what’s going to get larger and you’re going to basically just You know, scare yourself into a corner. And, and we all succumb to this sometimes, but it’s really critical to pay attention to your focus. You know, I’ll give you a great example of this dynamic. They asked Mother Teresa, when she was alive if she was anti war, and she said, No, I’m pro peace. And I and it’s just a, you know, play on the same thing. But but you see the point there and so, you know, and I have students are not even students actually just people that aren’t students, my students know better, but but people call me and say, you know, I’ve got all the student loan debt, how do I get out of this debt? And I say, Wrong question. How do you make so much money that the debts irrelevant? Right, so So, again, focus is super, super important through this period? And, and I will tell you, you know, the most successful people on the planet are the ones that have the most enhanced focus, okay, I mean, look at people like Elon Musk and, and, you know, Bezos and and so, you know, I, my podcast just broke 13 million downloads. I’m very, very proud of this. But I listened to really two podcasts, Joe Rogan on one side and Tim Ferriss on the other. And there’s a political component to that as well, but on Tim Ferriss show, and I think he gets 13 million a week. So just to give you some, some, some framework for this podcast, but he introduced he actually interviews the best of the best in the world in every walk of life from actors like, you know, Arnold Schwarzenegger, Ed Norton, Jamie, Jamie Foxx, Hugh Jackman, to, to, you know, Olympic athletes like Phelps and to billionaires like Ray Dalio. And I started to hear a pattern in those interviews, most of them meditate, and what is meditation enhance focus, right. So again, your focus is critical. And I don’t know about you, Darrin, but sometimes I’ll be watching a movie and I’ll have my phone up, and I’ll be scrolling social media, and what does that kill your focus, right, because your brain is making these micro decisions, you know, that, you know, that, that that just kill your focus. So so the focus is a super important piece and you also have to make a decision. When when you know, if the soup really hits the fan, you’ve got to make a decision that that you’re going to focus on the positive and focus on what you want. And and bring that in because and you know, the Latin root for the word decision means to cut off if you’re going to you know, attack the island and battle you burn your ships because you’re taking their chips home, that’s, that’s a decision. It’s not a one foot in one foot out sort of thing. It’s not a dip a toe in the water, it is frickin done. And so that is you’ve got to make sure you make that decision. But you also you know, need to have positive expectation. Okay, because it’s so easy to focus on pain and struggle we actually connect through pain and struggle I’ll give you an example of this. You know, Darrin if you came up to me and said Rod, how you doing? I said oh my god, I am freaking fantastic. Life is amazing. You know, I you know Darrin you probably you’re you’re evolved you might not but most people will take a few steps back and say okay rods off his freakin meds. But if you came up to me said Ron, how you doing I sell on my on my back is frickin killing me I just lost 10 grand in the market or 100 grand in the market, you put your arm around me and say, Oh, I feel your brother, we actually connect through pain leaders cannot do that leaders have got to focus on positivity, you know, and, and really, you’ve got to make some declarations to yourself, you have to decide what it is that you want. And really focus on that and God or the universe, whatever you believe will conspire to help you make that happen. And don’t forget this either, you know, I’ve had super negative things happen to me like that $50 million loss, you choose the meaning you place on something, okay? And it can it can be a positive meaning the meaning I place on my $50 million losses, I would have never met my supermodel beautiful wife been together 15 years and she’s supermodel beautiful, I’m not exaggerating, and more beautiful on the inside than the outside. So so, you know, again, that would have never happened to give it all up again for her. So if you had a negative thing happened to you don’t don’t let that be your identity, Don’t wallow in that. You remember you change the meaning of what happens to you. Now the other thing is many of us have fears and limiting beliefs. In fact, I’m sure you’ve got people listening that have never taken action in this commercial real estate. They listen to the, to the to these podcasts, but they’ve never made a move because of fear or because of limiting beliefs. And, you know, and they’re caught in analysis paralysis many times and so, but let’s talk about fear first. You know, the thing that you need to remember about fear is we all have it but but when you take action and push through it, it mitigates and, and

and it actually diminishes the fear. And I will say something else to when you’re grateful. It’s you can’t be fearful at the same time when you’re grateful you can’t be angry at the same time. So use gratitude as well. Just take a minute and look around it. You know your home and your family and go outside and look at nature and just be grateful you can’t be fearful at the same time. So that’ll be really important through this next session, you know, now the other thing I’ll mention is limiting beliefs. You know, when I immigrated this country, I didn’t speak English and I got thrown into school and I found out what bullies were for the first time. And you know, I got my butt kicked regularly. I didn’t hadn’t learned how to fight back yet. Love to run into a couple of those guys now, but but, but the point is that my mom is, you know, proud Dutch woman that she is. Gotta be a good idea to send me to school and wouldn’t shoes in those leather shorts. The Germans were for Oktoberfest the later Hosen. So I got my butt kicked again. And then the bullies would chase me home. And she thought she was helping me when she chased him off with a flyswatter next day, but kicking, and I came up with this limiting belief that I wasn’t good enough. And the reason I bring this up is a lot of people have limiting beliefs like that I’m not good enough. I’m not smart enough. I’m not old enough, young enough, you know, don’t have enough time to do this side business don’t have the money to do it. And honestly, there’s a reason that the acronym for belief systems is BS, because 99% of them are just that BS. Now, by the way, this is something we go into a great length in my bootcamp, I, you know, I can I mentioned my boot camp real quick, Darrin, just because he didn’t have time to what I’m going to say next. So I’ve got a live multifamily three day bootcamp coming up in Denver, it’s only one I do each year, it’s going to be in Denver, July 29 30th, and 31st, three days of training, it’s not a big sales pitch, I talked about my coaching for about 30 minutes, but the other three days is all full on training, every aspect of this business from building a team to picking a market to, you know, evaluating that market, assessing it to finding deals to evaluating those deals, underwriting those to financing them to raising all the money you need for your deals to syndication, joint ventures, even property management. But the reason I wanted to bring it up is I also get into this mindset, you know, there’s a reason that my students are so successful, I’m gonna brag for a minute here, I’ve been teaching a little over four years, my students are somewhere on somewhere in the neighborhood of 60 to $70,000, that we know of, it’s probably more than that. And, and it’s because they take action with what they learn. And so I spend time in my bootcamp, helping you take action with what you learn, and dealing with fears and limiting beliefs and very powerful. And so essentially a friend of dierence. If you text my name, Rod, to 72345, and use the code Rod friend, you can come for, for $197 For three days of training, it’s truly a no brainer, okay? So, again, text Rod to 72345, or go to rodin denver.com. But but but if you but but remember, the code rod friend is one word. Now, if if the price, it’ll even hit around $700 At some point, so if you’re hearing this, and it’s much higher, if you have any trouble, just DM me on any social channel, I’m on every one of them, they’ve even got me on tick tock now, and we will, we will respond and get you taken care of. But the other thing is that actually comes with a couple of bonuses as well, I’m thrown in my document library, which I’ve paid 10s of 1000s of dollars for the documents in there and my deal evaluator software, so that all all of that 497 bucks that held those two things alone are worth 10 times that so. But anyway, the reason I brought that up is because, you know, there, there are so many people, like I mentioned earlier that are analytical, which are some of the best people in this business. Because, you know, you have to underwrite deals, you have to review deals, but they have to check off every single box before they make a move, and then they end up never making a move. And so that’s why, you know, this mindset piece is so important and why I give it I give it time at the bootcamp because it’s so relevant. But, you know, because you’ve got to take that first step, you’ve got to take that first step in this business. And when I tell you, there is a probably a once in a lifetime opportunity coming over these next couple of years. I don’t say that lightly. I missed the one in a wait night, I will not miss this one. Okay, I missed that one. Because I was hiding under a rock feeling sorry for myself, but I’m gonna tell you there will be exponential opportunities in this multifamily business. And, and so, you know, the fact we’ve already seen big price, they call it price discovery, big price reductions. You know, we had a couple of deals in the $44 million range, one of them, they dropped to 38. And we still back down, we could have had it and we were looking at it 44 But for the interest rate bump, but so so, you know, these, these prices are starting to come down. And then once they do a couple more rate bumps, you’re gonna really see some some soup, and we could end up in stagflation, which would really be ugly, where we’ve got inflation and pricing, you know, and this recession, so so, you know, it’s just, it’s, it’s so but again, back to the first step. The reason I brought that up is is you know, you’ve got to take it. You know, Dr. Martin Luther King said, You take that first step and faith the next step. will be revealed. Lao Tzu 1000s of years ago said the journey of 1000 miles begins with a single step. And in real estate, I see it with my students. It’s the law, the first deal, it’s the scariest, it’s the most stressful, it takes the longest. And then then, you know, might take eight months to get it or even a year, sometimes my students next thing I know, after they get it, they have five, I’m like, What the heck just happened? So but you got to take action. And again, action mitigate spear. So I’ve been rambling. If you want to ask me a question. I’ve gotten more, but

J Darrin Gross 20:26

No, I appreciate everything you’ve kind of laid out here. And I think the thing that I think that anybody it’s been kind of either on the sideline, or they’ve been, you know, they’ve been working hard trying to find deals. And all of a sudden, now there’s all this information, and you said it, you know, it’s important to guard your mind. Because I think it’s so easy. And I think that, you know, it’s important to recognize that all of the, whether it be the social websites or the news, I mean, it’s a known fact that like even Facebook, you know, they know that if they can get you angry, they can get you to stay engaged kind of thing. And I think a lot of the news plays that as well. So

Rod Khleif 21:06

There’s a movie about that called the social dilemma, you’ve got these, these incredible supercomputers that are smarter, they’re really smarter than we are, and they’ll suck you in and they’ll stay in. And I forgot to mention something I’m sorry to interrupt buddy, I just when you said that, I realized I forgot to mention something, you know, you’ve not only do you have to stand guard at your mind, but you have to bring in the good stuff right now. Okay, like go on YouTube and listen to inspirational videos, I do these clips on my podcast called Own Your Power, which is just about that owning your power, I just want did one on playing to your strengths. In fact, that’s one of the things I want to talk about. But but you know, and they’re five minutes, so if you give me five minutes a week, I will juice you, they’ve got music, I’m really proud of them. There are hundreds of them there. But that’s the other piece of that not just guarding your mind, but but really bringing in good stuff. Sorry to interrupt, but he please continue.

J Darrin Gross 21:53

No, but I think just to be a you have to have the awareness that the game is not set up just to give you the good stuff, the game is set up to kind of keep you engaged in, they figured out a way to do that is to make it negative and keep you in fear in you’re going to have to pull yourself away because otherwise, if you don’t consciously do that, they win. And they they get your attention. And

Rod Khleif 22:18

I’ve even found myself sucked in on some Tik Tok stuff, you know, because I’ll look at some of the political stuff, and then I get sucked in and get angry. And my and I’ve had to take a hiatus, you know, from it.

J Darrin Gross 22:30

Not I think even even like the political parties, I think that, you know, a lot of the reason why we have the issues we have right now is the parties recognize if they can make the other guy, the bad guy, and keep the focus that the other guy is the bad guy. Rather than try and find some common middle ground, they can have power. And, and so there’s, I think it’s important to understand, they don’t want a solution when they run into the problem, because the problem keeps everybody energized. And so when you when you recognize, you know, it’s in the politics, it’s in the news, it’s in the social media, it’s, it’s up to you to take control of your mind. And, you know, invest in yourself and find that positive, you know, information or whatever it is, that’s good. Want to ask you. I mean, you know, the, you mentioned, like, you know, your bootcamp and talks about meditation. And so, how, what kind of frequency Do you recognize? I mean, do you have like a routine do you recommend? Yeah, good question regularly, good question. Is it just like, you know, quarterly go to, you know,

Rod Khleif 23:35

I meditated right before this, this interview, and, and I sit in my recliner behind this green screen here. And I have this little app that I use, there’s lots of meditation apps, I use one called buzzes, pz Izz. And, and, and you can set a time, from two minutes to three hours or 10 hours doesn’t matter. And it can put you to sleep very effectively, or meditate. It’s the focus piece of the app. And, and, you know, it’s been proven that a small piece of meditation is like, exponentially more relaxing, and what’s the word I’m trying to more rejuvenating than then even sleeping, believe it or not, and so, but But right now, more than ever, again, you need to clear your head and I’m speaking looking in the mirror while I’m saying this right now, more than ever, I need to clear my head. Because, you know, I’m my business is is, you know, very often we need to innovate, we need to pivot we need to redirect ourselves, you know, when things happen, like what’s coming, and so, you know, I want to be ready for it. And you know, I’ve had to innovate in the past. I remember when coat you know, in 20, early 2020, I had 800 People scheduled to come to Orlando, and if they don’t, and many of them had paid I’m like, holy crap, what are we going to do? And if you go to multifamily virtual bootcamp.com You’ll see rod on his cell phone shooting the video to go virtual, I went virtual almost immediately. I built a studio here at my compound. But you know, this Denver one is live. I mean, that’s in person three days, but I have done some virtual ones in the past too. And so, you know, sometimes you have to innovate or pivot to, but But what you said about social media is so critical. I mean, it’s really resonating with me, because I’ve noticed it myself. You know, like, I just came back from a vacation in St. Barts, and I was scrolling through a lot of that crap at the at the pool. And, you know, it’s just because, you know, I was bored, nothing to do. And then finally, like, yeah, this, I gotta turn this thing off and read read books, because it’s just so negative. But, you know, one of the things I want to mention Darren is, as you go through this, I mean, this this relates to the multifamily business as well, I just alluded to it that I just did an on your power clip on this, you must play to your strengths, especially through what’s coming, okay. Because, you know, some of the greatest partnerships I’ve seen, I’ve entered like you, I’ve interviewed some of the best operators in the world, really in multifamily. And it’s very often it’s a partnership between several people that are all paying two or a couple people, in many cases, they’re all playing to their strengths. The most common dynamic I see is I’ll see an analytical person that’s introverted, with a more outgoing, extroverted person. Those are, you know, incredible partnerships, I’m sorry, I’m sure you’ve seen it as well. And so it’s really important that instead of trying to maximize your weaknesses, you play to your strengths, and you hire a line or partner for your weaknesses, you know, because when you’re doing what, you’re strong, and you love it, okay, and when you love it, you’re going to be passionate in it. And it’s going to require passion for you to influence people to sell to you to invest, you know, with you, and, and so on and so forth. And, you know, if you’re not sure what your strengths and weaknesses are, you can do a Myers Briggs profile or what’s called a DISC profile DIFC, you know, or just ask your friends, you know, what are your strong and weak at and in. And again, playing to that is super important, because you need that passion, you need that passion to be able to influence people, especially when they’re operating in fear. And if you’re trying to raise money for a deal, if you’re passionate about it, you know, you’ll be able to influence and that passion is actually the fuel. So it’s really important that you discover what juices you and you and inspires you and you work in that because that passion also breeds creativity and, and minimizes and eliminates fear. So that’s a creep a critical piece and one that I’ve just realized I forgot to mention super important is be careful who you’re hanging out with through this, okay? Peers are critical when I was losing everything in a wait nine. Luckily, I was in a mastermind it was actually Tony Robbins Platinum Partnership. And I was around people that were thriving through the crash and they’re like, get up your big freakin baby 50 million, million, just get up and get back to work. And that and that’s what I needed, you know. So, you know, a lot of people, you know, will just

what’s the word I’m looking for, they’ll, they’ll, they’ll just end up being friends with people they went to school with, or work with. And sometimes with people out of their fear or jealousy or fear of losing you or fear of feeling like there’ll be let you know, perceived to be less than will hold you back. And so in sometimes it’s family, and I will tell you, you know, love your family, but choose your peers, be very proactive. You know, don’t don’t Don’t be lazy about that proactively. You know, like I started a mastermind that we’re meeting next week in Houston. And it’s I think it’s the largest multifamily mastermind there is about 14 billion in assets and represented by the members and, and, you know, we meet three times a year, but I started that thing, too. Because I want to be around people that think what I think is hard is easy. And that’s what you need to be seeking out. If you’re listening to this, you need to be seeking out groups that you know, that that are that are better than you that have people in them that are better than you at what you want to do like multifamily. Because, you know, if you’re gonna play tennis, you want to play somebody better or someone worse than you, right, you’re only gonna get better if you play someone better. It’s the same thing in this business. And you want to be around people, again, that aren’t afraid of your success. You know, that’s one of the amazing things in my warrior coaching program is, you know, most of these deals, these those 60 70,000 doors were done between warriors. And you know, people will post a win and everybody’s congratulating them and you want to be in that kind of an environment where people are praising you and, and holding you accountable. So, you know, I wanted to mention that as well Darrin.

J Darrin Gross 29:35

I think it’s all you know, again, it’s grabbing hold of your mind and protecting it from all the negative information and just as you know, you’re being attacked by the negative information, see it to kind of like safeguard the door. Get some positive information, surround yourself with, with people that are going places that you know, a mindset of achievement as opposed to Woe is me. And, you know, I think then beyond that, you know, how would you see if you’ve got your mind? Right. You know,

Rod Khleif 30:07

Let me let me add something Sorry. Sorry. Sorry. Please hold your question for one second. I just remembered I forgot something else. You know, we talked about, you know, that soup is coming, it’s coming for sure. And, and you also asked me what I do, routines that I have, and I realized they really didn’t answer that question. So that recliner I was talking about, typically, most mornings, I will sit in it, and I will manifest you could call it prayer, whatever you want. But I mean, I mean, I’ve manifested some big things in my life, you know, mansions, a, you know, a million dollar home, you know, all the stupid cars, I thought were important roles in the Lambo and the in the Bentley and all that stuff that I thought was important one time, but I manifested it, and how I did it was and how I do it now is I’ll sit in that chair, and I’ll just do gratitude, I’ll just be grateful for my beautiful wife, my kids my foundation, and and then I’ll do gratitude for the things that I want as if I already have them. And I know I’m going to lose some of you analytical ones on that one, but I’m just telling you, it freakin works. And so that’s, that’s, that’s what I would call a success habit. Okay. And, you know, we’ve all got habits, and through this period, you got to be really conscious of what your habits are, because some of your habits will project your life up, and others will project your life down. And I suppose the easiest way to look at that is with, you know, what you eat and whether or not you exercise, but, but it’s really critical that if you’ve got some bad habits, that you’re consciously aware of them, you mitigate them, and focus on, you know, success habits. You know, like having clarity around your goals, you come to my bootcamp, the first hour and a half is spent is goal setting on steroids. Because how are you going to get anything if you don’t know what it is, you need to know what you want with clarity to create what Napoleon Hill in his book, Think and Grow Rich calls a burning desire, you got to really want it, okay. And so, so, you know, you’ve got to have clarity with your goals, and you should reassociate with those goals. That’s one of the things when I lost everything I, I re associated with what I wanted, why I wanted it so that I was focused on that, not what I didn’t want, you know, and, and focusing on results instead of busy work, you know, making sure that you’re, you’re actually doing the you know, looking at your to do list and using the Pareto principle, the 8020 rule to work on the 20% that’s going to get you 80% Further, you know, and then another success habit is massive freakin action. Massive Action, mitigates everything, you know, and of course, really paying attention to your health through this as well. You know, not just your, your, your your, your will, of course, your physical health, what you eat your exercise, but even your mental health, making sure you’re getting outside spending time with family, meditating, praying, whatever, is super, super important. So habits through this managing those are really important.

J Darrin Gross 32:55

But I think, you know, where I was just kind of trying to go is just, you know, not only the routine thing, but just, I think the the, the global thing is that life is always going to happen. I mean, there’s always going to be whether it be, you know, the political situation or the economic situation or whatever that is that that’s, that’s going to create opportunities, stress, you know, wins losses, that are things that I can’t control. But if I can control the mindset, and I can, you know, look forward and have it in, like you said, the focus knowing exactly what I want, and what I need to do next. And you know, the massive action thing I think is the one that is obviously the the

Rod Khleif 33:42

It mitigates fear it mitigates fear, you know, whenever I’m stressful if I take massive action, it mitigates that, you know, achievers call it stress, but but it’s really fear. Okay, and so it mitigates that stress, slash fear. And it’s really important. Yeah.

J Darrin Gross 33:58

Yeah. It’s all good. Hey, Rod, if we could. Let me ask you one. Just one more question. In the, in the whole plethora of kind of what we’ve talked about, is there one most important tool for maintaining mindset?

Rod Khleif 34:17

I think its goals. I really do. I think it’s making sure you’re focused on what you want, not what you don’t want. And that’s why again, that’s my students know this and you know, re associating with what you want on a regular basis, maybe even a daily basis. By the way, I did a if you can’t make my bootcamp I did a goal setting workshop I do it every year on the on I did on January 1 this year on the New Year’s Day, and it’s if you go to rods, links.com, rods, plural links plural.com And that’s all got all my stuff on it. But at the bottom is this goal setting workshops, got music, there’s a guide you can download. So if you can’t make my boot camp for God’s sakes, go download that and do that goal setting exercise with your spouse with if you’ve got a kid Kids that are over 10 years old, have them do it super powerful. And I’m not going to try to sell you anything, it’s just a gift. So I highly recommend you do that. Because it’s so important people spend more time planning a freaking birthday party than they do designing their lives, that’s designing your life. So I think that’s probably the most important thing, God.

J Darrin Gross 35:21

If we could, I’d like to shift gears here for a second, by day I’m an insurance broker, and I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically look to, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if we can minimize the risk. And when we cannot avoid nor minimize the risk, then we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation. And you can frame this however you like could be, you know, the market politics, the interest rates, you know, however you choose to to frame it. But if you can identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer.

Rod Khleif 36:15

Got it? Got it? No, that’s not the answer. I’ll give you Yeah.

J Darrin Gross 36:19

So if you’re willing, I’d like to ask you, Rod Khleif. What is the biggest risk?

Rod Khleif 36:25

I will tell you to, Today is June 8. And I have to say that because who knows what will happen to things are changing daily right now. But and I know this alehrer in a week or two, but But right now, the biggest risk that I have alerted my students to on several occasions is the debt markets. Okay, that I mean, it is crazy out there right now. And and I’m going to tell you that it when you’re performing a multifamily right now, you need to do some worst case scenarios, like if you’re planning on getting in, right now, the most common debt is bridge debt. And that is very, can be very honest debt. And, and because you have a business, you have a business plan, you got to adhere to that business plan. Otherwise, you know, what’s could be non recourse can become full recourse. So it’s very, very important that you do what you say you’re going to do. And some of those have short fuses like three year timelines, and we could be in the midst of this recession in three years. So I would encourage you to do absolute worst case scenarios as it relates to interest rate, you know, take out interest rate, when you refinance, we just did, we just put 138 unit under contract, by the way, if if, if you were accredited, we it’s a phenomenal deal. 54,000 A unit which is unheard of in an emerging market in Arkansas, so so if you’re interested text partner to 72345, and get on our portal, because we’ll be presenting that probably about the time this goes live. And it’ll be a very short, it’s not a big raise. So it’ll it’ll subscribe very, very quickly. But that that’s a really good deal. But the point is, you know, we did worst case scenarios, what happens if the interest rates 8%? And can we still be okay? And yes, we could and so, you know, most people aren’t doing that. Most people aren’t, aren’t stress testing these deal strongly enough? You know, and, and I think we’re gonna see some upset when I’m, we’re going to snap up some deals where they didn’t do it right. You know, and I hate to say it, but that’s likely going to happen, people are still overpaying, and they’re not paying attention to that risk. And so I think that’s the biggest risk right now. That’s the first thing I thought of when you when you prepared me for that question earlier, Darrin, because I really, that jumped right into my head. So

J Darrin Gross 38:41

Well, I think it’s definitely timely and well put and, and we’ll know more when we get there. Yeah. But

Rod Khleif 38:48

I wish I had a crystal ball to see where we are a year from now, buddy, I just like, it’s like every day, it’s something new is like, what the heck’s going on out there?

J Darrin Gross 38:56

Well, I think that, you know, like, we’ve been talking mindset, and if you have your mindset, right, and you focus on your goal, you know, and you’re, you’re prepared to take action, I think you have the opportunity here, likely, you’re gonna be in a better spot than if you did. And so I appreciate you taking the time to. Thanks for having me. Hey, Rod, before we wrap up, where can listeners go? If they’d like to learn more connect with you?

Rod Khleif 39:20

Sure. Sure. So my bootcamp, again, is it’s multifamily bootcamp, I’d say Rodindenver.com is better, rodindenver.com is my boot camp or just text my name “Rod” to 72345. Listen, it’s $197 for three days without a big sales pitch, just training. You really if and if you’re trying to learn this business, once the recession is hit, it’s too late. You need to I mean, this is probably the most important event that you can do right now to really learn this business, not an event where I’ve got multiple speakers coming in to talk about different things because you don’t learn the business that way. You get some insights, but this is soup to nuts, the business and so if you can make it for God’s sakes do you’ll be glad in fact, if you come and you don’t Love it. I don’t mean like it. I mean freaking love it. I’ll give you your money back. So no questions asked. But, you know, so that’s that’s important but if you go to rods links.com that’s got all my stuff’s got my podcast, you can quickly get that it’s got lots of free books that you can download. You know, all my social media links, everything’s there. And that’s probably the best place, buddy. Thanks.

J Darrin Gross 40:25

Awesome. Rod, again, I cannot say thanks enough for taking the time to talk today. I thoroughly enjoyed it. Learned a lot, and I look forward to doing it again soon.

Rod Khleif 40:36

Thanks, buddy. Good to see you again.

J Darrin Gross 40:38

Announcer 40:56

You’re listening to CRE PN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio.

Land Deals with Brent Bowers – CRE PN #356

Brent Bowers 0:00

And then there’s the other list that the tax lien investors don’t buy the tax liens on, because the property suck, like they’re not accessible, they’re not buildable, they’re blah, blah, blah, they’re they’re landlocked, you name it. So I mailed the sucky list, like the land that no one’s mailing any offers to or even buying their tax liens. So when these guys got a postcard for me, it was like, you know, when the rivers dry up and there’s little puddles left and the fish are starving to death. And one little cricket jumps across, it’s like explosion of Puranas, basically, and that’s what happened to my phone. And I was hooked. Like I did two deals within about a week’s time. Each one of those deals I bought the first one for $285 sold it to a realtor for 5000 next day, I was like, Holy crap, this works better than that guy was saying on the podcast.

Announcer 0:51

J Darrin Gross 1:10

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is a returning guest, Brent Bowers. Brent is an investor and coach with a focus on buying and selling land. And in just a minute, we’re going to speak with Brent about the business of buying and selling land and investing strategies.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest back to CRE PN Radio. Brent, welcome back to CRE PN Radio.

Brent Bowers 2:21

You brought me on to quick I was trying to subscribe to your channel. I love it. All right. I’ll do that later. All right. Awesome. Um, first edition.

J Darrin Gross 2:33

Hey, thank you. spike up today. So Brent, I’m looking forward to our conversation today. But before we get started, if you could share with listeners a little bit about your background,

Brent Bowers 2:45

you know, I started out in real estate in 2007. And, you know, some say that’s the best time to start. Some say that’s the worst time to start. When I was in that position, I thought it was the worst time to start, which was 2008 was happening. Now, what I know now doing knowing what I know now I know it was actually the best time to start. And my problem was I threw in the towel too quickly. I got it in my head between my ears, that I was not going to make it because I saw others getting out of the business. So you know, I changed my course a little bit. I went back to school, I joined the military so I could pay for the school and they would pay for my schooling, and was pretty much out of the country until 2013 doing you know what the military told me to do. And that was deployed in Afghanistan. I lived in Germany when I wasn’t deployed, and pretty much took a break since about 2013. And then started doing something called House hacking when I got back to the States, and then started buying rentals, and then slowly found my way hole selling houses. And then I stumbled into the land. And what’s so cool is, you know, the CR e PN podcast, there’s things out there that educate us on how to buy commercial real estate because now I have a tax problem. And that tax problem that comes from all this money I’m making in land, I get passive income payments every single well actually, I’m paid every single day for land, sometimes multiple times a day, because we have a little over 100 notes, paying us on the land, we sell our finance, and we take that money and buy cash flowing assets, buildings, apartment complex, commercial office building, things like that. So I’ve actually just keep, you know, just stumbling into this stuff. And it’s usually because of a problem. It’s because of a problem I’m having. So with commercial real estate, there’s nothing better to depreciate in cost segregate and use the tax loopholes that the IRS gives us. So that is a really quick me in a nutshell. But a lot of my business has become has has come from problems I’ve had. So that’s me.

J Darrin Gross 4:57

I love it. iron your shirt, their land is that a logo for you the that’s a great shirt for you if that’s you?

Brent Bowers 5:06

Yeah, that’s the land sharks. Absolutely.

J Darrin Gross 5:09

Okay, gotcha, gotcha. So, okay, got the shark? Yeah, the fin and the mouth there. That’s awesome.

Brent Bowers 5:14

You got to go to YouTube to check it out.

J Darrin Gross 5:16

Yeah, definitely good to go check that out. What you know, it’s funny, the the, you started your introduction, they’re kind of just kind of telling them your tale. They’re about the the timing 2007 2008. And I haven’t, you know, read the tarot cards, or I don’t have a crystal ball. But it seems like all the the people that are talking are kind of looking at the current situation, we’re recording this in May of 2022, that there’s a there’s a lot of economic indicators that suggest we’re on the precipice of of a similar type of event, potential event, I guess it’s some sort of correction, just based on, you know, the the money in the system and an inflation, blah, blah, blah. And what I think is kind of cool is, is that, you know, one thing about all these economic cycles is that they are cyclical, there’s the up and the down. And, and, you know, like you were saying that that was the best time to get in, but you kind of throw in the towel too soon. And I’m just kind of curious, if you were to kind of use your hindsight, and kind of, you know, look back and some lessons you learned, or share what if you could share with us some of the lessons you learned and how you think you might be able to apply? Or, or, if you’ve given it much thought about what potentially is coming and how that, you know, what you’ve learned will potentially play out.

Brent Bowers 6:46

Yeah, and going back to 2008 2009, when I bought that first rental property, it was at the absolute height of the market. And then 2008 in the 2008 happened and things kind of really just slow down, it almost stopped there. It’s almost like when you fall off the ladder, you’re gonna lay there for a minute. And I learned this from a gentleman named Matt Valera. It’s like you, you lay there for a minute, and it’s like, what is broke? And then that’s the same thing with, like, the economy, you know, when that happened, I feel like things just kind of like stood still a little bit. And what we’re seeing today is really, I mean, I think it’s a little different. We’re not really dealing with the subprime loans, or you know, if you can breathe hot air on the glass, you get a loan type thing, because that’s what it was in 2007. Now we’re dealing with we’ve gotten so used to having 2% 3% equity, or three and a half percent loan on a rental property, can you believe that? Like, it’s just unbelievable. And now rates just went up to like, What 5% And people are freaking out, because now they can no longer afford that $500,000 house, they can only afford the $400,000 house because their rates just went up. So that’s going to stop those sales from happening so quickly, because now less people qualify for it. So as more you know, time goes on the market, things start to slow down when they sell it like it went from like six days sold in one market that I’m in to now 12 days and then it’s just going to increase now the moratoriums are over on the foreclosure or I don’t know they might still be going it’s like back and forth. I’m so confused with these moratoriums now, but as the moratoriums end, more inventory will come and I’m talking about real estate as a whole. I’m talking about land, I’m talking about houses talking about for plexes triplexes. And I’ll tell you, I have an office building, which sucked going through COVID Trying to rent that thing out, but we’ve just had to shift, but so we got interest rates, we got moratoriums ending, and builders are building like crazy. So what does that tell you? Like I think that tells me prices are going to come down a little bit because we’ll have a little bit more inventory, less buying power with the interest rates, like literally going from like 2% to 5%. So sellers, it might turn in to you know, more of a I’m not saying it’s gonna turn into a buyers market, but it might be more of an even playing field.

J Darrin Gross 9:14

Yeah. No, I I think that there’s a good case to be made for that. Like said the you know, one of the challenges I think that we all have is that our memory of the last one is what we’re looking for for the next one. And like you just indicated I don’t think it’ll be the same and we don’t have the subprime and we don’t have all the fog a mirror kind of mortgage situation that we had before. So that that will be different, but I think that you know, just some sort of a slowdown to where the maybe the the frenzy is not as hot. Maybe it gives buyers at least a little bit more flooding with sellers That kind of thing, and maybe perhaps a little less competition on every deal. Like, if you don’t buy it within, you know, you know, right away kind of thing. But I think that the the other side of that thing that I’ve come to recognize is that the opportunity is in the change in the marketplace, when the marketplace changes, that’s, that creates an opportunity, because there’s a mindset that everybody has of this as the market and then all sudden changed. And we’re in if you recognize that, that’s the opportunity and you you’ve been in the market and you’re sharp, and you know, you know where you need to be. And relative to what things are, I think that’s the, that’s the opportunity there. And hopefully, that’ll create some opportunities for all of us. If you’re, you know, in a good position, but

Brent Bowers 10:44

Opportunity comes with a change, right?

J Darrin Gross 10:46

Well, it certainly, I mean, if there’s, if there’s no other lesson to learn, it’s the you know, the ups and the downs, that’s what creates the opportunity, you know, it’s the, if you’re, if you’re only buying when things are up, and then you’re selling and things are down, you’ve got it all wrong, you’ve got to, you know, it’s in the down cycles, where you really make your money kind of thing. And, you know, just to be conscious of that, and to, you know, be aware of what’s going on and, and not not that everything’s going to crash and burn and everything like that, but there’s clearly signs of a slowdown when everything’s going up and cost and, and it’ll be there’ll be an adjustment, however, that, you know, that’s just the nature of things. There’s only and if you there was something I read the other day, and I was like, it’s always kind of shocking to me, it’s like, I think it was like 40% of Americans don’t have $1,000 in savings, you know, kind of thing. I was like, wow, you know, it’s that’s a pretty a pretty scary number. When you think about it, I couldn’t survive any kind of like, an enemy. You know how rare it is. But it just would you realize that how many people are basically they have no cushion, kind of thing.

Brent Bowers 11:57

And then I have a car loan too, and a house payment, and then they don’t even have the $1,000 in savings. They’re big trouble.

J Darrin Gross 12:03

Yeah, yeah. And so anyway, you know, that being said, if the cycles, if the markets changing, and the costs are going up, and they don’t have any kind of savings, they have no room for error, anything which to me, will, will create more opportunities, if you do have capital to deploy. So. But anyway, I wanted to just kind of touch on that just again, it was more of kind of a reflection point just based on where you started and where where things are and stuff. Let’s talk about your your land investing and, and how your, I guess kind of your journey, you started off saying that you you invested in. And I can’t remember the little bit of the story, but single family rental or something like that, and you were you’re overseas and and if I remember, right, there was like the pain of coming back to somebody destroyed your place. And the you know, there was just that it wasn’t a good fit based on where you’re at kind of thing. And that’s when he kind of threw in the towel. And then you ended up in that in the land thing that but help help us understand kind of, you know, how you got into land. And, you know, what you’ve seen and where you are now as to how your how it’s working 100 notes getting paid daily. That’s a pretty good story right there.

Brent Bowers 13:26

Yeah, Darrin, you have a magnificent memory, holy cow that you remember that from like a year and a half ago. So yeah, you know, I built a team around the land business. So how I came into land was, you know, once again, I had a problem on my hands. I had just paid almost, I think $5,000 Roughly for some mailers to go out for a bunch of single family homes and Colorado Springs. And then our battalion commander told us, Hey, you’re going to the field for two and a half weeks, you can’t bring your cell phones. So I now had a huge problem. I had just went into debt on AmEx, to pay for these mailers. So I spent money I didn’t have sent nets and mailers to people that are going to hopefully return a phone call or call on that mailer because they want to sell their house. And no one’s going to be there to answer the phone. So that problem caused me to lose money. And yes, we miss out on some leads. But I also had did two things with that one, I hired someone to help me start taking those phone calls and meeting the sellers, you know, because I just surely couldn’t do it. And I was working almost 1213 hour days on bass as an Army officer. And then I was also still searching for answers listening to podcasts like CR EPN, things like that and just trying to educate myself. And I shared a little bit about this on the last one we did together. But I heard about this guy buying land at Crazy discounts and flipping it overnight. And I was like wait a minute. I I’m currently right now, mailing the tax delinquent list. And I’m filtering out the mobile homes and the office buildings industrial, I’m only focused on one little niche that single family homes. And guess what? It seemed like everybody else was focused on that one as well, too. We’re all fighting over the dirty stinky old cat pee houses that have foundation problems, and Colorado Springs. And like, I would have to go to a meeting. And I would like rush off base on my lunch break, if the seller can meet me at that time. And I would rush there, and I will rush the appointment. And if I didn’t get that house under contract, good luck, I was never getting it. Because, you know, it’s you have to be a very skilled salesperson, to get someone to write a contract with you with like, and within about 15 minutes like that is that you got to create rapport, you got to learn about the problem, see how you can serve the seller, because most sellers are not going to sell their house at a discounted cash price, unless you are going to provide them speed, or convenience, or serve them in some type of, you know, like creative way to allow them to rent the house back. So that night that I heard that man talking on that podcast about land, I went and called my virtual assistant, I said, Hey, you now we scrub that all the land, can you please put that back in there and send me an Excel spreadsheet as soon as possible, because I want to mail all these landowners a postcard. So I mail them a postcard and mail 687 postcards out to people that were behind on their taxes. And I thought I was mailing just a regular old tax delinquent list. I was actually mailing the county held tax lien list. What that means for anybody listening to this is basically in Colorado, you had pretty much to list, you have the list of people the list of people that their properties, you can buy the tax lien on make a return on investment. And after three years, you can you know, it’s becomes deed eligible and you can foreclose. And then there’s the other list that the tax lien investors don’t buy the tax liens on because the property suck. Like they’re not accessible. They’re not buildable, they’re blah, blah, blah, they’re they’re landlocked, you name it. So I mailed the sucky list, like the land that no one’s mailing any offers to or even buying their tax liens. So when these guys got a postcard from me, it was like, you know, when the rivers dry up, and there’s little puddles left and the fish are starving to death. And one little cricket jumps across, it’s like explosion of Puranas, basically. And that’s what happened to my phone. And I was hooked. Like I did two deals within about a week’s time. Each one of those deals I bought the first one for $285 sold it to a realtor for 5000 next day, I was like, Holy crap, this works better than that guy was saying on the podcast. And then the second deal, this is where my brain was broken. Like my mindset changed my paradigm shift like Stephen Covey says, the second one, I bought for 500 bucks, and then sold it on Craigslist the next day for $500, down, and 400 a month. And I was hooked. That’s where my passive income journey began, because I’d already had rental properties. And I pretty much at that time still hadn’t made a profit on any of them. But my passive income started and eventually financial freedom because it only took like, 10 of those to cover my expenses. And then my geography freedom. And that’s where I was like just gung ho, I would buy any parcel of land, as long as I can get it for a discount, and sell it for a little more. And seller finance it.

J Darrin Gross 18:39

That’s awesome. So literally that fast, you shifted the focus from the single families to land. And you mentioned that the list was like there’s two sides to the list. In Did you also send to the the, the the back tax properties, or if I understood right there was the the properties that were inaccessible that were you know, nobody wanted, which are the sounds like those are the people that were calling you. And then you had the others which were the the county tax lien, the you know, kind of thing where there was more of a process. Did you get calls from those people as well?

Brent Bowers 19:20

Oh yeah, I figured out how to mail those guys as well because first Her name is Cindy. She didn’t send me that list because she still didn’t understand why I wanted that tax lien list because tax lien investors had already paid those back taxes. I was like, please just send me the list. I am going to buy the land from these people and get the let the taxes caught up. That way they don’t lose it. They make some money. And I will keep taxes caught up. So finally she sent me that list two and I mailed that and then I just mailed the entire county list like I eventually just started mailing the entire county landless but I never once took my I never I’d already built them. Gene for the house buying. So we just kept doing that one too. And we just kept growing and growing. I mean, my team is nine people now, which is very small, actually. But it’s perfect.

J Darrin Gross 20:11

All virtual? Or do you have people local? Or how are you? So we’re

Brent Bowers 20:14

We’re all virtual. Several of us are in Colorado, couple in the Philippines, one guy in India. But yeah, we we actually rented out our office, we had a beautiful office, we renovated it. And one thing happened during COVID, we learned that we don’t need offices. So we rented it out. And that’s another cash flowing asset coming in every month.

J Darrin Gross 20:37

It’s awesome. So, so you started almost by accident, you listen on podcast, you shifted gears from the single family into the land. You got to immediate success within just a week or so you’re you’ve got two deals. Are you still focused on Colorado, specifically, specific county? Or do you? How wide is your your focus? And how did you did you? If it is wider? Then how did you go that? Or how did you navigate that? From the first to where you are now,

Brent Bowers 21:14

We first started in the backyard. And it was actually one county and I could drive that whole county within like, several hours, you know, three, four hours. And then I expanded to the actually two counties over because someone said, Hey, man, we’re doing really well, because the land business is a very small niche. And there’s not a lot of people in it. But I heard from a friend that was doing very well in another county. He’s like, Dude, you gotta come on. And so I did, I started mailing that. And then I realized, wait a minute, the cash buyers list, the buyers lists of people that I’m serving in this particular county, are now asking me for land in the next county over. So we started mailing that one. And then it’s funny what happens, realtor, start finding out what you’re doing. And then you get on a few podcasts. And then you all of a sudden you’re buying land in San Bernardino, and then Pennsylvania. And then I’ve got my father involved in this and we’re buying land in Florida. My dad’s done over 50 Something land deals now. He’s done manual labor his entire life. And this guy is like the flip King on a five by five mile radius, a one one area of his county, like he could tell you what’s going on in every single road. So he no longer does manual labor.

J Darrin Gross 22:28

Well, that’s awesome. That’s awesome. So when you you said, like you started in your backyard? Was it basically just more people asking you to go, you know, to different counties? Or to expand your territory? Or? Or were there any parameters that you identified that were key to the success that you were having in your own backyard?

Brent Bowers 22:51

Yeah, I wouldn’t say I’m a super detailed or calculated person. It was you mentioned that it was I saw the demand was there. And then number two, I had the buyers asking me, so I’m not one that goes out and creates a product and says, you know, I think people will like this, though. I want to see where the demand is. And then I get a product that they’re looking for and asking me for and then I fill that demand. So I’m kind of lazy, I don’t like to create, I like to feel

J Darrin Gross 23:20

I mean, a lot easier just to sell to somebody it’s asking than trying to give in somebody that no, this is really good deal you could buy kind of thing. So that’s great. So talk a little bit about the, the, you know, the the, I guess the aspects of the land, you’re you’re buying and selling is it? Is it bare land? Does it have a structure on it? Is it acreage? Is it a city lot? Is it?

Brent Bowers 23:49

Yeah, it’s vacant, raw, unimproved land, I would say 99% of it. Now do we get the occasional parcel that had, you know, a house burned down at one time since so it’s already got a septic or sewer hookup and Water and Electric? Yes. We’ve done very well building on those parcels. You know, I’ve teamed up with a guy named Dan hammer cost. And we’ve started building together and we’ve done really, really well where I could have maybe sold the land quickly to a builder or developer or someone that wants to build their home and made $20,000 on it. We either order a modular home or build a stick built house on it and literally make 90,000 So there’s because there’s a huge demand right now, you know, the National Association of REALTORS says we’re 6 million houses short across the country. And then you look at the inventory and it’s only a couple of weeks. And now I remember I was just talking about interest rates going up and foreclosures I’m being very careful with what we build. I’m building houses that if I get stuck with it, I now have a beautiful rental. And they’re not massive houses. Which there’s a lot of money that too, by the way. So what are the parcels of land And look like, you know, a lot of times, I break it up into two categories, you got the rural stuff, the stuff that I love for cash flow. That’s the stuff on the outskirts of the city. And then you got the stuff that’s like in a neighborhood where there’s already sewer lines running by and Water and Electric. That’s the stuff that we call infill buildable lots. And that’s the stuff we sell to builders or developers. I just bought three lots down the street for me. And there’s a guy named eco son home builders, and he’s got a lot of demand right now to build his houses, what the builders need land. So I just listed the parcels with him, he put them on the MLS, he put his beautiful model home pictures, and now we’re gonna sell them to someone looking for a brand new home without a power bill or a water bill because the solar panels are going to cover their electric and then they’ll have a well, so it’s a really cool deal. So you just team up with guys like that, or build it yourself.

J Darrin Gross 25:56

Sweet. So the purchase price, you know, you mentioned like a couple 100 bucks. Is this? Is that the the net net price of the the property? Are you finding? Is there owner financing? Or how are you describe a little bit about the the in and out of the I guess the money side of this? I know you’ve talked about it, but I’m just kind of curious, is it? Is it predicated on you come in with cash? Are you getting a loan? Are you are you owner financing? What’s the what’s the

Brent Bowers 26:30

I mean, I’m sure I could have gotten a loan from that guy for $285. And you know, I didn’t have to at that point. And really, it’s funny how it worked out. I was so afraid to buy the land and spend $285, I lined up a buyer first. And she agreed to close on Wednesday with the title company. So I told the seller, I would pay him on Tuesday. So that way my money wasn’t locked up too long, right? Cuz I was like buying, you know, we had just moved across the country with the military, I had diapers to buy, we just had a verge baby, I was broke in 2016. Man. The second one is 500 That one actually wrote the check for before I found the buyer because I was getting a little bit more confident. You know, you get really cocky when you start winning. You know, Tony Robbins says when when we lose money, we ponder when we make money we party. So we learn a lot more from our failures. So about the 10th or 12th deal that I’m using my own cash for I’m not even getting financing. They did start costing more and more and more though, I think the next one was $1,300. And the fourth one was from a bank, I actually got under contract for 25,000. But here’s how I sold that when I didn’t even need, I didn’t even need a loan, I went out and put signs up all over the place. And I said 44 acres 38k phone number, and I put 30 Something signs out, I started getting phone calls. And it was literally, you know, a gift from God. Basically, these people had just sold their ranch in Texas, and they’re driving around Colorado looking for somewhere else to buy. And they saw my signs popping up while they were driving around. So no, I wasn’t getting loans at first. There’s some things I’m doing now bigger deals. We just bought one for 1.2 million. We’re working on another four and a half million dollar parcel that we’re bringing in partners for you know, that’s a you know, totally different but yeah, I I wish I was still plucking those, you know, $285 parcels out to make five grand, but you could spend, I mean, I’ve found that bigger deals take just a little bit longer. But there’s way more money. There’s way more zeros at the end of it.

J Darrin Gross 28:45

That’s awesome. On those larger deals. What kind of timeline do you find between acquisition to disposition? And I assume if you’re if you’re developing the land, that’s obviously a whole nother kettle of fish here. But are you? Is it I mean, you’ve been talking about buying on Tuesday sell it on Wednesday? What kind of timeline? Are you dealing with these larger deals?

Brent Bowers 29:11

Yeah, the larger stuff that we put on the MLS and it depends what area it is. There’s certain parts of Texas where we can sell this stuff and like 12 hours, Florida, you know, 3030 days, but our development stuff, that’s the stuff we’re sitting on. That’s that takes a lot more time. You know, and then a lot of times we will get it under contract with a due diligence period. So we can start working with the city start talking to the engineers to do the drawing. So that’s like more like a six month you know, just it’s sometimes it takes us six months just to buy it. Because if I go and buy a piece of land like we’re looking at another deal that we could put almost 300 RV lots on and that that price tag is a little higher. Now if I just went and paid that price without having the stamp of approval on engineer plans from the city, that’s totally gambling. And I mean, you might do, you might get lucky, kind of like I was in the very beginning of my land business till I started making big mistakes, because I got cocky, but you learn you learn the hard way. So I would say the answer your question, it’s it’s all over the place with acquisition disposition just depends. There’s so many variables.

J Darrin Gross 30:31

So, in the introduction there have mentioned that you do coaching. Do you tell me a little bit about your, your program your students? What are you? How are you working on?

Brent Bowers 30:44

Yeah, so I’m fortunate to be a wholesaling Inc coach, I am their official land coach, we have a course that we put together, that is the action steps of how to build a land business that will serve you and your family and others, just like I did, just like I started out, because I just assume everyone starts out just like I did, no money, no time. So that’s the way the course is built. And the it’s all about revenue in the first position. Like I don’t talk a lot about CRMs. And starting an LLC, none of that stuff, I want to get money in your pocket, like within 30 days. And then we start worrying about building the business blueprint. And then it’s weekly, weekly coaching calls, they are recorded, we’re on there every week. And then we have a support group so you can get your answers. I’m sorry, you can get your questions answered daily, because I can tell you exactly what to do. And then you’re going to get a little roadblock. And then you’re going to have a question. So that’s where I found that a lot of these, I went to so many seminars there and I read so many books, but what would happen was I would fizzle out because I’m like in my own little like playground here, like getting kicked in the stomach all by myself and no one else to talk to. And the biggest thing about our weekly calls is, we’re always sharing wins. Like, like, you got to start with a win first before you ask the question. And a lot of times these wins, I just made $200,000 Last month, or blah, blah, blah, you know, you name it, I just sold my first parcel. And I just got a parcel under contract for 45,000. Hard to have a buyer for 90. Like things like that. That’s what I needed when I was just starting out. Maybe it wouldn’t have taken me from 2007 to 2013 to keep you know just swinging the bat swinging the back swing the bat.

J Darrin Gross 32:28

That’s awesome. You mentioned your dad’s doing this now How long has he been doing it?

Brent Bowers 32:33

Ah, he’s she’s I would say two and a half years now is the probably the first land deal we did together. And it’s funny one of the the buyer that purchased that parcel of land, it was this Latino couple we couldn’t even understand, like, we couldn’t even understand each other. Their child was translating, and they just paid their parcel of land off in Indian town, Florida. And we’re super excited because that was like, one of the first ones we did together and we just changed those people’s legacy.

J Darrin Gross 33:04

That’s awesome. That’s awesome. So Brent, your students. In the success you you mentioned everybody’s having in the success calls that I’m curious how much of the success that your your students are having? Would you relate to a system you have that you I’m assuming you have a system that you introduce people to versus just their umption or their want to, you know, their their drive to succeed?

Brent Bowers 33:30

I love it. Yeah, every every student that comes in wholesaling, Inc, student or land shark student, we all want to make money. But that motivation goes away as we make mistakes and spend money and we’re not getting the phone calls. We don’t do a deal within you know, 45 days and the next shiny object comes around or our mother in law says why are you doing that? The problem is, is like we all go back, we all regress to the mean, we all go back to our old habits. But the systems we build with land sharks, it’s a community. And if you stay plugged in, you listen to the wholesaling, Inc podcast, you hear the winds that are constantly happening. And I was the reason why I know this so well is because I was one of those students back in 2016. Every single day on the way to work, I would still listen to the whole selling podcast. And I just wanted to hear that John and Sally, that Korean carry Rhema that Brent Daniels was still having success because even though I had had already I had already had success in real estate already and multiple properties by 2016. It still was not solidified in my mind that I could do it. Yeah, maybe they can do it. But every single day I needed that motivation. It’s like taking a shower. We got to still bathe every day. If we don’t want to stink sometimes multiple times a day. It’s like working out you can’t just go to the gym once a month. So What is that? And two is a system that you plug into, and we show you what to do when to do. We’re not We’re not educating you. We’re directing and giving you action steps and then we’re there. The system to when you hit the roadblock, when you hit the probate problem, or the financial or the legal issue to walk you through, okay, yeah, we’ve been there. Here’s what you do now, type thing. So it’s 100% of systems, and not just someone just wanting to make money because we all eventually want to make money. That’s why we that’s why we go to your YouTube channel or listen to this podcast.

J Darrin Gross 35:36

And another curiosity of your students. How, what’s the average time it takes for somebody to get their first deal?

Brent Bowers 35:46

Yeah, I want to say the average, you know, I wouldn’t say it takes about four months or so for most, have I had guys get make money in 29 days? Absolutely. has it taken some a year? Absolutely.

J Darrin Gross 36:02

Hey Brent, if we could want to shift gears here for just a quick second. In the in mentioned it before we started, but you’ve been on here before, it’s hopefully, you know, the drill. By day, I’m an insurance broker. And I like to ask my guests you know about risk. And as a an insurance broker, we try and, you know, do some risk manager, we try and assess the risk can determine what to do with the risk. And there’s a couple different strategies we typically try and employ. The first is we look to see if we can avoid the risk. When that’s not an option, we’ll see if there’s a way we can minimize the risk. And when we can’t avoid or minimize them, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests if they can come take a look at their own situation, could be their clients, the market? You know, interest rates, however you want to frame the question the answer. But if you can take a look at your situation and consider what you can what you see as the biggest risk. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Brent Bowers, what is the biggest risk?

Brent Bowers 37:26

I think the biggest risk is me dying. And my children and my wife getting taxed to death with this real estate that they’re probably going to sell because I didn’t set up a plan with trusts properly. I didn’t have proper life insurance, like it talks about this, this great book that I read called, become the Rockefellers and using a whole life policy to, you know, be your own bank. So I think that’s a huge risk. And it’s like, I’m just recently learning about these things and implementing these things, to where I can fund this policy for, you know, maybe I get a chunk of money 10 20,000, I can fund this policy, and now my, it’ll pass to my family tax free. And then oh, maybe I need that 20,000 Later, I can borrow like 90% of it at two or 3% interest. And that 20,000 is still making the 6% interest with the dividends and all this stuff. So I think that’s a huge risk. Business owners not having that and talking to you there and about that sort of thing. Because the Rockefellers set it up to where it passes on. That’s why they still have money six generations later, and the Vanderbilts don’t really have as much money as they used to. So that’s a huge risk, taxes, and death, to the things that we’re all pretty much guaranteed.

J Darrin Gross 38:56

Here, the unavoidable death and taxes. So that’s good stuff. Right? Where can the listeners go if they’d like to learn more or connect with you?

Brent Bowers 39:06

Well, I got a great YouTube channel. If you go on YouTube, and just search Brent Bowers, I talk about this stuff five days a week. I’ve got a video coming out five days a week, and I’m sorry, I just got really excited when you ask that because I’ve been pouring so much time and effort and airplane flights to build this YouTube channel. So I just asked that. Please subscribe. Even if you don’t like the content, just still subscribe.

J Darrin Gross 39:32

I will make certain that that happens for me anyway. I always enjoy Yes.

Brent Bowers 39:36

God to your channel. Yeah, no.

J Darrin Gross 39:39

return the favor. Brent, I can’t say thanks enough for taking the time to talk today. It’s always a pleasure. And you you bring good information. And I appreciate that. Hopefully we can do it again soon.

Unknown Speaker 39:54

My pleasure. Thank you. God bless.

J Darrin Gross 39:57

All right. For our listeners. If you liked this episode, don’t Forget to Like, Share and Subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks, CRE PN Radio.

Announcer 40:14

You’re listening to CRE PN Radio. for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio.

Building Technology Internet of Things with Marc Pégulu – CRE PN #355

Marc Pégulu 0:00

General Purpose of Internet of Things is about collecting some some data, process the data and then act. So you build an intelligence based on you know, objective set of data, you may compare them to certain profile of usage or an expected usage and from which you can make more intelligent decision, whether it’s about routing, or it’s about automating some operations in, in, in a building. So, when it comes to, you know, commercial building, there are different type of applications, which could be, you know, in the category of having a reduction of the operating cost of the building. That’s one key type of applications. And the second one would be, I would say, relative to the wellness of occupancy or in that case, for instance, and commercial building wellness of employees. And because there is a strong relationship between this notion of wellness and of course, the motivation and as a consequence the efficiency of employees.

Announcer 1:05

J Darrin Gross 1:24

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Marc Pégulu. Marc is the Vice President of Internet of Things product marketing and strategy for Semtech Wireless and Sensing Products Group. And in just a minute, we’re gonna speak with Marc about the IoT of things with commercial buildings, and how low raw sensors are being deployed to help builders, owners and residents overcome some of the biggest challenges for smart applications with commercial buildings.

But first, a quick reminder, if you’d like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. And you can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Marc. Welcome to CRE PN Radio.

Marc Pégulu 2:56

Hi there. And thank you very much for having me with your podcast. And I look forward to our conversation today.

J Darrin Gross 3:03

Well, I’m looking forward to our conversation as well. Before we get started, if you could share with listeners just a little bit about your background.

Marc Pégulu 3:10

Yes, my pleasure. So I’m an engineer by nature. You know, I came up like any engineers quite interested in solving problems. My speciality has been wireless and sensing from day one, I’ve been working in several companies in the semiconductor industry on sensors of connectivity. And with Semtech we thought that there was a huge, I would say opportunity to bring a new type of connectivity. It was back at a time in around 2015 People were starting to speak about this kind of World of Internet of Things or IoT. And we say where you know, we think that this type of market will require something new, something entirely low power, very low cost, the type of connectivity and this is where we come with this technology named LoRa, which simply stands for long range. And then we worked very closely with the ecosystem to build an alliance called the LoRa alliance to promote an open and free communication standard.

J Darrin Gross 4:26

Now I heard the LoRa is long range. The The other thing you’re talking about the last part that didn’t quite get that what was that you’re saying is for

Marc Pégulu 4:37

The low power, probably the low power part is very, very important. So what’s one of the key element and the other part is about having an open communication platform so you need you know,

J Darrin Gross 4:49

Okay, open so an open platform

Marc Pégulu 4:51

Is like yeah, like Wi Fi. For instance, you know, you want a protocol which is open so that anybody can can work separately and have a level of interoperability

J Darrin Gross 5:02

Now that that’s, that’s definitely music to anybody who’s trying to, you know, connect things, I find that everyone’s got their own platform, and you’ve got different entry points and, and nothing can speak to each other. Yeah, that’s the, that’s the point where sometimes I want to just undo the whole computer thing, because it’s like, I thought this was supposed to be single entry input, don’t just put it in one time and use it. But that’s great. So let’s talk a little bit about the Internet of Things in commercial real estate, what are some of the the points that you have identified, that can be controlled or measured or can can integrate with the Internet of Things? Yes.

Marc Pégulu 5:46

So the general purpose of Internet of Things is about collecting some some data, process the data and then act. So you build an intelligence based on you know, objective set of data, you may compare them to certain profile of usage or an expected usage, and from this, you can make more intelligent decision, whether it’s about routing, or it’s about automating some operations in, in in a building. So, when it comes to, you know, commercial building, there are different type of applications, which could be, you know, in the category of having a reduction of the operating cost of the building, that’s one key type of applications. And the second one would be I would say, relative to the wellness of occupancy or in that case, for instance, and commercial building wellness of employees, and because there is a strong relationship between this notion of wellness and of course, the motivation and as a consequence, the efficiency of employees. So, we try with the Internet of Things, indeed, to bring this kind of birth world of technology to a simple way enough so that it makes sense for people, it makes sense for corporations and we see is already a key element of what we are doing together with with the ecosystem. And of course, I would be happy to give some examples of type of applications if you want to,

J Darrin Gross 7:15

I was going to ask if you could identify some of the points that you’re monitoring or that you’re able to control.

Marc Pégulu 7:22

So, the typical typical examples would be for instance, anything related to air quality, and it’s especially important for indoor operations. So, how do you determine air quality in general you measure different parameters such as temperature, humidity, but also some specific gases like co2, and all of these you know, there are a lot of correlations between those different parameters and what you can call air quality has been seen during the last two years or so, with all the consequences of pandemic with COVID where it has been proven that you need to renew the the air quite often and the industry came to a realization that actually did not have enough sensors to properly make a determination as whether a specific home got the hair renewed, often enough. So, now, you know if you have a very cheap way to deploy sensors and collect regularly this data you can bring I mean the expected level I would say of feedback and and safety for for employees to air quality is a big one. Then you have things like customer satisfactions, right so which could be for instance about a feedback you know, you you collect a feedback with a traditional red green, yellow smiley face type of button, that’s fine but it could be also when you go to the restrooms you want to notify that you know something is not right and you would like to cause the cleanup company so all this kind of information is just you know to make sure your time at the office or in the commercial building a little bit more pleasant or so when you come to a place right you know, it’s nice to know that you can pack in Fiat directly to the right place to park but even better. So, this is what we call smart parking. And smart parking is based on some Proximity Detection sensors which basically you know, will give real time information as well as our place is occupied or not. And you could before even entering the parking get access to within permissions and be directed exactly to the right this may be your last one because there are a lot with be related to anything which is related to building damage. So I take the example of one of our office actually at Sam tech here in in San Diego we got leak damage during the time of pandemic. So know people from time taking the building and then we discover Like a few weeks later, that actually the tenant above us a leak. And we had a whole flow of kind of damage. And that’s super expensive from an insurance point of view, where what if you had? And now we have because we learned our lesson, what if we had some leak detection sense of everywhere in order to be alerted immediately? And, you know, to mitigate the risk and the cost for everyone?

J Darrin Gross 10:25

Yeah, that last one you touched on, I’m very familiar with insurance companies are really kind of keying in on that, you know, recognizing, whatever forget to call them water bugs, or whatever. But there’s, there’s a way to detect if there’s water where it shouldn’t be and then to turn off the supply to, again, to minimize the damage. It’s going to ask you, you know, on the on the air quality one, is that something that that has always been a point of measurement, or is that something that really kind of grew during the pandemic has that been something you guys have dealt with

Marc Pégulu 11:01

It’s grew significantly during the pandemic, I think temperature definitely and humidity have been constant measurement measurement point, but the co2 or ozone gas monitoring is new. It came up with, you know, it was, it was a little bit before the pandemic, but the pandemic bring, I think, the real value, immediate value, I would say to everyone, because it was short term and high risk immediately. But we we’ve seen that also in schools, for instance, we see a lot of schools now deploying those kind of co2 sensors, in order to make sure that the kids are being in a proper environment to run. And I think people are starting now to integrate this type of information to their daily life, and how to, you know, how to best use I think this is normally information everyone should have. We never paid attention to that before. But I think it’s going to be more and more, I would say, in in our way of, you know, thinking about how we should live, right?

J Darrin Gross 12:01

Yeah, no, I get it. And it makes complete sense. I was just, it’s kind of interesting, some of the, of the data points that are being collected and or the just the awareness of it, and even how, you know, the proper levels affect one’s experience, and where you can feel, you know, more alive, awake, and you know, you can affect one’s just enjoyment of the situation or the space by having, you know, better air quality there, as opposed to perhaps they didn’t even know they had poor air quality. Yeah,

Marc Pégulu 12:40

I think people didn’t know. And they, they think we see a trend or so you know, curious about as, you know, as a citizen to be a little bit more empowered. And I think empowerment comes or so can be helped with knowledge. So if you’re not aware of certain things, actually, you feel a little bit more empowered, and you know, you have a voice, your voice matter. And I believe corporations are integrating this more and more. You know, everybody, we hear that all the time, right, the first asset of a company is its employees, and being able to deliver, you know, this clear message to the employee that the company you’re working for, is taking care of that for you know, they may give the gift. Right, right. And definitely, we see a lot of impact, positive impact and motivation of employees.

J Darrin Gross 13:35

Right. Now, the the kind of curious, is the drive or the interest for these products? Is it coming from the building owner? Is it because it coming from the the the control industry, meaning like if it’s the HVAC industry or or the construction industry, or is it coming from the the tenant occupier, expecting these things to be present?

Marc Pégulu 14:06

I think that’s a very good question. And once we think that it comes now, because it’s related to the people and the occupants, it’s more the tenant actually, which is driving this kind of consideration. So maybe I can take the example of some some companies like Capgemini, which is a pretty large consulting service company is using our raw technology actually, for the building. We live we have about 400 buildings worldwide, pretty large specifici. And, you know, what’s driving them is for instance, optimizing the occupancy of the building. So it’s both about making sure that you know, there are not too many offices which are left unoccupied, but also making sure that if you need a meeting room, the meeting room is available when you need it. And when is not no conflict. And the the figure that, you know, he’s on the first case about occupancy, they could save six significant money, right they have a yearly budget of 300 million euro. And what they can save is, you know, you’re only 45 million, so it’s, you know, a bit more than 10%, the kind of savings, so which is very significant for a small amount. In that case, it was 6 million, your whole kind of investment to equip the building. And you get an immediate, I would say a payback on that. But this is a tenant in obviously, for themselves, because they want to optimize their space. It drove I would say this aspiration to reduce the cost and implement IoT technologies. For others, when it’s more related to wellness or health safety. Again, I think it’s company companies and tenants were basically making certain level of promise and our safety promises to their employees, and they have to deliver. So they’re asking, working quite often with, you know, the owner of the building to make sure that the building is properly equipped as well to to accommodate those kind of technologies.

J Darrin Gross 16:18

No, I appreciate you going through that the you find that predominantly, this is a commercial office, space wareness application where the market is, where are you finding it in different asset classes as well?

Marc Pégulu 16:36

We see a lot of traction in the commercial building right now. I mean, offices, definitely. That would extend that also to factories, factories as a tendency and warehouses as well have a tendency to include also some other considerations like safety. So we see for instance, panic buttons type of, of things, as well, in association to the oneness, in operation of operational optimization of the building. So these are the primary segments that today we see.

J Darrin Gross 17:19

You mentioned in the office, they’re talking about, like the conference room availability, and that, you know, made me think just for a second, you know, kind of the whole on the hospitality side of things with like the Airbnb and how they’ve, you know, created all these entry exit, things that are no touch, opportunity, and you can schedule, you know, you’d go on a calendar and pick the address or the place you want to stay and put it on electronic calendar, and you’ll be in and it will give you a code prior to entry. And as soon as you’re out and somebody else will come in and clean it for the next person. And I mean, it’s all very low touch kind of thing. Given kind of the reset that COVID is in, I don’t know that the the the ink is dried, as far as writing the story on on office space, post COVID, I think that there’s still kind of a, some sort of a, you know, a hybrid that’s that we’re in right now. But but, you know, pre COVID, this the the shared workspace was was a big, big thing, kind of the WeWork model. did, I would think they would would your your technology, not even kind of offer for a shared workspace to really implement some controls there would that be? Am I thinking long term?

Marc Pégulu 18:55

I think keeping it right indeed, because you have, for instance, with see usage of the technology associated to some low resolution camera for people counting. So you can count how many people are getting in or out. So it’s about preserve presence detect in general, which is one of the key elements in the to you know, make valuable a shell the aesthetic shadow shell building. We think anything which is indeed, related to security system, so you mentioned that Airbnb, obviously, you know, there is a lock here, this is one of your key and toughest to enter the place you have rented. You need to make sure that indeed you have the place has been properly locked as well. So it’s very convenient for the owner of the press, actually to our first kind of monitoring information. And obviously the technology I mean don’t exist as a technology in itself. And I would say independently of the sensing and the control mechanism, what you mentioned about delivering a new card, and then three cards all the time to the user fits into that right fits into this big picture. Where the technology comes into play this type of fire to technology, while it’s between, you know, at some point, you need to communicate with your luck with new information. And this is where more or less, it’s, you know, it’s the most common way actually to communicate between the lock itself, and whichever intelligence deliver or selectors and you got to enter. So but it’s a good good example that you gave, actually, I would agree with you that we are returned bitter still early in the phase of a post pandemic, to properly understand how companies are going to manage shared workspace like we work and others, we do see that it seems actually that they took the time to properly reflect on how they should equipped the building of their offices in order to anticipate the back to office in in a safer way. And what has been blocking so far a little bit, the installation is just manpower work. So it’s just a simple thing to allow people to go to the office to install devices, but the business case is definitely here, the desire and the budget here. And we see now that as people are allowed to get back to office, so are the maintenance people capable of installing in a simple way it was it was devices. And as a user, of course, you want that, right, you want that your building has been equipped with this kind of flavor of, of knowledge to make sure that you don’t enter an overcrowded press, you want to know that the press, the Office of the meeting room is free, right when you get into that, and that, indeed, that the air quality has been renewed. And that’s a safe place to come and maybe to bring your customers together with you.

J Darrin Gross 22:06

So let me ask you this question, because this is the the question I’ve always had with doing all these things on my phone or you know, however, and I get get that the capability of all of it exists and when it works, it works great. What is the the concern? Or how do you compensate for the the what if a network goes down? Or there’s a there’s a gap somewhere or there’s some sort of a could be a cyber thing is there is there an effort to is there any redundancy built into these to where you know, you can avoid any kind of you know, downtime or non operational time?

Marc Pégulu 22:54

So, yeah, I think you bring up a few good points. So, the first thing is of course, we want to use as an interface what people are used, you know, which is a you interface with your smartphone. So all those technologies are compatible, because in the end, we see data processing and internet and you’re using this interface this interface is also used for crafting quite often. So what happens you know what could happen right the first the first thing is any kind of communication is extremely encrypted. So you want to make sure that the there is no data privacy kind of concern. So that’s the first element then most of the information which is communicated is is a sensor information. So it gives you an additional information. It does not necessarily for instance, lock you out of a building or something like that, but it gives you an additional information remember what we spoke about and governmental information. But if you don’t have this information, you know you may not be happy. But you know, it’s it doesn’t prevent you save from using the premise Sam for early detection or something if it doesn’t work, why it means you know, you may have some risk for given you know, given time until this is repelled. But the good thing is that you are you’re alerted that something doesn’t work. So we see you get it and the reason why you get this information is like you pointed out it’s very easy to build a redundancy with this type of technology. So I started we started by saying you know we are working on this technology of Loja which is long range. And this is really important. Now because there are things you can and things you cannot do with short range technology. And building redundancy with short and short Tange technology. It’s very complicated because it means you need to install an infrastructure or dense infrastructure which is absolutely not compatible with economic concepts. With loha Actually, you are in studying almost like it’s like a Wi Fi hotspot except that you get a super long range something like 20 or 30 times longer range than Wi Fi And it enables, you know, with a few gateways in the building to cover with redundancy every corner of the building. So even if a gateway goes down, that’s fine, actually, you know, you will get another gateway. And interestingly, so let’s imagine you you lose, you know, power into your building, where actually your sensors which are battery operated could be received by what we call the lower one public network. So one of the elements which is already important for us is that we offer the possibility to ecosystem to deploy your network as a private network, like Wi Fi in your building, but also as a public network. So you have companies like, you know, mobile network operators, or cable network operators who are providing local one technology from outdoor to indoor. So your device can be received or so as an information as an encrypted message by outdoor hotspot router, or gateways, which don’t belong to your building, but you know, you can, you can subscribe to this service, my building is down, okay, I want to know what’s going on into my building. Okay, I can work, for instance, with a company like Comcast, to get my low one data and understand what’s going on, even if everything is is shut down in my building. So this is very, very powerful in terms of consultancy.

J Darrin Gross 26:24

Got it? So let me ask you, does this work better? Or can you do it in both new construction versus like an existing building? Upgrade?

Marc Pégulu 26:38

So you can do both? There is obviously no, no problem, I would say does it make a big difference? In general, if you do it in a new building, you can plan for it in a slightly better way. But where we see the business, I would say a putting us is actually in the retrofit, because there are quite a lot of buildings, you know, who have not been designed actually for these kind of new technologies. They don’t have, for instance, wires in order to connect sensors. And the only possibility is to install Wallace. But we operate in devices, they don’t have power, they don’t have cable, it’s so that’s the only way there is no no alternative. So that’s why we see quite vibrant demand in this type of retrofit Bonfield if you want in terms of building because, you know, you’re not going to deploy cable, it’s just too expensive. You want the lat Wallace is a very elegant way to get there. So both are possible. But you know, it makes sense that the market looks at the retrofit first for its base type of technology.

J Darrin Gross 27:47

Current given that this deals with some energy conservation, I would assume you you kind of fit in some of the funding sources that are available. Do you find that building owners that are looking to utilize you know, any, any of your, your your products? Or is there their funding available through any of these green initiatives that can help offset that the cost?

Marc Pégulu 28:18

Yeah, so totally. environment in general is one of the primary usage of IoT type of, of technologies. And NLG is quite often a primary driver, I would say, you know, quite often from an operation, expenses perspective, but also more and more for environmental concern, more and more companies now, you know, are working towards this kind of promise to be almost carbon neutral. And Semtech wants to, obviously, to encourage and I think we fit very well, with this notion of you know, we can help you deploy a better intelligence in a much more granular way, at a low cost with, you know, very, very low energy device, a battery operated device for all I can work for 10 years without any problem. So, that’s really important because, okay, not only you don’t need to connect to the power and you know, overuse, easy analogy. But also, you don’t have to replace the battery. So there is this waste management of a battery. Which means, you know, it’s not just about recycling the battery, but it’s also about sending somebody to change all those batteries. Imagine, you know, a building equipped with 1000s of sensors, if you need to get someone you know, every couple of months to change those batteries. If that customer outrights I mean fuel to get there and that’s just not workable. So, we he that’s why low power long range goes together, low cost for infrastructure, low cost of maintenance is very important and actually it’s so much low power that we to see in the very near future that NLGI investing is going to take over and potentially replace a lot of the of the batteries. The solar energy investing is about you know, using natural energy, which is number one on my mantle variable energy like light instance, in order to power your devices. And this is possible with this type of robust sensors, we see for instance, that even with say, no relatively dark office now, we can use very efficient solar panels to power you know, all all the requirements you need in terms of sensing and communication for for sensors. So, really important. So, you know, by giving this power of blinking sensors, everywhere, you can control light, make sure that lights is not left on, you can control the temperature to make sure you know that AC is not operating, while there is nobody in the building, all of that, you know, goes together. And, you know, in the end, this is really what we are trying to bring as a contribution as well and outside for better environment better social gospel value for the company, all the all the work.

J Darrin Gross 31:11

Is there any kind of a study you guys do like before or after, and kind of a, an energy savings or some sort of a cost savings estimates that as part of the sales process for the building owner to, you know, justify the the numbers or

Marc Pégulu 31:31

So, yeah, VCs indeed are something that are, I would say, technology user are doing. So Semtech, you know, as a technology provider, we provide one one piece, an important one, but it’s not the only one, which is a connectivity. But our direct customers indeed have this kind of study about savings of energy in different building. I don’t have one specific example right now, but I, you know, I on top of my head, as she you know, a lot of water savings in the range of 30% saving. And same for this kind of electricity saving. So, you know, this is the order of magnitude, the magnitude that we get quite often from a former customer when they make the study. And you’re right, we, this is important that they communicate in both terms to building owners or tenants. Because you know, nobody, you know, really care so much about the technology itself. I think in the end, they want to understand what’s the impact of that. And so we prefer, you know, to let our ecosystem where we say, you know, their specialist about the abdomen, they speak about that. And, you know, we’re here on the technology. So probably, they’re in a bit too harsh, but I would love indeed, to share with you as a follow up some detail, poor savings, and that he sees men by the ecosystem.

J Darrin Gross 32:51

And when I’m certainly just thinking about it, when you say 30%, I would think that’d be pretty easy to obtain, just based on controlling the temperature. You know, when during times when nobody’s there, we’re, you know, controlling lights and stuff. So makes a lot of sense.

Hey, Marc, if we could, I’d like to shift gears here for a second. As I mentioned earlier, by day, I’m an insurance broker. And as such, I work with my clients to assess risk, and determine what to do with the risk. And there’s three different strategies we typically try and consider to see if if we can’t, you know, mitigate the risk. The first we look to, is to see if we can avoid the risk. And if that’s not an option, then we look to see if there’s a way we can minimize the risk. And when we are unable to avoid nor minimize the risk, we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests if they can take a look at their own situation. Could be the technology could be the marketplace could be government, politics, interest rates, you know, however, however you would like to frame the question and answer with respect to the biggest risk. So if you’re willing, I’d like to ask you, Marc Pégulu, what is the biggest risk?

Marc Pégulu 34:27

So, you know, fall for what we talked about today, I would say for for us, the biggest or biggest risk would be having, I would say the wrong awareness or for low awareness about the technology and what it can do. We think that we have really a unique and huge opportunity in this law technology. We are extremely happy to have the opportunity to speak with you. For example, because you are helping us, I would say, to make sense to give a purpose to the technology itself. And this is the awareness I’m speaking about. Today, we are already, you know, willing to make sure that we are not seen as just, you know, new technology, you know, to always push the limit of the technology. We want to make sure that our customers and their customers understand that they have at hand now, technologies capable of bringing much more environmental friendly type of building and more social responsible type of building for their customers.

J Darrin Gross 35:39

Sounds good. Marc, where can listeners go if they’d like to learn more or connect with you.

Marc Pégulu 35:47

So I would really encourage them to connect is up to the Semtech website, or to some of our social media posting, which we do for instance, on LinkedIn Semtech , as as you know, is a sharing quite often some information I do share as well myself. And either way, I would be happy now they can contact me for some type of UI directly for my LinkedIn profile. I would be happy of course to share anything, you know, any answer any question that your audience would have.

J Darrin Gross 36:26

Right? Marc, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it thoroughly and learned a lot. And I hope we can do it again soon.

Marc Pégulu 36:37

Thanks a lot Darrin it was very inspiring for me also to put technology in the context of end users and knowing your background, as an insurance broker is definitely quite interesting for me.

J Darrin Gross 36:51

I appreciate that.

Marc Pégulu 36:52

Thank you.

J Darrin Gross 36:54

All right, for our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 37:13

You’re listening to CRE PN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio.

1
2
3
…
37
...Next Page

RECENT PODCAST INTERVIEW