J Darrin Gross Podcasts -

Learn Apply and Grow Rich in Real Estate with Roland Gib Stewart – CRE PN #408

Roland Gib Stewart 0:00

What happened was, of course $10,000 Even in those days wouldn’t buy you a 14 unit complex. So I picked up the phone and I called a number of friends. And all five of them loaned me money. They loaned me from anywhere from $3,500 to $5,000. My college roommate said that $7,500 to own a percentage of the building and we bought it bought the complex. Now the big the big hit came about 15 days later when they said you’re going to be late with your first payment that’s gonna hurt I don’t know where I’m gonna find that money. Buy a home mortgage for myself to the hilt.

Announcer 0:48

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 1:07

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 provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk. When you invest in real estate, it pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts had Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more go to Building Insurance Risk.com.

Today, my guest is Roland Gib Stewart. Roland is an investor and a recently published author. He and his ex wife started with to $285 and have built that to $30 million in real estate and is still going and in just a minute we’re going to speak with Roland Gib Steward about how you can build wealth through real estate. But first a few reminders. 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 our handsomer guest arm, be sure to check out our YouTube channel. You can find us on youtube bad commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Roland Gib Stewart, welcome to CRE PN Radio.

Roland Gib Stewart 2:56

Thanks for having me there.

J Darrin Gross 2:58

Well, I’m looking forward to our conversation today. I’ve known you for a number of years. And I’m excited for the listeners to get a chance to know you as well. But before we get started, if you could take just a minute and share with the listeners a little bit about your background?

Roland Gib Stewart 3:16

Well, my background is pretty varied and you’re in reality but I lived in. I grew up in most of the major cities on the West Coast. My father was a medical supply salesman, who was also Army Reservist. And as born in Seattle, most of my growing up was in Portland, Oregon. Then I went to Los Altos, California for a year, and then graduated Santa Monica High School and went to Willamette University ran track. I also played a little basketball, but that was ruined by some so I got ended up in informer infirmary, then army, United States Army officers candidate school, my orders to Vietnam were canceled 24 hours before I got on the plane, which I was very thankful for. Got out of the army toured Europe for three months and then tried to find a job, which was actually very harrowing experience.

J Darrin Gross 4:27

Well, let’s talk about how you got started in real estate. And what you know what, what was the first first thing you did? Or how did you decide that real estate was a good thing to invest in?

Roland Gib Stewart 4:44

Well, we, we had built up to $10,000. And we started to decide we needed to do something. And so we got an account with Merrill Lynch and had a very good stock broker that grew That’s it probably 12 or 12, five. And then he went to manage one of the, I think it was a Berkeley, one of the U Cal Berkeley investment funds. Very nice promotion for him, but he heard us, we got a new guy on the block. And he drove our account to exactly $0.00. So the next time we built $10,000, was kind of by accident. I actually had a reasonable job by then. And Bonnie, my ex wife got a very good job. She was a tire batteries and salesperson for Chevron USA. And by the end of the year, we did a draft tax return about November, we said, oh my goodness, we’re gonna owe the government $10,000. So she turned to me and she said, What can we do about that? And so we buy real estate. And so we went out and looked at all sorts of things. We started with single family, and then we moved to duplexes and triplexes, and we finally ended up buying a 14 Plex in Southeast Portland.

J Darrin Gross 6:20

Wow. So did you did you actually buy single family properties prior to that? Or did you just look at them?

Roland Gib Stewart 6:28

We just looked at him.

J Darrin Gross 6:29

Okay. Okay. And how long between the the November

Roland Gib Stewart 6:32

We tried to mitigate our risk Darrin.

J Darrin Gross 6:34

Yeah, no, I appreciate that. I get 14. Yeah, well, with a $10,000 bill to the government, that’ll make a lot of I mean that, that’ll get your attention. Yeah, make you want to see what else you can do there. So I get it. So. So from like, November, when, when you were doing this kind of pre tax planning kind of thing to when you actually bought the 14 units? How, how much time are we talking,

Roland Gib Stewart 7:03

I’m pretty sure we got it finished by the end of the year, because I don’t remember, write the check.

J Darrin Gross 7:08

That’s awesome. So you were able to accomplish it.

Roland Gib Stewart 7:11

But what happened was, of course, $10,000, even in those days, wouldn’t buy you a 14 unit complex. So I picked up the phone. And I called a number of friends. And all five of them loaned me money. They loaned me from anywhere from $3,500 to $5,000. My college roommate said that $7,500 to own a percentage of the building. And we bought it bought the complex. Now the big. The big hit came about 15 days later, when they said you’re gonna be late with your first payment. That’s gonna hurt. I don’t know where I’m gonna find that money by the high mortgage for myself to the hilt. So I took the city bus over to their office. And I said, I said, I can’t I can’t pay this. Now what is there anything we can do it? And they said, oh, we’ll just put it on the end of the contract. So so another person loaned me $2,400. So I was really a debt.

J Darrin Gross 8:24

That’s, that’s funny, the kind of the lessons you learn. So, your, your beginning sound very similar to mine. And I’m sure many others that I’ve talked with and others that are maybe listening. And that just absolutely just stretching as far as you can to to get the deal done.

Roland Gib Stewart 8:46

To do something, right.

J Darrin Gross 8:47

Yeah, to get to get into real estate. And so once you got in, how long did it take for, you know, there to be cashflow or to recognize that there was an upside and that you’d made a good decision. And it wasn’t, you know, he wasn’t going to continue to be you know, stretched from from limb to limb.

Roland Gib Stewart 9:12

So we were probably full for 24 months. So things look pretty reasonable. Then I had my first move out. And that was a breakout, I had to take a garden rake and rake it out because there was so much litter on the floor, and then I could vacuum it. So that was an experience that I said, Okay, if I can handle this, I guess I’m probably going to be able to handle this thing. And and then our second move out was a move out in the middle of the night. And Bonnie was in a law class for her Master’s. And I ran back downtown and I said, okay, the Prophet said you can ask any question, and he won’t charge if it’s in class, ask him what I can do about this. And he said well She came back out. And she said, he said you could help her move out. Well, that was a rude awakening. So no, right. So my first two move outs. And then then the, the ad recession, of course, hit us badly. And I spent a number of weekend days out on the street waving, waving balloons and or holding on to balloons and waving to people trying to get a move in. I posted notices all over Southeast Portland, and we survived.

J Darrin Gross 10:36

So you had the 14 Plex? How long did you end up keeping that?

Roland Gib Stewart 10:43

Oh, 22 years? Maybe?

J Darrin Gross 10:45

Okay. So quite a lot. That’s a

Roland Gib Stewart 10:47

Plus or minus? Well, we let it pay itself off.

J Darrin Gross 10:49

Sure. And then did you acquire additional properties? Or how did you

Roland Gib Stewart 10:56

Partway through that. Partway through that maybe eight years, maybe 12, somewhere in there. A friend of mine who was in real estate called and said, my business partner needs to sell. And all he wants to do is cover his costs to get out of a duplex. So we bought a duplex out in Oregon City. And so now we have two properties. And then short while later, something came up. Oh, I know, I had to move to Pendleton. I, I became the state labor economist for Northeastern Oregon. And so we were kind of, I didn’t want to own long term out there, I bought a house for us. And so there wasn’t much going on there. And then I went back to the director’s office, the Human Services was a budget analyst and Salem, and then I was free again. And when things came up, people wanted to sell I was a, I was a good target of people wanted to sell I was we we kept accumulating money, which was kind of mostly the way we were brought up. Bonnie was brought up on a farm, he never knew when the crop was gonna come in. So they were always living on a budget, and I was real malleable. She taught me how to save really early on, I still do.

J Darrin Gross 12:30

No, that’s, that’s a good, good habit to have. And also, you know, it’s a good a good opportunity when somebody has to sell or wants to sell, as opposed to the people that really don’t want to sell I think a lot of times what you see in the marketplace is somebody that wants a price, but they don’t really want to sell kind of thing. And if you’re trying to underwrite a deal. It’s it’s important that you know, what, what the numbers are, what numbers you can offer, and what makes sense, as opposed to, you know, somebody that doesn’t, and not offer more than what you can offer. Right kind of thing to make it work. So, so you started off, you got the 14, you’ve added some additional properties. At what point did you venture into other asset classes? Because I I’ve, I’ve known you for a number of years now and I know that multifamily is not something that you’re right. I don’t believe you’re currently in Are you still in any multifamily?

Roland Gib Stewart 13:32

No. Mostly family? No. I think we may have one. I think we’re down to one single family. Rental.

J Darrin Gross 13:43

Okay. So so what was it that what what was the the impetus for the, the the reason you exited that and, and for the most part, I got out of that and gotten to more of the what I know you do a lot of the the medical office and also some office slash retail, but what was it?

Roland Gib Stewart 14:09

Luck, luck and luck.

J Darrin Gross 14:09

Luck, luck and luck. Okay.

Roland Gib Stewart 14:13

So, I was we we were worth a million dollars that when I was 48. So I decided I wanted to retire at 50. So I retired at 50. And then a dentist friend of mine asked said, You’ve been in real estate a long time, can you help me find a place where I can expand my dental practice? So I did that for almost a year and we never found anything. In those days, dentists offices let out a lot of not very good smells. And so most landlords wouldn’t let to him or wouldn’t rent them out. So after about a year of that, the dentist was driving home and saw a vacant lot next to a Fred Meyer. And we Bonnie and I did a 1031 exchange and bought that. And then we went out interviewing developers. And after interviewing the third one, we were on the way back to his office to drop him off. And he turned to me, he says, I want you to develop this. And I said, Who me? Like, like, I have any idea what that would be like. And he went through and he said, you’ve negotiated contracts for 10 years, you’ve done this, you’ve done that, you can do this. So we decided we would go ahead and try that. And and if I failed, we had the guy identified. In those days. I think it was all guys, all three of them. Were guys, we identified the one we would go call and say, Hey, can you bail us out of the struggle. And it ended up being a homerun. So it’s like, somebody told me once, if you hit a homerun on your first one, you hit hit button singles and doubles and triples for the rest of your life, and you’ll be in great shape. So we were very fortunate.

J Darrin Gross 16:18

So you, I didn’t realize that you’d actually developed that, that that when there by the Fred Myers. So developing, I mean, what was the what was your experience there? I mean, that’s, that’s a different, you know, different exercise than just buying and operating what was tell me a little bit about the development experience.

Roland Gib Stewart 16:39

I was, I was totally lucky. So we went out interviewing architects, we found David Welsh. We walked into his office, it was like a third or fourth office we walked into, and the guy had real modest furniture and did edit. And we said, this guy thinks the way we want him to think right. And so we hired him. And he did a phenomenal job on that building. So that was the first thing I had to learn. And then the next one was okay, now how do you get a contractor, so we had three or four contractors bid. And one of them happened to be the husband of a woman that I was on a church committee for. And he, she told him, she said, You better, you better give, Gib a good price. And he gave us what I thought was a really good price. So we hired him, and the building went up. And we already had the dentist, ready to take two thirds of a second floor and we went from there.

J Darrin Gross 17:51

That’s great. So you’ve got a foothold on the medical office building, asset class. And like I said, I know that you have several other properties. And how quickly after that first one, did you look to expand?

Roland Gib Stewart 18:10

Oh, maybe six months? The contractor, not the contractor that did the building, the contractor that did the dentist tenant improvements. Called me, we went out to lunch. He said, We should build more of these. And that’s what got me back in. I would have been retired the second time I probably would have quit. Who knows?

J Darrin Gross 18:35

Yeah, yeah. So tell me a little bit about the the financing for these. I know that you you and Bonnie were were big savers. And you You did a lot to you know, make sure you had some ability to invest. But as far as the these other properties, what was the dentist? Was he a partner in that that first building Are

Roland Gib Stewart 18:58

We stuck until the end until the when we stopped? Okay, so five guys. The contractor that talked me into doing more David Welsh, the architect Sita who’s now totally retired because I called him on an investment last week and he said, I’m old enough I’m not investing in anything anymore. Now, whether that’s true or that he didn’t want to give me $25,000. Okay, so our contractor, architect, dentist, my army roommate, when I was after we graduated from Officers Candidate School, we went to Kentucky, both of us, and so we decided to room together. It was a CPA out of Florida. And me so there were five of us. We all put in $2,500 in a pot And we started.

J Darrin Gross 20:05

That was it.

Roland Gib Stewart 20:06

That was it.

J Darrin Gross 20:08

And so is far as going forward? I know, development is fairly, well, I guess it all depends on how the bank sees the opportunity. How much did your experience and your success in the the initial property give you credit? Or did it weigh in your success with with lenders and others?

Roland Gib Stewart 20:36

Well, I found a number of banks to be open to the idea that, if the architect drew the plans, he should get credit for that. Not that he would charge us for it, but he get credit for it. And the contractor couldn’t build the building. And the contractor wanted half of his fee in cash, but the other half, because he actually put the building together, got credit for that. So that’s that, I was the developer. And I didn’t want any money at all. So I got credit for that. And then each of the tenants that came in, most of them chose to do their own tenant improvements. So in those days, we were getting 10 or $12, a square foot per tenant, what if you came off the street and you were a regular tenant? The market was saying, you wanted 10 to $15 per square foot. So the bank would write in another line item that says this $15 per square foot was, was provided by the tenants. And then we had our down payment we put the building.

J Darrin Gross 21:47

Now that’s great. So and that’s, that’s basically the way it was put together than the the the each one of the investors were participants at a level of, of effort, which was then recognized by the banks in the in the early going. So is that correct? That’s great. And did you as far as the formal structure of the group, were you? Did you just five partners, each equal partners in an entity like an LLC? Or was there different levels of, of participation?

Roland Gib Stewart 22:33

A lot of research went into how much the architect should be worth, how much the contractor should be worth, how much the developers shouldn’t be worth, etc. And we put those numbers into an LLC, and each of us got that amount of share. It’s an LLC, and it changed over time. By the time it was over. There were only two of us left.

J Darrin Gross 22:56

Gotcha, gotcha. So, in in from the first property to today, how many years have we are we talking about? Me second. I think I probably started the first one and 1998 or nine? So 25 years, I guess. Okay. And, and your strategy, have you sold any of the buildings? Or has it been? Have they all been long term hold?

Roland Gib Stewart 23:39

Long term hold? Okay. And that’s, you know, varies by building who all’s in because not all the tenants came in. And we were really fortunate because we were out of money after the first building. Is $12,500 doesn’t go that far. Okay, so. So we met a group of accountants, they had their own LLC. And I and we were fortunate enough that they decided we had a good plan, and they come with us, and they brought a chunk of money. And that allowed us to build the second building. same premise it I didn’t get paid the architect and the contractor go 50%. By then Barney was doing the books because my army partner came out, looked at the property and he said, This is too big. Somebody’s gonna get greedy and you’re gonna be in Alaska. So that’s the way that went. So we were down to four. Barney should have probably been allowed to take over the barrels share when he bailed out. We never thought that far ahead.

J Darrin Gross 25:00

Sure. So in the so that when the accountants came in, were they again, they were partners in, or members of the LLC, at the percentage based on their participation.

Roland Gib Stewart 25:15

Their participation was based on their needs mound of money, and we gave them for building 234, and five, we just spread the money out among those, and they became LLC members based on those.

J Darrin Gross 25:35

Got it. But there was never, I guess what I was curious to understand, because so much of what I hear when I talk with others is syndication or, you know, JV, or it’s rarely do I hear people talking about just kind of, you know, participating in a long term investment at a level that represents, you know, what the worth, you bring kind of thing or the, the amount of cash you’re bringing. In, you know, as far as the LLC goes, were there any, is there anyone? That’s the general partner? Or is it everybody just, it’s all the members are based on the percentage of that was determined based on the value

Roland Gib Stewart 26:19

Voting, percentage voting.

J Darrin Gross 26:21

Okay, okay.

Roland Gib Stewart 26:23

I’ve told people, anytime anyone wants to bail out, I’m more than happy to buy them out. If the LLC doesn’t. But every time it’s happened, everybody else in the LLC is distributed among the members. Right? So it’s easy, and it’s really easy to form an LLC, as you probably know. And that’s the only thing I was smart enough to do. I mean, when we, when we formed the LLC for the first building. A guy who’s become a friend and has been retired five years, he told me yesterday, drew up the papers for the LLC. And so this is my template, we go forward.

J Darrin Gross 27:12

Ya know, it’s nice to have a template as opposed to having to constantly redo or any, it seems to me a lot of the the simplicity of your structure, it could be part of the secret. Whereas I think a lot of a lot of investors that I speak with, the goal is to get in and then get out. And the attraction is, you know, more of the, if you can get in, you can increase the value, and then you can get out fast, you know, obviously, your, your, your, you know, your return looks significantly greater as a quick hit. But then you have challenges, you know, if you’re, if you’re able to do a 1031 exchange, or if you’re just gonna give most of that back to the government kind of thing. And were you with a long term strategy and the fact that all of your present like the majority of your investors have stayed in the whole time. And had some sort of a, a, you know, a long term commitment to the, to the the plan was there, you mentioned that, you know, occasionally there have been people that have wanted out, and the LLC is has bought their, their shares. Was there any, when you were putting this together, and you were getting everybody together? Was there any talk about what the long term goal was? Or was there ever anybody that was not in the same frame of mind?

Roland Gib Stewart 28:44

Well, I think of the first five people, okay, architect, contractor, dentist, my army roommate, me, I think everybody thought that that was going to be long term. Pretty sure. That positive I don’t know that we ever discussed it. We just put $12,500 in a pot and started on our way. I bought a I bought 12 and a half percent in a film company last week, okay. And I think it’s going to reach not full value. Okay. But I think I’m gonna get maybe a 200 300% return in a, like a three year time period. And I expect by five years, I’ll be 500%. And then I think it’ll probably keep on growing. I mean, the kid that’s running is 32 years old. He has 11 years experience in the film industry, and has developed books. I mean, this thing’s out of sight. So for me, it’s a long term Right, I’m going to be dead, then my kids.

J Darrin Gross 30:05

Right. But the the opportunity, I mean, you, you’re not one that’s always looking to get out, you’re looking to get in and grow something for the ongoing revenue stream. Correct. And I think that see, that’s, I think one of the things that I’ve always appreciated in our conversations over the years is, that’s my mindset has always been to get in. And it’s the long haul, it’s not always been about getting in and getting out, which I find so so many investors, they want to get into real estate, because they’ve heard about all the, the, you know, the big wins that people have had, but don’t always recognize the time that usually is associated with, with most real estate investors who stay you know, there’s a, there’s a big opportunity to win over time. You know, and there’s a lot of the value add, where there was people who were either tired or didn’t keep up with the market. And you know, to bring that up to market, you can, you can do that kind of thing. But, but really long term. You know, that’s always been my mindset. But let me ask you a question about debt with long term investment. When I first started to invest, what I first saw was that if I had a tenant in my rental, and they stayed long enough, whether it was them or them and others, that eventually that the note that I had against that property would be down to zero. And that would be I looked at as like another 401k. And that was the limit of my understanding of real estate. How do you see the use of debt? With with the portfolio, you have partners? Is it. I’m just curious, how do you how do you view the use of debt for or ongoing?

Roland Gib Stewart 31:58

Well, I think I’m coming to that reality right now. Because I basically wiped out all my checking accounts to pay my tax bill this year. That’s the first time I’ve been that low in a long time. So. So I have a feeling next year is going to be tough. So I probably will start accumulating debt. But again, ideally, I have 20 years left, I mean, I am, I have such a good life. It’s unbelievable. And I want to take every day out of it that I can, and if my health continues to be reasonable. And I get to still exercise as much as I like to in a day. And I can still make investments like I did last week. I’m excited every day I wake up. And it might mean that I have to start accumulating debt. If that’s the price, I’m here. And as long as I can stretch it out, make the payments, I’m in good shape.

J Darrin Gross 33:03

Right. And as far as like your real estate it have you had goals to pay off the debt, or have you have you you know, refinanced and done cash distributions?

Roland Gib Stewart 33:17

We’ve done cash distributions, but we have, yes, and almost all of our real estate will have second to last one paid off in three years, and the last one will be paid off in six.

J Darrin Gross 33:30

Wow.

Roland Gib Stewart 33:31

Then everything we have, in all the states is all free and clear.

J Darrin Gross 33:37

That’s, that’s impressive, and I appreciate you sharing that because that’s, that’s something that, again, I think that especially in the low interest rate environment we just came from, there’s a mindset of, of younger investors, newer investors just get leveraged up to you know, leverage as much as you can, you know, and in the short term, I think, if you if your plan is to get in and out, it makes you can make sense of that. But for somebody it’s really looking to hold something for the duration for forever. It clearly the strategy with debt is a different strategy. And, and, you know, you may not get the interest rate off, but you also don’t have the debt payment. So, you know, I appreciate you sharing that because that’s that’s not something that’s that’s something that’s been the that I’ve had, you know, other guests comment on because I think a lot a lot of them are don’t have such a long term hold view of of the situation,

Roland Gib Stewart 34:47

and I just might not be smart enough to do the right thing. I mean, well, the comfortable with that, you know, I do the best I can, as creative as I can be and The I take the risk that I find to be reasonable to me, right? The other day, I met a young man who just seem to be potential potential potential, right? And I asked him where he was going. And he told me and I said, Well, wait, why aren’t you going there? He’s because nobody has any money, which you and I know, is false. I mean, that’s just false. If somebody wants to do something, I can teach them how to get to $50,000 within a couple of days, right? So they got want to do it. Almost anybody can do it. So I said, Okay, you got $100,000 My money? Let’s go do something. So we went out, and we reviewed four different companies decided to buy one of them. And he’s driven the company from 400,000 to $3.2 million over four years. So I mean, it was a lucky, lucky bet. I mean, he could have gone bankrupt, right. But I could have been stuck with another $300,000 worth of debt, because we bought the company for 400,000.

J Darrin Gross 36:09

Wow. Well, but But again, I think the you know, you are, I don’t say you’re unique, but I think you are rare, in that, I think most people, and I say most, most people listening to this, this podcast, are entrepreneurial, or looking to invest or looking for some way to increase their lot in life so that they have more assets, more time, more more cash flow, then they’re financially free. And that’s really the goal of, of, you know, I think most everybody listening here, but by and large in the masses, that’s not, you know, that’s not the case, there’s, there’s always a way to look, look to spend more than, you know, or everything you make and more. And, you know, not understanding that you need to do something beyond, you know, your your eight hour or your 40 hours a week job, where you’re working for for someone else. And so I appreciate you kind of kind of sharing it.

Roland Gib Stewart 37:13

Well, I explained to somebody the other day, I said, hold it, if you really want to do this, and you have $500,000 worth of debt available on your credit card, get the 500 that or the $55,000. Actually, it’s 500. You take the 500, and you do it, and then you make it grow. And it’s up to you to make it grow. And then you pay off that damn credit card, because that’s drowning, you realize that 16 or 18%? And you should be having that money for yourself, pay it off, decide?

J Darrin Gross 37:51

Yeah, no, that’s, that’s, you know, the, the availability of debt is endless. There’s always, always somebody out there looking to lend you money, and recognizing the the cost of that money. And, and, but also, you know, like you just mentioned the opportunity, you know, if you have something you really want, and you believe that you can go forward and improve your situation, whether it be real estate or business opportunity, and you know, that you know, that you can do this. I think that’s more power to you. I mean, because that’s a great. I know, the more I’ve talked with people on on this podcast, and the more I’ve gotten to understand the real estate have also come to understand the opportunity for people that own their own business. And, you know, real estate, real estate is a business, it’s not just a, a rental property. I mean, when you when you’re, you know, especially when you’re buying commercial properties. And, but But there really is an opportunity to grow and improve your, your, your end result for your own personal finances. So I appreciate you sharing that.

Roland Gib Stewart 39:06

I don’t know if it’s true or not Darrin, but to me, there’s a shortage of really motivated people. I don’t know if that’s true, but I surely I keep looking for people to invest in right. And my goal at the beginning of the year was my New Year’s resolution was to start associating with younger people. And so far, I started to be successful in that. I think that’s important to get, get get there and talk to them and learn from them.

J Darrin Gross 39:44

Ya know, definitely. That’s what’s coming in as opposed to what’s already been probably a good good strategy if you’re looking for the future and investing in the future. I believe in Yeah, well, good, cuz we need, we need to, we need to have something positive look forward to. So that’s good. Hey, Roland, if we could like to shift gears here for a second, my day, you know, 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 consider, we first look to see if there’s a way we can avoid the risk. And if that’s not an option, we look to see if there’s a way we can minimize the risk. And if we can’t avoid nor minimize the risk, then we look to see what could transfer the risk. And that’s what an insurance policy is. And as such, I like to ask all my guests, if they can look at their own situation, could be clients, tenants, investors, political. However, however, you would like to identify what you consider to be the biggest risk. And 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, Roland Gib Stewart, what is the biggest risk?

Roland Gib Stewart 41:19

I think right now, the biggest risk is the availability of money. Okay, so we got a lot of money available today, right? So in July, when we, the country hits its debt limit, what’s going to happen? Are we going to all collapse? Is this whole thing going to just the glass is going to break? And we’re going to all be wondering, Can Can, can I really get the money out of my credit card? I want to eat this week. I’m having fun. How do I continue this? So my biggest concern right now is that somebody’s gonna push us over the edge, which I think will damage the entire world’s economy, and our country will never be covered. And I don’t want that for my kids or my grandkids.

J Darrin Gross 42:13

Yeah, no, that’s, that’s a kind of a depressing thought to think about. But there’s a lot of a lot of pressure. And I think the thing that always gets me going kind of frustrated is that how many people have the ability to push it beyond for their own benefit? While I’m not necessarily concerned about the consequences kind of thing, which that’s kind of a personal perception sometimes. But I get it. Roland, we didn’t yet mention you mentioned you’re an author. But tell us a little bit about the book you’ve written.

Roland Gib Stewart 42:57

I brought it over, Learn, Apply and Grow Rich.

J Darrin Gross 43:04

Okay. That’s a that’s a good 123 there like that.

Roland Gib Stewart 43:11

I’ve never considered myself really smart. But when I first got into real estate, I had one heck of a lot to learn. Shortly after I got I got to be pretty friendly with the chief lieutenant for the contractor that sold us the building. And a few months down the road, he says, you just need to know that your two worst nightmares, as long as you stay in this business are going to be keys. And the second one is parking. Yay. Two of my things that haunt me are keys and barking Luckily, I’ve pushed that off on someone else. But let me tell you, those are those are the two things you got to worry about.

J Darrin Gross 43:55

That’s That’s funny. The keys and parking definitely, definitely something to be concerned about. Roland where can the listeners go if they’d like to learn more or connect with you?

Roland Gib Stewart 44:10

My email address is continueforward@live.com And it’s just all spelled out. Continueforward@live.com.

J Darrin Gross 44:23

Got it. Roland Gib Stewart. I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. I always enjoy when I talk with you learned a lot and I look forward to doing it again soon.

Roland Gib Stewart 44:37

Thank you, Darrin. Appreciate it. Take care. All right.

J Darrin Gross 44:40

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

Announcer 44:59

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Multifamily Investors Interest Rate Pain with Neal Bawa – CRE PN #407

Neal Bawa 0:00

So your average syndicator buys 10 properties, right? I think what’s not obvious in the industry is that three or possibly four of those properties are already underwater, because they already had these floating loans. And these floating loans went up, they hit their cap, some of them didn’t have a rate cap, so they still going up. And the ones that have hit the red cap rate caps usually been set to like 8%, or something like that. And so at, so they’re at the rate cap there, they’re still the rate cap companies helping them with their mortgage payment. But still, their portion of mortgage payment means they’re still illiquid. Now. Then there’s the bigger problem. Banks are realizing that your rate cap may be expiring sometime next year, let’s say it’s, or this year, maybe it’s maybe it’s August this year, October this year. So guess what more and more banks are doing at this point, Darren, they’re calling you and saying, Hey, we’re seeing that that rate cap is going to cost you about $700,000 When you get it and we require you to get that rate cap in October unless you’re selling your property. And even if you’re selling your property, even if you have plans to sell your property, look, we can’t do anything about this. We want you to start escrowing 50 to $70,000 a month for you to buy that rate cap when it comes up in October.

Announcer 1:14

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 1:35

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’s program is sponsored by Building Insurance and Risk. When you invest in real estate, it pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts had Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to BuildingInsuranceRisk.com.

Today my guest is Neal Bawa. Neal is the founder of Grow Capitus, an online multifamily investor education platform. He’s also an experienced syndicator developer, and his attention to the data has earned him the moniker the Mad Scientist of Multifamily. And in just a minute, we’re going to speak with Neal about the Feds Gambit with rising interest rates and their impact on commercial 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 and please subscribe. With that I want to welcome my guests back to CRE PN Radio radio. Neal Bawa, Welcome back.

Neal Bawa 3:31

It’s great to be back Darrin interesting times so interesting conversations.

J Darrin Gross 3:36

No that’s that’s always a guarantee with you. But definitely the the times are a changin before we jump into the conversation if you could take just a minute and share with our listeners a little bit about your background. Sure.

Neal Bawa 3:51

I’m a data science technologist, successful tech career successful tech exit. I work with about 900 A little over 900 fairly nerdy data driven investors a lot of them from Silicon Valley, and I buy and build properties across the US in 10 states and 16 metros portfolio is about a billion dollars. And we are agnostic to any particular asset class, but the largest portion of the portfolio currently is multifamily. both new construction and value add

J Darrin Gross 4:25

Got it. And you said to agnostic, have you how far have you strayed from the multifamily?

Neal Bawa 4:35

In my mind very far and sometimes people don’t quite get this so you know, I’ve I’ve done townhomes for sale. I’ve done for plexes for sale I’ve done for plexes for rent, I’ve done built around communities, which are very different from a standard multifamily community have done other asset classes like industrial self storage, student housing, and I’m still missing one or two

J Darrin Gross 5:00

All right. Well, it’s it’s I think it’s, you know, good to kind of test the other stuff there and and get a feel for how they play and and get to know those different asset classes. That’s great.

Neal Bawa 5:13

Yes. So I certainly don’t suffer from the grass is greener on the other side problem?

J Darrin Gross 5:18

Yeah, you’re, you’re mowing on both sides, I get it. So, Neal, it’s been a little while since we last spoke, you’ve been very kind with your time and coming on the program here, multiple times. And I think the last time we talked this, probably about a year ago, when when we were kind of working through COVID, things were still good, there was kind of the sense that the Fed was working to slow inflation. And there, the expectation was the interest rates were going to be pushed upward. And that that the fear was there was going to be a crash. And here we are, today, we’re we are recording this in February of 2023. We’re clearly feeling the effects of or the interest rates have been pushed up. And inflation has not necessarily been is not under control just yet. The fear of of, you know, a looming recession is still, you know, evidence. And there’s plenty of evidence of that. I mean, and so I guess my my first question to you is, is the the landscape sits before us right now? What is your just immediate sense of things, just with respect to the multifamily marketplace?

Neal Bawa 6:55

What I would say is that the market is not doing a very good job of adjusting to its new reality. So I feel like there is this sense of, you know, we’ve had goods for so long, right, the last eight years have been so good. And every time something bad happens, something changes it, like, for example, COVID was actually a very positive change for the multifamily industry, just when we felt like all the cash flow is getting squeezed out. COVID comes along, and then the Fed, you know, showers all this money and interest rates go to zero. And you know, it’s party time again, actually, the biggest party of all time, and multifamily was in 2021. And so something always comes along and Bails us out. But I feel like there’s no evidence at this point that there is something that is going to bail out the industry. But I still see too much of a party like atmosphere, I don’t see acknowledgement, either of the fact that today, you can’t really buy a value add property with significant cash flow, I mean, 1% 2%, you know, sure, technically, that’s cash flow. But I think that if your property is producing four or 5% cash flow, you’re probably being a little aggressive with your underwriting, because I don’t think that that actually exists. And so when you’re in a situation where you’re buying, you’re a cash flow industry, you’re a cash flow asset class, and you’re cash flowing at one or 2%, or 3%. And 40%, of all buildings purchased in the last four years, are either just breaking even or bleeding, then the sort of attitudes that I see in podcasts and conferences, needs to be adjusted. So my answer to Darren is, the industry is in a process of adjustment and not doing a very good job so far.

J Darrin Gross 8:46

Yeah, no, I have my own mind, I’ve kind of thought that it’s, it’s that transition phase between where we were, and the expectations that things are going to go back, or the kind of the reality, you know, where we really are, and that change in reality. And I think the only thing that, that that, you know, cures at his time, you know, it takes time for people to realize the marketplace to realize that what was is not anymore. This is the new reality. And

Neal Bawa 9:24

Well, I think what helps is having open discussions, because there’s people that are going to listen to this podcast that I think will have a slightly changed point point of view. If there were 90 people or 200 people on 200 podcasts having this conversation, then that pivot to reality would just go faster. It takes time. Yes, but it you know, that takes less time. And I think that that’s why having these kinds of conversations is even more critical than the sort of conversations that we’ve been having on this podcast for the last two or three or four years.

J Darrin Gross 9:55

Ya know, and I wonder to this Does the conversation and the reality accelerate as the the financing that one has in place expires and has to reset? And does that not necessarily, you know, either force a sale or force a refinance or kind of that recalibration happens when we’ve just come out of some very low interest rate terms, those who were looking to refinance probably locked in and a pretty good, pretty good rate. They’ve got some runway to work with. But those that are, are coming up on an expiring term, or you know, are looking to sell or have to refinance. They’re facing a different reality. And wondering if if your thoughts on on as they transfer or transfer, you know, go through that, that transfer. If that doesn’t kind of cement for more people that the new route, what the new reality is,

Neal Bawa 10:58

It’s beginning to cement it. The problem is there’s no education around what to do. Right. So I have yet to see a course. And you know, most indicators today did not go through a college education course, they didn’t go to Utah University’s real estate program. They basically went to a weekend course or a five day course and then signed up for some kind of mentorship and they became syndicators. That’s the standard path, right? So you look at that, and you look at the curriculums of all the gurus and it’s good. I mean, the stuff that’s being taught there, you know, underwriting stuff like that, what to look for in property, excellent stuff. But there’s never any chapter on what happens when debt takes your property underwater, because that scenario really didn’t exist for the last eight years. So nobody ever wrote a chapter. Nobody ever recorded a podcast, nobody ever had a conference session on it. And so the problem isn’t that people don’t understand the issue. The problem is that there are very simple, straightforward, somewhat painful fixes that people are not aware of, because no one has ever provided any kind of education. And this isn’t necessarily true of, you know, people speaking at the NMHC conference, because those folks have gone through 2008. And they understand what what are the things that they need to do? But but the syndication industry, the vast majority of us were doing this, including myself, in 2008 2009 2010. Right? Luckily, in my case, I had a property where I got education, forced education, and but I look at what people are doing today. And I tell them, you know, look, the problem isn’t just what Darren described. So what you described is, there’s a bunch of properties that basically have to be refinanced and made refinance, all of a sudden those properties will go from either breaking even or making some money to just losing money. $50,000 $100,000 a month. Yes, that’s the case. But let’s talk about what is already happening. And that’s, that’s, that’s what I really want to focus on. So if you bought, let’s say you’re a regular syndicator, you know, you have a regular portfolio you like most of us believe that bridge loans or floating loans are better than, you know, being locked into a loan for 10 years, right, nine out of 10, syndicators, were using some kind of floating debt, because they wanted access to, you know, extra money from the bank for rehabbing their property. So you’re like us? Well, then, in the last three years, 2020 2021 and 2022, and maybe a little bit in 2023, these three years, let’s say you bought 10 properties. So your average syndicator buys 10 properties, right? I think what’s not obvious in the industry is that three or possibly four of those properties are already underwater, because they already had these floating loans. And these four floating loans went up, they hit their cap, some of them didn’t have a rate cap, so they’re still going up. And the ones that have hit the rate cap, the rate caps usually been set to like 8%, or something like that. And so at, so they’re at the rate cap there, they’re still the rate cap companies helping them with their mortgage payment. But still, their portion of mortgage payment means they’re still illiquid now. Then there’s the bigger problem. Banks are realizing that your rate cap may be expiring sometime next year, let’s say it’s, or this year, maybe it’s maybe it’s August, this year, October this year. So guess what more and more banks are doing at this point, Darrin, they’re calling you and saying, Hey, we’re seeing that that rate cap is going to cost you about $700,000 When you get it and we require you to get that rate cap in October, unless you’re selling your property. And even if you’re selling your property, even if you have plans to sell your property, look, we can’t do anything about this. We want you to start escrowing, 50 to $70,000 a month for you to buy that rate cap when it comes up in October or August. And so now all of a sudden, you are bleeding already. And now you’re bleeding because you have to put another $50,000 in and we’re not at the peak yet because I at this point, it’s pretty much guaranteed that the Fed will raise interest rates once in March once in May and once in June. So there’s still another point seven five increase He’s. So if you have a $20 million loan point seven 5% is basically $150,000 more a year in interest, which is $12,000 more a month. So guess what’s going to happen? In July, you’re going to be bleeding $12,000, more than you’re bleeding today. But today, if you’re putting that bleed in from your pocket, imagine how you’re going to feel putting in an additional $12,000 a month in July. And you might say, Yeah, but it’ll get better. Here’s the problem. Nobody has spreadsheets on this, I’m looking to create the industry’s first spreadsheet on actually showing syndicators, what their cash flow will look like in the next 24 months based on their own projections based on their own assumptions. I’m telling you that property, if it’s bleeding $100,000 today, and it’s going to be 120 $12,000, in July, is still going to be bleeding $100,000.09 months later, does that mean it needs a million dollars of cash? And that understanding of what to do when you have this kind of situation is completely missing? That’s the problem. You know, you asked this question on your app. Sorry, I’ll get back to you. But you asked this question about risk, right. The number one risk today is not interest rates, and it’s not inflation. The number one risk today is complacency.

J Darrin Gross 16:19

Yeah, no, I think that that’s, that is, you know, you’re spot on. And in the end, I think it’s a necessity that changes the mindset, and you know, the action, or it creates the action. And until you have that, if if, you know, people keep thinking they’re gonna hang on, or they’re going to be able to or things are going to change? Are they telling their investors that, you know, we’re, you know, we’re expecting this to change here? And in the third quarter are mean, how are they? How are they positioning that because eventually there’s, there’s going to be a change, either they either, you know, they lose the property, the the interest rates do do go down, and they’re able to refinance out of it? Or, or, or what else can they do?

Neal Bawa 17:09

It will be very useful if you’re saying those things to investors that interest rates may go down for you to actually project it. So one of the things that we do, and we give this out to anybody that wants it, by the way, we create something called the Grow capitalist interest rate tracker, and it tracks all of the usual stuff. So you know, where Sofer where spreads? You know, where’s the overall number, which is so far plus the spread? Where do we think the inflation is going to be in the next 12 months? Where do you think the Feds gonna be? The truth is, whether you’re Goldman Sachs or Merrill Lynch, or you know, you’re one of the big guys, if you read their stuff, everybody thinks the Fed might cut by 25 basis points, or 50 basis points sometime in November or in December. And if you’re lucky, it might be 25 basis points in November and 25 basis points in December. How much is that going to help you that property? That’s cat that’s bleeding? $100,000, that’s going to be bleeding $112,000, in June or July? Well, that’s still going to be bleeding by $88,000. If those that half point reduction did happen. So in January, how is your situation going to be a lot better than it is in July? Right? And, and then July, August, September, October will all look the same, they will all look more painful? And so my big question is, how can you stay with a straight face to your investors, that things are going to get better with existing properties? When the most basic math and you know you’re a syndicator? You do very complex math and do it quite well. So clearly, you don’t have any shortage of math people. Why? How do you say this? How do you say it with a straight face? I think it’s absurd. And I think that everyone has these properties. I’m one that’s very straightforward saying I have these properties. There’s nothing that I did that in any way changed. My problem, that problem that I’m describing. What I’m saying, though, is I’m extremely proactive, on buffering up cashflow for my properties, extremely proactive, raising more equity, getting more loans, doing everything that’s needed. Because, you know, and I have a monthly meeting with my team. We don’t talk about anything else. We don’t talk about the property. We don’t talk about asset management, we just talk about this property stability. And every month, we open a spreadsheet, we play with it, we tweak it based on what our beliefs are at that point, right of where interest rates are going to be over the next 18 months. And how this property is liquidity is going to get affected if you’re not doing that religiously. And by the way, we were doing it weekly. Eventually you get to the point where monthly is fine. If you’re not doing this, it’s your job right now, for God’s sake to be doing this with an existing property. And here you are underwriting 30 new properties every week, making three offers a week and buying a property every three months and that property has the same exact problem.

J Darrin Gross 19:56

Let me ask you this because you’re the as a data scientist here, the the data that you’ve been kind of referring to and a lot of the syndicators that, that are, you know, relatively new to this asset class, I mean, you know, the 2008 crash created an opportunity for a lot of people to get in and get get some, you know, properties that were that were in distress. And so, if you are looking at your, your current properties and trying to bolster them so that you can, you know, make it through this situation here. Are you looking to other historical points, where the interest rates and you know, the, the investment environment was similar? Or are you basically just taking your, your, what you have now, and seeing what you can do to to, to bolster your, you know, your position so that you can make it through?

Neal Bawa 20:59

Um, it’s a good question, I think it’s a very good question. As I think about it, the answer is, we don’t need to go back and look at history. 2008 was extremely unusual, it was a worldwide equity crash, a worldwide liquidity crash. We have no liquidity problems in the US economy today of any kind that I can think about. There’s massive amounts of debt and massive amounts of equity available, everybody wants to lend everybody wants to invest. The problem is that the interest rates are so high, that you basically effectively can’t make a property cash flow, if you invest, if you put that into it, if you put equity into it. So the our situation is vastly superior to 2009. The problem is complacency. And the problem is because like, you know, I asked this question, I’m gonna not gonna mention names. But a recent conference conference, you know, somebody called the conference, I said, Where’s your sessions on teaching people about all this stuff? Cash calls? recapitalizations, you know, bargaining with lenders? What are the things you say to your investors? You need to be teaching people how to do this, because this is what they need to know. And they said, Yeah, but there’s no distress right now. And my question is, you realize your conference is only held once in a year 12 months from now will be too late to teach people. Because the distress basically effectively starts this quarter. And you might say, why this quarter? Well, the answer is, when did interest rates go up? Right. So you know, in March, it was a quarter point increase, nobody cares. In May, it was a half point, nobody cares. And then after that, we have 475 basis point bombs, right, going to October, and then a 50. basis point bomb in December. So three and a half basis point increases happened in the second half of last year. Well, how could there be distressed in the second half of last year, interest rates were still going up. Now they’ve gotten up to the point where in January, you’re like, Oh, my God, I’m noticing losing a lot of money. And but you have reserves, you can put some money and you can raise some equity. So no distress, q2, same thing will happen. You know, we will put more money in the won’t be any distress, you’ll push something back, you’ll take money from your rehab reserves to three now you’re getting seriously worried because you’re like, Man, this thing gets keeps getting worse. By q4. The whole industry is like, oh my god, bad stuff is happening in q1, I think next year is the peak of when properties are going back to the bank. So if you’re having a conference in February next year, who are you going to help?

J Darrin Gross 23:33

Yeah. Right. The new buyers of the properties have gotten off.

Neal Bawa 23:38

Right. So I mean, I think that’s what’s what it is. I think the distress takes such a long time, because there’s so many steps in the process. But why are there no podcasts about cash calls recapitalisation bank management? What are the sort of things that you can do with banks, and I’m not saying I’m an expert at this, I’m saying I need that education just as much as the next guy. I’m just aware of the problem. And the fact that it’s the next 12 months, not the previous 12 months, all the stuff that’s indicators have been saying about the pain in the last 12 months. There isn’t any pain, all of the pain 100% of it starts now and goes for the next 18 months.

J Darrin Gross 24:18

Right. Right. Now. And again, I think you’re you’re spot on with the in the sense that I think today that at least my experience has been that people keep looking backwards with the expectation they’re going to be able to recognize what’s coming. And to your point is none of the syndicators that are of have no right now I’ve been through that. So how are they going to be of any value for the coming year on on how to weather the storm and how to not lose a property?

Neal Bawa 24:48

Right. And people people have been saying, I said this in a podcast last month and people are like, Why are you saying it Neil? You should just be hiding it and waiting for these people to make mistakes and pick up their properties. No, you don’t really realize I won’t be able to buy their properties in q1 next year if there’s contagion in the industry, because banks will stop lending right now. No, every bank wants to lend, right? They don’t want to lend a 70%, LTV, they want to lend a 55%. Because, you know, the DSCR is the numbers that they care about are not working, right. But otherwise, every bank wants to lend on every project. Well, what if there’s hundreds and hundreds of properties returning to the bank in q1 next year, which bank will be ready to lend to me? How is that going to be helpful to me, as an industry, we either figure out how to get over this bump in the road, because that’s really what it is. By understanding, recognizing and getting stopped for God’s sake buying properties at this point, just focus on the existing ones, so they don’t go back to the bank. That’s all they have to do. This is our job is maybe 1/10 As hard as 2009. But why aren’t we doing it? Why aren’t we having those conversations? Why aren’t you having people actively say, Hey, we’ve got to be talking about this stuff. And let’s get some education. Let’s figure out how to be better. Let’s start calling every frickin lender in the industry and saying give us six months of deferment. You did that as soon as COVID happened, where why aren’t you making those phone calls now?

J Darrin Gross 26:14

It you know, I’m curious. Do you think any of this part or maybe part of the reason why there’s not this conversation and education occurring is that most of the syndicators I mean, the the the business plan is to, you know, buy the property, renovate and sell. And her I guess rented higher ed, you know, get the get the NOI up and then exit. But But how many of the the syndicators business plan really has a whole plan with an operation to weather a storm.

Neal Bawa 26:54

I don’t think that these plans were ever built, because they were unnecessary in the last six or seven years. You know, here’s my plan on my existing properties. Make sure my investors don’t lose money. If I promised you 17 IRR. I’m sorry, that’s not my plan. If I promised you 8% cash flow, I’m sorry, that’s not my plan. Something happened that no one in the industry, not Goldman Sachs, not the Fed itself predicted a massive bomb went off. My focus right now is I want to make sure that I don’t lose your money. That is my only business plan. And if I don’t lose your money for the next 18 months, then I’ll go try and recover whatever portions of the business plan I could on a property by property basis. Don’t think about it 18 months from now?

J Darrin Gross 27:45

No, no, I think that honesty and having that frank conversation with investors, it may not be what they want to hear right now. But, you know, as we get through this, and when they get to the end of it, if you’re successful in, you know, able to do that, you will attract a whole bunch more investors from the standpoint of, you know, the, the honest, reality based conversation that was occurring with your investors, and I think that would, that’ll that’ll bode well, well, I

Neal Bawa 28:21

hope so. Because I think that that’s what is needed today, I obviously have to give up buying buildings today, I can buy buildings, you know, everyone sends emails out saying you buildings are $20,000 a door cheaper right now. $40,000 a door, I’ve got a huge deal compared to 12 months ago, when this building was $40,000 a door more? Well, you’re probably neglecting to mention that you were you know, underwriting you know, 4% interest rates a year ago, and now you’re underwriting at seven or eight or nine or even 10. Right, so that part of it is rarely mentioned. And so, I mean, I look at how I can get pencils up because I desperately want to be pencils up I haven’t been pencils up for a while. And every time I pick up my pencil, I look at data and I put the damn pencil down again.

J Darrin Gross 29:12

Yeah. In let me ask you so the you know, the the Fed sets the interest rates were they kind of the the overnight rate for banks and and, and, you know, as long as I can remember I think was Alan Greenspan back when he was kind of the first Fed chairman of note that really pushed the lower rates and in so it’s been 2020 plus years that we’ve had lower interest rates. But, but as we settle into kind of, like I see settle into, I don’t know if it’s gonna settle but I’ve heard conversations both on both sides or, you know, trying to express it both ways. Do you think that the, you know, if the market plays out like you, you’ve suggested here and that first quarter of 24 properties gone back? Naturally, you would assume that the Fed will then have to do something to kind of, you know, Goose the, the the market, do you think that the interest rates will go down because of that? Or, or do you think they’ll try and hang on to as much rain as they can?

Neal Bawa 30:32

No, I don’t think the Fed will do anything at all to help when the when this occurs, because I want to just explain the size of what will happen 1000s of properties could go back to the bank in q4 this year and q1 next year, q2 next year, right. Please understand the size of the multifamily industry. The syndication industry itself is a very small portion of the multifamily industry, people have been buying multifamily for generations there lots of people that don’t even sell them, they hold on to them for decades. And then there’s the institutional guys that are buying multifamily with hard loans and 10 year fixed loans, and they’re just laughing at the rest of us saying, hey, my property, I’ve owned it for 10 years, it’s got another 10 year fixed loan. So as a portion of the multifamily industry, the syndication industry is fairly small, and as a portion of the syndication industry, that properties that are actually going to be distressed enough to go back to the bank, that’s still very small. And then multifamily itself is a small component of the overall real estate industry, the single family industry is larger. And then the real estate industry is only a small component of the economy. In 2008, it wasn’t a real estate crash, all liquidity dried up in every single part of the economy. So compared to what happened in 2008, what could happen and may not happen, right? I could be wrong, and there may not be that distress next year. But let’s say that there is distressed, we’re looking at dollar numbers that are maybe 1% of what the Fed had to deal with in 2008. Why would they change track, when bad stuff happens in the economy all the time, the Fed didn’t change track when when Twitter laid off, you know, 7000 people or when Facebook laid off 11,000 people, the Fed actually pointed out to people that unemployment in the tech sector has risen in the last four months, even though big companies are laying laying off people, the small ones are hiring them, because they didn’t have access to those people before. So point is, the Fed doesn’t really react to things the way that the market would like them to react, they look at the economy as an overall picture. And within that, if there’s a sector that’s distressed, they’re not going to jump in to help that sector easily.

J Darrin Gross 32:34

Yeah, that’s interesting, as you kind of lay that out, you know, just thinking back about the oh eight. And how big that was. I mean, it wasn’t just, you know, commercial real estate, but, you know, all real

Neal Bawa 32:47

thing. The entire economy was in severe distress because of a complete lack of trust, complete lack of liquidity. We don’t see anything like that today. They just, I don’t see a scenario in which there’s a Fed chairman, that’s going to vote to start dropping interest rates to help 1000 multifamily properties in a in a country that has millions of them.

J Darrin Gross 33:08

Right, right. Do you think this could potentially, you know, reduce this, the the numbers of syndicators just based on, you know, the sexy investment of real estate, non performing, as well,

Neal Bawa 33:26

as there’s 100% chance that there’s going to be less indicators 18 months from now than they are today, there’s 100% chance. The problem is these people don’t know how to speak to their investors. So there’s still people doing sessions where they don’t talk about this stuff. And I’m actually, I’m guilty of that too, myself, right. But I’m planning over the next three months, I feel like I’ve done enough to make sure that my properties are not going back to the bank. But I feel like I need to do more sessions with my investors and just have these straight, toxic straight conversations with them about what’s happening in the marketplace, and how it’s affecting them. I think this stuff is important. And I really don’t feel I lose investors that way. They may not give me money for a property three months or six months from now. But I think that there’s appreciation that I’m right now, pencils down, I’m not looking to buy properties. I’m not looking to my I have staff on payroll that I’m paying from my own pocket, because you know, I’m not buying new properties just focused on their money, because they gave me that money. So I think that if, unless that happens in the syndication industry, I predict that there’s going to be a lot a lot less indicators. I mean, you already see brokers in the US single family brokers have dropped by about 30%. In just the last six months. The bottom dwellers just couldn’t take the fact that homes were not selling. And they went and did something else. Right. The job markets good. They got other jobs. I think we lose. I’m speculating maybe 20 to 40% of the entire syndication industry in the next 18 months. Yeah. Now and again, this isn’t this isn’t blood on the streets, right? There’s at no point have anything that I said represents Blood on the street, it just represents distress for individual properties.

J Darrin Gross 35:06

Right, right. Now just deal by deal challenge as opposed to a systemic.

Neal Bawa 35:14

You know, I don’t see a systemic problem, I do see that if 1000s of properties do go back to the bank 2024 2023, maybe or next year, 2024 may be a difficult year, especially early on in the year to get lending, where the banks are, if they’re worried about properties on their books coming back into them, it’s harder for them to lend at that point of time, because they have to deal with those properties. Today, slow down,

J Darrin Gross 35:38

right? I’m just sitting here thinking is you’re talking about the, you know, the lending environment, and just kind of this education that you’re working now, with your investors, it would seem that part of that education be kind of just more about the cycle, you know, the market cycle itself, and where the opportunities, you know, potentially will come from, or when they will come. And, you know, if you are able to weather the storm, and investors are wanting to get back in or have additional capital they want to put to you to use that that would be kind of the point for them to jump in or for you to go forward. But I’m kind of curious to on just the psychology with investors, you know, if they’re, you know, the aversion to loss, you know, the fear of losing, is so strong. And if they’re in the mindset of where if that’s what this week, your investors are, the hope is that you’re like you said, you’re able to, to not lose their their investment. So let’s say you’re successful in that, and you’re having a good conversation with them. And they feel educated and they feel taken care of by Neil. And as the cycle presents itself, there’s all these other additional properties that are that are turned back to the bank. Do you think you’ll you’ll I mean, I would assume you’ll be in a better position to raise capital from those people hand or anybody else? I mean, the I guess the the flip side is that people that lose money in the deals from the syndicators that aren’t having this conversation that are turning the deals, they’re not going to have the capital nor they’re going to want to get get back in the market, I would assume is that,

Neal Bawa 37:26

Yeah, it’s not read necessarily a good story, right? So 18 months from now, my job actually will be harder to raise money than it is today. Because those investors in my properties or other properties, haven’t seen this play out publicly. At this point of time, as I said, when I go to conferences, tell people, where’s the session on training on this? And they say, well, there’s not enough to stress Yes, for us to be doing this stuff. So stuff is in our future. And because it’s in our future, I think that 18 months from now, there’ll be investors who a have been burned, you know, with the property going back to the bank, or, you know, having to put in cash, or be they’ve been with somebody like me, and, you know, work hard, and maybe our properties are, are skating through this challenge, but they’re still not making money. I mean, I’m even for properties where I’m when I’m quite profitable, just out of an abundance of caution. I’ve told them, I’m sorry, I’m not distributing any cash, I need to just build my operating reserves, it’s your money, it’s not mine. If I don’t use it, it’s yours. I’ll, I’ll distribute it to you. Right. So since it’s not like, I’m going to sit and eat this money, it’s going to go into a bank account, it’s going to sit there for a while, sorry, but that’s what I have to do. Because my job is to manage your money. And know I see potential risks. And if that risk goes away, you’ll get your money. So so there’s people even in my database that are not particularly not happy with Neil Bauer, because they’re like, you know, I’ve this property is doing well, by now, you know, you kind of delayed cash flow during COVID. And then the cash flow came back, and now you’re taking it away from me again, I’m not quite happy. I think they understand. But they’re grumpy about it. And I think so, raising money next year is not going to be easier simply because other syndicators have burned investors. I think there’s a process where the mindset resets 2024 We’ll just muddle through 2025 I think is going to be a fine year. And we’ll do well. You know, you said Alan Greenspan was really the first guy that advocated for lower interest rates. I believe all Fed chairman in the future will advocate for lower interest rates simply because it’s okay for the US to have these high interest rates for one year, maybe even a year and a half. It’s no big deal. We’re a very strong economy. But what Imagine if interest rates were this high for the next 10 years? Do you know what that does to the interest payment on the federal debt? I mean, you have to cut every program, you have to cut military you have to cut Social Security, you have to cut, you know, job entitlement programs or unemployment. Everything’s got to be cut because you’re basically spending $300 billion extra that you weren’t paying thing before. So the political pressure from both Republicans and Democrats to keep interest rates low in the long run is extraordinary. In the short run everyone’s understanding of what the Feds doing, they understand that inflation can prevent them from being elected at the next election. So they’re like, Yeah, go ahead, do your job. Once inflation comes down to a reasonable level, there’s going to be a lot of pressure.

J Darrin Gross 40:21

Yeah. No, I definitely. It’s a interesting dynamic with the Fed. And, and, you know, have some scary times ahead of us. But I think that, you know, the wise syndicators and, you know, investors that understand the situation, the the, you know, preventing a loss is really kind of prevented, you know, prevent defense or whatever, trying to try to prevent losing is really kind of the game right now.

Neal Bawa 40:52

Yeah, and it’s not that hard, right. So if I wanted to sum this whole thing out, I don’t want to use the word scary, because I don’t think it’s scary. I think it’s just neglect. People are just not thinking about this, because they’re like, you know, it’ll get better. No, take a spreadsheet, plan out the next 18 months, and be reasonable, when you think how interest rates are going to fall, and how it’s going to reasonably affect your property, figure out how many dollars you need, and put together a plan, it’s not as many dollars as you think. You just need to look at it. Now. It’s going to be a lot harder a year from now. So you might as well look at it now. So I think this is really all about action there and not panic.

J Darrin Gross 41:32

That’s good. Hey, Neil, if we could like shift gears here for a second, but damn an insurance broker, and to have such worth my clients to assess risk, and try and determine what to do with the risk. And the three strategies we typically consider our first 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 cannot avoid nor minimize risk. We look to 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 political interest rates, the Fed clients, investors, tenants, however you want to frame the question for the answer for you. But, you know, I’d like ask you Neal Bawa, what is the Biggest Risk?

Neal Bawa 42:30

The biggest Risk is to keep doing what you were doing before. Right now we are at a point where we need to pivot. So you know, you name three things. And so I’ll go through those three and tie them back to the biggest risk. This change right now may not be a good time to buy multifamily. In fact, I don’t want to buy multifamily until about July this year, when something known as the spread, which is a portion above Sofer is likely to to drop it might even just collapse. So I basically want to wait until that time in terms of transferring risk. Yeah, I want to go out and have my distressed fund by not buy properties, but invest money into properties. Because when I invest money into properties that are that are distressed right now have negative cashflow. I’m doing what Darren mentioned, I’m transferring my the risk from my investors to the existing investors of that property. So if they change their mind would allow me to come in as preferential money. I’m coming in ahead of them. And I’m transferring the risk of ownership of the property while I’m getting ownership of it to someone else. It’s somebody else’s risk is the GP and the LPS risk, not my LPs, their LPs. So if I can transfer risk successfully, I’m looking to do it by recapitalizing existing properties that I like nothing wrong with the property, just the interest rates are killing it. One day, the interest rates will go away and the property will do well, again, I want to own this property, but I don’t want to buy it from the market because I think that the price is too high. So when I recapitalize somebody else’s property and put my investors in pole position and transfer the risk.

J Darrin Gross 44:12

That’s an interesting strategy there. Are you finding lots of opportunities that way?

Neal Bawa 44:18

One a day early. That’s, that’s remember the distresses there. Everyone’s ashamed to talk about it.

J Darrin Gross 44:26

Right. Now, that’s, that’s, that’s good stuff. And you’re able to with your investors come in and establish a position and put some capital in and I’m

Neal Bawa 44:42

Looking to do so as I as I said in my commentary, that the peak of the distress starts in q3 this year. So right now it’s time for conversations, understanding those properties, seeing, you know what they’re doing, we’re encouraging them to do cash calls first before they recapitalize. You know, cash because if they can get by with cash calls good for them, I mean, that’s the easiest way that that’s what they should be doing. So we’re providing education at this point of time. But there may be properties where the cash calls are not successful, and they come back to us, they’ve checked off that box. And then their investors are ready for a, you know, change in their position in the equity stack, after an unsuccessful cash flow. So it’s a process. I haven’t done any yet. I’ve got, you know, two dozen properties that I’ve looked at, I think I like four. And I’m monitoring those four to see what happens in the coming months. And I’m also having conversations with my investors. This, you know, I shouldn’t be recapping any property at this point, but six months from now is different.

J Darrin Gross 45:42

Well, I have an interesting conversation for later to hear. Are you? Are you done? That sounds good?

Neal Bawa 45:48

Sure. There’s, there’s more opportunity at a time of distress, not less.

J Darrin Gross 45:53

Yeah, no, absolutely. It’s the old Warren Buffett there, you get a chance to use homeruns shorts on this kind of thing. So I like it. Hey, Neal, where can listeners go if they’d like to learn more connect with you?

Neal Bawa 46:06

Two different ways. One, I’m the only Neal Bawa on the World Wide Web. So you can just type in N e al space B Awa and hit Enter on Google and you’ll find my content and connections to me. The other one which is more formal. We have about 50 75,000 people that are current subscribers of multifamily University, the web URL is multifamily followed by you that letter U so MultifamilyU.com. We do webinars each month on these kinds of thorny topics that no one else wants to touch. We do about 20 of them a year. We just did one we had 2600 people registered about 1200 watched it live. So those kinds of events. I don’t have a podcast so you can’t listen to one but I have been on over 200 podcasts so you can go to pod chaser.com and search for my name and you’ll find a couple 100 of them.

J Darrin Gross 47:00

Awesome. Well, Neal Bawa, I cannot say thanks enough for taking the time to talk. I always enjoyed, learn a lot, and I look forward to doing it again soon.

Neal Bawa 47:11

Awesome. Thanks for having me back Darrin.

J Darrin Gross 47:13

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.

Unknown Speaker 47:32

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Multifamily Recession Investing with Anna Kelley – CRE PN #406

Anna Kelley 0:00

And so when we hit the peak, because when money is cheap asset values go up, if you can borrow more cheaply, you can afford a bigger house and you know, a nicer lower payment, and you’re going to go buy and invest in more things that you’re going to try to generate a return. Well, that created this asset bubble. And when values started to come down a little bit, and these loans start to reset, it became evident that many people were going to walk away from their properties upside down and declare bankruptcy. And when that happened, essentially, all of the financial institutions booked asset values went down, their ratings declined. And they many of them, you know, as you know, went under so I think there’s a lot to learn from that. The mortgage world got tighter and better. So the loans issued since then have been much more stable, fixed loans, higher credit quality, so we’re better there. But the variable debt in the commercial real estate world and the commercial lending world, I think, is still a lesson that we haven’t learned, and it could cause some future pain as well.

Announcer 1:07

J Darrin Gross 1:27

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 Anna Kelley. Ana is a former top ranked financial relationship manager for Bank of America’s private bank. She also worked for AIG for 20 years in the corporate and affluent Markets Group focused on creating products for ultra high net worth individuals, banks and institutions. Anna has been investing in real estate since 1998, and has held active ownership of a rental portfolio valued at $300 million across Texas, Pennsylvania, Florida, Tennessee and Maryland. As a sponsor, Anna seeks strong multifamily investment opportunities to help her partners and investors meet their financial goals and grow wealth on a tax preferred basis. She brings her decades of experience with both traditional investments and real estate to help others overcome fears, increase knowledge, mitigate risk, and make wise investments in real estate. Anna is passionate about creating a meaningful impact in the lives of her residence and communities. And is also a sought after speaker real estate coach and a four times Amazon number one best selling author. And in just a minute, we’re gonna speak with Anna about real estate investing through market cycles.

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 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 Anna Kelley, welcome to C R E PN Radio.

Anna Kelley 4:10

Thank you so much Darrin, it’s so great to be here with you today.

J Darrin Gross 4:13

I’m I’m delighted to have you and looking forward to our conversation. I gave kind of a little bit of your background there. But I’m curious if you could share any insight with listeners. Take a minute and share a little bit more insight with listeners.

Anna Kelley 4:30

Sure, so one of the things that makes me a little different than maybe some people that you’ll hear on on commercial real estate is I really didn’t get started investing in real estate. I started my career out in the financial world in the institutional investing world. And I realized very quickly working with ultra high net worth investors that if you have a lot of money to begin with, it’s pretty easy to find investments to grow your wealth pretty rapidly. As long as we’re in an upward economic cycle, but if you really don’t start with wealth, it takes a very long time to grow wealth in the traditional investing arena, investing in your 401 K and stocks, bonds and mutual funds. And so I recognized that I didn’t want to have to wait until I was 65, to create a million dollar net worth and to live on $40,000 A year after that. And so I had a very wealthy client, who, when we mentioned back in the late 90s, that we could get him a CD at about 8%, he laughed at me and said, Honey, I make way more than that on my real estate investments. And I realized that in all my training in the financial world, and investment advisory classes, and all of that, I never learned anything about real estate. And so it piqued my interest to say, I might want to check into this and see if there’s a way for me to grow wealth more rapidly through real estate. And that put me on a path of interest in real estate. But it wasn’t really until 2009, the great recession, when I worked for AIG, lost the majority of my 401 K and was told every week, we were probably losing our jobs, that I realized that, that putting my entire financial future in the hands of the stock market, retail investments, or a corporate job really wasn’t wise over the long term. And that’s what got me to really escalate my level of real estate investing to create financial freedom. And it’s the best thing that I ever did.

J Darrin Gross 6:35

Alright, I love it. Love the history there little backstory, and how you get started? You know, it’s funny, I just had coffee with a couple of investors, little Meetup group we do. And I’m based here in Portland, Oregon. And you mentioned that the, the, where you were in ’09, with AIG, and kind of the the sense of like, you know, are you going to be able to keep your job? I just learned this morning that Intel, the big chip manufacturer, has announced salary reductions for all of its workforce. And I think the front line is like 5%, management, maybe 10%. And if you’re vice president, it’s, you know, 20%. And I thought, wow, I mean, that’s, that’s not the head doesn’t necessarily jive with the, the inflation inflation, you know, you hear about wage increases is kind of the one of the things that that is, you know, hanging out there kind of thing. But yes. You know, on the flip side of that, I’m also talking with the guy who’s in sales, he said, sales are way down. So, you know, it does kind of offer an entree into kind of the the market cycle conversation I was hoping to have with you today. Absolutely. And I just kind of curious that, you know, if, if maybe the best place to start would be to maybe go back to kind of the oh nine, because that’s the most recent cratering of the market. What was what was in place at that time. And I think, you know, one of the one of the things that I’m a big believer in is that whatever the cause of it, was, has likely been tweaked. So that it won’t likely happen this time. But I think that people are looking for that, you know, like, oh, it’s gonna make everyone happy. But the reality is, is that, you know, where it comes from, isn’t always easy to identify. But the results are very similar. Right? And that, so maybe if we could go back and just kind of reset, you know, what was going on and in, you know, the capital markets, the job markets, and, you know, real estate back in the day, oh nine, and then kind of look, from there forward, and then see where we’re sitting right now, that sounds like a

Anna Kelley 9:08

Absolutely? Yeah, absolutely. I’ll say this. You know, one thing having been in, you know, really the elite areas of Bank of America and AIG and when I say that, we had a lot of information on every type of investment available to us, and where, where can we find the best returns? And how can we mitigate risk with those returns? Right, I worked at AIG. So we were in the business of creating returns and mitigating risks together as much as we could primarily through private placement, life insurance, where investors, banks institutions could park their money in just about any investment they wanted to as a private placement and put that within a life insurance policy so their wealth could grow tax free within that plan, or if you’d invested directly in a stock or you know, private place meant outside of insurance most of the time that that that’s taxable. And so, having had such great training and these, you know, increasing roles where we were looking at more and more products, I have to say, looking back that I was naive to think that I knew as much as I knew, I kind of figured if you understand investments, well, the risks are generally the same over time. And you can make a pretty informed decision based upon looking at history and looking at the things that are going well. And when I was really blindsided by, you know, late 2008, early 2009, completely blindsided by the collapse of the financial system and the real estate markets, I realized that you can know a lot about your chosen investment, whether that’s you know, multifamily, or the stock market, gold and silver, you name it. But if you don’t understand the forces that are happening in the economy that impact asset values, the impact your cash on cash return and your income, that impact interest rates, you can be blindsided, again, by anything that can disrupt asset values, interest rates, cheap debt, et cetera. So my biggest lesson from 2009 Was that it’s not good enough to know your one or two or three chosen niches, well, you really need to become a student of the economy and watch the macro economics, watch the real estate and the economic cycles and say, Are we in an expanding cycle? Is that expanding cycle likely to continue? Or other signs of it cracking and heading back down toward a decline or a recession? And what are those signs? How do we know how to recognize when things might be shifting so that we can understand that there might be new risks that could impact our returns, or even wipe out our retirement plans like, like, it happened to me in 2009. So I really didn’t study the economy at a high level before I only really studied specific investments and historical returns. So that was my biggest lesson. And since then, I’ve become a student of the economy. So I’m watch macro economics like a hawk. And I understand I watch rates, I watch what’s happening in the currency wars between countries in trade wars between countries, because all of those things, impact currency values, and ultimately impact how the Fed reacts to changes in potential global issues. Where before 2008, we really were mostly focused on national economic health. And we were focused on real estate as a major asset that had been increasing for such a long time, that I think we got lazy in the financial system. And we just assumed that things were going to continue to get better, the economy was going to be different this time it was going to continue to expand. And a lot of the signs that there was unhealth in the mortgage industry, and an asset values and in the collateral that was used, you know, for financial assets and derivatives and things like that. They assumed that things were going well, and they ignored all the negative news. So when I look back on 2008, and nine and say, How could all of these really smart, large financial institutions with well paid, you know, actuaries that mitigate risk? And you know, financial engineers that understand all this? How can all of us be so blindsided and in hindsight, you know, appear to be stupid and not know what we were doing? And the reality is that there were signs There were articles written, you know, starting in 2006, saying, beware there’s problems in the mortgage market, there’s there’s rougher worse debt worse, underwritten loans than what we think they are. And there’s way too much collateralization of that debt backing many, many, many obligations and and loans, and that if the bubble pops, things could collapse. And it did. So, you know, I think we’ve learned from that in terms of the some of the problems with the mortgage market that brought down the system was that rate, loans were easy, they were easy to get, you didn’t have to have a great credit score, you didn’t even have to prove your income. They had no dock loans, and they were filled, the economy was filled with those types of loans and variable rate interest loans where, you know, adjustable rate mortgages would reset. And so when we hit the peak, because when money is cheap asset values go up. If you can borrow more cheaply, you can afford a bigger house and you know, a nicer lower payment and you’re going to go buy and invest in more things that you’re going to try to generate a return Arne well, that created this asset bubble. And when value started to come down a little bit, and these loans start to reset, it became evident that many people were going to walk away from their properties upside down and declare bankruptcy. And when that happened, essentially, all of the financial institutions booked asset values went down, their ratings declined. And they many of them, you know, as you know, went under. So I think there’s a lot to learn from that. The mortgage world got tighter and better. So the loans issued since then have been much more stable, fixed loans, higher credit quality, so we’re better there. But the variable debt in the commercial real estate world and the commercial lending world, I think, is still a lesson that we haven’t learned. And it could cause some future pain as well.

J Darrin Gross 15:53

No, I appreciate you kind of going through that. Because, you know, that whole time with, you know, running up to, oh, 809, there were were, you know, the rates were so cheap and easy, or money was easy to get. And the fact that so many people have multiple properties or had very little skin in the game. You know, I think the the notion of, of Safe, safe loan or a safe investment from a lender perspective, lost sight of, you know, there’s no skin in the game, there’s no, you know, what’s the incentive to to make the payment? What’s the incentive to, you know, you know, keep the, you know, the home a roof over your head, right. And, you know, you know, the, the fact is, is that underwriting has tightened up significantly from then we just went through a huge wave of refinancing, where people have like locked in low interest rate, debt, fixed rate for for a long runway. But, you know, as you were saying that everything like Wayman, this is exactly what’s been playing out in the commercial here. The, you know, whether it be just in, in commercial real estate investors in general, or a whole, a, you know, crop of newer investors that found commercial real estate, that maybe just thought it was like, you know, like, oh, eight or, Oh, 607 in the residential, where you could decide to get a get a loan, you buy a fix that you sell, you buy a fix, you know, kind of that kind of thing, not to realize that or not, you know, having thought it through that, you know, what happens if, if I can’t sell it? What happens if the market changes? Right, How well am I prepared to weather the cycle? Right. And so, tell me a little bit I mean, your background and with your experience investing in a lot of the the oh, 809 crash? You mentioned it before here was the debt was not fixed, it was some sort of variable product with with less than capable buyers to absorb that change in the, the the loan. Right, you look, look at the commercial debt, and the way most commercial deals are, are structured. Do you see a parallel that’s playing out or that’s about to play out?

Anna Kelley 18:36

Absolutely, I do. And, you know, because I lost so much in 2009, really, we had started a business at the height of the economy in 2007, with a significant amount of debt. And so, you know, when when everything collapsed, not only did I have to, you know, provide for our family, but part of my salary went to cover my husband’s staff expenses, because he had a new business, and then I lost most of my 401k. So I never wanted to live through that again. And so I’ve been very, very conservative as a commercial real estate investor, you know, since 2009, with the types of debt that I take on because really, most people can survive a recession or even a financial crisis that last 10 months to a year and a half, which is about how long most of them last, if they can continue to cover their debt. So your debt payment as a percentage of what your income is, through all sources, is really the thing that you’ve got to be very careful of, and if you don’t know what that debt payments is going to be into the future, when you’re at the cusp of the end of an expansion period in the economy and starting to head downward really is what I see the greatest risk to all investors regardless of what type of debt you have and what that particular asset is so specific to multifamily. Right before things started to get really crazy, I’d say before the pandemic, and even through the middle of the pandemic, most multifamily investors, which is all I invest in actively, I’m passively invested in lots of other commercial real estate. But my active investments are buying and syndicating and operating large apartment complexes, these value add deals where we buy them at a good basis, and then we increase the value, increase the rents and sell them for a profit. Typically, that process is about three years. And so the great thing before the recession is most syndicators, were using Fannie and Freddie backed mortgages. And so we got, you know, five to 10 year fixed rate loans. And those that did do bridge that they only did it when they bought properties that couldn’t pencil with Fannie and Freddie. So bridge debt, temporary debt, that’s variable rate really always has some risk. But in an expanding economy, where you think things are just going to keep expanding over the next three years, rates won’t go up significantly, we’ll be able to roll that new debt, if we have to refi or if someone buys the asset from us, they can get a low rate mortgage, then it keeps you pretty comfortable that your asset values are going to keep going up, because of the fact that the economy is going up. Well, the pandemic kind of was the first major shock that said, Wait a second, now we have all these tenants that don’t have to pay, at least the media’s telling them that the government’s not going to make them pay. And now you’ve got debt that you have to maintain, even with potentially a 3040 50% cut in income. So I thought during that crisis, while we are in in big trouble, and we got through it, and we got through it really well, because we had cash reserves. And because we had a fixed debt payment, we did not use bridge debt. So after the pandemic, I became more resolute in my decision not to do deals with any kind of variable rate or bridge debt loans, because I had experienced the pain of that during the pandemic. But what happens is we quickly forget, you know, we had this pandemic, we had a recession, the the government stimulated the economy, we had all this excess cash, and rates, you know, came down and everybody says cheap money. Surely, we’re out of it, we’re back up into expansion, we’re not going down. If we can get through this, we can get through anything. And so they they bought more property values continued to push up in commercial real estate because of the cheap debt. And essentially, most syndicators, were using bridge debt. Now, instead of the Fannie Freddie that meaning they had a year, maybe two with an extension to get the renovations done, to sell the property for a high value or to refi. And they estimated that their mortgage payments would be about the same and rates would be about the same when they had to exit. And that’s where the real risk is today. Because as you know, and all of our listeners, if you’ve been watching the news at all, you can see that we’ve had mass inflation that that many people didn’t expect. And that’s caused the Fed to raise rates at the most aggressive rate since I was a child in the 1970s. And so when you don’t think that things could get worse, you make decisions based upon the assumption that things get better. I didn’t do that. And I don’t do bridge debt, because of those lessons I learned in oh nine, because of the fear that we wouldn’t be able to pay on mortgages during the pandemic, I said, my kind of foundational, you know, debt paradigm is that, generally speaking, I don’t do bridge debt unless I have many ways to mitigate the potential for the asset value to fall cap rates to rise interest rates to rise and need to be able to afford a much higher mortgage payment.

J Darrin Gross 23:52

Yeah, no, I, I, I like your, your thought process there on, you know, locking in the debt. And also, it just, it, it’s more about you being able to weather that whatever that cycle, whatever the future is, because, you know, as we’ve we’ve kind of alluded to, and kind of look back, things happen. And, you know, while it’s it’s popular to believe that it’s just everything’s gonna go up and up and up and up, there is a limit, even though a lot of people can’t see it. It’s kind of like on a roller coaster, you can’t see the the vertical or the drop until you’re right, all the way over the top there. Right. But that it sounds like that, that for you is kind of a rule of investing period is that lock in that debt and know that you can service the debt from now, till the till the end of the loan? There’s because I kind of,

Anna Kelley 24:52

I’d say yes, but there’s always exceptions to every rule, but if you make an exception, it shouldn’t then And quickly become the rule because it worked out once or twice, right. So there are situations and I’ll use right now, for example, now we’re at the point where commercial real estate values haven’t come down significantly, yet rates have gone up significantly, and lenders have cut quite significantly the loan to value they’ll actually give you for that debt. And so it’s much more expensive to buy properties today. And so, if I were to lock in a rate for 10 years today, when I believe that rates won’t be this high for 10 years that wants, you know, the Fed has been successful, hopefully, in killing inflation. And we have a little bit of softening in the economy, the hope is that they go back and reverse rates, I’d say in the next year, I don’t count on it till 2024. But if I think rates are going to come back down, you know, even a point or two or three, I might not want to lock a rate for 10 years today with a prepayment penalty, that could be pretty stuff, this might be one of those only periods when I say, because of how high rates are today, if I think that history is gonna repeat itself, and the Feds gonna lower rates within a year or two, or we have a deep crisis or a deep recession, that will definitely necessitate them cutting cutting rates, I might go ahead and take the risk of a variable loan, because it might be actually less risky today than a fixed loan with a multimillion dollar prepayment penalty. So I’m not going to do that on all of my deals. But if I find something with a strong enough basis, Darren, and I can hold enough cash reserves that I can whether a rate going up even more, you know, after a year, and that I have enough upside in that property to really create massive income to offset potential cap rate changes or interest rate changes, then I might do a variable loan or two today. And if it’s a development, which I do, then most of your loans are variable. So you just have to find different ways to mitigate that interest rate cap insurance, things like that.

J Darrin Gross 27:03

Right. And I’m just curious with the development, it seems like that’s almost it’s a, like an entirely different animal from like a value add, and a value add, you release, you know, whatever the income stream is. And I’m assuming that you’ve got a pretty good idea what the market can bear as far as additional rents in you’ve got a little bit fewer variables there. I mean, there’s still obviously a material supply chain kind of stuff that could happen and, and, you know, create a situation but development I mean, that that to me, is kind of the the original value add, starting from a piece of dirt to something that that you know, something that sell eventually or do you do you build whatever you’re developing to to keep buying all or you know, building hold, are you are you in your developments of is it more of a for for sale,

Anna Kelley 28:01

it is really more for a sale. But the great thing about multifamily development. And again, this is very regional specific, so I only invest in markets that have extremely strong resilient economies, with lots of new companies moving in lots of jobs, the things that are going to keep an area resilient, and where there’s really minimal supply for the demand of the population growth. So when you’re in that type of market, and you know that there is a lack of housing, that there’s going to be an extra three 510 1000 people within two or three years, then you can feel pretty good about what you can get for rents, how full you’ll be able to be. And so you know, we’re we’re building those for the upside. On the positive front, you know, we do hold a lot of reserves, and we have to because again, those those loans are a bit variable, and we don’t have income coming in to service that debt. You know, which which makes it a little bit tougher. But on the positive side, we really don’t have a lot of expenses either other than the building. And so if we raise enough money and have enough money to develop the project between our capital stack our equity, private equity lenders, you know, different kinds of, of lending programs that might give us credits and things of that nature, then we can pretty well bank on what our exits going to be. Now, with that said, a typical development project, we’re developing large apartment buildings, you know, 500 to 1600 unit complexes, they’re going to take two to three years to complete and fill. And so our exit is similar to a syndication about you I deal with three years. But if the economy doesn’t give us what we want, and this is what everybody doesn’t know the answer to is where is our economy really going? So we can tell that it’s on a downward trend, we’re probably likely in a recession or very close to and will be in 2013. But if the recession goes longer than the average of 10 months, and if the recovery lasts longer than the average of 18 months for recovery, rates were right close to that three year mark. And so the beauty of development is, you know, if you have the right economic fundamentals locally where that asset is really needed to provide housing and affordable housing for people, then if we had to at that point, we would refinance and keep the property and go into a Fannie or Freddie fixed rate product. Rather than sell it if the economy didn’t give us what we thought we would have yet. And upside. We can hold that asset for a few more years, and then sell it at the optimal time during an expansion period of the market cycle.

J Darrin Gross 30:35

Love the multiple exit strategies. That’s, that’s, that’s great. wants to touch her ask you about this. So that you mentioned kind of the normal duration of like the peak and the trough. I thought I heard you say 1018 months? It? Is there a time between the top and the bottom? That’s a normal cycle. I mean, that I was that seven, eight years was kind of the the, the timeline, but I don’t know that that’s necessarily the case.

Anna Kelley 31:10

Yeah, it’s really interesting. So I’ve studied this pretty extensively, going back to all the data that’s been available since about the 1930s. Multifamily data has come a long way, since about the 80s. So some of the data prior isn’t, isn’t great. But what I can say is that in a recession, in general, on average, since they’ve been tracking since the 1920s, the average recession lasts 10 months. Now, not every recession is average, right? So 2008, clearly lasted a lot longer. And the recovery period was much longer, the average recovery period after a recession is 18 months beyond that, before you start getting back into an expansion or growth cycle. And then the average peak to trough is actually five and a half years. So from, you know, recession to recession average is five and a half years. But if you look back in the last period, since the global financial crisis, the Great Recession in 2009, we had about a 12 to 13 year exit expansion period, so much longer than the averages. But the reason for that was extremely loose monetary policy, significant monetary supply into the system to encourage borrowing to encourage investment to encourage stimulating that economy. And that that stimulus, the volume of money supply into the system, as well as the extremely low interest rates allowed us to continue to move up, up up up up, the consequence of that is the the massive amount of debt. I mean, we have a quadrillion dollar debt derivative market. So if there’s any risk that I’m a little nervous about in the next year or two, especially if the Fed does continue to raise rates is more that we have a derivatives or a credit crisis, you know, related to this debt that we’re talking about. And if that happens, and it happens, not only in the US, but globally, our recession could last much longer than 10 months. Again, it could be a deeper recession, and it could take a lot longer than 18 months to recover from. But if we don’t have a crisis, and the Fed is able to kind of engineer this miraculous soft landing, if you will, or recession may not be as deep or as long this time. And so what I’ve learned is averages help us kind of have an idea of what to look for, what direction are we heading, are we heading in a positive expansionary direction or a negative contractionary era. But then we have to look at what are all the other kind of pins that can pop the external factors that could make something much more quickly go into recession be much deeper and be much longer. And it’s infinitely more complex today than it was in 2009 2009 was infinitely more complex than I ever realized. Until then, because I didn’t understand that the entire financial system was so intertwined with credit default swaps, essentially insurance on the value of of all the other companies they were investing in. And now we’re substantially more complicated than we were there with with global trade. Globalism over this last decade has really expanded the supply chain issues, potential escalation of war with Russia and Ukraine. So those things, the health of our global alliances over overseas, all of those things can impact our economy and the health of our currency, our interest rates and ultimately our asset values in a way that we’ve never had to really think about before. And so I think there’s more risk and more things that could tip us into deeper and faster recessions in the near future than what we’ve experienced in the recent past.

J Darrin Gross 34:56

Ya know, that that you know, Free Money has a price. And it’s not always recognizable at the front end. But, you know, in insurance, I mean, this is a, a, just the thing I’m dealing with with my clients. And that is just how reinsurance has been so affected by a lot of the global stuff and, and or the the, whatever global warming or whatever, however you want to phrase it, the insurance companies are a big believer in. But the, but what I’m seeing is like, they’re setting the price, which is increasing the price to the insurance companies, which increases the price to the retail buyers. But I’m seeing now that just yesterday, I had one where the buyer, we had had a claim a couple of years ago and had to raise, the price went way up. And last year, the deductible went way up. And this year, he took even a larger, you know, to x of a large deductible. So I went from my, you know, $25,000 deductible to a $50,000 deductible, and just his kind of ability to try and reconcile that. And I guess my question is, is, you know, when, when we go through this kind of adjustment phase is 1018 months, or however long it takes for buyers and sellers to recalibrate as to what is the market, you know, as prices keep going up. There’s not likely that prices are going to come back down. I mean, that’s kind of the hope. But I think that after a point, if everybody’s been paying the price, and that’s the cost of whatever it is you’re used to buying, it’s done all of a sudden, there’s not. There’s not like an endless supply and no demand, because the market is proved out there is demand and the price to support it. So, you know, I’m kind of curious, in your thoughts on that, as far as is that part of the trough? Is that? Or are we in kind of a new territory be based on the the increase the inflationary element? You know, because I think normally when we when we think about like the cycles, I don’t know how much inflation is built into the those cycles, whereas this inflation element, does it create a new element to to? You know, I guess, take stock in or to ponder? Sure.

Anna Kelley 37:26

Yeah, it’s interesting, because typically, when you’re nearing a top at the peak, there generally starts to be either a slowing of GDP, or an increase in inflation, that kind of tips you over from peak to heading down into the trough. We haven’t seen inflation like this, really, in my lifetime. I was born in 1974. And as you know, Volcker was you know, aggressively trying to kill inflation through most of the 1970s. And so this time, and again, the complexity of our economy is so much different than what it was 40 plus years ago, that it’s really hard to to say, what’s the norm and what’s going to happen, we really haven’t had this particular type of thing that’s pushing us over the edge. I mean, some of it was clearly pandemic spending, pandemic stimulus, pandemic supply chain issues. And so when you look at inflation, there’s really four key components that the Fed looks at, and the National Bureau of Economic Research that dates recessions, they look at core goods, in a core Energy for Food and core services, and poor energy and core food went up significantly when Russia invaded Ukraine, because they’re a major exporter of energy, of fertilizer, and quite a few crops as well. And so you know, that is a piece of the inflation that over time, we’ve seen start to come down a little bit. So food was very inflated, it’s coming down a little bit. Energy prices were, you know, really massively impacted by the war between Russia and Ukraine as well. And so when you have elevated energy costs and and or elevated oil costs, that means that transporting everything is more expensive. And so goods and food are gonna go up just by nature of energy going up. But then you add the COVID, supply chain issues, and there were back logs of goods and supplies for a very long time. And when there’s a lack of supply and a huge demand that creates this massive inflation. So the good news for us is all three of those have come down quite substantially. The piece that stickier that I’m a little bit concerned with is the core services and that is things you know, that we use as day to day services, it’s eating out its restaurants, it’s doctor’s visits, it’s all kinds of things. And so essentially, those core services have a lack of skilled workers and lack of workers for the number of jobs available, which is really caused wages to go up. So wage inflation is primarily related to core services. And so that’s why the Fed is trying to now really create enough pressure and make the costs of doing business, the cost of servicing debt, the cost of borrowing higher, so that companies have no choice but to start lowering wages, and reducing, you know, demand for jobs. So they’re trying to do that to bring inflation down. And if they bring inflation down successfully, without going into a deep recession, this next cycle may not be nearly as long or as bad. The thing that I worry about a little bit, and this is again, where we really don’t have precedents is that if the war escalates, you know, Russia’s invasion of Ukraine, the US and Germany are now sending in tanks and, you know, Russia saying, this is an act of aggression, et cetera, if this gets worse than energy prices, and food prices could come back up again. And regardless of what the Fed does, what they can really control is employment and wages and the amount of our debt, but they can’t really control prices of energy and food. And so we could have an escalation of inflation again, which could keep us you know, with the Fed having to continue to keep rates up to control what they can and be in a longer period of some type of recessionary decline. And then the last thing I’ll say is that a lot of this code, both COVID, and the war with Russia and Ukraine, is causing countries to really relook at how and where they distribute really items of national security, food, semiconductors, energy. And so I think there’s this D globalization and shift to let’s bring things back on shore, that is going to have a cost to it, that could keep inflation higher for much longer than what we anticipate. And so you could have an environment, this is what I actually think we’re going to have. That’s not really in a clear place in the cycle. It’s not really a deep recession, because there’s still some growth and there’s still inflation, it’s not really a peak, like inflation. In a healthy economy. It’s more akin to stagflation, where you have this declining growth, a stagnating growth, at the same time that you have elevated inflation. And if that happens, it’s really tough for us as investors to gauge where is it going to go and for how long? How long is it going to be, you know, negative, but I tend to think that we really can’t look at history and say, based on this, this recession is going to last this long, we’ll be out of it, this quickly, rates will go back to this cap rates will be you know, here or there, because there’s so many factors that are converging at the same time to make today’s market much more inflationary. And ultimately, the only way the Fed can do that can kill it is to create stress and deflation and decelerating growth or recession for a longer period of time.

J Darrin Gross 43:05

No, you clearly made the case for studying more than just the real estate market. I mean, there’s, there’s a lot to pay attention to a lot a lot of balls up in the air. And, you know, the hope is that they stay in the air, you know, and that there’s not a a somebody dropped the ball and, or crash kind of thing. And, and we keep this thing going. But

Anna Kelley 43:32

I think the thing, you know, the other key takeaway is that since we don’t know where these things are going, you really should be looking at your investments for more of a longer term strategy, you know, the days of value add, sell it in a year and a half or two years, because the economy’s booming, those days are over for now, you know, you’ve got to be really a resilient and very strong operator. Because if you can’t control the things that impact interest rates, which do impact cap rates and values, you’ve got to get really good at increasing noi on your assets. And you’ve got to have great debt that you know, you can basically know where your debt payments are going to be, and the reserves and the wherewithal to hold properties longer. So that if we don’t bounce back in two years, like we you know, have in the past, that you are very resilient and that you can hold these assets and wait several more years to have that kind of growth that we saw before to really boost asset values. So you know, there has to be a little bit of a shift from value add as the norm to more value add with the longer hold period, generate cash flow while you’re holding it and have have much more stable assets with stable debt until we can kind of see when we’re close to being on the other side of of this pain.

J Darrin Gross 44:53

No, no good. Good stuff there. Hey, Ana, if we could like to shift gears here for a second. 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 strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And that’s not an option, we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize, then we look to see if we could transfer. 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 clients, investors, the economy and political? How are we you would frame your situation and and what you would consider to be the biggest risk? And again, for clarification, 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 Anna Kelley, what is the Biggest Risk?

Anna Kelley 46:00

I think the biggest Risk right now is not knowing how high inflation might get for how long and how that might impact both the interest rates over the next decade and cap rates over the next decade. And so with that risk comes a few things that we really have to look at. One, as we talked about is what kind of debt are you putting on your properties? So the question is, when you when you’re trying to create value for a commercial asset, you’re really focused on noi, and you’re focused on on the cap rate. And so these things that that we can’t control are these factors that impact interest rate and cap rate? And so we have to look at what can we control? What risks can we control? Since we can’t transfer that risk? It’s going to be what it is, what can we do to mitigate some of that risk, one of the things is investing in really strong, resilient markets, right? If you’re investing in a class C property and a Class C town with not a whole lot of good jobs, industry, diversity and not population growth, you know, more demand than there is supply, you’re going to really struggle. So if you want to mitigate risk, you need to be in areas that still need way more product than what there is demand for towns that have lots and lots of jobs so that if some businesses or industries get really hit hard, they’re still resilient, and there’s elevated wages and affordable, affordable living in those areas. So the market in which you invest is critical. And then the other thing is, you need to be able to control your expenses, what other expenses can you cut, or make sure that they’re fixed for some period of time, so that they’re not an additional variable that could impact your noi, and bring your value down as a nature of that? And so, you know, an insurance answer is basically, where do you invest? So I’ll give an example. I’m from Texas, and I’m from from Houston, and Houston has had a significant flood risk over the last couple of years because of hurricanes in certain areas of the city. Now, it’s a 10,000 square mile major metro. So Houston is extremely large. And there’s pockets that do not have flooding, and that are much less risky. Well, I want to buy assets there, because if I buy in an area that has had some flooding, I wouldn’t be surprised if my insurance goes up another 30 or 40%, like it has over the last couple of years. So you’ve got to get really good at where are my expenses? And where can I invest and what assets are going to give me the best outcomes, given all of the uncertainty to increase my noi to bank on where I can increase my noi by increasing income and cutting expenses. While I can’t mitigate, you know, the interest rates and the cap rates that we ultimately have.

J Darrin Gross 48:56

Yeah, now that that is very, very wise, of you to, you know, consider the flood zone of seeing the flood maps get redrawn multiple couple times here lately. And it’s usually a surprise to anybody that’s trying to refinance or are a

Anna Kelley 49:14

huge difference in asset values, especially in commercial real estate. So it doesn’t impact single family as much. But if you’re looking at something commercial, and your expenses go up, you know, 10%, it’s it’s hard to make that up, you know, unless again, you’re in an area where you can kind of name the rents or you can continue to increase rents to keep up with the increase in expenses. And that’s where location of your investments is extremely critical.

J Darrin Gross 49:38

Yeah, absolutely. Jana, where can listeners go if they’d like to learn more or connect with you?

Anna Kelley 49:45

Great, so you can find me on social media at Anna Kelly Rei Mom on Facebook, LinkedIn and Instagram. And if you are an accredited investor looking for multifamily opportunities in this market, where we also make a meaningful impact on the lives of our communities. You can find me on my website there at GreaterPurposeCapital.com.

J Darrin Gross 50:03

Awesome. Aana Kelly. I cannot say thanks enough for taking the time to talk today. I have enjoyed it immensely. I’ve learned a lot, and I look forward to doing it again soon.

Anna Kelley 50:16

Thank you so much for having me.

J Darrin Gross 50:18

Announcer 50:38

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How Real Estate Investors Can Leverage Virtual Assistants with Greg Brooks – CRE PN #405

Greg Brooks 0:00

Whether you need scale within your you know your accounting department your AP your AR your your your vendor management we handle a lot of work like that we do you know customer service work especially within our property managers right running their their maintenance lines, leasing inquiries, you know 24/7 Call coverage we do a lot within the customer service realm and then obviously the sales side as well and I think especially within our investment, real estate investor side of our business specifically commercial a lot of our clients leverage our virtual talent for for the sales side, someone who can kind of work that pipeline and help them raise a fund or have consistent communication with potential investors as well as the underwriting component of that.

Announcer 0:44

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 1:04

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’s program is sponsored by Building Insurance and Risk. When you invest in real estate. It pays to work with a real estate investor protection specialists to protect yourself and your investment from catastrophic loss. The experts at building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Greg Brooks. Greg is a partner in Rocket Station and oversees everything, business development, and marketing. Greg is the National Director of Business Development at rocket station, an outsourcing company that helps real estate businesses hire experienced virtual assistants. And in just a minute, we’re going to speak with Greg about improving your process with virtual assistants.

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 without a warm welcome my guest, Greg Brooks, welcome to CRE PN Radio.

Greg Brooks 2:58

Yeah, thanks so much for having us, Darrin, looking looking forward to the conversation.

J Darrin Gross 3:02

Likewise, before we get into it, if you could take just a minute and share with the listeners a little bit about your background.

Greg Brooks 3:10

Yeah, no, definitely. So we were very entrepreneurial entrepreneurial company. That’s kind of been my background, I was your kind of typical college graduate graduate with my MBA, and did the seven jobs in nine years trying to figure out what I wanted to do personally. So I’ve done everything from kind of I’ve owned, I’ve owned a couple of restaurants, I worked in the military resale channel, invested in real estate myself, and eventually landed here with my partners at at rocket station. So we’re the number one virtual staffing company to the real estate industry specifically. So we specialize in everything from commercial as well as residential property management, the brokerage side of the business all the way through to the investing side of it, and we’ve got just over 2200 team members overseas in the Philippines that work right alongside our our real estate clients every day.

J Darrin Gross 3:59

Awesome. Well, let’s let’s get into this. I’ve had some experience with virtual assistants, and I’m sure anybody listening to this has been touched or, you know, called or contacted or had some sort of a, an interaction that was created by or, or, you know, started by or somehow affected by a virtual assistant. What are some of the reasons why someone would would look to engage a virtual assistant?

Greg Brooks 4:37

Yeah, I mean, I think definitely the main reason a lot of people look initially into the virtual assistant space is the price point, right? You can kind of leverage the fact that you know, especially if you’re here in North America, you know, the dollar goes a lot further. And there’s very talented well educated skilled professionals all over the world that you know, you can have them work for you in this new digital working world that we all live in for a fraction of the cost of what it would, you know, potentially cost you to have them hire somebody, you know, in your local market or, or here stateside. So I think that’s the initial reason somebody’s looking for it, I think especially in the investing space, especially on the commercial space, right, you do have, you know, large enterprise level companies, which they’re looking to kind of subsidize their their workforces, and there’s always so much work to be done. And finding scalable, affordable talent is tough in any market, you know, across the US or Canada. Or if you’re, you know, the kind of side hustle investor, right, where maybe you’re doing your first syndication deal or raising your first round of funds. I mean, there’s so much that goes into that as well. And finding that really good virtual assistant that can really help you while maybe you’re working your nine to five job or while you’re trying to wear you know, the 50 different hats that you have to wear. I think a lot of people realize through through, especially through COVID, where we all kind of were virtual assistants in some capacity at one time or another that we do a lot of work a lot of commerce these days, especially in the real estate space, on our phone, on our computers, you know, on our different digital marketing channels. And you don’t necessarily have to be sitting in a traditional office to be able to do that. So, you know, through services like ours, we help our clients find real estate, specifically trained virtual talent that’s been evaluated, so that they can, you know, they can leverage it, whether they’re looking to hire at scale, you know, hundreds of team members, or they’re looking to make that first part time hire, you know, to help them raise their first fund for a syndication deal. We kind of help cater the talent, the skill sets of the VA to match where they are within their business journey.

J Darrin Gross 6:39

So what are some of the keys to having a successful experience with a VA,

Greg Brooks 6:47

For what we find and kind of how we’ve structured what we do, it all comes down to process, right, we’ve all been employees, I’m sure lots of us have hired people, what we find is the success between a successful hire or the difference between a successful hire and a not successful hire, sometimes it comes down to it being the wrong person, sometimes it’s not the right time or not the right fit, but what we find so often is it comes down to the clarity within the process within the role within the scope of work, you want that person to plug into, you know, especially just at the price point of VAS A lot of people think that VA is kind of a magic button, candidly, a lot of companies in this space, we’d been guilty of it kind of sell VA services as this, you know, the that was Easy button right from those old staples commercials. And it’s not, it’s a person, you need to give them clarity, you need to outline what you want them to do, you need to set realistic expectations. And as the business owner, you need to have at least a basic grasp on how to do it yourself so that you can train and onboard and hold this person accountable. So what we find is like the the implementation, the thoughtfulness within the process, within the clarity of what they’re going to do, is usually where you know, a lot of people struggle. And I think that’s true of hiring people in general, whether you’re hiring them into an office, or you’re hiring somebody, even maybe they’re virtual, but they’re in the same city as you, like it’s giving that clarity to the person so that they know what you want them to do how you want them to do it, that’s always the toughest part. Because for most entrepreneurs looking to hire, they don’t exactly have, you know, a lot of free time to sit there and plan and map and document, right, there’s usually a lot going on, that’s why you’re hiring in the first place.

J Darrin Gross 8:26

Yeah, I’m kind of chuckling inside because I think so many times the small business owner is somebody that was successful, somewhere else, and decided to go out on their own, and they know how to do it, but maybe not necessarily communicated to others. And so when they hire bring on people they don’t, the others don’t necessarily have the same level of success. And there’s this disconnect is I don’t know why that guy can’t, you know, that person can’t figure it out, it works, you know, this works great for me, kind of thing and that that communication, you know, the breaking it down as to what we do here and how we do it and why we do it is so key there. What are can you describe kind of a scope of of services or the skill set that you know, a va might be a good fit for?

Greg Brooks 9:21

Yeah, definitely. And I’ll give kind of two examples here. I mean, there’s talent all over the world, every corner that can do probably anything that you need done in your business, right, whether that’s you need graphic design, whether you need a great salesperson to go you know, reach out to potential investors and raise a new fund, whether you need someone with more technical abilities to you know, manage your data or maybe do some underwriting for you. When the term VA so often kind of gets discounted where people you say virtual assistant and they think of like, oh, you can, you know, order my groceries for me online and answer some emails and it’s like it kind of it kind of goes to the traditional like admin assistant, the The scope of virtual assistants that we deal with and we place with our clients, they truly are virtual professionals, our company, I mean, it’s very intentional. So if you’re watching on YouTube, it’s rocket station virtual staffing behind me because it’s, it’s an individual that has a specific skill set that truly is a professional and that when leverage correctly when screen correctly, when trained correctly, can do anything within your business that you need them to do what where we specifically play, we do a lot on the business operations, sales, marketing and accounting standpoint. So like whether you need scale within your you know, your accounting department and your AP, your AR, your your, your vendor management, we handle a lot of work like that. We do, you know, customer service work, especially within our property managers, right running their, their maintenance lines, leasing inquiries, you know, 24/7 call coverage, we do a lot within the customer service realm, and then obviously, the sales side, as well. And I think especially within our investment, real estate investor side of our business, specifically commercial a lot of our clients leverage our virtual talent for for the sales side, someone who can kind of work that pipeline and help them raise a fund or have consistent communication with potential investors, as well as the underwriting component of that.

J Darrin Gross 11:19

And do you find? Or is the herd the VAs you have? Are they traditionally, are they are they mostly doing inbound calls? Or is it somebody? Are they making outbound calls? Or is it more of like emails, you know, accounting, underwriting kind of things like you were describing?

Greg Brooks 11:40

Yeah, so we like say we cover all those bases. So we were very particular, we have a very rigorous onboarding for the VAs. And then we also have a very customizable experience that we give the client to really get a deep understanding, right, we talked about process, we like to really reiterate that we’re a process driven company, meaning we work with all of our clients to kind of flush out what is this role? Exactly? Is this inbound sales, outbound sales? Is this accounting? Is this a data management CRM specialist? Is this someone who you need help with the underwriting? Is it a marketing position, we help really take that deep dive with the client. And like you said, for that entrepreneur that used to be an employee, and is now doing it themselves and wearing 60 hats, a lot of them, it’s just, you know, you’re spinning in circles, you know, you’re, I gotta get this done, put this fire out, get over here. So we help them really, you know, slow down and understand, like, hey, if I could get five things off my plate, whether it’s because I run out of time to do it in my day, whether it’s because these are things that are pivotal to my business succeeding, or maybe it’s just things that I’m not good at, but I know needs to be done, we help our clients really unpack what those things are. And then custom match the talent based based around what the you know, the experience, you know, communication skills, salesmanship, like what that individual role is going to require for the for the eventual virtual assistant that

J Darrin Gross 12:54

they hire. And so tell me a little bit about kind of like a typical experience for somebody that’s that’s working with a VA. Does it start out like as a project as a start out kind of part time? Do they start out with a with a specific thing they’re trying to solve for?

Greg Brooks 13:18

Yeah, no, great question. So within within rocket station, we are fully dedicated, dedicated integrated virtual staffing. So that means our perfect client experience is we want your virtual assistant to look at and feel like they work for your company. So it’s strictly one on one there’s no like call center there’s no manager that relays what you need done to a to a group of people or one person, it’s all one on one our clients have a hand in interviewing and selecting the candidate they want from our pre screened pool. So we offer part time and full time we stay away from project based we find like a lot of the project based stuff we’re Our specialty is really helping our clients grow their businesses really create scalability really helped themselves remove themselves if they are a one or two person team remove themselves from a lot of the day to day and hire really talented individuals that can be a pivotal anchor within within their business. But but all all of those options exist. You know what we find is the difference between the people that are successful and not successful. It really does come down to that process piece of it right anytime you’re hiring but specifically when you’re outsourcing you know when your office is zoom when you’re communicating with a stranger that you can’t sit down in a room with and show them everything you know, whether it is a project based project whether you need some a team of people full time really being able to dive into that process and clearly scope out what you need done the expectations the KPIs around the role is really kind of what you know, what is the most important thing for anybody looking to hire virtually.

J Darrin Gross 14:48

So what are some limitations that you know having a VA present his or his or a list or anything you recognize right Up the top that a VA might present us this limitation.

Greg Brooks 15:04

So what I would say once again, speaking to kind of the entrepreneurial, you know, real estate investor, commercial real estate investor. I think so often, our clients see great results with their virtual teams, right? They maybe they hire them to just do some outbound sales or to do some underwriting work, some due diligence, some market research, and they start to try to hand off things too quickly, and try to have almost their virtual assistant run their business for them, you know what I mean? So I think what we try to get our clients to, and really the pathway we try to create for them is anything in your business that involves strategy, anything in your business that that involves final decision making, that should stay with you or should stay with local hires or executive suites, depending on how big your team is, where VAs can be right out of the gate, your first VA hire, you want it to be as impactful as possible, is really with like the day to day operational type work, right we and like I said, it kind of comes back to how VAs are kind of sold by some of the companies out there, it’s like it’s not a magic button, right? It’s somebody where there’s going to be a learning curve, they’re going to need communication, they’re going to need clarity in their role. So we find where entrepreneurs can really leverage VAs is, you know, on the operational type work. And keeping in mind, we have lots of clients that have had their VAs for four or five, six years. So those VAs roles have changed. We have clients who their VAs that were original hires with us are now managers within their teams. So there can always be that progression. But right out of the gate, you know, looking at that, we call them the $25. And under Tasks, right, the things that need to happen in the business. But you know that if you were to try to hire locally, you pay someone 25 bucks or less to do it. That’s the stuff where bas can come in and be very impactful. Right off the jump.

J Darrin Gross 16:56

No, that’s, that’s great. What about hours? You know, you mentioned the Philippines, I don’t know exactly what timezone that is, but I’m quite certain it’s not Central Time. Do they work your hours? Or do they? Or? Or is it a matter of what their task is to where they can? If they can do it on their time? Or were? How does that work?

Greg Brooks 17:24

Yeah, so we structure it to really mirror the in office experience. So to give you some background on the Philippines, and for the for the listeners that maybe aren’t that familiar, number one, the most beautiful beaches in the world highly recommend if anybody wants to do an overseas vacation, get to the Philippines. But they’re known as the nocturnal nation. So the virtual assistant experience that we’re talking about here, it’s called it’s part of a bigger industry called the business process outsourcing industry. So JP Morgan, American Express has 175,000 employees in Metro Manila, what we’re tapping into are the same resources that financial institutions that the fortune 1000 have leveraged, you know, for 2530 plus years, really, since the internet came online, it’s just now it’s more accessible, because the infrastructure over there is a lot stronger, because now we have platforms like zoom, and slack and CRMs that can be accessed through the cloud. So what how we structure most of our clients, the virtual, and a lot of the working economy in the Philippines have worked, you know, the business professionals, people with college degrees, people who manage teams, they work, you know, what’s known as the graveyard shift in the US, because they work mostly with Western clients, whether that be Europe, or, or North America. So it’s kind of a work in culture that’s flipped on their head. Part of our value prop is is we truly are kind of where we’ve truly are virtual meaning, if you think LA traffic is bad, or you’ve been through New York traffic traffic in Manila, you know, a country that’s a little bit smaller than the state of Florida, that has 160 million people in it. You know, you’re talking about working the overnight shift, and if traffic’s bad, you can be on the road for six to eight hours, roundtrip. So a big part of what we what we do is we you know, we put people into their home offices, you know, it allows them a lot more leverage their days flip, but they’re doing breakfast with the kids, getting them to school, you know, grab grabbing some sleep, doing the after school thing with kids and family, and then clocking in clocking in for work. You know, a lot of people you know, some people have questions about that for I’ll tell you just from working with, say, 1000 1000s of team members in the Philippines, it’s very normal for them. But but you do always have that flexibility depending on what you’re hiring. Like I said, we structure it because a lot of what we do is day to day operational stuff. But we do have some clients that you know, the virtual team members handle the overnight shift here in the US. So that’s a daytime shift in the Philippines. So we give that flexibility and I think for anybody out there hiring, if you’re interviewing if you’re putting job postings on Freelancer websites, make sure you are clear with with Setting, hey, this is going to be on a per project basis, I need to have very specific completion dates, or be just upfront saying, hey, I need you to cover 9am to 5pm, Central Standard Time, are you good with working? The overnight shift? It just one of those things you have to be aware of when you’re stepping into the virtual world? Because we’re not all on the, you know, the five time zones that touch the us

J Darrin Gross 20:22

know? So, this is a curiosity. I haven’t in my personal experience, asked her so are not not to this not like a sexist type of question, but I’m just kind of curious. Do you find it? Is there a is there a better performance as far as like, lead generation outbound calls? Male Voice versus a female voice? Is there any psychology there? Or Or have you found any any results that that, you know, say this or that?

Greg Brooks 21:05

No, I mean, it’s, it’s a great question. It’s something that we study very intensely. So our workforce is, it’s about 48%, male, 52% female, so we’re pretty much split right down the middle. I like to look at it on a on a per case basis, right, there’s a great, there’s great salespeople that are male, there’s great salespeople that are female, what I will say is where we see the patterns, in terms of the literally millions of hours of call data that we analyze, is specifically on the inbound and customer service side. You know, not to say a male can’t be successful in those roles. But we do find that when it comes to de escalations of calls, when it comes to NPS scoring around calls, female, you know, call agents do tend to score a tad bit higher on average than than their male counterparts. What I will say is, from the sales perspective, I’m just a big believer that that all does come down to the individual themselves, I think it doesn’t matter if you sit in Portland, OR Dallas, or Manila, or Mexico City, being a salesperson, and, and having a salesman ship about you is a very personalized skill. But as on the customer service side, we do see, you know, results a little bit favoring females, right, whether that’s on, you know, just from an experience standpoint, or whether that’s from the call, you know, what the caller wants to talk to kind of that more I don’t know, nourishing, I guess voice if you will, the customer service side, we do see a little bit more success with female female voices on the phone.

J Darrin Gross 22:34

And I, again, personal experience, I just know, I used to be a little while back and, and I remember, there were some candidates that I was having a conversation with, and, and again, it was maybe just the individuals the way they presented themselves, but I just remember, there was like a, you know, I was only listening to the call, but there was just a, in maybe it was just kind of an add on nurturing, or just like he was an add ease, kind of a thing as opposed to a somebody who’s trying to make a sale kind of thing as opposed to somebody who’s you know, engaging and, and we did really well with it, it was as an outbound lead generation kind of thing. And, you know, he worked out worked out really well. And I think the, the thing that I recognized is that when I engage in those lead generation activities myself, by the time that I actually get a viable prospect, I can be exhausted because I’ve been working through all these other activities trying to get to this one. Whereas when the, you know, the only one I’ve got to talk to is somebody who’s wanting to talk to me, it was like a whole different my energy was, you know, considerably different. I was excited to talk with them. And they were complimentary of the process and the person that set up the call and, and all that and it just it was it was literally it was just a kind of a great experience. And I’d love to have another project similar to what I was dealing with it that you know, was reasonable, we had one but I was I was impressed just in again the morning it was about offloading those, you know, that grind, if you will, you know, trying to do the outbound calls and and just have one teed up ready to go kind of thing was good.

Greg Brooks 24:26

Yeah. And that’s the type of stuff that VAs are incredible to be leveraged in within your business. You know what I mean? Like, just sales in general, right? The reason sales burns people out right, the average salesperson last last less than nine months at at a new job. I mean, it’s a grind, you got to keep the pipeline full. It’s a lot of nose, it’s a lot of phones put down and you as the business owner, who also has to number one, find time to make those calls and do that follow up and be consistent with it. But then you’ve also got to operate the rest of the business, right? It can just wear you down so that like those types of things to get that off of your plate if you don’t have enjoy I may not add in it, or it’s like, Hey, I just need someone that can consistently do this, because I can’t allocate 510 20 hours a week to it. I mean, those are the things that kind of the virtual assistant space is just really great at in terms of maximizing your time getting someone who is great at the cold calls and the outbound and can be consistent with it. So at the end of the day, you know, it all starts to kind of the ball starts to roll downhill for you, right, where now you’re starting to really see the results of that effort. And if that work,

J Darrin Gross 25:27

that’s great. You referenced $25 and under, is there a, like a cost comparison, or like a sense of what it might cost? If he were to compare, you know, domestic labor to the VA? The same task? Kind of thing? Is there a way in your, your approach to prospective clients? Is there some sort of a range or a number that you would expect it to be compared to a domestic employee? Or is it market specific? Or?

Greg Brooks 26:02

Yeah, so So to the US, the just the cost of living, and this just this goes in general to the Philippines is about 1/5, to one, six, the average. So for example, you know, a typical, you know, a $15 an hour employee that you’d hire here locally, right, that’s a four or $5 an hour employee in the Philippines, and not just in terms of compensation, that’s also kind of the the living, you know, the kind of, you know, lower middle class, middle class, upper middle class breakdown, that that’s just consistent with the with the value and cost of living in the Philippines. Right. So that’s, that’s one of the most probably rewarding things there. And that I see every single day within within our workforces, and our teams, is our pricing is it’s $10 an hour for a full time, you know, 40 hour a week virtual assistant. And I mean, from that, you know, there’s there’s a little bit of management fee that’s built in there, but from what the VA is making, you know, they’re living upper middle class lives are putting away for their kids, they’re building their first houses buying their first property, kind of everything, right that the American dream and the real estate industry has built around. Like, we’re able to provide that to our, to our virtual assistants, and we look at it as a as a triple win, right, we’re able to continue to grow rocket stations presence recruit more better individuals to service our clients, the client wins, because they have someone that for minimum wage, is doing the caliber of work of a 5060 $70,000 a year type employee. And then obviously, the VA wins right there, they’re able to provide for their family and have a stable income. And, you know, typically, with our client relationship where most of our clients have, you know, anywhere from seven to 10 Vas, they’re working in small teams, right, they’re actually talking to their boss, they’re not at American Express where, you know, their number, you know, 12,406 of 175,000, right, they’re actually working in a business and they’re having impact. And you see that passion come out in it. So like seeing those triple wins are, are really kind of what you know, I mean, that’s what gets me up every morning, and it has really allowed our company to kind of grow and flourish over the last few years.

J Darrin Gross 28:05

Now, that’s cool, the kind of more of the long term sense of things. And, you know, it’s funny, I know, obviously, Verizon, cell phone service, remember making a call, and it was very clear that there was a VA and, and great service and stuff, but I was like, you know, here’s, you know, like you said fortune 500 companies that are that are using this and and, you know, great, great skill said great customer service. And, and, you know, it’s it’s everywhere. I mean, it’s it’s again, it’s a it’s a matter of trying to contain your cost, and get the level of service that you’re trying to deliver to your clients. Makes complete sense.

Greg Brooks 28:51

Yeah. And I think just from a culture standpoint, within a company, we, I think everybody experiences this, whether you’re a solopreneur, or you work, you have an enterprise level company with 1000s of people, there’s always more to be done. Right? There’s just always more well, how can I how can I create a great customer experience? How can I create a great client experience a great investor experience, right? It takes time. So finding a way to balance like, Hey, we’re all running businesses that we want to make money in with, like paying enough people or having enough people to handle all of the work being done like that. I mean, that’s business. Right? That’s, that’s the toughest part. But what we really see from the feedback from a lot of our clients is like said, whether you are that one man or woman show or whether you’re, you know, managing the large teams is we’re able to get high level people out of doing C and D level work, like you talked about, you had great passion with actually talking to somebody that was interested in doing a deal, right, but it was the grind of doing the cold calls and trying to find that person that was wearing you out. Well, that’s the C and D level work so we can bring you someone in who’s technically more talented, who is very affordable for your business who can handle that work. So now you can focus or your teams can Focus on the A and B level work that you actually want them to do, right? The stuff that’s actually going to help the business grow or help you take on a new market or help you bring on another investment property. So that’s that’s kind of like the full cycle, what we love to see is like the virtual assistant space, the BPO space, when done correctly, it lets you invest your resources appropriately, where you can kind of have all of it right, you can have the great experience, you can have a workplace with a great culture, and you can have people slotted doing the work that you really want them to do, you know, not stuck behind a computer trying to get through their emails or catch up on calls or, you know, slog through a bunch of cold calls, right, we can actually get great people in the right seats so that everybody can level up over time.

J Darrin Gross 30:41

Now, I’m believer in it and have seen it work well. So I agree. Hey, Greg, if we could, I’d like to shift gears here for a second. 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 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 look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, then we look to see if we can transfer it. 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 their clients, political, you know, interest rates, the market, whatever you identify, or you consider to be the biggest risk. It’s free for you to define. And again, for clarification, 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, Greg Brooks, what is the Biggest Risk?

Greg Brooks 32:01

For me, I think it’s the pace of how quickly technology is changing how quickly global workforces is changing. And I think it’s a risk, especially in the real estate space, for those that are still trying to operate the same way they were in 1995, or two, even 2005, or even 2015. What we’ve seen a lot both on the technology side, obviously, US servicing on the staffing side, providing a virtual option. I mean, just like everything, the decisions that you have to make as a business operator are just accelerating, you have to make them faster, there’s a new software and new technology, a new tool, a new resource out there every second every trade show every corner. So having an effective way to vet those to find the ones that are going to work for your business and are going to fit, but then also getting people on boarded into them and changing existing policies and procedures and processes and weigh the ways that you operate to be more efficient, it takes a ton of human capital. So that’s something that I see I know, even just within our company, you know, in a short time becoming as big as we are, you know, that that that the evolution of technology and say a lot of the podcasts that I listened to AI is kind of the word of the here already, you know, 25 days into January. And I think that puts a lot. I mean, it puts a lot of risk on the owners in terms of making the right choices, finding the things that are going to last and actually take you to the next level and which of the things are kind of fly by night, you know, not not as good as as advertised. So I see ICT technology and then that globally expanding workforce, you know, really becoming something that especially in the real estate world, people need to be aware of and be talking about consistently, in order to make sure that you don’t get left behind because I guarantee your competitors. They’re making sure they’re not going to be left behind either.

J Darrin Gross 34:04

Oh boy, do I know that I’m talking to Mr. Slow ski. This as far as the adopter of these things, but you know, it’s it’s definitely a changing world. fast pace. That’s good. Hey, Greg, where can listeners go? If they would like to learn more connect with you?

Greg Brooks 34:23

Yeah, definitely. I encourage anybody to check, check out our website RocketStation.com If anybody say is looking for a VA wants to talk processes, best practices, looking to hire. So I’ve made my calendar available at Discovery.RocketStation.com We’d love to have a quick little 30 minute chat. See where you’re at see if it’s the right time to hire a virtual assistant. kind of understand what your needs are. So yeah, rocket station.com or book a call with us at Discovery dot rocket station dot com.

J Darrin Gross 34:55

Well alright. Well Greg Brooks, I can’t say thanks enough for taking the time to Talk today. I’ve enjoyed it. I learned a lot, and I look forward to doing it again soon.

Greg Brooks 35:06

Thanks so much Darrin, you have a good one. All right.

J Darrin Gross 35:09

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Cap Rate and Interest Rate Relation to Value with Edward Ring – CRE PN #404

Edward Ring 0:00

From call it 1980 Through through the early 2000s All apartment buildings were bought with negative leverage. Leverage was always the price of debt was always higher than than the cap rates are very frequently a higher than the cap rates. And people got used to figuring out how to how to buy real estate with that kind of debt environment if you had equity just buy with equity because why would you pay a lender you know you know, we get to the later part of the 90s and now all of a sudden you know, early 2000s Now we’re talking about leverage cost of debt that’s actually lower than your cap rate. So you walk into a project and the more debt you can put on it, the higher return your equity is going to get that’s how the math works. And so everybody got pretty excited about using that call it certain read about when I got into the business so read read around 2002 You know borrow it 4% Or four and a half percent and buy a property that has that’s thrown out for five and a half percent. And why yield that feels great.

Announcer 1:22

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 1:42

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.

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Today, my guest is Edward Ring. Edward founded New Standard Equities in 2010 and serves as its chief executive officer Edward has transacted over $2 billion of real estate over an illustrious 25 year career. And in just a minute, we’re going to speak with Edward about the relation between interest rates and cap rates.

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 Anna want to welcome my guest, Edward ring. Welcome to CRE PN Radio.

Edward Ring 3:37

Hi, thanks for having me. It’s a pleasure to spend morning with you.

J Darrin Gross 3:42

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

Edward Ring 3:51

Sure, I I’ve been in the multifamily real estate space since 2002. I was working for another company for about eight years when the great recession hit and I decided to do what I was doing for them for my own book and my own investors and you know, I was full of hubris and ignorance and just enough to keep the blinders on and the things I didn’t know about and you know enough to give me the the courage to try to do this on my own. So it’s been about 13 years now and I’ve got currently about 2000 units in my portfolio. I I do strictly value add apartment investing, and I own and operate and manage the investments with a team of course, we’re about 60 stronger so on the employee side and I stick to the markets that I know I’m in as greater see Seattle, I’m in Northern California, I’m in Southern California, and I’ve been farming Denver for the better part of about four years. So eventually, we’ll be in Denver as well. I use equity from anywhere, anywhere from Mom and Pop type investors, to large institutional equity sources, and in all parts in between family offices and whatnot. And my debt, generally speaking comes from Freddie Mac, Fannie Mae debt funds, banks, kind of whoever’s giving us the best rate at the moment in time, all nonrecourse talking about risk, I don’t want to lose my house over this stuff. I am very, very cautious. Some of my peers are more cowboys, and I tend to be very slow and steady wins the race kind of kind of character.

J Darrin Gross 6:06

No, I appreciate you sharing that kind of your background there. So you’ve been doing this long enough to see the front end and the and the kind of the back end of a cycle. I feel like a lot of people I speak with are kind of all, you know, post, you know, the the crash where everything was, you know, so low that you you didn’t really have to know anything you’ve just got in at the right price, you could write it up and, and, you know, get out and make some money. Because if my math is correct, 2013 or, excuse me, 13 I guess you were 2010. So it was kind of postcrash. Is that kind of the when you got in as far as doing it doing it on your own?

Edward Ring 6:56

Yes, exactly. Um, as far as going on my own, there was a small recession in the early 2000s 2000 123 ish. And, of course, I saw what was going on in that. And interestingly, the folks I was working with back in the early 2000s had gone through the previous downturn and recession in the end the and the, the credit crisis of the early 90s. And that was fascinating, because everybody that I learned from and my mentors and whatnot, We’re all veterans from multiple cycles. And for sure, it’s a pretty interesting time right now, because I to meeting all sorts of people who jumped into this business in 2010, or 2011. And have never really experienced what it means to sign on the dotted line, and what it means to have, you know, your credit crisis or, you know, or fundamental changes in, in the macro economy where your values can get impacted. It’s, it all looks so easy from afar, but it’s far from easy.

J Darrin Gross 8:15

No, well said. So I’m kind of curious, you know, I, when, when I have these conversations, a lot of times, what I find is that there’s a viewpoint that what happened last time that caused the crash is, you know, and this is more like a pre crash conversation. And I’m not saying we’re having her, we haven’t crashed yet, but there’s certainly been a slowdown right now. But the the want is to look to the past, and identify what caused the, the the last crash and look for those signs on the horizon for the next crash. Clearly, the the, the 90s was a credit crash, you know, you said the mentors you learned from and, and if I remember, it was not like the savings and loan kind of debacle that that kind of came on, done with I don’t remember what the circumstances were. Yeah, that’s

Edward Ring 9:19

effectively Correct. was you know, back way back then you’re talking about a a system that didn’t have really didn’t have the internet. I mean, that’s how, that’s how long ago it was. And that really that that information flow changed everything. Obviously it changed and we hear about it all the time. But when you really think about commercial real estate and and what’s going on, you went from a system where it was a weird thing to invest in an apartment building, because who knows what’s going on and what you got to fix the toilets. I don’t get it. You know, there’s a lot of ways There’s stuff out there and people are like, Oh, no, you can make money by investing with, you know, this guy from Chicago. It’s like, Oh, my God, that sounds terrible. Well, then the internet comes around. And you know, the last, the last big recession? What 2008? We talked about that in a minute. But all of a sudden, you had asset managers at banks, who were, you know, all of my peers and mentors, and people who had been around were like, oh, no, no, the banks, they don’t want to own this stuff, the banks are just going to take it on the chin. And don’t worry, you’ll buy it pennies on the dollar. Well, not so much. In 2008, there was this thing called the internet. And there were things called cameras that you can plug in, you know, put on your computer desk and take a look at the asset. And even in 2008, we had that technology. And so now all of a sudden, you have banks that are now populated with highly educated people who aren’t necessarily afraid of, of this thing called an apartment building, they’re not necessarily afraid of what they don’t know and are willing and able to jump in with two feet. So whatever it was afraid, or whatever was excited about in 2008, and nine was out, we’re gonna, we’re gonna go and make a ton of money, because banks are going to take it on the chin. And now that didn’t happen too much a little bit. Some, some borrowers and some owners really got over their skis and bought in markets that they didn’t understand or whatever. And sure, there were some losses. But cut to today. And the most fascinating conversation I had, I think was really at the front end of this thing back in, in June. And again, we don’t know where we’re all heading. I have some, I have a hunch. But back in June, I had a extremely sophisticated, very, very intelligent investor, institutional investor manages billions of dollars. And he’s literally one of the smartest people I’ve ever met. And he said to me, he pulled out of a project that we were trying to buy. And he said, Eddie, I know where this is all heading. I remember 2008 I know where this is all going. Like, really? You’re the most sophisticated guy I know. How do you know where this is heading? And he said, Yes, this total straight face and I said, Listen, I can tell you one thing for sure. One thing for sure is, it’s not going to happen the way it happened in 2008. That’s the only thing I know. In fact, nobody knows anything about anything except for no things happen in the exact same way each and every time. If they did, that’s called a crystal ball. And he would everybody would make money, I guess, or everybody would lose money. And, you know, think of a world where everything happens the exact same way every single time, first of all, but pretty boring. Second of all, that’s not the way human beings are. So now the question is, well, what’s going to happen in this next go around, and that’s where I’ve been mulling a lot recently, and kind of think through the various factors and, and, and prepare for a downturn prepare for the worst. But however, this is not 2008 2009 that was the scariest time I’ve ever seen in my life, not just as an investor, but as a sophisticated person who reads the reads the news and watches what’s going on and understands what’s happening with with credit markets, that was a really, really scary time, we were very much on the brink of an entire financial system collapse. And so if you think about that, and he cut to today, we have some inflation, we have a group in Washington dialing up the interest rates, we don’t have anything remotely close to what it looked like in 2008. And in fact, we’ve got full employment we’ve got lack of employment, we don’t have enough people to fill the jobs that we have out there. So you know, I the assure a bunch of layoffs in the tech industry right now and you know, you open up the newspaper here about somebody else laying people off but that’s actually normal. It’s a normal course of business. That doesn’t necessarily mean that we’re facing a ginormous credit crisis and everybody should run for the hills.

J Darrin Gross 14:38

No, I appreciate you kind of going through that and I’m you know, a believer like you say that whatever happened last time was now not what is going to happen this time you’re you know, that’s too easy. In a lot of it is because the the holes get fixed or like in the instance where you’re talking about the 90s where it was pre internet and now we have the internet You know that that’s a whole lot of information coming in everybody that’s available 24/7 365 as opposed to some sort of a local on the on the street kind of knowledge that, you know, may not be available to everybody. So let’s talk a little bit about, you know, kind of the, where we are now. And then, if we, you know, however it works best talk about, you know, that that that relationship between interest rates in and cap rates, because I think one of the things that, that, you know, people, historically, the interest rates read today, the mark would be doing cartwheels on the broad, kind of the broad spectrum of time. But having come from such a low interest rate environment, it’s a shock to the system. Right now, in my sense, and I guess my question to you is, do you think that the market will accept this and continue forward? Or will there be a complete stoppage? You know, and, and the recession, and then the need for the low interest rates to get the market going again?

Edward Ring 16:23

Yeah, it’s a great question. And I think that when I really like look at the landscape, and and I think about where we’ve been, and where we’re heading, first of all, there’s a couple of factors. From call it 1980, through through the early 2000s. All apartment buildings were bought with negative leverage, leverage was always the price of debt was always higher than, than the cap rates are very frequently higher than the cap rates. And people got used to figuring out how to how to buy real estate with that kind of debt environment, if you had equity, just buy with equity, because why would you pay a lender, you know, you know, we get to the later part of the 90s. And now all of a sudden, you know, early 2000s, now we’re talking about leverage, cost of debt that’s actually lower than your cap rate. So you walk into a project and the more debt you can put on it, the higher return your equity is gonna get, that’s how the math works. And so everybody got pretty excited about using that call it certain read, right, when I got into the business, so read, read around 2002. You know, borrow it 4%, or four and a half percent and buy a property that has that’s thrown off a five and a half percent. You know, and why yield? That feels great. You know, in some markets, that was a six versus a four and a half, or a seven versus a four and a half. And, you know, some markets, that’s a four and a half or a four and a half. But either way, that was everybody got used to the idea that that was part of the calculus, that would be there forever. And again, things change, and things move around. And people who are buying these things with financial engineering in mind are not looking necessarily at the proper metrics. Just because you can buy a seven cap somewhere, and finance it at a four doesn’t mean you should be buying that property. There’s a, there could be a lot of reasons why you shouldn’t be buying a property and we can talk about that in a minute. But, you know, today, last couple of years cap rates fell, because you know, the Fed cut interest rates to zero when Cap rates fell through the floorboards, and all of a sudden, people are getting comfortable at a three, three and a quarter cap. And the lower that cap rate, the tougher it is to dig out of it if you’ve you know, if something changes. And so we were very slow in 2021. And we were very cautious. I kept looking in my markets, we had a bunch of people not paying rent, and we couldn’t kick them out. And it was it was still very, very, very challenging. But we we tried our best to stick to our knitting and stick to our park discipline. And some folks may have not done that. And they bought it a three and a half cap and today they’re sitting at a four cap, maybe with some rent growth and you know, the markets are decidedly in the five and a half kind of range. All those folks are underwater. And so at some point, if they don’t have additional equity or they can’t do capital calls or Then those properties will be sold. And the equity holders will take a loss and maybe isn’t the lenders will take the loss depending on again where that property is. However, the other funny thing about today, and this is what makes me laugh every time I think about it, every single conversation I’ve had in the last nine months, is some version of the following. Oh, it’s gonna there’s gonna be a lot of opportunities out there. We’re excited. Oh, yeah. Yes, we have. We have dry powder. We’ve got billions. We have you know how much money we’ve raised billions of Okay, great, wonderful, all your dry powder well, and then I turned the conversation to their own portfolios and said, Well, what are you going to do on your own portfolios? Oh, no, our portfolio is fine. Right? So nobody, nobody’s, nobody wants to look at their own stuff is saying like, Yeah, I’m gonna get rid of my junky stuff and buy this now brand new stuff, like, you know, eight caps, nobody’s talking about that. They’re just talking about how everybody has dry powder. Well, somebody’s got to not have it, somebody has to have a deal, the clothes to sell, if nobody has to sell. And you know, it’s a little bit like the single family home market. And you want to talk differences between 2008 and 2023, the single family home market in 2008, there were tons of people with floating rate debt and tons of people that are underwater in their homes and forced to sell. And there were a lot of things well, this time around, not only has there been fiscal discipline on the part of the lender side, in the last 10 years. But now we’re coming out of this crazy time where people were refinancing their homes at two and a half 3% 4%, whatever it is, but there is no sale pressure at all in the marketplace for single family homes. Very, very little. And so now we’re just like in the multifamily spot, if people don’t have to sell, they’re not going to sell, they’re not going to sell and say, Yeah, we’re gonna sell it or nightcap, just because No, not we’re gonna hold because we don’t have to sell. Just reified. We’ve got 30 year mortgage on my house, why should I sell it, you know, that kind of thing. So I don’t know, if you can look at today’s market and say, yeah, there’s gonna be tons of deals gonna just materialize. But I can say that when the market fully resets, there will be a new cap rate, we won’t be buying in the threes anymore, we won’t be buying, you know, across the country at the same cap rate, which we can talk about that too, will be bifurcating and diversifying what we think is a good deal in Des Moines, Iowa versus Hollywood, California versus Hollywood, Florida, you know, there’s going to be a difference in all of those cap rates that we haven’t seen really in the last couple of years. And that’s driven in part by written by interest rates.

J Darrin Gross 23:03

Yeah, it is, I love the comparison that you’re making there about, you know, in what what created the market opportunity in the in the Oh eights is that people had had the sell, they didn’t have the revenue, they had a loan being called, or the I mean, the capital markets dried up to where they they couldn’t meet their, their, their debt covenants or whatever, whatever those situations were, they were forces outside that were causing them to have to sell. Whereas again, right now, like you just described, if somebody’s got, you know, low cost debt, and their property is performing, what’s the where’s the supply of opportunity going to come from? Other than get their markets where maybe there was a overbuilding that occurred or maybe you’ve got, you know, a debt that’s that’s coming due or that has to be refinanced, or I’ve heard a couple of stories where maybe a fund has a property and because the stock market has not performed well, that they had to liquidate, to rebalance their portfolio and, and I heard about a, you know, a group that picked up a property with tenure debt that was only one year into the debt, you know, at a at a great rate, I mean, they had bring more capital than maybe maybe it would have but but, you know, I am not hearing all of the story is just yet, of all the opportunities that have been forecasted by those you’ve talked with and many others and you 90. And I mean, there is a chance that this just could be kind of a boring cycle that that is the new norm of, of business. But I guess the history books will tell us what it what it what it was, or, you know, after we have to go through it. So, let me ask you about, you know, we’ve we’ve already talked a little bit about, you know, kind of the compression, the cap rate compression that occurred, and, and I guess even going back before, like the 2000s, how, you know, debt was always more expensive to wear, you know, the way people you know, the performance of a property. I mean, it encouraged people to come with more equity than it did. Debt. Is it possible that, you know, that becomes the new norm? And if that is the case, what are your thoughts on how long it will take for the market to accept that that’s the new, the new norm?

Edward Ring 26:09

Yeah, great question, I definitely think that it is possible that that is going to rapidly become the new norm. And I think that the what, what we’re getting back to, and this is, I think, good for my business. But we’ll see. But that is that you pay a lower cap rate. A lot of times the cap rate is always a function of risk, and you’re going to pay a lower cap rate, if there’s less risk in the project. And part of that risk comes from the market fundamentals. So we’re here on the West Coast, and we get a lot of a lot of grief about our politics and a lot of grief about, you know, this, that and the other thing, but you know, at the end of the day, we’ve got a ton of jobs here, we have a ton of high paying jobs. And so if we’re buying properties, even if we have to finance them at, you know, five 6% and whatnot, we can go and buy a project at a five, four and a half 475 cap rate, even though there’s, there’s negative leverage, because we know that our incomes here are so high, and the jobs are so plentiful, and this housing supply is so limited, that we have a very good sense that we’ll be able to move that rent in place up to basically cover ourselves, maybe we’re negative leverage for a year, year and a half. But within two to three years, we might be positive leverage, if we put the right data on, so all of a sudden, that opportunity feels a little less risky. And so we’re willing to pay a lower cap rate for that particular play. Now, if you’re buying something in a different, I don’t know where other markets where your listeners are, but let’s just I don’t know, pick some market in the middle of the country somewhere east coast or something that I don’t know. But let’s pretend there’s a market that used to trade at a six and a half. And lately, it’s been a three and a half. Well, in the last two to three years that didn’t necessarily add a bunch of high tech high paying, you know, supercharged jobs. And you’re really talking about service workers and you know, retail employees and whatnot. Well, now you don’t have the fundamentals that you could then make that bet that your cap rate was that you were safe at buying a three and a half, four and a half cap rate, because you’ve been moved that cap rate up as tight as you can raise rent, all of a sudden, you’re stuck with the rent, you know, barring maybe two 3% a year or something increases, but by and large your market is your market. And all of a sudden, that feels very risky. If you’re putting on a piece of data at five and a half, and you’re buying at four and a half and you’re in a market where that that market growth is not going to happen. Now how you can actually generate enough yield for your investors or enough appreciation so that when you go to sell your project in three to five years, they’ll actually make money. So now all of a sudden, that feels a lot more risky to me. And so that going in cap rate had better be a little higher than say what you’re buying in California. So all of a sudden, you know, what we saw in the last three or four years is just a real compression of cap rates around the country to a single kind of cap rate. Oh, this is the cap rate for an apartment building. Well, now I think we’re going back to No this is a cap rate in Tucson. This is a cap rate in Los Angeles is the cap rate and northern cow and each specific pocket. Each sub market has its own risk measurements and its own risk profile and its own fundamentals. And that’s why you have to be really, really diligent and smart about what Your buying and where you’re buying?

J Darrin Gross 30:03

Yeah, I totally agree with you, I’ve, I’ve definitely come to the conclusion that, you know, the cap rate does dictate, will there be anybody behind me wanting to buy this, when I’m ready to sell, you know, if if, even when, you know, cap rates are crazy in the twos and threes or whatever, in some of your bigger metro areas, and that was felt like that the one safety, you know, piece of security that they had was that market was not going to collapse. Whereas you get somebody that’s all excited, because it’s a 10 cap, you know, or something like that. I’m gonna like, you know, the 10 cap, you better love that property, because you may own that forever, as opposed to, you know, something that’s more in a, you know, in a market with jobs, I mean, the fact that you, you know, have said jobs, jobs, jobs, that’s, that’s pretty key, because those people with jobs are the people you want in your, your property. Right. And I feel like, you know, with is cheapest capital has been for the recent past, it’s allowed investors to, I don’t say, overlooked jobs, because jobs have always been kind of that statistical point that you have to be able to identify, you know, what’s the median income? You know, what’s the, how much how much rent can your, your potential tenants afford. But, you know, with the, we mentioned, the internet will shoot, you know, the whole COVID taught us that you can work remote. And so there was this kind of this almost this thought that you didn’t necessarily need to be in the market where the job was, you could be, you know, you know, at any point. And I think that, by and large that has played out, and I think there’s a lot of people that have relocated, you know, talk to anybody that’s investing in an office space, and I’ll tell you, certainly some, some stories about that, but but, you know, again, it still comes down to jobs. And, you know, there’s got to be some sort of concentration of jobs, high paying jobs, so that you can whether you buy a property at a low cap today will be, you know, cash positive or leverage positive here in a short amount of time. And I just think that, you know, kind of what, what I’m hearing you say, and what I’m kind of picking up from, from others is just that, you know, there is a reset that’s occurring. It’s, I’m assuming, and tell me, how long do you think? Is there a timeline you think are you believe that it will take for people to accept? This is the new norm? Um, we I know, we talked about Yeah, we think it could be, but is it like a year? Is it two years? Do you think it’d be three years when everybody just kind of accepts us? Or is this just a everybody keeps looking for something different until it doesn’t happen? And then they say, Oh, I guess this is what it is.

Edward Ring 33:36

Yeah, I think, I think that we’re we, as a real estate investor, as a group are impatient. And I think I I’m a no, no, no exception to that. It’s been, as far as I can tell, since about April of last year, so we’re talking about it’s been 10 910 months now, where the Fed has really started changing the dynamics of our marketplace, you know, with their intentions, good intentions or not, whatever their whatever people feel that they’re doing. They’re doing it and they’ve moved rates so quickly, so rapidly that investors haven’t been able to find their footing. And by and large, don’t want to actually be a participant in a market where they really don’t understand what the landscape is. And I think in you know, get my crystal ball out. But if the Fed pauses or stops, decides, hey, you know, we’ve moved interest rates high enough. We’ve slowed the economy down. Inflation is back to normal. Our jobs are still plentiful. Let’s, let’s just wait and see now and see how this goes on. I think then we’re going to start getting real estate investors to, to really kind of jump back into the market, I think that if they can project what’s going to happen, they’re okay to invest, if that means to get rewarded at some point with interest rate cuts, and great, they’ll take it. But if they presumed interest rates are what they’re going to be for the next three or four years, I think people will start jumping in sooner than later. And I think helping all of this, at least in the markets that we play in, on the west coast, is that our rents are, now there’s they’ve softened up a little bit, but for the most part are holding. And if we were getting, say, $1,800, for an apartment, a year ago, we’re still getting that 1800, you know, and maybe it’s a little bit more, maybe now we’re getting, you know, 1950 if we renovate the project or something like that, so we’re actually still seeing fundamentals been in a decent shape. So if that’s the case, and we can work those higher rents through the rent rolls than our cap rates will be rising, and somebody can turn to us and a year from now and say, Hey, would you want to sell this thing at a six cap? Yeah, I’d be like, Sure, why not? I could sell it a six cap, because my basis, my cost basis is really at an eight cap now. And so if I’m selling at a sixth grade, I’m gonna do well. Now, you know, if I am forced to sell fairly, and I haven’t been able to move the rents, then well, I may be pretty upset, but I might have to sell anyway, in which case, you know, we go back to what it was, like, many years ago with, with having to sell into a market that we prefer not to be in. So

J Darrin Gross 36:56

right. Now, I think that the recognition and understanding of the cap rate, you know, obviously, it’s a market. It’s a market cap rate, like you, like you said earlier, it’s not a, a nationwide cap rate, although that’s kind of what it was portrayed as. More recently, but, but definitely each market has its own home campaign be to be intimately familiar with that, and understand the, the likelihood or the possibility of it moving, I would expect that, it’s probably wise to assume it will go up. So if you’re, if you’re getting a deal, and you have an exit strategy plan, that you you know, plan for something a little higher, you know, but or at least have a plan to be able to hold through, you know, whatever is immediately in front of us. Let me ask you, because I think this is the, you know, it’s probably a question that seems obvious to some people, but I’m always kind of curious about this. How do you see the the the commercial debt? Just the structure of commercial debt? And does it not kind of create the cycles in the market all by itself? Meaning if you have a low rate environment, and people either rush into the marketplace and buy or refinance? Does it almost create a, you know, a natural cycle for when that debts, you know, to be to be refinanced, or extinguished? Or does it present just part of the the operators? You know, Rubik’s cube that they have to solve for?

Edward Ring 38:55

Yeah, I think it’s a little of both. I think, you know, over the last 20 years, we’ve seen commercial lending, take on a very interesting characteristic. Or maybe it’s been going on more than 20 years, but for sure, I see it today that commercial lenders are really just investors. And so they’re just investing in a sub stack of the of the, of the capital in particular project, you know, with between one and 70% or 65% or so. But at the end of the day, all those folks are investing and they’ve got investors and they’re mining their ship for what they’ve promised their people and Gone are the, you know, are the days of, you know, the local bank, you know, Mr. Potter had to go get your loan, you know, that those days are so far gone that now it’s, you know, everything’s been sliced and diced into bonds and you know, that Most people have investors, and so everybody’s basically an investor. And so, and there’s a lot of creativity and investing, as we all know, there’s a lot of creativity in structuring debt. And so yes, what you’re saying is, is quite true, which is, the more creativity that lenders get, the more they’re able to offer the lower interest rate, because they are making certain fundamental assumptions that the next lenders not making, again, trying to arbitrage and squeeze out a little bit more yield for their investors and do a little bit better. So one, time for bonuses come in February, their their bosses are all happy. And you know, because home and celebrates, that kind of competition really mirrors what goes on in the operator space, where we’re going to chase apartment building with, you know, five other groups. And we’re saying, Yeah, but we think we can do XYZ, so we’re gonna pay a little bit more. Well, if we’re right or wrong, that’s kind of where the rubber meets the road. And the same exact dynamic dynamic is happening at the lender level, from at the lender level is the losses could be even higher than, say, the losses and operator level, even though it might feel like feel worse, because you know, losing all of your equity, in one deal was terrible feeling but a lender could lose the, you know, 10s of millions more, and that is a much, much larger loss to bear.

J Darrin Gross 41:30

Yeah, that’s that old saying, if you have a $5 million loan, that’s a huge problem. If you got a $500 million loan, that’s a bank problem,

Edward Ring 41:39

exactly.

J Darrin Gross 41:43

Hey, Edward, if we could, I’d like to shift gears here for a second by dam and 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 strategies we typically look to consider, we first look to see if 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 when we cannot avoid nor minimize the risk, we look to see if we can transfer the risk. And that’s what an insurance policy is a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation. It could be their clients, investors, tenants, the market political, the Fed, how are we you would like to frame and consider the question, what is the biggest risk? And 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, Edward Ring, what is the Biggest Risk?

Edward Ring 42:56

I think the biggest risk I’m facing right now is not having the patience to to get comfortable with the knowledge base that I have, and what I see on the horizon. So I’m, I’m a person that tends to slow down when other people are rushing. They want me to make a decision quickly. So I peel back and take a moment, take a pause. I do my best work when I’m thoughtful. And I assess. And I think that that’s the risk that most humans not just in real estate, but most humans face is that they are making decisions without actually understanding the fundamentals surrounding the problems that they are faced with. And I think that folks out there would, would do well to get educated, and to really make sure that they’re arming themselves with intelligence and intelligent reporting. So they understand the markets that are in they understand the risk, reward calculus, and they understand what, what they’re facing. And if they understand all of those factors and are comfortable with them, then it’s pretty easy to make the right decision or at least a decision. And time will tell if it’s been right or not. But at least you’re eliminating the one single factor that everybody has and that’s your own ignorance. If you can eliminate your own ignorance, man, you’re gonna do great.

J Darrin Gross 44:35

Now, let’s say wise man speaking there. That’s That’s good stuff there. I appreciate that. And where can listeners go if they’d like to learn more connect with you?

Edward Ring 44:49

Yeah. NewStandardEquities.com. You can send us a note I think we have info at and I think there’s investors. There’s an investor portal if anybody’s saying interested in investing with us. You just go visit our website and click around you’ll find you’ll find it pretty easily. We, you know, we’re very cautious. So it’s not like you’re gonna go and see 1000 deals like a crowdfunding platform, you know that. So it’s a couple of year maybe. So, I welcome people to, you know, hop on our site and become one of our investor members. And we’ll see what happens. Hopefully we’ll find some decent deals out there.

J Darrin Gross 45:34

And 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.

Edward Ring 45:42

Cool. Anytime, take care.

J Darrin Gross 45:44

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 46:04 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.

Value Add Storage Facility Investing with Ryan Gibson – CRE PN #403

Ryan Gibson 0:00

We buy existing properties and our main focus is to deploy really solid revenue management and that would mean taking a property that’s underperforming or it doesn’t have isn’t quite built out all the way like we have extra land to we could build additional units on and we will take that property. Implement ancillary income like tenant insurance will raise rents to market will expand the existing portfolio of basically our property and will basically increase that noi so that we can improve the value of the facility over time.

Announcer 0:34

J Darrin Gross 0:53

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 to provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialists to protect yourself and your investment from catastrophic loss. The experts had building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Ryan Gibson. Ryan is the co founder president and chief investment officer of Spartan Investment Group. Ryan has organized over 200 million of private equity for Spartans projects across the country. And in just a minute, we’re going to speak with Ryan about real estate investing and development.

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 investor or on our investors, our listeners. And 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, and please subscribe. With that, I want to welcome my guest, Ryan Gibson. Welcome to CRE PN Radio.

Ryan Gibson 2:45

Thank you, Darrin, thanks for having me.

J Darrin Gross 2:47

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

Ryan Gibson 2:56

Yeah, started off actually as an airline pilot, and I met my business partner in Washington, DC. And we started with a residential development. And now we have a portfolio of a little over 500 million of self storage, a little bit of office retail industrial spread across 13 states. And our focus today is on finding existing Self Storage properties that we can add value to either through expansion or increasing rents or revenue management, or we sometimes build from the ground up. So we’ll find a development site, that will fully entitle and build a construction from the ground up and then lease up the facility. The other thing that we focus on and specialize in is construction. So we have our own construction company that will build self storage for others and also builds up our portfolio as well.

J Darrin Gross 3:50

Awesome. So if I understood right, the the asset class you guys focus on is is self storage and office is that right?

Ryan Gibson 3:59

Primarily 100% Self Storage. Sometimes the Self Storage is that we buy come with some ancillary things like office, retail, industrial, etc. But the majority of our focus is building our free up storage in our storage platform.

J Darrin Gross 4:16

And the two strategies I heard you say and I was hoping we could get into today is kind of compare. If you’re buying an existing property, I’m assuming that’s a value add strategy where you’re, you’re looking to increase the value. Is that is that my spot on with that or is that? Am I missing something? Yeah, absolutely.

Ryan Gibson 4:42

We buy existing properties and our main focus is to deploy really solid revenue management and that would mean taking a property that’s underperforming or it doesn’t have isn’t quite built out all the way like we have extra land to we could build a additional units on and we will take that property, implement ancillary income, like tenant insurance will raise rents to market will expand the existing portfolio, basically our property and will basically increase that noi, so that we can improve the value of the facility over time. That’s 95% of what we do.

J Darrin Gross 5:21

And when you’re when you’re buying an existing property, what are some of the the, I guess your due diligence? What are you looking for? Is it is it management? I mean, you mentioned the opportunity to build out more but but is management kind of one of the the the easy to fix? Or is it or is it grants? Or was there a particular thing that you look for? Or is it kind of like you dig in and, you know, try and find the, the golden egg or whatever the title make it, you know, make it work better?

Ryan Gibson 5:57

That’s a great question I there’s three things really, that we look for on an existing property. One, we look at the market, and if the market has rents that are below the rents that that facility is collecting, we analyze how much below the market that is based on a light kind property. That way we know we buy the asset, that we’re already below the market in rents, but also what’s really important in that is that the occupancy of the market is strong. And the rental rates are strong, so that we can justify raising rents on their on our current customers. So that’s kind of like the easiest, one of them all. The second thing that we look at is, what is the future potential of that market in the sense of how much population growth is coming? What is the access to population centers? What is the general consensus of where that market is headed, maybe there’s 10,000 homes being built within a mile, or there’s really strong job or income growth, those are variables that we strongly look at to make an investment decision, you know, surrounding a particular asset that kind of plays into occupancy and rents below the market. And the third thing that we look at is really, what other value can we add to the facility. So a lot of ways to make extra income is through tenant insurance sales, you know, we get 70% of the revenue on the insurance that we sell our tenants. And we require all facilities to have 10 insurance, they don’t have to use ours by by law, they can use whoever they want. But they have to have insurance to do that. So that’s one big ancillary thing that we can add right away. The other big one is that if it comes with vacant land to expand, and there is unmet demand in the market for additional storage, we will go in, and we will make sure that we can do the expansion that we’re intending to do. And that that comes in the due diligence process. We do a site survey, we look at the environmental study, we look at, can we build what we’re intending to build here. And you know, that’s usually done through the assistance of a civil engineer. And then those additional units will will add a ton of value to the to the property overall. So those are kind of the three main things that we’re going to look for and due diligence

J Darrin Gross 8:10

on it, and you mentioned the insurance and kind of the the rents, are you guys employing any kind of systems? I mean, is that a like, is it management systems as well? Or is there any kind of automation? And I have talked with others? And that seems like that’s kind of a big thing, if you get here? I’m just kind of curious, do you get that?

Ryan Gibson 8:37

Yeah, the nice thing about self storage is I feel like property technology, or prop tech is something that actually scales and self storage. So most facilities have not, you know, 90 95% of them have the capability of being fully automated, where you can integrate the revenue management system that we use into the property so that it speaks to the gate software, and it could switch on and off access based on late payments of rents, and other things like that. So the industry in general is highly automated, I don’t think it’s unique. That Spartan is going out and highly automating these facilities or implementing these software’s. Now, it’s rare, but sometimes we find a mom and pop that just has been doing it by hand, you know, handwriting, the leases, still, they’re not hooked up to the internet. Some facilities don’t have internet at all, or even sometimes running water or things like that. And they’re just doing it, because this is how they’ve always done it. And there’s no reason to go spend money in the software. But the industry has made it widely available to use this type of revenue management software that provides a lot of scale and automation. And so Absolutely, we do that, but I wouldn’t say that makes us really unique necessarily. I would say that that’s more of an industry trend that that most operators are doing and and it scales because you can really start dialing in collections, you know, having delinquent customers, you know, make sure they’re paying because they’re not being able to access their units, that gets their attention pretty quickly. So, you know, it’s a really fascinating space because of the automation that’s available to the to the consumer and the operators.

J Darrin Gross 10:19

Done. Did I hear you, right, 13 states is where you’re currently operating? Yes. And it is that? I mean, obviously, you do your deal with due diligence, like you talked about on kind of man in that. But do you have people on the ground then later with your organization? Or do you have third party? subcontractors that do any management for your How are you set up that way?

Ryan Gibson 10:45

Yeah, currently, we’re mostly all there’s only one facility out of 60 or so we manage all of them ourselves. So our employee count, as you know, well, north of 100 employees, I think 115 employees now, and we have our own employees deployed at each individual property across the country. So when we go through the acquisitions process, our employees are traveling to the site that will be overseeing that facility. So we know exactly what we’re getting into, before we buy the asset. And I think that’s an advantage. One of the many advantages of having your own in house property management is you have the ability to know that your employee is going to be there, that you have boots on the ground, in each of these markets that really help us you know, drive good performance. So that’s a really, really big piece of that, plus, you know, the principles of the organization, you know, myself and Scott and Ben, we traveled to the sites and see these properties for ourselves as well. It’s really important.

J Darrin Gross 11:45

Yeah, there’s no substitution for seeing it up front, in person. So your investment model, are you guys primarily doing? What am I trying to say here? Are you doing syndication? Are you doing? Is this your own money? Or how are you? How are you raising capital? Or how are you?

Ryan Gibson 12:09

Yeah, yeah, every every property is a syndication. So we, we like to target, you know, the bold types of investors, those investors who want to replace hard earned active income into passive income. So we have our in our Spartan storage income fund, that we raise capital for that goes out and buys existing properties with cash flow. And that’s a very specific target for people that want to see that monthly income because we do monthly distributions, that provides the investor with the upside potential and the month of cash flow, it also has got a component of depreciation, so the investors are getting losses tax depreciation in the year that they invest, which is great. The other thing that we do is a growth fund. So Spartan storage Growth Fund, which targets ground up developments. So those are the for those investors that yeah, maybe they’ve got a good balance of passive income, or maybe passive income isn’t as important as taking a little bit more risk for a lot more reward. And that’s the growth fund where we go and we find difficult to build sites or entitlement projects where we can go build from the ground up and add, that’s where we get the most value out of an investment. So we give our investors sort of those two options. And then we also do a debt fund, where if investors want to just have no upside, but But no, they’re gonna get that eight to 9%, monthly coupon, regardless of what happens and be in a higher position, or with some collateral, the debt fund provides that, that, that vehicle for them as well, so, and of course, we always put in our own money, we’re typically putting our own guarantee on the loans. And our employees also invest in our projects as well. So we’re very aligned when it comes to, you know, having our share of skin in the game.

J Darrin Gross 14:04

So tell me on the on the debt fund, do you use that on your own deals, then? Or is that to use go out and lend money to others or we’re

Ryan Gibson 14:12

Currently it’s just on our own deals. In the future, we may expand that to lending to other operators. But really the the issue with going to other operators at this point is having an investment committee that can approve the, you know, the worthiness of the borrower, and we’re just not quite feeling comfortable with doing that yet. So as of right now, it’s to help fund our own projects. And especially in this interest rate environment, it’s become more critical to have kind of more control over the capital stack so that we can do more for our investors, which is which has been fantastic.

J Darrin Gross 14:48

Yeah, I think you’re one of the first that I’ve talked to that have have I mean, people I know do a lot of like note investing and that kind of stuff, but actually to raise capital as debt as opposed to more of an equity side of things. And have you always been that way? Or is that something that came about later? Or how long have you been doing that?

Ryan Gibson 15:15

Yes. Yeah, so we haven’t been doing a debt fund. In the past, we’ve done kind of a deal by deal syndication of private debt. And it’s been very beneficial to our investors a great example, we were buying an asset back in 2017. And the lender pulled out at the last minute and is anybody knows in a single asset syndication, so many things have to come to a head to make the transaction successful, you have to have the capital raised from the investors, the bank financing lined up, and all that comes to a point at the time that you’re supposed to close with the with the seller. And sometimes that doesn’t really line up as you plan. And having the the RM to do private debt in the investors that have that appetite, can be very beneficial to being able to close on time when you say you’re going to close or maybe even adjust the closing timeframe, up to be more competitive. And so we’ve been doing this since 2017. And it’s been better, you know, there’s a litany of things that have happened such as bank financing pulls out last minute, or the bank changes the terms a week before, you’re supposed to close. And you say, I don’t really want to get stuck with this loan, I want to go somewhere else, but I just need a temporary loan for three months. So I can close on time and comply with the purchase and sales agreement, but have the bandwidth of the runway to go find better terms for debt. And traditionally, if anybody invest in self storage, or has been investing in self storage, it’s not the easiest asset to finance. And especially when you’re doing these projects that are value add and have a construction component to them, or they’re underperforming, or they’re in a tertiary market, or you’re an out of state operator, it’s difficult to find financing, exactly in the way that you perform it. So the private debt has really just opened up a lot more flexibility as our organization grows. Yeah, no, that

J Darrin Gross 17:07

makes so much sense. I I’m surprised, I haven’t heard others, you know, talk of it as much. And just the thing that kind of stands out for me, it’s just the control, like you mentioned, you’re no longer, you know, at the whim of the bank that decides to pull out in the last deal? Or? Or, you know, it would seem to me, it would give you a lot of security in the ability to control the closing and the deal. Now, when you when you put the debt on there, do you then once you get the property, you know, operating at a higher level on the NOI increases? Do you then seek to replace the debt and and use it again? Or is it a more of a permanent debt for the property through the fund?

Ryan Gibson 17:57

Sure. So it’s, you know, the debt fund offers redemption. So if investors want to park cash for three months, and then call it, it provides that liquidity. So we’re constantly turning over the money and putting it into other projects, as part of a debt fund allows. But but also, if that liquidity comes back, and we have a redemption request, or an investor that wants their cash back gives us that flexibility as well. So it’s kind of a win win for everybody, you know, it’s it’s, I don’t want my money to sit my savings account and collect point 00 2%. Or maybe it’s higher now. Maybe it’s 2%. Now, but you know, at the same time, it also provides limited liquidity based on the redemption period, and etc. So it gives us flexibility, you know, we look to say, the way that we’ve written the rules in the debt fund is, if there are if all the redemption requests are fulfilled, then great, we can continue to go lend that cash to other projects, but if it hasn’t been that we can’t continue to lend until all the redemption requests have been fulfilled. So, it gives us that optionality to pay off an investor or roll it into the next project. So a lot of interesting things.

J Darrin Gross 19:08

Got it? And I guess, let me just be more clear. So I get the idea and that your ability to close us whether it be the the equity raised through syndication, or the debt fund for bring that bring in the financing, but is there a point you do down the road wants the property you have it up and running and and, you know, operating at a higher level than what you purchased it at? D then ever replace it debt? or D? Yes. Okay. Okay. 100% Yeah, so

Ryan Gibson 19:44

a great example, we bought a property a couple of years back for about 1,000,003 and we put about 300,000 into fixing it up. property was a disaster. It was like 14% occupied. Obviously we fix it up and leased up the pot. property to stabilization, more than tripled the value and then did a cash out refinance. And then the investors benefit because they get all their cash back tax free and then continue to earn income from distributions on the property just as they would, prior to the refinance, except, you know, just not as much, because obviously, there’s higher leverage on the asset. But that’s a great strategy that we have repeatedly used. And today’s interest rate environment, obviously, it’s a little bit more difficult, because you’re going to be refinancing out probably some pretty healthy debt, you know, lower interest rate debt, but we do plan to do that going forward, as as we feel and have we, we’ve seen the predictions that interest rates will decline, hopefully, at some point. So,

J Darrin Gross 20:43

ya know, I love that concept and that strategy, you know, again, to have the cash to close to get your thing or your your deal, you know, operating at a higher level, and then to be able to refinance and, and recharge the line with investors or return capital or whatever that might be. But that’s, that’s a, that’s a neat, new way you’re doing it. As far as the operation of the properties, you mentioned that you’ve got people on the ground, you’re buying these in a syndication model, what’s a typical hold time for you guys on a on a property.

Ryan Gibson 21:18

So we’ve seen hold periods go two years to five years, typically, we project five years for pretty much everything we do. And we’ve seen properties, mostly that what typically happens within five years is we send all the money back, whether through distributions or through a refinance, or a partial sale, maybe we’ll have a an asset with a carwash on the front, or something like that. And we’ll, we’ll sub split the parcel and sell the carwash and the cash back early, but our goal is to send all the investors money back, plus a profit within five years. That’s our goal with every syndication we’ve ever done. So we’ve been pretty successful.

J Darrin Gross 22:00

Got it. And as far as when you’re buying an existing property, the timeline, from when you identify a property to close? What’s uh, what’s the typical timeline for either on due diligence.

Ryan Gibson 22:13

Typical due diligence period, depends on the asset, obviously, but I would say 60 to 90 days is pretty typical. 90 days being on the long end of things, obviously, that property may just have more dd to do or more kind of a tricky situation, or maybe a bigger asset. But you can see, you know, due diligence has dropped due diligence period has dropped because of our team, to as little as 30 to 45 days in some cases. But it really just depends on the third parties, because you have to order the survey, you have to order the environmental, and we rely on those studies to come in, in order to conclude due diligence. So it really just depends on the third parties. But we’ve seen that due diligence period really get a lot shorter over the years because of our thoroughness, and knowing exactly what we need to know, before we close. So that’s, you know, but I would say 60 to 90 days to answer your question a little more directly.

J Darrin Gross 23:10

Yeah, and then but even your your ability to shorten that, in your capital to be able to close? That’s, that’s pretty impressive. What about, what’s an average timeline for you guys to take a property that you acquire, implement your, your strategies to where the property is, you know, operational at the higher forecasted model.

Ryan Gibson 23:37

So we always pro forma a decline in revenue, at least initially, because when you take over, you’re always going to have a declining occupancy or friction, you know, these people walk into the office, and they see a new person, a new uniform new paint job on the place. And they don’t like it. They don’t like the change. But typically, we’ve seen revenue increase in as little as three months. And we’ve seen it take as long as a year. So I would say three months to a year is when we start seeing that benefit. If it’s a really nasty property, it might take a little bit longer, maybe on the more on the year side, we bought a portfolio about a year ago, and we’re just now turning it around. It took took a while to just deploy all the capital improvements, turnover, all the staff get everything sort of in place, and the revenue is now you know, increasing and it’s been about a year, but we’ve also takeover we’ve also taken over assets and done immediate rent increases and we’ve seen the impacts of that effect within as little as three months. So it’s it really depends on the the asset quality and sort of the deal itself.

J Darrin Gross 24:43

And as far as your capital improvements, you mentioned you’ve got your own construction, crew or personnel. Are you guys deploying? Are you a general or how Are you Are you hiring subcontractors? Or how are you handling all the work that you need to do in a in a value add strategy is had that in house or is that are you are you subbing out some of the worker.

Ryan Gibson 25:13

So everybody, everybody’s a Spartan from our project executive at the corporate level to our estimator, Project Engineer, all the way down to the job check trailer is a Spartan, so we are licensed in the states that we do improvements in, we’re a licensed contractor, we’re general contractor, but everything is subbed out. So we don’t self perform any of the subcontractor work, but we’re doing all the general contractor work and serving in that capacity. So we do everything from the initial improvements to the expansions. So we’ll build we’ll, we’ll do everything from oversee the hanging of a camera to a multi storey building from the ground up.

J Darrin Gross 25:56

That’s awesome. Definitely, you know, just have the more again, control compared to relying on on everybody else outside and, and be able to assess the situation, the numbers you’re getting and, and figure out if you’re getting a good deal, or somebody’s trying to take advantage of you. That’s good on you. So let’s talk a little bit about the development opportunities. You’ve mentioned, we’ve talked a little bit about buying an existing property or going out there some land that you can, you know, expand the operations on. Have you guys done some just bare ground, no asset, or, you know, no operations in place and gone gone vertical from there, or where’s it all been on an existing property with with operations.

Ryan Gibson 26:50

So we’ve done ground up development, we’ve done several, and we’ve taken some very difficult parcels and turn them into beautiful Class A properties I was mentioning before, we jumped on here, one that’s just outside of the Portland market about 35 minutes south east of Portland in a town called Sandy, we built a really beautiful property there took a really useless piece of dirt to be perfectly honest. It’s if you ever cruising out to Mount Hood, you’ll see the I think it’s an arco gas station right next to the Tractor Supply. And we’re right into that little that little complex there. And we took this parcel that has wetlands in the back, it was kind of a stalled project from a developer and took it over got it and got it the rest of the way through the the entitlements or building permits, and built it. And we’ve also built property in the state of Washington that had been riddled in wetlands, required approval, extensive approval from the core Department of Ecology, fish and wildlife, etc. And we’ve done things like rezone properties, there’s been a property we built in Colorado and Aspen Park, Colorado, that we had to use dynamite to blow up bedrock to put in a foundation. So I feel like the things that we even the early on projects have all been just extremely difficult. From, you know, the land that we had to work with, and the entitlements and zoning and permitting that we’ve had to deal with, we’ve done some very difficult projects. But what’s great is once you get those projects built, they’re in high barrier to entry markets, they’re in markets, where the competition is going to be severely limited in the future. So that you know that you’re kind of walling up your your fortress of, of competition. So while he while you pay a lot up front, in brain damage, and time and money, you also get the benefit on the backside, which we really like. So we do do ground up construction, and we do do, you know, very challenging entitlement opportunities.

J Darrin Gross 28:49

Yes, so these challenging entitlement things a little bit, I understand what that is just the time it can take to make something, you know, or to get the, to the point where you’ve got permits, and you’re ready to roll. You know, you were just talking about, you know, 90 days from identification to closing. What kind of timeline are you talking about when you you identify a property for development? And maybe we should break it down from from identification to permits to you’ve got space to rent?

Ryan Gibson 29:27

I’m laughing because that’s a that’s such a fun question to answer. Anywhere from No Time required at all, because the permits aren’t even there’s there’s no jurisdiction, we just called the h j, the authority having jurisdiction. There’s no jurisdiction, there’s no building permit process. So zero days to five years. So so it’s it’s everything in between. So, you know, he might, you know, we were really getting really frustrated when we first started getting into this because we’d hear people say, oh, yeah, it takes three to six months to get a permit and a year to build and And then it’s open. And then you know, we’re here we are in our project that, you know, our first ground up development took us four years. And we call it four years trees, the keys. So from the time that like, trees, yeah, so tree trees to key this could could vary. And it’s, it really depends. But, again, you know, we just built a facility in Tyler, Texas, there’s, we’re literally not even in a jurisdiction that has authority over our permit process. We’re we’ve got facilities and tight everything’s Oh, Texas is just an easy place. We have facilities in Texas that we built, that we had to go in front of our hearing examiner to get a conditional use permit on. And now, you know, just scheduling that hearing and getting in front of the board, and, you know, or the, the planning commission, and then them deciding and voting and how long that decision takes, you know, that could take six to nine months. And then you could be ultimately denied or have to come back and clarify, unfortunate, you know, fortunately, those things have been approved, and we’ve gotten pretty good at it. But it really can depend. And it really, in your due diligence process, you know, I highly encourage you, you know, of course, ground up developments going to have a longer due diligence timeframe, typically. But really, the important part is there is that we want to make sure that we can get all the government external approvals, before committing to fully committing to buying the land, you know, we’ll put up earnest money and spend a lot of money on the studies and things like that, but we don’t want to actually own the land, or be so committed to the property. And so we know we can do what we want to do. And we’ll move as quickly as we possibly can to get to that decision point. So we’re really upfront with our sellers, that that is our goal, right? Our goal is to build this thing here. And our goal is to move quickly, to buy the land and get those approvals. So. But yeah, it really it, you know, the sandy project, that was a five year development? Really? Yeah, yeah, the city didn’t want it. They didn’t, they didn’t want it. And in fact, after we had built the facility, they further restricted where self storage could be built. So it’s not something everybody thinks, oh, man, I see it just popping up all over the place. Self Storage is in every single neighborhood that I’m in, but especially in the Pacific Northwest, there’s a lot of jurisdictions that are putting moratoriums on storage there, and they don’t want any more of it, which is really I think, you know, I know I’m in the industry, but I think it’s a disservice, because every American uses self storage, at some point in their life, typically, you know, one in every 10 Americans. And, you know, when you look at a city, we know exactly how much demand exists because there’s heuristics, there’s through state, local, and really, micro market heuristics that, that tell you how much demand there is. And when you restrict the supply, all you do is increase the price for the facilities that remain. So really, you’re doing a disservice to the people in your community that need a self storage facility. And most of the time, people use people think, oh, self storage is just for people who have too many things. But I’ve pulled the housings of people, you know, at speaking events and conferences, and we also know our customers, you know, or we have, you know, 30,000 plus customers, they use it for primarily two reasons. Number one, for business. So their store, they’re using it to, you know, a real estate staging company, or sheetmetal contractor or somebody who has an Etsy store, something like that, some some kind of business, or they’re using it because they have a life event. They move, they relocate, they downsize, they renovate their home, somebody dies, they put their stuff in storage, there’s their family gets too big, they put their stuff in storage. So really, it’s a life event driven business. And when you restrict, allowing it to be constructed in a, in a community, you’re going to, you’re going to just create price inflation, like anything. Now, the other hand of that is if you if you build too much of it, then you reduce the pricing, right. But, you know, that’s kind of the balance. And that’s some of the things that sometimes are in our favor as operators and sometimes go against us.

J Darrin Gross 34:09

Ya know, the, the supply and demand thing, and in the political landscape is always kind of a dynamic that it seems like there’s a, there’s good intentions for whatever reason, that they’re, they’re putting out there, but but I don’t think that the they always have a good understanding of the market and how to solve the problem. You know, and it’s so unfortunate because it’s, it’s in a lot of different asset classes, not just self storage. I mean, you look at, you know, housing, absolutely, and stuff and it’s just it, but it’s a, it for whatever reason, that’s a riddle that seems to just be a constant. And, you know, then there’s, you know, the, the, the source of the problem that they identify is not necessarily the source of the problem, but it’s more of a restrictions that they put on the marketplace. But other another time another conversation,

Ryan Gibson 35:09

I think summarized and with that is, you know, affordability is a person made problem. Its zoning, at the end of the day, you know, you restrict what you can build and where you can build it. And you create affordability issues. So I digress. Yeah.

J Darrin Gross 35:25

Well, I, you know, I’m kind of curious. This kind of leads in her comes from that is the zoning. Do you find that as you get further away from a metro area, the minute it typically, I mean, you mentioned like, 00, time to, to, you know, four or five years, whatever kind of thing is, is that the zoning, typically, is it very specific about self storage? Or is it? Is there is there? I mean, is there a lot of resistance to it, outside of the Northwest?

Ryan Gibson 36:00

Yes, or No, I mean, there’s certain markets, you know, that will restrict it, especially like, you know, resort towns and highfalutin areas, I would say three things, three, three ways to bucket what you’re going to encounter one little to no zoning, or very generic allowance in a commercial zone. So if the property is commercial zoned, you’ll be able to go into the zoning code, and you’ll see that self storage as a permitted use under that zoning jurisdiction, that’s pretty typical, you know, out out in the rural areas, that you’ll be able to do that. The second thing you’ll encounter, you know, the out of the three that I would say, is you’ll the zone, the Self Storage, you’ll be allowed as a permitted use under conditional permit. So a conditional use permit, or some kind of special use permit, something that you have to go in, and it’s not an automatic approval, but you have to sort of justify to somebody what you’re about to do. And then I would say the last thing you encounter is, it’s, it’s not allowed, or you have to have a rezone, you know, based on the property you’re trying to do. So maybe it’s a residential property, or maybe it’s zoned a certain way, and you’ve got to get it rezone into commercial, or rezone into allow for self storage. Or you might find that even if you are allowed to build self storage here and you are in the zone, there’s a moratorium for that for another year. So or there’s some kind of restriction in that zone. So it’s really important to understand kind of what you might expect to find in a market. And that always starts with just going down to the city and saying, I have this parcel, I have the site, I want to put self storage on it, obviously do your homework a little bit on the zoning and what’s allowed, but just go get the temperature check from the city. And that’s usually done through what’s called like a pre application hearing, or some kind of a preliminary hearing where you can kind of get all your chips out of the table. And you don’t have to have design plans or spend a lot of money on an architect with that. But the more you kind of under know, kind of what you want to build and what you want to get out of it, the more you’ll take away from it. So housing kind of the better prepared you are from from a pre op meeting, the more you’ll kind of take away with what you can do,

J Darrin Gross 38:10

ya know, if you’ve got a partner in the project, or if you got a, you know, somebody’s gonna try and keep you from doing it makes a lot of sense. He let me ask you, so you mentioned kind of the the return, you know, the opportunity if you’re if you’re doing the value add strategy that the returns kind of quicker, and people are able to say if they’re late, isn’t exactly what you said, maybe what I interpreted was, that, if so many is kind of more on a right away, they’re looking for a return that the syndication model in the in the value add, allows for that, whereas, but you also made it sound like that, you know, the opportunity, like you mentioned the one deal where you bought it for like 1,000,003, put 300 in and were able to triple the value and return all the capital and do a refinance and and all that. How do the returns compare with the new development as opposed to some of the value added strategies? Or the

Ryan Gibson 39:20

Yeah, obviously, you know, past performance doesn’t predict future results. And this is just a projection, you know, do your own due diligence, I would say the projected return on a kind of existing property that you know, kind of stands to just have some slight you know, tweaks to the value add and revenue management, you’re gonna see 14 to 19% annualized returns so that that includes all the money that you might receive from cash flow, and all the money that you might receive from the potential sale. So that’s a range that we give our investors so 14 to 19% with cash flow being between, you know, usually typically starting in the four to 5% range and and increasing to the 8% per annum range, and then that we kick that out monthly. And then the rest of the money coming from the eventual sale the asset, you know, after we make those improvements, properties producing more income and there by the valuation is higher the growth fund or or the ground up developments where you’re you’re taking raw land from scratch, maybe getting a really good price on the raw land and really doing a lot of the sweat equity work through getting those challenging entitlements and permits and building, you’re gonna see those returns stretch into the mid 20s. So you’re gonna see that 22 to probably 27% projected annualized return, no cash flow, I always like to stress to investors, you know, when you build something from the ground up, it’s not producing any income for at least three years, typically, you know, if you if you had a fully entitled site, and you could put a shovel on the ground, a typical size facility, so it’ll take you a year to build it, then it’s going to take typically 30% leased per year. So if it’s going to take and your breakevens, usually around around 6060 to 65%, typical, you know, depends on your capital stack and all that. But typically 60%. So when you think about a year to build, and then two years to get it to 60% occupancy, you’re looking at no cash flow for three years. So but you’ve built a tremendous amount of value, your cost basis, or what it costs you to get to that point is going to be considerably typically considerably lower than what somebody be willing to pay for that asset, at certificate of occupancy like right when you open or when you lease it up and stabilize it. So there’s a wide range of exit strategies in that model, but there’s no cash flow. And there’s an expectation to make mid, you know, low to mid to maybe even high, you know, 20% return range on that on an annual basis.

J Darrin Gross 41:57

Now, I appreciate you doing the comparison there. Because it’s always been kind of curious and always thought there was a opportunity for a greater return on the development. Do you guys ever do any redevelopment, take a like a warehouse and convert it into self storage or like an old retail box or something like that.

Ryan Gibson 42:18

We haven’t done the work ourselves to do that. But we have bought a Macy’s that was converted into self storage. It’s one of our largest properties, 180,000 square feet 1100 units in Fort Worth, Texas, we bought a Macy’s that was part of a mall. And that was converted into self storage. So we look to do more of those. But we haven’t done as much as I would say I like I’d like I’d like to I think there’s a big opportunity. And that still, some of those parcels are you know, they don’t have enough demand or the the expectation of what they would sell and how much money you’d have to spend to fix it up to convert it is still kind of out of out of balance. Because you know, if you’re buying like a really nice main and main store that can be repurposed into a Whole Foods or something that is going to get, you know, really good cash flow, the sellers are going to expect to sell that asset for what kind of retail it made a main would trade for. Likewise, if you’re buying a junk Kmart that went out of business many, many years ago, it may have gone out of business for a reason. So and it doesn’t necessarily equal Self Storage demand. So even if the building is super cheap, it might not be in an area that’s going to have self storage demand. So you got to be really careful. You know, a lot of those opportunities have been picked over, or sold off if they’re if they’re really well positioned. But there’s still a ton of empty retail, and grocery store chains and bowling alleys and skating rinks and just tons of opportunities out there. You just got to really find what makes sense.

J Darrin Gross 43:53

No, no, I just love the opportunity or the idea of repurposing as opposed to you know, knock it down, put it up, you know, cuz it seems to me like there’s a there’s some infrastructure there that’s worth something, but maybe, you know, just the cost doesn’t, doesn’t penciled up to make it work. But

Ryan Gibson 44:10

Absolutely, yeah.

J Darrin Gross 44:13

Hey, Ryan, 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 that we typically consider, we first look to see if there’s a way we can avoid the risk. If that’s not an option, when we look to see if there’s a way we can minimize risk. And when avoiding or minimizing is not an option, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be the economy, the Fed, political you know, whatever you whatever you view as the biggest risk if you can identify that, and let us know 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, Ryan Gibson, what is the Biggest Risk?

Ryan Gibson 45:25

Yeah, so I would say your biggest risks are external threats. Things like cap rate expansion, you know, property values declining, really can’t control that. Interest rate, risk, etc. But I would say my focus that I’d like to share is five main things that I look at, in underwriting a deal. In I can do this in 10 seconds. I look at revenue growth year over year, and is it reasonable? Does the business plan, identify if that revenue is achievable based on the market study that you’ve done, somebody else has done or an operator’s done? The second thing I look at is insurance. So insurance costs are not going down. So if you have not pro forma added, that your insurance expenses are going up, I usually don’t like the deal anymore. As much. The second thing that I access risk, or the third thing is property taxes, property taxes are not going down, property taxes are going up. And if you’re not planning on property taxes, at least doubling over a five year hold period, I don’t think we’ve assessed the risk and the opportunity. The third thing I look at is expense to gross our revenue to expense income. So Egi, expense to gross income ratio, I guess there’s another way of saying it Egi. That’s if you make $1 of revenue, what percentage will be your operating expenses. And so in self storage, I’ll look at a deal. And I’ll say, you know, I expect to see between 35 and 40%, expense to gross income ratio, meaning that if you’re collecting $1, I expect to see 35 to 40 cents for that dollar and expenses, and all your utilities, insurance, property taxes, all that stuff before debt service. If I see that number 20%, or 15%, I don’t think there has been enough assessment in the underwriting to really accurately depict the worthiness of that deal. And the last thing I look at is cap rate. Because cap rate, you know, we love to everybody loves to think that they’re the best operator, they have secrets and things like that. But at the end of the day, cap rates drive the value, they drive, the value, they drive, the exit strategy they drive, the market really drives where a lot of these assets can perform. And yeah, we can control and do our best. But that cap rate really makes an impact. I mean, one $1 on a 6% cap rate means $15 evaluation. So yes, operating income can do that. But I like to see an investment where you can stress test it. And that you can actually show the cap rate getting worse than what you bought it for. Not from your operations, but just market cap rates. So if you buy something going in cap rate at 5%. In today’s market, I’d like to see that it can exit at a market cap rate of 6% and still be profitable. So when I assess risk, I look at those five things and underwriting and I and I really kind of stick to my guns on that. That’s how I can look at a deal in 30 seconds. No, have they adequately assess the risk? Of course, there’s tons of more things that you need to do beyond that, but those are kind of my five quick checkboxes on any opportunity.

J Darrin Gross 48:40

No, I love it. It’s kind of simple and direct. And you can you know if it follows check the box you can can proceed. Ryan, where can the listeners go if they’d like to learn more connect with you?

Ryan Gibson 48:55

Yeah, sure my emails, Ryan at Spartan hyphen investors.com, or our website is just Spartan-Investors.com. I’m also pretty active on LinkedIn. So if you connect with me on LinkedIn, I think I’m Ryan Gibson oh one or something like that. And in the Seattle area.

J Darrin Gross 49:13

Awesome. Well, Ryan, 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.

Ryan Gibson 49:23

Thanks for having me, Darrin.

J Darrin Gross 49:25

Announcer 49:43

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Real Estate Note Investing with Fred Moskowitz – CRE PN #402

Fred Moskowitz 0:00

But we’re buying notes on the secondary market notes that were already originated by someone else. And what happens is they’re sold at a discount. So we buy notes that exist already either they were originated by a traditional lender or a bank or an institution and then they’re sold on the secondary market. Now back to your back to your which is different than being the originator of the loan originator of commercial, a commercial loan commercial projects.

Announcer 0:36

J Darrin Gross 0:56

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 Fred Moscowitz. Fred is an educator and best selling author who has trained countless investors from all walks of life on how to create passive income streams on their own. As a fund manager Fred manages a mortgage note Investment Fund, and is considered an industry veteran within the note investing arena. But it teaches the concept that individual investors are able to step into the shoes of the lender through note investing, and effectively be the bank. And in just a minute, we’re going to speak with Fred about mortgage note investing.

But first, if you like our show, there’s 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, Fred Moscowitz. Welcome to CRE PN Radio.

Fred Moskowitz 2:56

Thank you, Darrin, it’s great to be here. I’m so excited for our conversation today.

J Darrin Gross 3:01

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

Fred Moskowitz 3:10

Yeah, absolutely a little bit about my background, I come from having a very long and successful career. Working as a computer engineer, I spent a lot of time working at technology startup companies. And it was wonderful, it was amazing. So many amazing opportunities that I was part of what happened was that I watched my entire industry get turned completely upside down. We lived through the bursting of the.com bubble. And then that was immediately followed by the September 11 terrorist attacks. And there was all this turmoil in the world all across the world. And our industry was in shambles it was in shambles. And what happened was I realized that I was way too dependent on the income from my job on that paycheck. That was my only income source. And so I came to this realization that even though I love my job, it was a job full of all of the circumstances out of my control. And it didn’t matter how talented an engineer I was, or how valuable of an employee I was. If things were not going well in the industry or in the company that I would lose my job through no fault of my own. And so with that, I turn to investing to find other sources of income. And I’ve wanted to generate passive income so I would not be relying on my job as my only source of income.

J Darrin Gross 5:04

Got it. So as you were looking for something different, were there any other things that you, you tried before you settled on? Investing the way you are now?

Fred Moskowitz 5:19

Well, I started out, I started out investing in real estate, I wanted to one thing I learned was that there that I couldn’t invest in tangible assets, in fact, and turning to the alternative investments area, could invest in in tangible assets, that would generate income for me while I own them. And that was very important. That was I was focused on cash flow. And so I started with investing in real estate, I built up a rental portfolio here in Philadelphia, where I’m based out of, and I did really well with that that was was going well, after a number of years, what happened was through my education, I was pursuing education, the whole time learning learning skills, learning new strategies and techniques, I learned about note investing, where you could invest in instead of buying and owning the property, you can instead buy and own the debt on the property and earn cash flow from that. And that was very intriguing to me, because I saw that it was something that you could really scale and turn into something big, you could build a very large portfolio, and it was, was not difficult to scale it. And so that became very appealing to me. And I got involved with that, and eventually has grown to where it’s the main focus of my business activity now. And real estate is a great asset. But there’s so many ways to invest in real estate. So many note investing is one of them. But what’s interesting about it, is that you you own the debt, however, you don’t own the property, so you don’t have the the management headaches of owning the property or the risk and liability of owning the property. So it does put you in a in a unique situation.

J Darrin Gross 7:29

Yeah, no, I hear you. So let’s talk about the mortgage note investing. I think probably the the first thought that comes to mind is, you know, how much money do you need to be a lender? You know, if you’re going to borrow hundreds of 1000s of dollars from the bank to buy a property as a private mortgage note investor, how much? How much does a person need in order to get started as a lender?

Fred Moskowitz 8:00

Yeah, that’s a great question. Taryn. Let me start out by saying that my focus what I do and what I teach about, it’s about not creating the lending. But we’re buying notes on the secondary market notes that were already originated by someone else. And what happens is, they’re sold at a discount. So we buy notes that exist already, either they were originated by a traditional lender or a bank or an institution, and then they’re sold on the secondary market. Now back to your back to your which is different than being the originator of the loan originator of commercial, a commercial loan commercial project. How much do you need? There? There’s no, no limit. It is a capital intensive business for sure. So you do need to have capital, there are notes, small notes that may have a five or $10,000 balance, and you can get up from there go all the way into jumbo loans which are approaching a million dollars and everywhere in between. And so there is no set amount on that. In that goes for buying individual notes. And if you invest in a note fund, where you’re investing in a fund that’s professionally managed, they will have minimums and maximums. But some of them are on the smaller end maybe $25,000 or $50,000 or $100,000. Each one is different. There’s no right or wrong. It’s it’s just however, The business model is. So really, it’s something that you can look at to see what fits best for you individually as an investor.

J Darrin Gross 10:10

Got it. So with respects to the different opportunities, whether it be invest, investing, or buying a single node or investing in a fund. Can you describe kind of the, the range of return? One might expect?

Fred Moskowitz 10:30

Yeah, absolutely. I’ll give you some, some rough examples. Think of it this way, it comes down to risk tolerance. Right? For you guys in the insurance world, you know all about this. So for someone that’s willing to take on very low risk, you’re gonna get a lower lower rate of return in exchange for the high security. Now, if you’re comfortable with a greater risk than the rate of return goes up and not. And so this is give you an idea on ranges if you’re investing in super safe notes that are in first position. And they’re there’s equity above and beyond all of the liens on the property. And it’s in a good area, and the borrower has excellent credit, excellent track record, checks all the boxes, right, you might be looking at five or 6% rate of return. Now, at the other end of the spectrum, you could get into things that have higher risk, for instance, notes that do not have a perfect payment history and perfect track record, or a borrower that is a little more challenged with their credit history credit record, or the property might not have a good equity coverage on it. Or the loan might be in second or third lien position, where it could be any of these things, or maybe it’s a loan, that’s a hard, hard money loan, where the lender, the lender is originating a loan to an investor that’s doing flip, fix and flip projects. And that’s a short term loan, but the RE returns is very high, it’s not uncommon to see 1012 14% interest rates on those. And that’s why, and so it really runs the full spectrum there. And what I found in this industry is as you get more experienced, you get more comfortable with managing risk and taking on different challenges. Maybe you’re comfortable with solving different kinds of issues. And so you pursue those higher, higher risk higher return opportunities, which is a natural progression. In note investing. It’s present in real estate investing as well. People as they become more experienced more savvy investors, they will go and acquire a property that has some problems that can be fixed has some challenges, whether it’s a management issue or or property conditions issue, but all of these things can be corrected and addressed. If you put in the work and the resources to do that, and time. And so when when you do that you become more successful as an investor, because you’re able to create value, you’re able to realize a higher rate of return and greater profitability that way because you’re pursuing opportunities that others may decline to pursue.

J Darrin Gross 14:02

Yeah, no, that makes complete sense. I want to ask you getting back to the you know, where you are selecting a loan to buy or investing in a fund. If, if I were to underwrite an individual or a, you know, for for a specific property and I’m assuming it’s, it would be very similar to like, if I was going to borrow money myself they want to see financials want to know about the property, you know, that you and your likelihood repay. When you go to buy something from, you know, an existing loan that’s already in force. How do you get the information you discussed? With respect to the likelihood of the loan being paid and how safe it is?

Fred Moskowitz 14:53

Yeah, for it for for your due diligence, right. Very important, very important prior to buying, buying To note, or investing in a note fund you have, that’s the time to do your due diligence, right. And I talk a lot about this. In my book about noon investing, I’m an entire chapter dedicated to how to perform due diligence and the various areas to look at. Now, when buying existing loan, like you said, you have, you look at the property and the property value and the borrower and their track record, all of that information is provided to you by the prior note holder, they will, they will provide that to you as part of the transaction, you have every right to, to review that information, you have the right to pull credit on the borrower, because you’re buying that loan, that mortgage. And so this is very important, you have access to this to this information. And it’s up to you to obtain it to know what you’re looking at and do an analysis. Now another area that is very important is loans are typically managed by a note serves a loan servicer. And so the servicing company is going to be able to provide reports and data on the payment history and the track record. And so you can review all of that. And that’s that’s very important. And let me just add an additional point here. loan servicers are an integral part of our business and very important vendors. Think of loan servicers as the same way that a property manager manages a rental property on behalf of the owner. The loan servicer manages the note on behalf of the lender. And they take care of keeping track of the accounting of the amortization schedule, they collect the payments from the borrower, the take phone calls, they send out the IRS tax forms at the end of the year that need to get get sent for the interest that’s been paid, they handle when a loan is going to be paid off and generating all those documents that’s needed. And also all the compliance paperwork and requirements that are that are needed. So they take care of all of this. And it really is a valuable service. And I would say that, at least in our business, we we place every single loan with a loan servicer, that’s that’s very important, because they handle so much so much of the day to day details, and it makes our lives easier. And it keeps us compliant as well.

J Darrin Gross 17:49

Ya know, they definitely don’t want to get upside down or sideways or chasing money.

Fred Moskowitz 17:55

Because we have to focus on on our business as investors, right. That’s, that’s what we do. And so a lot of things, it’s better to to delegate we’re hand off to experts, that that’s what they’re good at.

J Darrin Gross 18:13

Sure, that makes sense. So let me ask you this. You’re buying an existing loan? Why is the the existing lender selling the loan? Hmm, great, great

Fred Moskowitz 18:26

question. A lot of there’s a lot of different reasons. So the main reason that I see it revolves around liquidity. The seller of a note usually needs their capital back whether it is because they’re paying investors back. Or they’re maybe they’re recapitalizing because they have a new a new purchase transaction they need to fund it could be that there is a note fund or a mortgage backed security on Wall Street that exists for a specific timeframe. And after X number of years has elapsed, they call they collapse that investment and sell off all the assets. And so these are some of the reasons why but when we buy from we buy a lot from individual investors and other note funds and hedge funds. It’s usually due to liquidity that they need, they need the capital for something else. And so they’ll sell off notes to close out close out fund, close out an investment where raise capital for the next purchase they’re doing.

J Darrin Gross 19:45

So you mentioned you can buy these at a discount. If you have an original loan and let’s just use a like a residential mortgage for example of a 30 year fixed rate have, you know, I’m trying to think, currently think where you can get rates on five. But you know, they recently they were as low as you know, in the three years or below. You’d mentioned these five to six and 10 to 14. Are you? Are these notes not like an individual mortgage? Are they are they typically more of like a commercial nature?

Fred Moskowitz 20:26

No, they’re they’re often residential mortgages. Absolutely. There’s both types for sure. But some of the things that impact pricing may be that the loan, the loan might be in second position, for instance, we buy a lot of, of junior liens, there’s a lot of nuances to that space, it’s its niche area. And so that’s perceived as a higher risk. And with that, there’s going to be agreed or discount. Another another thing, you’ll see a lot or noon notes that they’re being paid on. But they have a less than perfect track record, maybe there’s been some lapses in in payment history, or the borrower is one month behind, however, they’re still paying every month, when when you have these scenarios, that’s going to change changed the greeting and the risk and those who will trade for a greater discount. Or if there is equity, whether it’s not full equity coverage, or maybe the properties underwater, we saw a lot of that about a decade ago where notes were bought and sold, and there was not enough equity to cover cover the lien, however, it’s still a valid lien, the borrower is still paying on the note, right? People want to stay staying in their house and live there, they’re not going to get up and move because the property value had dropped. And so you would see a lot of these different scenarios. And, and when you when that happens, that changes the valuation of the note.

J Darrin Gross 22:24

Got it? And with like a second, or a third position, again, the further you get away from being the first the rate goes up, risk goes up. Is there a a sweet spot you find for the from the length of of the loan, meaning, you know, in year one, it’s worth more than, than it is when you’re five? Or are they get? Is there a grade on the value of the loan based on length of time from origination?

Fred Moskowitz 23:01

Yeah, not so much. Not so much. Really. What’s interesting is that something that’s less important to look at. And here’s why this is really interesting phenomenon. Most common we see or third year fixed rate mortgages right here in the US. However, the average t know what the average life of a residential mortgage note is in the United States. Historically, it’s five to seven years, it’s five to seven years before the borrower will refinance and pay off that loan, or they’ll sell the property because they’re moving to a larger house, or moving because of employment, or downsizing to a smaller house, all of these life changes that happen to everyone is part of life. And so that creates an element of randomness in our industry where yes, you may have bought a 20 or 30 year note, however, you never know when the borrower is going to pay that off. And they have the right to pay off at any time. And so it creates an element of randomness because you never know when that may happen. And what when you start to manage a larger portfolio, there will always be notes being paid off. And so capital is going out because you’re buying new notes. Capital is coming back in because notes are being paid off. And so it’s a it’s a dance to keep as much of your capital deployed and at work at any given time. When you’re managing a fund managing a new portfolio, larger portfolio. This is some of the larger, higher level dynamic MX that happened. And if you think about this, if you’re sitting on capital on deployed, it’s going to create a drag on your overall rate of return, because that money is earning zero for you. So it’s only when you put it out in the form of acquiring notes or lending, that it’s generating a return for you. And so that’s always something to be looking at, and to balance in a portfolio. But it’s really interesting, as I said, that element of randomness, you never know, you never know, I’ve thought notes that one or two months after buying them, they got paid off. And if you negotiated a good discount on it, the payoff comes for the full amount of the debt. So that discount that’s becomes profit, which, which is nice, but then there’s other notes that you can earn for 510 15 years, and they’re paying and you’re making money on on your yield, and that’s fine, too. And so having a mix, having diversity in the portfolio, it helps to round that out.

J Darrin Gross 26:12

Yeah, definitely, I get the, you know, kind of the diversity thing there to, to try and mix it up. And, and it sounds like you know, similar to real estate, a lot of the the value you can create is in the upfront and the price you pay for the loan. So if you can get a significant discount. And then if the borrower pays it off, right away, I mean, homerun, that you make make all your money in a hurry. So, let me ask you, so the the opportunity for private lending? Is it a constant? Does it does it, you know, go up and down, as does the, you know, the published Fed rate? Does it go up and down with the economy as it is? It’s just always there.

Fred Moskowitz 27:04

And you’re talking about originating private lending,

J Darrin Gross 27:07

but just the opportunity to be whether to be, you know, buying secondary notes or, you know, existing or or, I mean, I guess both ways. Yeah. originators or is there a constant demand for this?

Fred Moskowitz 27:21

Yes, absolutely. There’s, there’s constant demand. People are always buying property, no matter what the real estate market looks like. And most of those transactions are financed with purchase money financing. And so and so that’s something that that all the time, it doesn’t change, what what changes is usually, with the real estate market is demand is risk profiles, property values change. And so there’s always adjustments being made. However, all all the time, there’s a demand for lending, because here in the US, there’s not a lot of real estate transactions that are funded as an all cash purchase. And if they are, you hear about them, you see, see a lot of that with investors particular, they’ll buy a property, all cash, but then after the property gets stabilized, then they’ll go in and put a loan, take out a loan on it put financing, permanent financing in place. And so really, it’s, it’s at the heart of most transactions. And so there’s always a demand for that for sure.

J Darrin Gross 28:51

So going back to the first question I was asking about, you know, how much do you need? Where do where I guess, let me ask it this way. Do most people just invest, you know, some liquid cash they have? Or do they look to the retirement funds to put to work? Yeah, that’s investing or how do people capitalize for doing this?

Fred Moskowitz 29:12

That’s a great question, Darrin. And the answer is both both of those, you You hit the nail right on the head, it’s either liquid, liquid cash, we see a lot of interest in buying and investing in notes or investing in a note fun from someone that may be just sold a property or they just exited from another investment and they have liquidity. But in addition to that, is using retirement funds, retirement account funds. And when in our business, I talked to investors all the time. And this is something that the majority of investors actually leverage the strategy using self directed retirement accounts, whether it’s 401 k or IRA funds, those funds can be used to invest in mortgage notes. or invest in real estate, it’s a great strategy. I always feel like not enough people talk about this or actually use it. But you can absolutely, if you have an old 401 K plan from a prior employer, or you have an IRA, you can put that capital to work in note investing. And what I love about that is that you’re investing in an investment that has tangible value, right? It’s backed, it’s an asset backed by buy real estate has tangible value, and so that that’s a really good security for your capital. And so, I find that that very appealing, but those, those are the ways that that people can can invest in in notes. And that goes for investing in individual notes. If you want to build a portfolio, or investing in in a note fund that’s professionally managed, you can absolutely use your retirement account money to do that. And it’s a very powerful strategy. And what I really love with that is the preferential tax treatment, especially if you have a Roth, like a Roth IRA, and then you own notes, are you You invest in a note fund all of your, your returns all of your profits? It’s tax free, as a Roth, right? And so that’s powerful. That’s very powerful. The growth in that account over the long term is phenomenal.

J Darrin Gross 31:51

Yeah, no, I love the Roth. That’s a great option. Let me ask you, in your experience, what is the the rate of failure? Portfolio wise? You know, what are you seeing? If you have, you know, 100 loans or 1000 loans over the life expectancy of those? What’s the what’s the industry? Or what’s your experience for failures?

Fred Moskowitz 32:23

Yeah, that’s a great question. It’s, it’s very low, actually, very low in in particular, with the way the real estate market has been. Even though we’ve just went through a pandemic, and there was a lot of turmoil. We did see some, some notes where borrowers were impacted by the pandemic, either they’re they stopped work, or they got sick, different things. And so there was some people that got behind. But eventually, what happens is people people get with enough time to get these problems worked out. And really didn’t see much with serious, serious problems all throughout the pandemic, which was, was really, really good. Something to think about with this is that there’s always some some rate of default, in a loan portfolio. It can be kept low through good due diligence and good management of of your notes. But it’s not perfect, right? And never, it’s never perfect, there’s no guarantee. But But most times, what I find is that with enough time, and having the right people and resources working on it, just about every problem can be resolved, come to a resolution and come out, it’s a win win scenario for everyone moving forward.

J Darrin Gross 34:06

And I would assume that the fund model would give you a little bit of insulation, where you wouldn’t necessarily be the single sole participant owner of a note, the more like a percentage of a note for that would be owned by the fund kind of thing as opposed to if you were holding the note that failed. Yeah.

Fred Moskowitz 34:27

Yeah, that’s that’s a great point. Aaron, what happens is that if you were investing, let’s say you were investing $100,000, right? You could go and buy one or two or three notes with that maybe, and all your capital is spread out into those few notes. But if you invest in a note fund, your investment now gets spread out over hundreds of notes, maybe 1000s of notes. And so there’s so much diversity there and it Just really adds an element of stability into your portfolio and into your cash flow stream. And that’s one of the nice advantages of that. It’s that diversification within the portfolio. And if I want one additional point, because you’re an insurance guy, I know this is going to resonate with you. But how do insurance companies manage their risk? Right? It’s by not me writing a policy on one person or one building or one property, they insure a pool spread out diversified. And so that the strength of the pool is what carries the whole insurance company keeps it liquid, keeps it moving well as a good entity, because yeah, there may be some claims here and there, but not likely that all of the insurance, all the policies are going to have a claim all at the same time. Highly unlikely. And so it’s the same thing. And so it’s, I like to say we take a page out of the playbook from insurance companies, in the note business by doing that same thing, have a portfolio, and now your your risk is spread out into that diversification among many notes, and that’s wonderful.

J Darrin Gross 36:24

Yeah, no, that makes a lot of sense. Do you guys use any kind of algorithm or any kind of, you know, computer modeling, to determine kind of level of risk? Or is it more of kind of like, one loan, you know, one, one, review? Kind of a scenario? I mean, is it is it deep? Are you doing all the underwriting individually, personally? Or is there more of a model that you guys look for? If you’re buying like a pool of loans from a, from a lender?

Fred Moskowitz 37:01

Yeah, it’s, it’s a combination of the two, we absolutely look at each loan individually, when when we’re buying. But in the beginning, when we’re looking through many, many loans, we’ll definitely use some modeling to to kick out loans or exclude loans that maybe don’t meet the criteria we’re setting. And so that’s very important to to do that. But there’s a lot of great tools and modeling that that can be done to help you with that, if you’re looking at a larger portfolio.

J Darrin Gross 37:38

Got it. Hey Fred, if we could, I’d like to shift gears here for a second 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 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, we’ll 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. It could be clients, investors, political, the Fed, weather, you know, whatever it is you you consider to be the biggest risk, but identify what what that is. And, you know, let us know 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 Fred Moscowitz. What is the Biggest Risk?

Fred Moskowitz 38:53

Wow, this is a great question. There’s, there’s many, many risks. That’s a big part of what we do is known investors is get good at understanding what they are. As I said earlier, diversification is is a great way to manage risk and the note portfolio, but some other other areas, it’s really getting good at doing your due diligence before purchase. As I said, I dedicate a large portion of my book to this topic because it’s so important. It’s prior to buying, running your due diligence and surrounding yourself with the right individuals to help you whether it’s vendors its data providers, to give you the resources and information. It can be an another area super important. Is counterparty risk when you’re buying a note, who are you buying from? This is a big one. You want to make sure you’re comfortable with who and this goes for any any business transaction. Are you comfortable with who you’re you’re entering into a business transaction with with them as a person with their company, their reputation and track record industry, I feel like this is something that often gets overlooked, or doesn’t get enough attention to it. Because deals can go bad transactions can have problems, they can go bad. And so what’s very important is how is the other person going to respond and cooperate and work with you to solve a problem that comes up? Because we live in a far from perfect world? And so you want to know, how is the other person going to show up and resolve this issue. And that matters so much, so much, so that you’re comfortable, that you can work through an issue, you can still be friends at the end and walk away knowing that everyone got a fair transaction. And you’re looking forward to doing the next deal again, in the future. There’s nothing worse than walking away from a transaction saying never again, am I going to deal with this individual or this company, or this client, it’s so all these headaches, it’s the worst feeling in the world. And so that’s something you can avoid upfront. Something you can easily avoid upfront. And that that’s, I would say, a huge risk that a lot of people neglect to think about or talk about.

J Darrin Gross 41:42

Yeah, no, definitely want to know who you’re dealing with. And, you know, otherwise, you might find out the hard way, once it’s yours, and that can be expensive. So that’s good to know. Hey, Fred, where can listeners go if they would like to learn more or connect with you?

Fred Moskowitz 42:01

Thank you, thank you appreciate that. Best way to connect with me is to visit my website, which is FredMoscowitz.com. Or if you prefer, I have an easier spelling for you. You can go to gift from fred.com. It’ll take you right to my website. And once you’re there, you can learn more about me, you can connect with me and request a copy of a special report on Node investing, be happy to send that out. And my book is available on Amazon, which provides a great overview of the industry and node investing as an asset class and how to get started how to get involved. It’s called The Little Green Book of note investing, and it’s available on Amazon. Oh one more thing. If you prefer to use your mobile device, you can connect with me by texting, text, the word money to 215-461-4433 and then follow the prompts. I look forward to connecting with you and interacting with you. I always love speaking with investors and learning about what they do.

J Darrin Gross 43:16

Awesome. Fread Moscowitz thanks for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Fred Moskowitz 43:26

Thank you Darrin was my pleasure. Thank you for having me on the show.

J Darrin Gross 43:31

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 43:51

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The Value of Texting for Business Communication with Aaron Weiche – CRE PN #401

Aaron Weiche 0:00

Texting has shown overall to be where a majority people have gravitated towards for their number one communication channel. It’s where we interact with friends and family, coworkers, interest groups. It is an asynchronous conversation that’s easy to manage that we can do it anytime we don’t need a quiet place to engage and do it, we can do it while we’re waiting in line at the grocery store. Some people while there’s at a red light driving their car, sitting in a meeting board, right? There’s all kinds of elements to it. And what started out as a strictly personal channel, I think just as anything in life, once we find something that’s easier and more efficient, and our behaviors change, we start to seek that ease across our life. And we start opening up those barriers. And I think the pandemic only fast forwarded, businesses were looking for more ways to connect and interact with customers that couldn’t walk through their door they couldn’t have meetings with so this offered a really personalized channel and I think we saw these things start to meet at a much more rapid rate to really provide kind of a no nonsense straightforward communication channel. That still a lot of businesses haven’t tapped into yet because they don’t fully understand how to or what the benefits might be to it.

Announcer 1:19

J Darrin Gross 1:39

Today’s program is sponsored by Building Insurance and Risk. When you invest in real estate it pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts at building insurance and risk focus on real estate and investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more go to Building Insurance Risk.com.

Today, my guest is Aaron Weiche. Aaron is the co founder and CEO of LeadFerno. A text messaging platform for businesses to close more leads faster. Aaron is an entrepreneur, founding and leading multiple companies and digital marketing agencies over the past 20 years. And in just a minute, we’re going to speak with Aaron about lead generation marketing via text message.

But first, a couple of things you can do to help us out. 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 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 Aaron Weiche, welcome to CRE PN Radio.

Aaron Weiche 3:33

Thanks, Darrin, appreciate you having me on.

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.

Yeah, I think the easiest way to sum it up is I’m kind of a digital addict. Things started to change in the mid to late 90s. And I’m gracious I was unlucky enough to be open minded and to catch on to it. And were some people who have kind of a creative vibe might find painting or woodworking or other ways I found pixel and code and that’s what attracted me to the world of technology and be able to create things and make make things and that kind of spiraled into building a lot of websites and then building apps and then constructing marketing campaigns for search engines and social media and all of those things. And then the last roughly eight years I’ve focused on the software world and just bringing software to businesses of all sizes that help them accomplish goals operate more efficiently and ultimately build a better business.

Well, you certainly have benefited from the I mean all the digital, you know boom. As far as marketing goes. I remember a long time ago when I was getting a college degree in marketing when I graduated there was like this fuzzy line and that sales and marketing were kind of like this together thing, there was not this distinct difference between when is a marketing versus when is it sales. And I don’t know if you agree, but I, it seems to me that marketing is very, very clear. That’s when you’re trying to get in front of somebody where sales is when you’re, you’re asking for the order or getting the check kind of thing. And then the web is very clearly identified the two sides of the, you know, the sales and marketing and sales is sales and marketing is marketing. You find that to be true with, with your experience,

I think there’s some interweaving of them just because how you might want to approach your sales can definitely influence what you’re doing with your marketing. I can only speak, you know, from my own experience, and that in being I’m somebody who likes to sell with a very educational format, I want to tell you everything I know about something and help you understand it, so that you can start to picture and take the position of using it and being successful. So in wanting to adapt that sales method that’s very much in how I market I try to be very transparent, very open, it’s not hard to know, where I stand on things, or how I think there’s very little of Don’t look behind the curtain, or I’m not telling you my secret recipe or anything else, I’d rather put it all out there. And if that sounds like something that can can benefit you, then you’re going to be a good fit for what I’m working on.

Cool. Well, let’s talk about your text message marketing, and how that works. You know, I can remember the first time texting, it was on a, you know, like a flip phone. And there was like, you know, three letters to a key, and I was gonna, like, why would anybody do this? And then smartphones came along, and all sudden, you had a keyboard. And, you know, the the messaging became more of a possibility. So I guess my my question is, you said, you’ve been doing the the text marketing for about eight years. Is that right?

The text messaging business just for the last two years now, the software side of things for eight years, my previous startup we sold, and that freed me up to start work on this next venture.

Got it? So text messaging, let’s talk about some of the the advantages to text messaging. Yeah, so marketing tech, yeah. text message marketing.

Yeah. So interestingly enough, and I think most people can think of this within their their own world in their own life. Texting has shown overall to be where a majority people have gravitated towards for their number one communication channel. It’s where we interact with friends and family, coworkers, interest groups. It is an asynchronous conversation that’s easy to manage, that we can do at any time, we don’t need a quiet place to engage and do it, we can do it while we’re waiting in line at the grocery store. Some people while there’s at a red light driving their car, sitting in a meeting board, right? There’s all kinds of elements to it. And what started out as a strictly personal channel, I think just as anything in life, once we find something that’s easier and more efficient, and our behaviors change, we start to seek that ease across our life. And we start opening up those barriers. And I think the pandemic only fast forwarded, businesses were looking for more ways to connect and interact with customers that couldn’t walk through their door they couldn’t have meetings with. So this offered a really personalized channel. And I think we saw these things start to meet at a much more rapid rate to really provide kind of a no nonsense, straightforward communication channel. That still a lot of businesses haven’t tapped into yet, because they don’t fully understand how to or what the benefits might be to it.

Yeah, so let’s talk a little bit about you know, just the, the nature of the text, you mentioned how it’s kind of like something everybody’s gravitated towards. I know for myself, you know that it’s very true. I mean, it’s the it’s the go to communication for especially friends or family or you know, whatever. It’s kind of that if you really want to get a hold of me just shoot me a text kind of thing. So, that mean the case. How How are you I guess opening the door or making the connection. Is there a is there a sequence prior to texting or or are you finding texting cold? To somebody who’s not expecting a message to be a viable option?

Yeah, so we take a little bit different approach with this. Interesting enough, if someone asked us what our primary focuses or our primary focus is conversion, meaning we want to take people that are prospects to you that might be on your website, see other pieces of your marketing. And we want to turn them into being a known lead where they present themselves with contact information. And what we found in in researching that is that text messaging was emerging as the lowest barrier to entry to starting a conversation. So one of the things our software does is places these call to action buttons on every page of your website that basically you can fine tune and customize. But you’re getting across like, Hey, do you have questions, you can just text us want to know more want to talk to an expert text us? You know, just different elements within those call to actions to let people know, hey, we’re super approachable for questions. It’s not taking time out of your day, you don’t have to do a major commitment. You can just quickly start this conversation by asking a question, and we will respond to you over text. So the majority of the start of our conversations for our customers is a customer reaching out because they’ve already landed on that business’s website. We also integrate with like Facebook Messenger. Google has a product called Google Business messages that show up in your Google business profile. So we’re looking at multiple ways where messaging might be the very start of a conversation, ask that first question as a prospect. And we’re just helping them market and put that front and center that that is as easy as can be. And then once it’s in the business hands, they use our app to either respond to them, or to start to move them to another channel, book an appointment, set a call time, meet in person, whatever that might be with them. But we’re really focused on how do we take someone from being as we call it being a lurker, they’re just lurking around your marketing lurking around your website and turning them into a lead where you know who they are, and you have a personal connection

to them. I like that the using it as a conversion tool, as opposed to I can’t tell you how many times I get like a unsolicited texts, and it’s the full offer. It’s not like, Hey, Aaron, how are ya? It’s a hair. And as Darren I’m a little bit a little bit a little bit of a, you know, I’m like, you know, how did this even come to be kind of thing. And I think there’s plenty of whether it be political or other entities or, you know, organizations that have taken liberties with, you know, because they have my message, assuming that that, you know, I want more thing, but I think if I’ve been your website, and I’ve been lurking around in in our most of your texts, or they inbound from somebody because of the the opportunities you you’ve got on the websites that say, Hey, for any questions, just Texas.

Yeah, that’s usually the start of it. And it also opens up a number of different things. So one, my previous company, we worked with about 25,000 businesses collecting customer feedback and online reviews globally. And we had a text feature in that product to ask for feedback or to ask for a Google review, or Facebook review, using text messaging. And I was surprised how many businesses were like, That’s great, we’d love to use that we don’t ever customers mobile numbers. So they lacked a process somewhere where they were capturing that important piece of information from a customer. So that was one angle where I looked at like, well, then you don’t have to overcome that if the very first interaction comes over text messaging. The next items that I looked at is one of the kind of I guess, ways to grease the skids in conversion is offer people options, right? Just as in paying for anything, the more options you have to pay for it, loan types, credit types, seller financing, whatever that that might be, the more flexible is to try to make that deal happen because you have options. same holds true with communication. And when you can appeal to people who then they have the choice to say, Oh, well, I can call them I can email them, I can fill out a form or I can send them a text, you’re just adding one more possible inroad to coming into that business. And when you offer texting and they do it, you know, one, they’re starting it so they are opting in by the action they’re taking. We even include a small disclaimer that says you know, by submitting this request for reply via text you are agreeing to receive messages from from this business. So now you’ve gotten that consent and that keeps you out of that trouble that you know, we definitely see things tightening up in in the mobile carrier world with cutting down on spam They’ve, they’ve seen what’s happened with email, they’ve seen the explosion of SMS, as a product and things are only going to get tighter. So it really behooves your business to do things the right way, capture that permission. And then you have just this direct contact to that consumer at any time that you can leverage moving forward. So while a lot of our focus is there, we then have customers doing so many things on keeping their customer updated and informed, making them aware of deadlines, timelines, sending them reminders, right, we’re all very familiar, where we’re getting an appointment reminder from our dentist, or chiropractor or medical, they’ve used that for a long time. So these, there’s all these other utility type features that you continue to use text for through the relationship. And it’s just great for quick touch points and to reach out further down the road, right, because we all know like getting a customer, the first time is where it’s the most expensive. And then after that, getting them to easily refer you or getting them to come back and utilize you again, like that’s where you want to develop that repeat business. So if you’re engaging with them like this, and now you’re a saved contact on their phone, someone asked them, hey, who would you you know, use I have some commercial real estate business, who you use with yours might be like, Oh, let me just text you Sarah’s information, text, you John’s information, really easy to send that contact file across. So even though our focus is on the front, we see businesses really use this all across the board and the entire customer experience with what works best for their customer. And they really start to find some of their own efficiencies. But you know, it’s probably pretty easy to understand, in the same amount of time that you can take and adhere yourself to one phone call, you can manage anywhere from six to 10 text conversations, because of it being a synchronous. So when you start to get into efficiencies, and there’s features that promote that you can be far more efficient as a business person when you use a business grade texting app as well.

Got it? So a couple of thoughts are so the the conversation, is there a any kind of like rules of the road? As far as you know, how long the text should be? How frequent you should text? How you know how to start the text? Or? Or do you have some sort of is it? Where do you keep it kind of conversation like you would text a friend or family member kind of thing? Or what? What’s the guidelines? Are there any guidelines here?

Yeah, I definitely think there’s things that you want to think about. As far as tone of voice or communication style, I always tell people, business casual is a term that we understand when it comes to dress and things like that. And I think it applies to text conversation, you still want to have that business element and aspect to it, you probably want to avoid as much as possible, especially early on your use of acronyms, your lol ing, rolling on the floor, laughing You know, any of those kinds of things and expecting your customer to always know those. You know, I’m in the space. And there’s still times where I have to ask one of my teenagers like, alright, what is this one? I’ve never seen these letters. What does it mean? Is it bad? Things like that. So definitely keep any business forward. But it is a very personal channel. And that’s, that’s one of the things that we see and hear from our clients is, these leads feel like they warm up so much faster, because we’re connecting through something that is more of a personal and more of a real time channel than if they fill out a static cold form on a website. And then I’m emailing them back. And then things are, you know, very business centered, and doesn’t have that relationship side, which as we all know, in any aspect of real estate, the relationship ship side is a massive driver to what takes place and getting things accomplished, turning them into repeat and referral

business. Right. So you mentioned, like for a business that doesn’t have records, or they don’t have mobile phone numbers for their clients? Supposing they do it, is there a right way to start engaging your clients prospects? I mean, let’s just say they’re not going to the website. You know, it’s more a matter of just trying to, you know, establish this line of communication.

Yep. I would say, you know, based on your communications and interaction, I would definitely find a way to be proactive and get permission, then give them a reason why it’s going to be beneficial for them to give you that information. So, you know, on one side, when you set something up like our tool, now you have something in place that’s going to drive that. But if you need to retro actively go back, you definitely want to have that permission and have it in a way that you start it so maybe you create a quick online form and just say hey, from time to time, you know, we might want to reach out to you with something we think is of interest to you more conditions you might be interested in, things like that. If you can outline, you know, we likely wouldn’t do this more than, you know, twice a year, things like that. So people understand great, they’re not you know, I’m not signing up for something that’s going to weekly show up. And ultimately, I’m going to mark it as spam or ask them to stop sending me because this is such an important personal connection. You don’t want to burn that bridge. And it’s one thing I point out to a lot of businesses they instantly think most of our minds in wanting to sell goes to one too many. Great, how can I build a list of 101,000 10,000 and shoot them a message every week or every month? Well, what we fail to realize is put ourselves right back into the shoes of being a consumer or being a buyer. And how much do we love those messages? Like we really don’t, there’s very few of those that ever stay subscribed to. And then once they cut that off, you lose that channel. So I really tell businesses to focus more and think more, how can I use this to my advantage in one to one where I know the customer? Well, I know what’s important to them, I know what they’d be interested in. And I have times where I do want to touch base and keep things in front of them. So how can i Master this to use this as nice little reach outs to stay on their radar? Stay up to date, let them know, I’m thinking of them, and be able to play something that you know feels really well positioned to what their interests are? Or what they’re looking to do or invest in or their past history and working with me.

Know, I like you mentioned this multiple times the one to one, I was kind of curious about this, when preparing for the the interview? Is the are the the your customers that are utilizing text with communicating with their clients? Are they doing it one on one? Is it literally on the keyboard of their? of their computer to the to their clients phone? Or is there any AI involved? Or is there a wonder, is there ever a one too many?

Yeah, right now we don’t have a one to many, we are focused on the one to one, the what a couple of things to point out that are on the efficiency side. One, you can transfer conversations between any of your team members. So if you have five, or 10 Different people on your staff, if somebody is a better fit for someone else, or they need to take something over or do a next step for you, you can transfer that entire conversation to someone else. So right there is a huge benefit over using like your personal texting app on your phone. Because now you’re able to move an entire conversation, you can type notes into it so they can see why you’re transferring it and what what you’d like them to do. For anyone that has multiple people on their staff. Now you’re centralizing and securing these customer conversations and customer data instead of it living on their phones. And it makes it really easy to sync to your CRM or your customer database, so that those conversations and those contacts are secured and sitting in a in a centralized area. So if you have more than one staff member, that aspect alone should definitely be of interest to you. And then efficiency wise, there’s things so we have a feature called the shortcuts that allows you to save messages, save questions, links, things like that. So you don’t have to type out things that might be repetitive or that you commonly ask in a pre sales environment. Link to a listing that you might keep getting inquisitions on or asked about. So you’re able to just send those within a couple of taps or a couple clicks, we have both a desktop app and a mobile phone app, those are synced together. So you can work however you work best between those items, you can send messages quickly and easily with it. So instead of trying to send everyone you know, a giant message and hoping there’s a piece of it, that interact with them, and that a couple percent of your list, find it interesting, we find it better spend a little bit more time, even if you recreating the same message, send it individually. And maybe there’s one small thing where you like, adhere to them, personalize it, address something with them to make them feel like this was personally crafted and well thought out, not just here’s a please by message, which again, usually doesn’t go over well. And a lot of times just get you gets you closer to being blocked, which is the last thing you want, because that cuts off your entire future of using it

makes sense? Is there any numbers you can point to as far as like, increase in conversion rate based on you know, pretexting versus now? Somebody’s using texting?

Yep. Yeah, so the two high level things to think about that you’re doing when you use a tool like ours is. One you are now placing our buttons or what we would call a floating call to action, so they’re always visible on the screen. No matter if you’re on mobile tablet or desktop. You’re always going to see the prompt to text you to contact you ask a question. So it’s always in front of the so the user does didn’t have to hunt, go to your header, go to your footer, where’s the form on the page, any of those things, so you’re making them aware of their options and to contact you right in front of them at all times. The second thing is you’re adding a channel like text messaging with that low barrier to entry and saying, Great, I can ask this and they’re just gonna text me and answer how I can get the info. And there’s no cognitive load for me, I don’t have to run out of a meeting to take a phone call, I don’t have to play voice tag, voicemail tag any of those kinds of things. So the combination of those two things, what we usually see on the low end is a 10 to 15% increase in conversions. And on the high end, we’ll see some businesses two and 3x. Where we see that and where you see those range in those numbers, if somebody is more of a smaller business, and they’re getting, you know, a handful to dozens of leads a month from their website and digital properties, you can also write that there’s some options that we can talk about, but people can text you through your landline, if you have an existing landline, possibly, you can use if we distribute you a texting number, you can put that on billboards. So new leads can come in directly from seeing a billboard, you know, signage at the property, things like that, as well. So within that, they can come in that way as well. So somebody who’s doing, you know, single digits to dozens, those are the ones that we see have an opportunity to sometimes two and 3x, just by making it easier to ask questions, and putting a call to action in front of them. And it really makes the business more approachable than anything else than knowing I’m not gonna get bombarded with this formal process and a sales pitch and all these other things, I’m gonna get a text reply, which I can choose to ignore, delete, block, or take interest in because you’re making it really easy to work with you. And then so somebody who’s maybe, you know, doing higher 50, leads, 75, leads 100 Plus leads a month, those are the ones that we see usually fall more into that 10 to 15%. And, you know, on up to like a 30% range where they already have quite a bit of inertia and a lot of leads going on. And now they’re just grabbing more of those by making it a little easier and offering this additional channel.

It makes a lot of sense. I just sent her thinking about my like, my personal experience with, you know, just the ease of communication. And if it’s something that’s timely and valuable, you know, spot on, you’ve got you’ve got the attention of the person, and there’s probably an easy call to action to take care of whatever it is, or to, you know, engage in the solution that’s been presented. And I’ve got, I was kind of curious, I have I’ve got clients tend to be on the younger side that I mean, they will text me all day long to my personal phone before they would ever email me. You know, and I’ve, I’ve adopted to that. But the present moment, there’s a more matter of trying to convert that over to the emails from my assistants to be able to see what’s going on. I’m curious, is this Do you find this to be age focused as far as the acceptance or the willingness to engage in the text? Or is it up and down? The ASPCA?

During? That’s a great question. I think there’s some like, you know, most people, I think, probably have some misconceptions there. So this is really good. And yeah, we actually performed our own survey on this. We had the same questions. There’s a number of things where if you haven’t noticed, I’m, I’m opinionated. So I love to do surveys to find out like, is my opinion right or wrong? Do I have something else to back it up? Besides my own voice and thoughts? So what we found in this is really all the way across the board except for 65. Plus, when we asked how do you prefer to communicate? Everyone 64 down all of those age groups. Texting was number one, then followed by phone calls, and then email, a couple of variances that we saw, we saw a phone just barely ahead of texting for the 65 Plus crowd, it was only a couple percentage points, where there was a differentiating factor. And then all the way down to the youngest group, right, the 18 to 24. Crowd, texting still in the lead. But what we saw make even more of a erosion was messaging off of other platforms. So your Facebook message matters. Yes, Instagram messages that things like that, where they had, you know, twice as high of a number in that area as every other age group. And the biggest area where there is separation for texting was the couple of age groups that make up like the you know, 3035 to 64 crowd is where we really saw those are the ones that preferred texting by far and away double digits, over over phone calls. Right. And when you think into that, you think, you know busyness of life and career and possibly, you know, family status, personal things and whatever else. You know, it really starts to makes sense, because texting is our most, you know, manageable communication channel that’s there, right we’ve, most of us have already long lost control of our email inboxes. And having to go in there and wait. And, you know, find when someone has replied to you amongst all the other things that are coming in from the years or decades of that email address being in use, I constantly hear from people that maybe one of their biggest pains on earth now is like listening to a voicemail. It’s it’s funny where we’ve arrived on that, because I can remember putting so much time into crafting your greeting message to receive a voicemail and being creative or fun or whatever else. And now, there’s so many people that you call and they’re like, you know, don’t leave a message, please text me if you need some, right? Like, I don’t want to have to retrieve these at all, even if I can just read the voicemail. And to your point on getting staff to be able to transpose because it totally makes sense, right? That one thing I tell people, our job is to start conversations for you. That’s our number one job. And if we get that conversation started, and you want to turn it into another communication channel, because that’s what works best for you or best for your process or best for the customer, by all means do it. So if you take the initial question, you answered over text, and then your next move is to try to move it into another channel. Again, a business texting platform works great, because now you can have office staff that also has access. So now you can assign it to one of your assistants and say, you know, hey, I’ve already answered a couple questions. Now let’s get an email out to them with a packet of information that they need, please do that today. And now they have access to see that conversation, have that information, transpose it while they’re sitting right at the their computer, and keep that process moving for you in a way that feels very seamless to the customer. And it wasn’t a bunch of effort for you to screenshot it printed out, copy, paste it do anything else, it’s a much more aligned workflow for you.

Hey, you mentioned the email thing. I’m kind of curious with, you know, a lot of this stuff, I feel like there’s almost like a duplication. I mean, that the text is the instant feedback kind of thing to where I can get somebody’s attention, I can get a response. Let them know, Hey, I just sent you an email or something like that. But do you do you find the need to duplicate meaning like if I because again, I’m just thinking of this one particular client where I could send them emails all day long every day and never get responses? Send them one text, I get an instant answer. And to where, you know, I’m still like, if there’s an attachment that I needed him to sign or something like that, I’ve got to send it to him via the tech. So you’ll see it kind of thing. Do you find? Or is there any kind of rule for, you know, sending it both ways? Or is it just kind of a more of like the exception to the rule?

Yeah, I guess I really look at it, as always determining one of my biggest golden rules I just wrote a article kind of breaking this down is like being easy to work with. And when you are easy to work with, that’s what really gets someone to be committed to you refer you rave about you all of those things. So I think in that situation that you just outlined, you have something that maybe needs to travel over email, because of how it needs to be interacted with, or you want them to, you know, have it in a searchable way, whatever that might be. But if you do that, but then you’re using the ease of prompting them through the channel that they’re paying way more attention to, and they’re seeing your message, right text messages, you know, 95% of text messages are read within the first three minutes of receiving it. And that is 95%. Yeah, and that crazy. And that is not true for email, at all right, like, but much, much, much lower many things ever, you know, unread. So when you use that combination, it’s like this is the best delivery method for us to get this in your hands based on what it is. And that way you, you know, always can have access to if you want, but then we’re giving you this nice little nudge that it’s there or to go check your email or whatever else like you’re just making it very easy for you to work with. That’s there instead of you’re wondering like, oh, did they see the email come in? How often did they check their email? Did it come in with 12 other things and they just somehow missed it? Or they accidentally clicked delete when they’re just deleting a bunch of things. So yeah, there’s definitely some combinations within those things. And you know, when you’re talking about best practices before, one of my best practice things in communication is proactive communication. So when you’re able to tell people like hey, I’m going to be sending you this over email when we do send it I’m going to send you just a quick text to let you know that it’s there. Just respond and let me know that that you you’ve got it and that you’ve received it right and now you’re having that micro communication and a channel that works best for them. And the other stuff that’s more of a resource or or long term or in how they might need to be accessing it is available in that other channel that If you just relied on them to let you know via email, you might not ever know if they received it or replied or anything else.

Now, this is fascinating, just the, as I think about, you know, the ways that I’ve seen text misused, but I’ve also seen the way, I’ve used text and it’s had a positive interaction and just trying to, you know, accelerate that. So tell me a little bit about his lead for No, is that the, the the text platform that you guys? Is that what it’s called?

Yep, yep. So that’s what we built to handle all these features, and be able to deliver a number of the things that that I’ve talked about, and that I kind of like, I want to state one thing that I really like, about your comment, Darren of all the ways people use things wrong. And there’s a great saying that I wish I knew who to attribute this to, but I definitely use it all the time in spending years now building software. And that’s just the simple statement of a fool with a tool is still a fool. So you still need to have that right mindset. And when you have that right mindset, this can be extremely advantageous, it can be a difference maker for you, from your competitors, can be a difference maker in your customer experience all these things, when you do it, right. And when you understand the value of the one to one communication, finding efficiency in that, instead of automating right, there’s so much that’s come along with chatbots. And we’ve seen a big resurgence with it. If anyone’s familiar with the evolution of chat GPT that’s come out to end 2022. Like, the AI stuff is definitely getting smarter. But really is we know, at the end of the day, people are still reliant on humans to solve their problems, provide guidance, provide expertise. And the easiest, that you make that happen for someone where they don’t have to go through a call tree and press buttons and leave a voicemail fill out a form that they have no idea where the form is going to have even looked at. I mean, how many of us have filled out a form on a small business website and never ever heard from that business. I just had an experience last month where I reached out to like a paint chip auto paint chip repair, they asked for like photos on their forum. So I sent here’s the two three spots where I have some chips on my hood, and I want to get a quote on getting repaired. I never heard back from them. The next month, I got their monthly email newsletter, and I was just blown away. That’s like, alright, somewhere in your process, you’ve got me into your marketing funnel. But you’ve completely abandoned me on the buying funnel, which you know, just shows how discombobulated things can be sometimes. So yeah, so there’s a number of features, we have a number of articles and information on our blog, where we really try to highlight the right ways to use it, how to have the rights to to strategical mind about it, so that you’re using this to your advantage, and really winning with it. Our little thing is win right now. We think you can win all kinds of micro moments with your customers when you use texting the right way.

No, definitely don’t be the fool with the tool. They’re totally. Hey, so just to understand, does your software then does it have an API or does it plug into like if somebody has like some sort of a some data management kind of system they’re using? Okay,

yeah, so we have two two different options one is using, there’s another piece of software called Zapier. Zapier is really commonly known because it’s a no code connection. So it’ll connect two or more pieces of software. So most commonly, we see that in our world where it’s based off of a trigger and action system. So the trigger is when a new contact is created in lead for know from someone submitting a question. A new contact file is created in like their CRM, like HubSpot, Salesforce, whatever that might be MailChimp. And there’s like over 5000 pieces of software that also have an app and Zapier. So that’s a really easy, low cost way that you can find people with, you know, a much lower level of technical aptitude to make two pieces or more of software talk to each other. And then we do have an API as well if someone needs to do something custom, or maybe they have a proprietary CRM or customer database in house that they can do that with but I’d say with anyone buying software, knowing what your software can talk to out of the box or utilize a tool like Zapier should be part of your purchasing process in this day and age.

You definitely don’t want to have to recreate all the gains in another Yes. I mean, that’s that’s the thing. I think that’s so frustrating is all for all the promise that digital provides. And, you know, all the good. There’s still a a canyon between the the systems have actually talked together and work together. And I can’t tell you how much time is spent in our business of, you know, duplicate data. entry kind of thing. And it just, it’s mind numbing,

it totally is. And we can only hope that as things continue to progress, people continue to build with that mindset. But you have so many legacy pieces of software that are much slower to adapt to that. And you just even have old school, right? I mean, inside of every industry, right? There’s all kinds of old school thinking within the commercial real estate industry, right? Like this is how it’s always been done, right? You know, that resistance to change. It’s no different in software, where some of them thought, Oh, the best way to defend our business is to create a moat around it, where like, we’re not letting anybody in and we’re not letting anybody out. So but now, you actually ended up seeing the opposite, where the more flexible your software is, it makes him want to use it more, because all right, so I can connect this to all kinds of things. So I’m eliminating manual work and repeat entry. And then having these things in silos when I actually want to get to, you know, one record of truth about this customer somewhere within my ecosystem.

Now, I like to be easy to work with. That’s good. Hey, Aaron, 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 consider, we first look to see if we can avoid the risk. And 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 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 as a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be their clients, the political environment, interest rates, you know, whatever, whatever it is in your world that you would identify, and 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 Aaron Weiche, what is the Biggest Risk?

So here’s the first thing that comes to mind to me. And that is not being connected to your customer. So to me, in all kinds of aspects I’ve talked and written about this recently, with so many people looking inside of so many industries, with a downturn slowdown, whatever that might look like. Those are the kinds of times where you need to be more connected than ever to your to your customer, so that they understand the value you still bring. As you change and adapt how you might deliver, or price or what’s going on in the market, things like that. You need to have that personal connection with them. If you haven’t been keeping in touch with your customers, if you’re not staying top of mind, if you’re not solidifying the resource you are and how your expertise helps them out no matter what the market looks like timing opportunity, any of those things like it’s just slowly eroding the chance away of once that opportunity might surface for them because too much distance has built up. So I’m just a massive proponent in running your business where you really know and understand your customers and you’re finding the right touch points that enrich their relationship with you keep keep you in contact and keep you connected with them. So that you’re always just a text or a phone call away from what their need is. And they really feel like you you’re a valuable resource in a relationship and a connection sense instead of just a transactional sense.

Now, those are some words of wisdom there be a resource up the floor with a tool. Yeah. So hey, Aaron, where can listeners go if they’d like to learn more or connect with you?

Yeah, so I have to thank my parents. I think I’m the only Aaron Weiche on Earth. Thanks to that awkward German spelled last name. So if you just Google Aaron Weiche, you will run across a whole slew of things for me over the years videos, whatever else. To be more specific to learn about lead for unknown business texting, it’s lead for no.com. As I shared, I invite you go through our blog, we have 50 plus articles we’ve written in the last couple of years research. So you can really dive into and get a feel for how it strategically aligns with your business and starting to envision how it helps. You can request and schedule a demo that only takes 20 to 30 minutes right from our website so you can get a test drive from myself or someone else on the team to see how it works for you. And then I’m definitely a Twitter Holic. So connecting with me on Twitter at Aaron Weiche. You know, Elon still hasn’t put it into the ground yet. So I’m still there. I share thoughts weekly and engage with with people there. And then of course, LinkedIn as well if people want

to connect there Awesome. Well, Aaron, Waikiki I cannot say thanks enough for taking the time to talk today. I have thoroughly enjoyed it. Learned a lot, and I look forward to doing it again soon.

Appreciate it. Darrin, thanks so much for having me. 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 Ccommercial Real Estate Pro Networks. CRE PN Radio.

Announcer 45:36

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Multifamily Interest Rates and Cashflow with Shannon Robnett – CRE PN #400

Shannon Robnett 0:00

So you’re seeing a lot of this where people are absorbing the, the fall off here where we, we bought it the right thing at the right time, the wrong way. And so we’ve got a great apartment complex, the business plan executed properly, but the interest rate floated up and now it doesn’t cash well. So there’s gonna be some of that that’s going to be a little bit painful. There’s going to be some of that that’s going to readjust. Unfortunately, with where pricing has gone, I think that most of that is going to be able to be absorbed by the investor, not necessarily affecting the bank. Right, because the product is stable. The product has received facelifts in some cases they’ve received rent gross, they’ve seen them repositioned in the market well, and so there’s really not a problem with the asset. There’s a problem with either the opposite Well, it’s not even really the operator. In most cases it has to do with the financing.

Announcer 1:00

J Darrin Gross 1:20

Today my guest is Shannon Robnett. With over 25 years of experience Shannon has been involved from start to finish on over $350 million in construction projects, and is dedicated to sharing his experience and expertise. And in just a minute, we’re going to speak with Shannon about the multifamily marketplace.

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 Shannon Robinette Welcome back to CRE PN Radio.

Shannon Robnett 3:10

Thanks, Darrin, it’s great to be here again.

J Darrin Gross 3:12

Well, I’m so glad you’re able to join us. And I’m looking forward to our conversation. For those that may not be familiar with you, if you could give us just a little bit about your your background.

Shannon Robnett 3:25

Yeah, so I grew up in a real estate family. You know, I, my parents were always in construction and development. My mom was a third generation realtor, I’m a fourth, my son’s a fifth generation. You know, so I grew up watching development deals happen. And I got involved at an early age. And I soon figured out that working for even in construction, if you even if you own your own company, you can work for somebody else, and you can make money. But the reality was, if you really wanted to get to where the real money was, you became the developer, you began to find the property and and then you built the asset. And, you know, so I’ve done that whole thing for a long time. And we’ve just been, you know, we’ve been fortunate in the fact that, you know, we currently have about $100 million worth of commercial real estate being built. And we’ve got about $200 million on our books to start in the next 18 months. And you know, we’re just looking at how the markets shaping up and what we’re going to do next, but it’s it’s kind of on repeat. Just really, I mean, we’ve seen it all before it’s coming back again. 6% interest rates are normal. You know, we’re seeing some very similar things that we’ve seen a lot in my past.

J Darrin Gross 4:48

Yeah, no, I appreciate you kind of given us the the background there and I look forward to digging into this a little bit. Just as a kind of a reminder or Are you still kind of primarily operating in Idaho as far as your development?

Shannon Robnett 5:07

You know, we’ve got projects going in Florida and Texas as well. And we’ve done some stuff in Washington. It’s just it’s been some value add stuff, but we’re moving out from, from Idaho for sure. We still do quite a bit in Idaho, we’ve got a lot of people still moving in, I think we’re the second or the third most attractive state by percentage of influx, if you look at numbers, we’re not really there. When you’ve got, you know, somewhere like Dallas, Texas, that, you know, Colorado Springs imported 65,000 people last year. You know, we don’t have quite the size that we compete, but on a percentage basis, we definitely do.

J Darrin Gross 5:49

Got it. And as far as the the asset classes that you’re active in multifamily, and or you use an industrial or what’s the word? Yeah, so classes,

Shannon Robnett 6:00

I grew up in industrial space, that’s been a, that’s been kind of a bread and butter. You know, it’s funny, multifamily is kind of everybody’s darling. But, you know, industrial trades that probably, oh, probably 1% higher on the cap rate on a normal basis. Plus, it’s a triple net lease, which means that the tenant pays all property taxes, insurance, snow removal, lawn care, all of those additional expenses. And on top of that, they’re usually three to five year leases, and a lot of them have national tenants and personal guarantees buying them. So it’s really a better class of tenant. But when people think of industrial, they think of you know, those dirty old dingy warehouses down by the dock.

J Darrin Gross 6:44

Right? Yeah, yeah. No, and I think that I’ve talked with numerous investors and people in the know, just about the kind of the Amazon effect and, and, you know, all of the kind of flex space that’s become so in demand and in, you know, in everywhere, you know, so that’s, that’s definitely an appeal there. And you mentioned, the the projects you have in progress, are those primarily multifamily? Or Is any of that industrial?

Shannon Robnett 7:19

We’ve we’ve got, I just put another $10 million industrial project under contract today, we’re moving forward on, we probably have of that 100 million, there’s probably 20 million. That’s industrial right now. 25 million, that’s industrial right now, and the rest is multifamily?

J Darrin Gross 7:41

Well, let’s talk a little bit about kind of the market and the market cycle. And, and I’m trying to think, where the best place to start on this because I think the there’s been kind of a a sense of something was coming for as long as I’ve been doing this podcast, which I started in 2015. And at that point, there was a notion of that we were, you know, if we weren’t in the eighth or ninth inning of the cycle, maybe this was going in extra innings, you know, and, and then from then we went through kind of a minor slowdown, and then we had all of the boost of the additional printed money in the COVID. You know, situation where a lot of a lot of extra capital is out of the market and interest rates were pushed down. And you know, and now we’re at a point where interest rates are kind of the, the story from as much as that if I understand it, and you could certainly speak to it more is just the, the, the market is trying to understand what’s going on the, you know, the Fed keeps pushing the rates up trying to get the brakes to slow down the economy a little bit. There’s a concern of, you know, a looming coming recession. But then there’s all sorts of signs, maybe it won’t be a recession kind of thing. And I’d love to get your kind of a sense on, you know, where we’ve been to where we are now. And then maybe we could pick up from there and compare that to, you know, historical cycles, as you mentioned earlier.

Shannon Robnett 9:31

You know, it’s funny, I’ve I’ve seen government do a lot of really dumb stuff, and I think they continue to not disappoint. But, you know, when you have people when you have the government really trying to control the money supply and do the things that they’re doing with interest rates. The biggest issue that we have right now that is really hurting what they’re trying to do is the fact that we have no inventory. I mean, we are you know, doesn’t matter who you talk to, there’s not enough The Inventory out there, whether it’s, you know, we’re million housing units short, I’ve seen it up to 9 million housing units short, we’re still we still have a product constraint. And we saw that in my primary market in during COVID, where we went down to a three day supply of real estate, right? This is the average, we’re currently we’ve only bumped back up against 2.8 months supply. And that’s now starting to dwindle, because people are starting to see that maybe the Feds ease easing off a little bit, maybe there’s going to be a plateau here. But the reality is people do things based on what’s happening right now, they tend to forget what happened when we had a percent interest rates, you know, they tend to forget what happened when we, you know, when when we had these other things, but but really, we’re supply line constrained. And so there’s, as the market has shifted upward, we’ve definitely had pricing go up. So now a $200,000 house is $400,000. Well, you know, $200,000 house and 8% is a very different thing than a $400,000 house at 8%. But what I’ve always seen in these cycles is the fact that everything happens in an order, first of all, you have pricing goes up, that’s usually stimulated by some sort of funkiness with the interest rate, which we saw. And then you see as the bidding goes up, you know, now we’re seeing the pressure on wages, we’ve seen a lot of pressure that way, we’re seeing job cuts. But I’m wondering if that’s not a consolidation of, hey, we’re cutting Jim’s jobs so that we can pay Sam and Sally and Sarah, what they’re demanding, because we’re, we’ve got to do this. So we’re losing some jobs, but but by and large employees are being paid more. And that’s kind of at the tail end of the cycle, because then what comes next is we now have $400,000 houses that are being bought by investors that are being financed at 8% that now need 2700 instead of 2700 a month or 3700 a month. And that’s what’s coming. And so we always see these things happen in the cycles. And it’s just what point are we at, you know, we and then with that we’ve got a lot of apartment investors, buyers that bought and thought, you know what this is so great, we’ve got 2% money, but let’s leave it flexible, because we can get 1.78% money, and we can save that extra quarter, or eighth or whatever. And we can have this floating rate debt. So now we’ve got people out there that can’t cashflow their properties, it’s nothing wrong with the property that has everything to do with the financing, right. And I probably see a deal a week coming across my desk that are, you know, assumable loans that nobody wants, or they’re, you know, great products that are underwater currently. And really, they would be underwater, unless you brought a massive cash amount to the table to bring that equity cost out. You’re seeing a lot of this where people are absorbing the the fall off here where we we bought it the right thing at the right time, the wrong way. And so we’ve got a great apartment complex, the business plan executed properly, but the interest rate floated up and now it doesn’t cash flow. So there’s going to be some of that that’s going to be a little bit painful, there’s going to be some of that that’s going to readjust. Unfortunately, with where pricing has gone. I think that most of that’s going to be able to be absorbed by the investor, not necessarily affecting the bank. Right, because the product is stable. The product has received facelifts in some cases, they’ve received rent gross, they’ve seen them repositioned in the market well, and so there’s really not a problem with the asset. There’s a problem with either the OP Well, it’s not even really the operator. In most cases, it has to do with the financing. So there’s going to be some pain of that constriction and that absorption. But it’s not, in my opinion, it’s not going to be catastrophic. Because there’s lots of buyers out there that have the equity to come in and say, hey, you know, you’ve got $70 million in bank debt on an asset that you paid $100 million for, that’s now worth 85. So we’re willing to come in and buy that from you at 85. We’ve just got to get some adjustment here because we’re gonna have to bring in our own $30 million to make this deal cashflow. And we’ll be fine. And as the wages continue to come back into the market, over the next three or four years, we’re gonna see that steady three to 5% rent growth like we’ve always seen, and now your $85 million asset five years from now is back up to $100 million.

J Darrin Gross 14:49

Right. So, if I’m hearing you right, it’s just a matter of time for this to kind of reset or the the you know, the You have a long in the front of the runway on your financing, and you can wait. I will resolve itself. But it’s more a matter of need you need to get out now? Or is there somebody calling your note? Or do you have to refinance her or something like that as well?

Shannon Robnett 15:17

Yeah, Darrin, I mean, you know, real estate is a long game. And there’s a lot of people that joined in the last 18 to 24 months. That thought it was, you know, thought it was a short game, because, you know, they came into it, and they said, hey, you know, what, we can buy this, we can flip this, and, and a lot of cases, they had some great success. But they didn’t come into it with the thought process, that maybe we need to have some some prudent reserves. I mean, we went through the whole COVID thing, right, nobody really got in trouble there. Because rates kept going up, you know, property, values kept going up interest rates kind of substantiated that, but really where we’re at, if you’ve got an asset that is, is not performing today, because of the note, you’re probably you know, if you can stabilize and stop that bleeding, you’re probably somewhere in the neighborhood of 18 months from being right sided back in that deal. It’s just can you survive long enough to be there. And in most cases, everybody I know of people there in that got, they bought a $50 million asset. Sorry, $63 million asset, they financed 85% of the asset, and 100% of the of the $5 million rehab. On a floating rate debt, they got a little bit delayed on how things went together, they got a little bit delayed on their lease up, their contractor cost them a little bit more. And they are now trying to lock in fixed debt today that they anticipated being 4% in their performance. They’re toast, right? They’re toast still there, they’re a million dollars over on the remodel 20%. You know, not terrible with everything we saw in COVID. But all things considered, they don’t have enough runway, and they don’t have enough cash on hand to survive the deal. So now they’re 55 $56 million strike price is likely coming in closer to 48 on a sale, 48 million on a sale, that’s financial, which means that they’re going to eat, they’re going to lose most of their equity, if not all of it to stop the bleeding because they don’t have the ability to get further down the road to get this thing truly honestly stabilized. Everybody says buy real estate and wait. But a lot of people that are getting hurt right now forgot that last word. And they just bought real estate thinking, well, this is a short game, and we can flip and we can do this. And they’re they’re kind of they’re kind of they’re struggling. It’s you know, it’s difficult.

J Darrin Gross 17:59

No, I like your your timeline there but 18 month, because everything you point to is I mean, demand is still strong. I mean, there’s a there’s a need housing is, you know that that riddle hasn’t been solved just yet. And, you know, as long as interest rates are creeping up, and investors aren’t, you know, feeling 100% certain about what their costs are. It seems like and then you tell me, I mean, obviously there, we’re just talking about people that have got have been caught? Are Are people getting? Are you? Are you? How are you structuring deals that you’re offering? Your you know, that you’re making offers on now that you’re locking up? Are you have you Is it still the same math that it was before? Or is there a question mark as to what’s the value? Or is it or is it just a matter of lock in what your financing is? Know what your operation cost and your you know, whatever development costs you may have, and then, you know, make the offer based on that?

Shannon Robnett 19:06

Well, you know, I’ve always made mathematically based offers, I’ve never been the guy that runs in non refundable, you know, million dollar earnest money is day one, you know, so and we’ve always made sense of it. If it doesn’t make sense. You can’t you can’t bet on yesterday, or you sorry, you can’t bet on tomorrow with the appreciation we had yesterday. Right? Right. It doesn’t work like that in most cases. And and a lot of us learned that lesson and oh, wait, so we don’t need to repeat that right. But here here here’s what we’ve always looked at if I can make it pencil today. We’ve I don’t know of anything that has historically gotten cheaper and stayed cheaper. So if I can make it work with today’s rents, today’s construction costs today’s rehab costs, today’s interest rates than the likelihood of me having a successful project are very good. it. So based on always doing that, and always making the math at the front, it’s never been about one of those things. And I heard a guy say this, well, you’ll just have to bring more equity to deal because your bank will only loan you 85% of the appraisal. Well, why are you bringing? Why are you spending more on it? And the appraisal says it’s worth just to get the deal? I mean, where is this? Where is this really going? Right? Right. So people found themselves in trouble because they overpaid for it. They had expectations. I’ve seen stuff that even now shows 10 to 12%, rent bumps for the next three years. Right? Well, who models that? You know, if you’re modeling that stuff, you’re gonna get in trouble, because there’s going to be the year that you get a 7% Rent bump or a 5% Rent bump, or what we’ve always penciled in on our site is a 3% Rent bump. And here’s the thing, Darren, if I run my math, the way I’ve always run my math, the last 25 years, I look like a genius, right? Instead of looking like the town idiot, right? So the people that have that have not been doing that they’ve been running it going, hey, I can pistol whip or I can I can pencil whip this thing. And I can make my numbers work. So any deal looks good. We’ve We’ve walked away from a lot of deals, we passed on a lot of deals, and we were having trouble right now, educating sellers on what the deals really worth with this interest rate. Right? I mean, you know, I’m paying, you know, a mortgage on a deal right now, we’re about $900,000 apart, the seller doesn’t think that’s a big deal. It’s about $4,000 a month at current interest rates. Well, $4,000 a month, the current interest rates on a $10 million deal is the profit margin. I’m not gonna go into the deal at cost breaking, even hoping that somewhere between the time I take the deal down, and the next 12 months, I’m going to somehow mysteriously run into appreciation that’s going to give me profit. Right, right. Well, I’m actually having to have the conversation with the seller, that shows him my math. And he’s having to decide if he wants to sell today or not.

J Darrin Gross 22:23

Yeah, I think that’s that’s kind of that’s kind of the feel I get from, you know, just the things I’ve seen, and people I’ve talked with, it’s just, you know, that the math doesn’t work like it did, you know, six or nine months ago. And, you know, I would tend to leave just kind of like we’ve been talking that it’s a matter of time, I mean, you know, is a rinse do continue to creep up in the NOI will improve the cap rate, again, market specific will again, then, you know, determine the value, but it’s not going to be a compressed cap rate that was six or nine months ago based on just, you know, unlimited demand and cheaper free money. Yeah, kind of thing.

Shannon Robnett 23:09

Like, I can give you a quick example, from my area in in September of 21, we had average rents in Boise were $1,640 bucks. They peaked in June of 22, at $2,085. Okay, average rent and Boise. They’ve slid down now to about 1965. I was just looking at a model that that was was reevaluating a model that we’re currently under construction on that I had modeled three years ago. And I was adjusting my rents $575 to meet market today. Now that market has slid a little bit from the peak, but I’m looking like absolutely, even with cap rates expanding again, I’m still looking very good with my model. Because I didn’t think that the $1,640 jump to $2,085 in a 12 month period of time was normal. Right? All I did was applied some logic to it and went this can’t this we got to give up a little bit. And the funny thing is there when people look at Tesla, or look at Microsoft, or look at the price of gold, it’s nothing for that to fluctuate four or 5% in a week and nobody freaks out. But if but if real estate fluctuates 1% In a year, even though your debt is fixed for 30 Everybody loses their ever loving mind.

J Darrin Gross 24:37

Right, right. Yeah, no, it is it is kind of interesting. And I think that you know, there’s kind of the fury of it all I think, because so many people have found real estate as an alternative investment. You know, back in a way when when all you had to do is fog a mirror and you could you know have multiple properties under, you know, her own multiple properties regardless of your income and, and, you know, the there was just kind of a story and there was a buzz and it seemed very attainable, and everybody everybody knew somebody that was in real estate. And, you know, as an alternative, I mean, I think that, you know, the stock market the.com was kind of the similar story, you know, everybody was everybody was in, in the market, and it was, you know, I can remember walking by bookstore with my father in law, and he goes the Dow’s at, you know, 10,000, you know, what, that he was thinking it should be like, you know, 3030 500 Dots, that was his reference point, you know, right. And here’s a big stretch. I mean, that’s, that’s a, you know, 300% error of almost a 300% increase. And so that, I think that’s kind of the news. And then you have this constant barrage of the information and stuff to where it it, it’s really easy to get sucked in and, and, you know, pay attention that but I’m kind of curious in, in love to hear your thoughts on this, you know, with with the the run up of the multifamily specifically, since the 2008. Crash, and the number of of syndicators that have come to be, or have entered the marketplace where, you know, it used to be it was it was kind of more in this probably more pre JOBS Act, as probably be more one of the things that then restricted the capital so much, but, but it used to be kind of more of like an old boys network, or kind of who you knew kind of thing or, or, you know, larger funds or families or whatever, that were there primarily, the operators or the investors in that space. But since since the Jobs Act, and around 2008 have been there’s been a complete proliferation, proliferation of syndicators. And obviously, there’s been plenty of opportunity demand. So my question to you is, do you think through this kind of the cycle, kind of going back to some historic levels? Will that kind of thin the herd? Do you think there will be some that will? Get out, stop, you know, let go and we’ll be more of like a more of a dedicated, you know, syndicators that are that are committed to the long, long term, or do you think this, this is just going to be the new norm and everybody in will continue to play?

Shannon Robnett 27:43

No, you know, I think it’s like everything, you know, it’s, it’s the new I mean, shoot in, if you told people in 2011, you were in real estate, they treated you like you’re a leper, or, you know, mentally deficient. It’s, I think it’s kind of the same thing. We’ve gone fullcycle real estate got sexy again, you know, I mean, I ran into somebody I went to high school with and, you know, they were a chiropractor in town, and they were now a developer, you know, and so where’s that gonna go? There’s gotta be some of that clearing out, like with the.com bubble bursts with, you know, what’s happened in the run up in the market. And hopefully, the professionals will come in and clean up and take care of things. And hopefully, the government doesn’t decide to throw some more regulation on there to protect the poor, unwitting people that got into involved in stuff that maybe shouldn’t have, or should have known more about or whatever. But the reality is, I believe that with the lack of supply in the market, we have a whole different thing that’s going to happen, that’s going to make it easier to clean up. You know, when I was talking with Ken McElroy, about where we’re at in the ballgame being you know, now we’ve gone the other direction, right? You when you were talking about the ballgame earlier, it was the ballgame from here to peak, right? Well, now we’re talking about we’ve already we already know we pass the peak, but where is it from peak to keys back at the bank, because people are given up on their projects? You know, I think we’re I agree with Kenny, we’re probably in that second or third inning because of the lack of supply. Because of the strong retail market that we have everybody’s there’s still a lot of transactions going on, go into a restaurant, they’re packed, retail stores are selling things. There’s a lot that’s happening there. Even though we’re at a record low savings in America right now. We still have a lot of transactions happening. And I think that the rent market is going to stay strong. And it’s taken a lot of people out of the home buying mode and left them stuck as renters. But I think in all of that, you’re still going to see that with with high occupancies rents increasing, it’s going to be pretty easy for people to come in, that have a good solid business plan that have learned to syndicate properly, that have learned to raise capital that can Ron, these projects be able to come in and assimilate that. So you’re not going to have vacant buildings and you know, half finished projects and those kinds of things, you really going to be able to finish this out and walk it across the finish line without too much disruption. But there is going to be a lot of, let’s call it short selling in the meantime, that people that maybe overpaid, maybe didn’t quite execute the business plan properly, maybe have a little bit of an issue getting to the end of the day, that they’ll I think they’ll be quickly absorbed, though.

J Darrin Gross 30:33

No. Yeah. I mean, that makes sense to me. You know, again, I think that the it’s, it’s kind of human nature to, you know, look to the last disaster for the answers for, you know, whatever the next one will be, or the crisis or whatever, you know, and, you know, my my sense of things is that whatever happened in the past, there have been efforts that have been made to correct or to not allow that to happen again. And so, you know, even though you have some similar kind of, you know, market conditions, the cause is not always the same. And, you know, so it’s, how it will play out will, will likely be entirely different. Yeah. And so, I think you’re, and then

Shannon Robnett 31:25

And then you’re right, I mean, then you’re going to have, you know, government come in and try and correct the situation and protect everybody and, and do the things that, well, maybe we shouldn’t have, and, you know, maybe you gotta get a serious 65 to do this kind of thing. And, and maybe that’s not bad. But then you when you have those kinds of things, you’ve got the stifling of an economy for a little bit, you know, an artificial constraint, if you will, on, you know, capital coming into the market, like we had in 10 and 11, where we really choked out homebuilding, because of all of the, you know, regulation that was coming in because of the funky loans that were written in, oh, five, you know, six, those adjustable rate mortgages. So there’s always that precession, that lag, in effect, you know, the effects happen, we had the low interest rates, prices went up, rents are now going up, and here comes the after effect.

J Darrin Gross 32:21

Interest rates, where do you think, they’ll kind of rest? Or, you know, what’s your sense of things as far as where we are today, and where we might be within 12 month?

Shannon Robnett 32:33

You know, I just got my crystal ball yesterday, but I dropped it, it’s kind of cloudy right now, I’m hoping it clears up. But, you know, I, I think we’re still going to see some rate increases, I think we’re, you know, everybody’s signaling that we’re going to see another quarter percent this next time they meet, I think we’re gonna have another quarter percent after that, I think you’re gonna see toward the end of the year, we’ll have eased our way up from six to probably seven, I think we’re still going to see some, some raising of interest rates, but I think you’re gonna see, I think you’re gonna see wages are going to have to push up to match that to put people in a position where they can afford what has to happen. Because if that deals gotta get financed at 7%, the rents got to be here. And, you know, people have got to be able to afford it. So it’s going to come out of there, we’re gonna go back to the hurt cycle of, we’re going to be pushing on employers to pay more, because they’ve got to fund this upcycle. And then, then here, we come with more inflation on pricing of what it costs for me to show up with my employees because of what I got to pay. So I think you’re gonna see 7% And you’re gonna see that cycle just continue to ease its way up through the end of the year.

J Darrin Gross 33:49

Yeah. That’s clearly plausible. And, and, you know, I think historically, if you look at the the markets, like we’re, you know, started the conversation. You know, and that historically, that’s not been a, an outline. Interest rate. I can remember, the first home loan I got I was seven and three eighths, and we were doing cartwheels because I was like, Oh, my God, you know, we’re the

Shannon Robnett 34:18

he used to be that phrase, if it’s under eight, don’t hesitate. Right? I mean, it was so cliche, but it was and yet now we’ve got the combination of the incredible price increase and the interest rate that may get a little bit different story. But at some point, we’ve got to we’ve got to choke down and get through that.

J Darrin Gross 34:37

Right. You mentioned trying to re educate sellers. What What’s the conversation like with some of your investors when you’re raising capital?

Shannon Robnett 34:50

You know, most people that we’re that we work with work with us based on reputation based on knowledge based on who we are and what we do. So it’s true really kind of a we’ve had, we’ve had a shift from from people looking at it going all I wants appreciation, everything’s going up, give me some more of that, to really maybe being a little bit more balanced in their portfolio and going, you know what I really need to get some cash flow in my portfolio, I can afford to take some risk and some appreciation on these deals. But I like cash flow, we’ve always dealing with people who are looking for the tax savings, you know, we do a lot of tax planning with our investors. So that you can come in and we can say, hey, you know, you need some some of this, you need some of this, you need some of this, we can tailor that product, and help you put together a plan. But a lot of people are shifting back to what I think should be normal, where you’ve got a balanced portfolio, you’ve got cash flow, so you can always take your appreciation deal. What you’re looking for is as you know, the growth and say, Well, if that doesn’t come through, and it takes three or four years, I’m not trying to, you know, get all I don’t have all my eggs in one basket. And so I think we’re seeing people kind of go back to what maybe is a little bit more normal, and more maybe what I think it should be where you’ve got a portion of your portfolio that’s looking to grow and a portion that’s tax free, or in the tax realm of things, and then a portion that is cashflow based.

J Darrin Gross 36:17

No, no, definitely the the cash flow is certainly a lot more are getting a lot more attention now than then, you know, when it was just low cap rates and just turn it in or kind of thing. Yeah, getting get in get out. Let me ask you this COVID kind of introduced, you know, a sense of place that perhaps maybe I needed to be in a certain place before now I can be almost anywhere. I know, certainly Idaho, Boise specifically have benefited significantly from that just, you know, people looking for a place that they rather live than where they were knowing that they could work from anywhere. Do you see that continuing? Or do you do you see the the work placed, kind of normalizing and being more, you know, on site, as it historically were, or some sort of a hybrid of that?

Shannon Robnett 37:24

Well, as you know, I’ve been my physical address is in Puerto Rico, and I live there and have lived there for the last four years while conducting a lot of most of my business in Idaho, and then expanding into into other markets. But, you know, I think that the ability to work from a lot of places, is going through its initial evolution, I mean, it’s kind of like, you know, we got turned loose, and everybody went and did and the whole work from home thing was all the rage, and everybody was doing it. Now you see a lot of the major corporations kind of pulling it back. But you know, I was talking to a guy just today that, you know, he’s been working remotely for a company out of Palo Alto for 10 years. And so I think that that, too, as technology allows us to do that, we’re going to do that more, I know that Boise went from an average median income of $74,000, a year in Boise, Idaho, to $92,000 a year because of COVID, and people that moved in with the higher paying jobs. So I think you’re still going to see pressure that way, I think you’re still going to see, you know, people wanting to work outside of the office. But I think employers are going to pull back on that. So you’re going to wind up with a little bit more of a hybrid. But the technology is there that wasn’t there five years ago, you know, we’re conducting this, the zoom 1000s of miles away, and not having any glitchy stuff, like we used to have with Skype, you know, and any of that kind of stuff. So I think that that’s gonna make it a lot more practical. I think we’re gonna go through the evolution of, you know, there was just this court case where a woman was caught, not actually working, but she built her employer for it, she actually has to pay the employer back. So I think there’s gonna be some more of that employee tracking stuff. So they recognize that you are working when you’re working remotely. And I think we’re just gonna go through that evolution. But I know that work from home is here to stay. And we’re actually incorporating that into some of our designs on our on our projects, because we know that people want those workspaces in the home again.

J Darrin Gross 39:26

Yeah, that seems to make a lot of sense. building that into the design there for for piano players.

Shannon Robnett 39:33

You remember when they used to build houses with a phone desk, right? I mean, no, desk and the phone sat over here and there was this thing called a phone book and, you know, get a pencils and a tablet there to take note. I mean, you know, we’re just going back in time to go forward in time.

J Darrin Gross 39:52

Right? No, I was laughing. As you’re saying that. I remember the phone was attached to the wall. Yeah. I’m very short cord Yeah, you couldn’t get away from the noise kind of. That’s funny. Hey, Shannon, 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 their risk. And there’s three strategies we typically consider. We first looked 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, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation could be their clients, investors, the Feds tenants interest rates, however, you would like to frame the question and identify what you consider to be the biggest risk. And 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 Shannon Robnett. What is the Biggest Risk?

Shannon Robnett 41:12

You know, in my business, the Biggest Risk is taking on the project and having things like prices increase on commodities. You know, we started a construction project. And our lumber costs estimate went from 3 million to 9 million. We locked in on the way up and caught it at about five and a half million, but it was still a two and a half million dollar Upswing on that. Those are the risks that we take as developers on brand new ground up. And so there’s always that question that you have to ask and it comes back to your underwriting? Do you have the runway to absorb this? Can you get from here to there so that you’re not, you know, your framing is in the first third of your job? If you’ve used all your contingency in the first third of the job? How are you going to finish the rest without additional cash? So are you properly capitalized? Have you underwritten correctly? Do you know that three years from now when you’re built out on a 200 unit apartment complex that you’ve you’re going to be able to sell those are the risks that we take that that sometimes keep me up at night?

J Darrin Gross 42:29

Yep, know the budget and the actual definitely plan accordingly, I guess. Hey, Shannon, where can the listeners go? If they’d like to learn more connect with you?

Shannon Robnett 42:43

You know, the easiest place to find me is just ShannonRobnett.com. You can go on there. You can connect with us there you can get on my calendar. I’d love to have a call with you. chat with you about what you’re doing what we’re doing. But we’re we’re we’re there or you know, all the socials. You can find me out there.

J Darrin Gross 43:02

Got it? Well, Shannon, I can’t say thanks enough for making time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Shannon Robnett 43:12

I appreciate it. Darrin, thanks again.

J Darrin Gross 43:15

All right. And 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 43:34

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Commercial Real Estate Deal Cycle Interest Rates with Dan Brisse – CRE PN #399

Dan Brisse 0:00

I do sympathize and understand the market change but this is a very dangerous time to be buying if you don’t know what you’re doing very very dangerous and very it’s not the right time to be coming into a market you know if you’re a newbie investor wait for this to wait for this to blow over wait for interest rates to bottom out wait for something to be a more stable than trying to get into a market right now. So there’s the gap between the buyers and sellers. sellers want prices from June buyers are saying your price is crazy. We’re not paying that. So we’re at more of a standstill I think.

Announcer 0:31

J Darrin Gross 0:50

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 Dan Brisse. Dan is the co founder and principal at Granite Towers Equity Group, where he oversees the Operations, Acquisitions, Investor Relations and Asset Management. Dan is resident of southern Washington and is also a former professional athlete. As a professional snowboarder for over 13 years, Dan took home multiple X Games gold medals, and was known as one of the top urban snowboarders in the world. Dan’s drive for excellence and success transpires into Granite Towers real estate portfolio. Dan is also the co host of the podcast, Keeping It Real Estate, and the co author of Four steps to Successful Passive Investing. In just a minute, we’re gonna speak with Dan about the multifamily marketplace for 2023.

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 our answer 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, Dan Brisse, welcome to CRE PN Radio.

Dan Brisse 3:03

Hey, Darrin, thanks for having me. I’m excited to be here.

J Darrin Gross 3:06

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

Dan Brisse 3:15

Yeah, you bet. I grew up in central Minnesota with this childhood dream of trying to become a professional snowboarder. And you know, at that age, I was 1011 years old. 12 years old. I went and told everybody about how I was going to be this pro snowboarder. And most everybody told me to get real and you know, I was like, you know, you are in Minnesota. There’s no mountains here, Dan, or maybe you should have a backup plan for that. And yeah, long story short, my parents believed in me and I told my parents and my mom, my dad told me Go for it. You know, they my parents were the biggest asset I’ve ever had in my life growing up. I mean, they basically they just said we didn’t do what we love. Make sure you do what you love as you grow up. And I never forgot that. So with their, you know, support, I had down, started snowboarding and just did it because I loved it. I didn’t you know, first 234 years of snowboarding. I didn’t want to be a pro snowboarder. I just loved doing it. By the time of 15 1617 years old. It was very clear that they were pro athletes. They were these guys who traveled around the world got paid to snowboard very well and had a career out of it. So that was kind of the background there. And as 18 years old, I moved out of Minnesota I transplanted to Salt Lake City. I lived in Salt Lake City for 10 years. Never had any financial help from my parents. I worked the most odd jobs you can imagine. As an ally coordinator at Red Lobster I worked at Blockbuster checking people’s out for movie as I was a busser at TGI Fridays, and after being in Salt Lake City for four years grinding working my tail off snowboarding every day I went to the Aspen open in Aspen, Colorado, and I my buddy actually paid for me to get in the contest and he drove me there because I was still living paycheck to paycheck. And I entered the contest, got through finals I had to get through 250 riders, they’d be the top 10 to get finals, finals, they came, I won the contest and my career took off. And I had a really great successful run as a professional snowboarder and have now since transitioned into real estate investing. So that’s kind of I’ll let you go from there, Darren.

J Darrin Gross 5:14

Well, I’m just gonna encourage any of our listeners, if they want to see some of the rides that you took, it’s pretty easy if you if you Google or search on YouTube, Dan, breezy snowboard, you’ll be entertained. It was pretty, pretty amazing stuff that you did there. Extreme. Extreme. I mean, that is the rider or extreme? Yeah. But well, awesome. I like that. I’m really looking forward to our conversation. So tell me a little bit about the the, the transfer from your snowboarding days into real estate because it’s not exactly like they’re, they’re connected other than the fact that you were snowboarding on real estate there.

Dan Brisse 5:59

Yeah, good way to put that. Yeah, real, really what happened was is as I got into my career, and I started to get to know a bunch of the other pro snowboarders in the industry who were older than me, I saw some of their careers and and it was brutal. It scared me. You know, they ended up coming into this career where you’re this huge known athlete getting paid very well traveling the world, everyone knows you, you go up these events, everyone wants your autograph, and then the career ends and you’re a nobody, or at least that’s how you feel. You’re still somebody but your identity of who you were, your whole life is gone. You’re maybe didn’t manage your money. Well, like most folks that they start making money as athletes, they just don’t know what to do with it. You know, I hear so many people say, and the money ruined me, it wasn’t the money, you just didn’t know what to do with the money. You know, you give someone a million dollars, and they’re broke two years later, you give someone a million dollars, and they’re worth 4 million, you know, two years later, it’s about what you do with it. So really what happened was I just kind of got scared and started reading books on what separates folks and what makes what’s the difference between people who do well and take their money and multiply and other folks that lose it all. So I read a bunch of books, and I started investing in real estate as I figured out I wanted passive income. That was my main goal. How can I find a way to create residual money coming in whether I work or don’t work? And then how can I get a tax savings? How can I get a tax break based on my income. And so I hired a CPA out of Arizona after reading a bunch of books. And we set up a business plan with them, including my wife, to help with the real estate investing. And we were off to the races buying smaller stuff. I bought a duplex in 2012. I bought a nine unit deal. Couple years in the year later. And then I bought a 24 unit deal. All on my own all my self education didn’t have a mentor yet, but I was just reading books and trying to find a way to invest the cash I was making.

J Darrin Gross 7:52

Cool. So the the, you know, seeking some sort of plan B passive income, you’re drawn to real estate. If I understand correctly, now with granite, you guys are doing syndication. Is that correct?

Dan Brisse 8:07

Yeah, that’s correct. After buying our first few deals on my own my business partner now Mike Roeder, one of my best friends I grew up with. He’s actually in high net worth insurance sales. He was buying a ton of single family homes in central Minnesota, and I just said, Hey, let’s buy a deal together. So he myself and one other guy that I went to high school with bought a 28 unit deal together. And then Mike and I went on to hire a personal mentor, or somebody who had been doing this for 24 years, had several 1000 doors, and had the results we were looking to, you know, move to for granite towers. So we started the company. And since then we’ve been buying, you know, 150 to 400 unit deals with private investors, you know, all value at apartments

J Darrin Gross 8:57

counted. So let’s say you said around 200 or 220 12, you buy your first duplex. What about did you start syndicating

Dan Brisse 9:09

the first deal? We syndicated wasn’t 2017 or 2018. So there was a period of time there. Where there’s there’s a steep learning curve in real estate, you know, it takes time. There’s everything takes time. So yeah, it was it was 2017 2018. We didn’t raise money until we had our really, really raise money from several investors until we had had more training

J Darrin Gross 9:37

on it. Got it. So and now how many how many doors do you guys have under?

Dan Brisse 9:42

Yeah, we’re right around 2400 units or so. Just around 300 million of assets under management that we’re overseeing as our team at Granite towers, as you know, takes the property from where it is to its new level through the business plan operation.

J Darrin Gross 9:58

So is it primarily evaluated A value add strategy that you guys?

Dan Brisse 10:02

Yeah, Yeah, it’s it’s exactly like that every every property is pretty dang similar. It’s a rinse and repeat model, you know, we don’t buy Office and storage and all the other stuff we focus on B and C, and we have one a class deal multifamily in Dallas Fort Worth in Nashville, Tennessee. And that’s really all we look at.

J Darrin Gross 10:21

Gotcha, gotcha. So in, excuse me in the the run up here told us, I mean, we’re talking now it’s it’s January 2023. The last, you know, five or six years, or even before that, I want to say back when I first started this podcast in 2010, it was 2015. I remember talking to people going like, Oh, my God, it’s you know, we’re running long, extra long and extra innings. You know, it’s the least the normal cycle of things was running kind of long from when the crash had happened. They were expecting a crash to occur, then. Clearly, it didn’t happen. We had multiple things that had kind of interrupted the normal cycles, including COVID. Your, your build up to the 2400 doors? How many? How many times have you gone full cycle? How many how many deals have you guys sold? And

Dan Brisse 11:22

yeah, we’ve gone we’ve gone full cycle on six deals, four that have been syndicated the two that I bought before I’ve sold off on my own. So that’s, that’s where we’re at currently.

J Darrin Gross 11:34

Okay. And in the in the syndication model, raising capital? How, tell me a little bit about that, as far as your experience with the initial efforts to raise capital versus where you are now.

Dan Brisse 11:54

You know, the market is changing quickly. Right now, obviously, everybody knows being we’re in is January 2023. When we first tried to raise money on our first deal, we raised 575,000 bucks on a 45 unit deal, located in River Falls, Wisconsin. And because of our database at the time in the work we had done, and the folks we had already spoken to about what we were doing, it was relatively quick, it was probably three, four or five days. And we had maybe like 10 or 15 investors who threw in 50 grand. So it was always very easily knock on wood. It’s always been very easy to raise money. I think that you’ve got some positives and some negatives. The positives are that you know, cash is looked at more I think as as trash at times you hear guys like Ray Dalio saying cash is trash on NBC News. I mean, that catches some attention. You know, what does that mean? Obviously, right now, cash feels like King. So are you still thinking cash is trash? I don’t think it is I never thought it was. But I think you have more folks that are thinking, Hey, I can’t let the dollar sit in the bank, I need to find a place to create some residual income find a tax savings? Can I be a part of the inflation through, you know, the destruction of the dollar? So I think I think there’s gonna be challenges for different groups, it really depends on you know, what do you know? And what kind of reputation do you have in the real estate business?

J Darrin Gross 13:28

Got it. So you mentioned like the first deal it took you only like a couple of days to raise the money you needed? Are you guys actively looking for for properties? Now? Do you have any under contract, or where are you at in in your acquisition phase?

Dan Brisse 13:47

Yeah. We’re always looking WE ARE WE every single deal that comes out in Dallas and Nashville, we’re underwriting and trying to see how close we can get to the Whisper price or their offer price. Right now, we don’t have anything under contract we have submitted a few offers, and it’s just there’s a gap right now. And realistically is the gap. I mean, if I’m selling, which we are, we’re selling one deal, you know, that went under contract in June, and the gentleman is still trying to get it closed. And he’s got $860,000 of non refundable money that he’s already released to us that we have in our bank account. And, you know, for us, we’re still of the opinion that you put the deal under contract in June at that price. That’s the valuation he’s of the opinion that interest rates have moved and now you know, the values come down and I i understand what he’s saying. But our noi has also massively increased. And you know, most of the time you don’t close a deal over six months, you close it in 60 to 75 days, at least we do. So I do sympathize and understand the market changed but this is a very dangerous time to be buying if you don’t know what you’re doing very, very dangerous and very it’s not the right time to be coming into a market. You know, if you’re a newbie investor what wait for this to wait for this to blow over wait for interest rates to bottom out wait for something to be a more stable than trying to get into a market right now. So there’s the gap between the buyers and sellers, sellers want prices from June buyers are saying your price is crazy. We’re not paying that. So we’re at more of a standstill, I think.

J Darrin Gross 15:19

That kind of sums up kind of what my my sense of things have been. But yet I still hear about, you know, deals being done. I’m kind of curious, have you in the deals you’ve underwritten? Has there been any change in your strategy as far as maybe some of the, you know, the points you were looking to historically for whether it be value add or always had been more of a financing? You know, Rubik’s cube on how to solve the financing.

Dan Brisse 15:52

Here, our biggest change definitely is what we’re using for debt. And how we’re going about that, and that affects your what you can pay for these deals, you know, when you’re in a very volatile market, like he are, how do you go put bridge debt on in Bridge debt where the variable rate you might get way more loan dollars, but just because you’re getting more loan dollars, and the returns look better on paper does not mean in my opinion, and our philosophy, granite towers, that that’s the way you go. So our biggest thing is just low leverage fixed debt. And if you can’t make the deal work with low leverage fixed debt in a market we’re familiar with, then we’re gonna wait a little bit, we’re gonna stack cash and and see how things play out. You know, we we bought a lot of deals over the last four or five years. And if we have to pause for six or 12 months to see what comes of this, we’re going to pause.

J Darrin Gross 16:51

And historically, your acquisitions, have you raised the capital for the value add capital improvements, or have you built that into your loan? Or have you done bridge financing? Or have you handled the capital improvement budget?

Dan Brisse 17:09

Great question. We’ve done it all. We’ve done it where it’s financed through Fannie Mae. And we’ve done bridge, when we’ve done it, where we raise the capital and just have it liquid in our bank account. Right now the last three deals we’ve bought has been Freddie Mac, fixed debt, and we raise the cap x and it’s liquid. And it gives us more flexibility. Prior to that, we’ve done some bridge debt that we’ve put rate cap insurance policies on where as rates rise, which they have now you have your rate cap insurance paying you to offset your cost and debt still very uncomfortable. Something that, you know, as we go through this cycle, probably will be very hesitant with bridge debt moving forward doesn’t mean you still can’t do well with the deal. I think I think there’s still an opportunity as long as you manage very well. And you can make it through this elevated interest rate period, how low? Did they come down? When did they come down? That’s the unknown factor. So you need cash reserves to get through that stuff. And then the other one Fannie Mae debt, with your capex finance, we’ve done that as well. It’s just a little bit more tedious and much more of a headache to get those loan dollars when you do want to use them. They’re very, very critical on seeing exactly what you did with the money was the work done perfectly, and then you get your money released? So it’s just it just depends on the deal. Depends on your your business plan.

J Darrin Gross 18:37

On those Fannie capex dollars, is that kind of like a construction loan where you have to submit all the work that was done and they inspector?

Dan Brisse 18:47

Yep, that’s exactly how it goes. It’s just part of the loan. I don’t think they consider it a construction loan, like a second loan, it’s just part of the loan that’s you can tap into when you’re ready, it’s available for you.

J Darrin Gross 18:58

Right, but those capex dollars are like in escrow and you’ve got to submit proof. Okay,

Dan Brisse 19:03

that’s 100% Correct.

J Darrin Gross 19:05

Gotcha. So, as far as the, you know, kind of the market changed, are you are you I guess what I’m trying to think is on your hold times, I’m assuming that up until now, you know, there’s been multiple people I’ve talked to if, you know, they bought the deal in January and you know, maybe January the following year, they’ve got a, an offer to sell at a multiple that they had, you know, anticipated for a couple of years. I’m assuming or let me ask it this way. Are you seeing your hold hold times extend based on you know, just the market and kind of the, the, you know, buyer seller gap? Are you do you anticipate holding your deals longer than then maybe you might have a couple of years ago?

Dan Brisse 19:55

Yeah, it one 100% will be dependent on what happens With interest rates in this recession, and how deep we go, and how long the Fed holds rates where they need to hold them, you know, I don’t know right now, that’s the part where if you want certainty of weathering a storm, you want to have fixed debt for a long period of time, because you don’t control when Jerome Powell is going to bring rates back down, or the Federal Reserve decides that it’s, you know, we’re far enough we need to help the market come back to life. So you know, going back to the chant, the biggest change we’ve made is just low leverage fixed debt. You can weather storms, yeah, you’re gonna have a prepayment penalty if you want to exit early. And it’s probably going to be a little bit painful. But which would you rather go back to your investors and say, Hey, we’re going to exit, we do have a prepayment penalty return instead of being 110 is going to be, you know, 97%. Or, you know, what our bridge debt is needing more capital put in 50 grand right now, or you’re we’re going to lose the deal. I mean, what would you rather be in as a syndicator? I’d rather be in the first position and always that position, I want boredom. I want to be bored. I don’t want to be gripped one bit when I’m investing in real estate, you shouldn’t be if you do it, right. You should. You should, it should be somewhat boring. And if it’s exciting, great. You’re just gonna sell for more because the market is good.

J Darrin Gross 21:18

Yeah, no, exciting is good when it’s the right kind of exciting that the Oh my god. Yeah, yeah, exciting. What about rate increase, not rate increases, but rent increases? In the last few years, there’s been quite a run out based on supply and demand, and inflation, etc. And, and all that. In the market you’re in in Texas and Tennessee, are you seen? Or have you seen substantial rent increases? And also looking forward? Based on kind of the economic conditions we’ve discussed? Do you have any kind of expectations for for rent increases? Or what are your expectations for rent increases?

Dan Brisse 22:08

Yeah, um, thus far with our DFW deals, and our Nashville deals, we’re still seeing very large rental increases in somewhere between you know, that 12 to 30%, which is, which is not normal, you know, based off of history, what we think is coming with the oversupply of a class is, is, is definitely gonna be less, you know, how much less again, unknown, do we have negative rent, I don’t know. As far as what we’re underwriting, we’re taking a look at costar, what they’re projecting, we’re taking a look at our one mile median income, we’re making sure we have a B or C Class DL a class, I think we’ll probably get rekt a lot harder than B or C class. And, you know, based off of what we can see with our primary data of what the other competitors are doing, and we take a look at costar and compare it, we’ll make a rent projection based off of that data of what’s coming over the next five years. This is part of real estate, though, that’s always been a challenge. What do you think your exit cap rates gonna be? What our rents gonna do? We’re interest rates going to be you there’s no way of knowing that information other than, you know, and I think you can read a lot on cycles, you know, that’s one thing I think is worth putting more time and effort into is studying real estate market cycles, and trying to better understand if you’re going into a downward cycle, what are the past cycles look like? And should you be using some numbers that are closer to what they were modeling in 2008? Nine, maybe that’s your best kind of, you know, projection of the future. As of right now, you’re in 2023.

J Darrin Gross 23:50

Yeah, no doubt. I, you know, the funny thing to me is, and this is just my, you know, brief experience in investing and just kind of observing the, the market cycles net, but, but it feels like a lot of times what happened before corrections have been made, like, Take, for instance, the Great Recession, there were measures put in place by Congress and, and, you know, other kind of real estate lender fixes that we’re putting into place. And I have this weird sense of a lot of times people when they when they look to the future, because they see certain signs they anticipate is going to happen, just like it did last time. And but, you know, what I’ve seen is that, you know, wherever the problem came from last time, those those holes have been plugged in. So now it’s not leaking over here, but it’s, you know, over there or up there down there. There’s a different cause. Doesn’t mean that it won’t be the same effect. But it’s just about where, where it’s coming from and I think also one of the challenges that I think we have this time is with all of the cash that was pumped into the marketplace. You know, there’s, there’s still I and I haven’t looked at anything recently, but I seemed like I read somewhere that, you know, the the amount of cash, whether it be savings or just, you know, just just cash that people or people are holding as cash as opposed to him in liquid. He has significantly greater than, than what it had been historically. And I should probably check out and have a resource, you know, to cite, but, but there’s like, it’s been more like a sense of like, kind of hanging on like, you know, the, we might need this. Yeah, to cash. And yeah, so,

Dan Brisse 25:47

Yeah, I don’t know if you’re familiar with Ken McElroy, he shared a pretty interesting chart on that as far as the amount of cash in people’s bank accounts, and it was very, very high during COVID. And very quickly, it’s been coming down to some of the lower levels we’ve seen in recent history over the last three, four months. So the direction we’re heading is definitely toward pain. The part that’s interesting to me is how much the Federal Reserve controls the market with these with interest rates, you know, I think the flick of the pen and they bring rates down 2% overnight, and all of a sudden everyone refinancing deals. People are able to now sell deals, people are back to buying deals, you know, people are back to building. It’s just It’s just unbelievable. And the other piece I think that’s unique now compared to the Great Recession is the amount of unrest between our the folks in their country. I am concerned as we go later into this debt debt cycle, and Ray Dalio talks about this in the changing world order. It’s a great book, if you haven’t read it, take a look at changing world order by Ray Dalio just talks about as you get late into a debt cycle like we are, that the amount of synergy and people working together goes down, and you have more fighting amongst political parties. And we’re seeing that I mean, I can tell you right now, firsthand, Portland is a different city now now than it was two years ago. And I don’t know why there isn’t more action being taken to stop what’s happening, because that seems very clear what we need to do, but it seems like it’s being allowed, and it’s trending down very quickly. So, um, you know, that’s the other piece is how, how much do people fight? Versus do they get along? You know?

J Darrin Gross 27:31

Excuse me? Yeah, no doubt the work together versus the, you know, the friction in all phases, but more, you know, more dramatically, so in the political space. And I think, you know, there’s, there’s all sorts of things you can point to that, that, probably exacerbate that. But, you know, it’s, it’s just, it’s just really a sad state of affairs, when you see, the the only thing that has been publicized is about how the other guy is all wrong. As opposed to, you know, going behind closed doors and finding out where the common ground is, and trying to, you know, come out with a solution. But yeah, I mean, Portland, right now, I don’t I don’t get it. How the, you know, just the, the leadership does understand the the value of the businesses and the people in you know, coming in the city and making your your, your city the most attractive and most wanted place, which, you know, people people, I mean, the people with money can leave. Yeah, I think say enough of this. I’m out. Yeah, those are exactly the people you want. Yeah, the if you don’t do what you need to do to attract and keep their interest, you’ll lose them. And

Dan Brisse 28:58

Yeah, and just think about as a parent, if I’m a parent, and I’m looking out the window, seeing the stuff I’m seeing with children, like, I can’t keep my kids there, I have to leave the city, you’re forcing me out because it’s unsafe. And I can’t be explaining, you know what, to them. They’re not at that age, they shouldn’t be seeing the stuff that I’m seeing. So, you know, it seems so obvious and so clear. I wonder if there’s something more it just it, you know, it doesn’t make sense. It’s beyond me.

J Darrin Gross 29:25

Yeah. Well, I’m with you there. And I don’t know what the, the answer is. But I think unfortunately, it’s one of these things where it won’t correct until it gets worse or you know, enough people leave to where, you know, somebody, somebody new in charge. changes the direction but yeah, yeah, not something they’re asking me to solve, but my two cents. Yeah. So, what is as far as looking forward here? You know, we’ve talked about interest rates and kind of the gap in the marketplace between buyers and sellers. With the information that you’re taking in the conversations you’re having with brokers, investors, you know, all of the different players, what what are you? Or where are you with expectations as far as whether it be a a new normal that people just accept? This is the marketplace? Or things change for the better to where it’s, it feels more easy to do business? Do you have a any sense of time that you guys are looking for? Or do you have any sense of that? Or is it just you keep looking until you see something that works? And maybe you find somebody that has to sell? And you’re able to pick up a deal?

Dan Brisse 30:52

Yeah, we’re very tuned into CPI each month to the consumer price index and just monitoring the pace of inflation, just to see how quickly it changes? And can they get it under control? And what does it look like? He looked back at history based off of the last 40 5060 years, then bringing inflation down, it doesn’t happen as quick as some people might think it you know, yours can take. So, you know, you’re heading into this environment. I just it’s it’s hard to say what the heck is coming? It’s hard to say, you know, with how quickly they’ve raised interest rates, and how quickly things have come to a stop, at least in real estate. You know, will it be something we haven’t seen before my not put my money on it. But what we’re really doing is we’re taking care of what we have, we’re making dang sure that the assets we do have are asset managing to the absolute best of our ability. We’re making sure all of our team members that we do have in place are trained well, and are taking care of our tenants focusing on the fundamentals, making sure that any of our debt that we do have it is variable, how are you going to exit it? What does it look like? Well, you know, Can we can we exit it sooner? And just just kind of hunkering down, you know, and seeing how far this needs to go for the system to break. I think that’s probably the next step is at some point, you think that there will be something that breaks in the system where they have to make a pivot move?

J Darrin Gross 32:17

Yeah, no, and it is kind of that I feel like more and more of the people I talked to, there’s I mean, there’s plenty of people I talk with, that are looking that are, you know, hungry that want to do a deal. But it’s again, it’s trying to get the numbers to make sense. And I’m curious when you go and underwrite a deal, and you mentioned kind of like the Whisper price. If you’re not able to get there, do you whisper back a price where you’d be interested? Or are you just kind of like, yeah, doesn’t work for us?

Dan Brisse 32:49

Yeah, we always do it. I think that’s one thing that helps you with your reputation as you go to build relationships with these brokers is they want to know where you’re coming in, you know, if you’ve got a seller who’s selling, and they take the deal out to the market, and all the buyers come back, and here’s a two and a half million dollar gap, they can at least go back to the seller and say you guys are two and a half million bucks off, what do you want to do, and see if they can get the seller to just or if he’s just holding steady. So I think the real deals you’re gonna see come to the market will because of force, you know, force of sale in the sense that their bridge loan variable debt has gone up too much. They don’t have a rate cap in place, and they can no longer make the debt payment, they need to do a capital call to investors, or they need to offload the deal wherever at whatever level they can. So if things don’t change, that seems like the most logical exit for for the deals that are distressed.

J Darrin Gross 33:43

I got it. As far as the markets you’re invested in in Nashville and Dallas. Do you are those the two markets that you’re limited to? Do you have any sense of anywhere else that you might go? If you were to what would be some of the the I don’t say the where but what would be some of the the criteria or or let me put this way? Historically, there have been there have been certain things that people look to mainly, I would say population growth and jobs and demand for housing. Has any of that change for you, given the COVID experience? And if so, what are some of the characteristics or the market characteristics that have have changed? So

Dan Brisse 34:37

Yeah, I would say one of the things that we’re more focused on than ever is just your one mile median income of what kind of demographic Are you buying in? And what kind of laws are being passed by politicians that give you know your tenants more rights than you you’re the one buying the property putting the debt on the property guaranteeing these loans? Taking the risk and building the business plan, bringing these investors together working on the property day after day, and then your tenants have the ability to not pay their rent and they can stay that just doesn’t work. So where are you going to buy so that it doesn’t matter what the government does that the people care enough about their credit, or their future to, to perform in just means pay rent? You know, I mean, at the end of the day, when I buy a home, I don’t just call the bank and say, I’m not paying this month, and they say, no worries, just stay there and enjoy, you know, they just take the house. So so, you know, it is a little black and white. But that’s, that’s the way it is.

J Darrin Gross 35:38

No, I just, it is kind of screwy. And, and, but I think as an investor, you have to be, you know, hyper aware of that kind of stuff. So that you can protect your asset. And, you know, I was having coffee with some investors this morning, we get to talking about and it’s not so much that you have the one bad apple, if he will, I mean, honestly, I made the other part of this conversation was, you know, evictions on a smaller portfolio are not something you’re dealing with all the time, it’s kind of a, you know, a rare kind of thing. But as you get to scale, it’s more of a common, I mean, it becomes more of a regular thing. But just how a, you know, a tenant that needs to go is likely causing other problems that may bleed over to some of your other good tenants that don’t want to be around, you know, that, that that situation and and so it really is it becomes more of an operational thing, and just how you can contain that and get rid of that that problem as efficiently as possible. So it doesn’t become more of a, you know, larger problem, but

Dan Brisse 36:49

Right, right. I could not agree more. I mean, that is that is something we’re evicting constantly, unfortunately, in this environment, there are, there’s more in some demographics than others. But I mean, there’s, there’s, there’s always folks that just decide not to pay, I don’t know what happens exactly, or, you know, because if they’re willing to work with us, or they give us a heads up that things are challenging, then we can work with them, but they just stopped communicating in skip or whatever, you know, it may be that they just go silent on you. And it just I’m not sure what’s going on over there.

J Darrin Gross 37:21

No, no, that’s always kind of a pain that. I mean, nobody, nobody wants to go there. But something you got to you got to have the access to it when you need it. So you can protect yourself. So yeah. Hey, Dan, if we could, I’d like to shift gears here for a second. My 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 strategies that 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, and 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 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 your investors, your tenants, the market, the interest rates, political however you choose to identify what you consider to be the biggest risk. And 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, Dan, Brisse, What is the Biggest Risk?

Dan Brisse 38:42

Yeah, I would say that there’s a couple boats the the one biggest one is get your debt right. In this market, particularly if your debts wrong, they can blow up the deal, and you can lose the entire deal lose all investors equity. So I’d say that that right now is the most important piece if you’re looking for the one biggest risk.

J Darrin Gross 39:01

I think that’s that is a pretty good answer given the circumstances. So I gotcha. Hey, Dan, where can listeners go if they’d like to learn more connect with you?

Dan Brisse 39:13

Yeah, they can just go to our website, www.granitetowersequitygroup.com. And there’s a Contact Us form. Fill it out a little email, phone number, hop on a call and we can get to know you guys better see if what we do is a good fit for you.

J Darrin Gross 39:29

Awesome. Well, Dan, 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. Yeah, thanks for having me on deer has been great. 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 40:01

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