J Darrin Gross Podcasts -

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

Alison Williams 0:00

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

Ana Ramos 0:37

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

Announcer 1:03

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

J Darrin Gross 1:22

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

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

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

Alison Williams 2:43

Thank you for having us.

Ana Ramos 2:45

Thank you.

J Darrin Gross 2:46

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

Alison Williams 2:56

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

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

J Darrin Gross 3:47

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

Alison Williams 4:12

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

J Darrin Gross 5:21

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

Alison Williams 5:31

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

J Darrin Gross 5:54

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

Alison Williams 6:33

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

J Darrin Gross 7:18

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

Ana Ramos 7:48

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

Alison Williams 7:55

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

J Darrin Gross 8:26

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

Ana Ramos 9:06

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

Alison Williams 9:51

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

Ana Ramos 10:28

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

Alison Williams 10:55

Absolutely.

J Darrin Gross 10:56

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

Alison Williams 11:29

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

J Darrin Gross 12:05

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

Ana Ramos 12:12

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

Alison Williams 12:21

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

J Darrin Gross 12:25

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

Ana Ramos 12:33

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

Alison Williams 13:27

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

J Darrin Gross 14:30

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

Ana Ramos 14:53

Typically on the cash our 75.

J Darrin Gross 14:56

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

Ana Ramos 14:59

125 to 130 for the cash out. Okay.

J Darrin Gross 15:05

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

Ana Ramos 15:28

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

Alison Williams 15:51

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

J Darrin Gross 16:26

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

Alison Williams 16:35

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

J Darrin Gross 17:18

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

Alison Williams 17:24

You do you refinance out?

J Darrin Gross 17:26

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

Ana Ramos 17:48

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

J Darrin Gross 18:32

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

Ana Ramos 18:52

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

Alison Williams 19:56

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

J Darrin Gross 20:31

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

Alison Williams 20:57

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

J Darrin Gross 21:46

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

Ana Ramos 22:13

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

J Darrin Gross 22:38

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

Ana Ramos 22:50

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

Alison Williams 23:45

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

J Darrin Gross 24:30

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

Ana Ramos 24:57

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

Alison Williams 25:53

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

J Darrin Gross 27:15

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

Alison Williams 27:55

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

J Darrin Gross 28:33

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

Alison Williams 29:10

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

J Darrin Gross 30:52

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

Alison Williams 31:00

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

J Darrin Gross 32:09

Jobs, jobs, jobs,

Alison Williams 32:11

jobs. Absolutely. And wages.

J Darrin Gross 32:14

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

Alison Williams 32:19

Yeah, absolutely. So,

J Darrin Gross 32:20

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

Alison Williams 33:35

Anna, do you want to start?

Ana Ramos 33:36

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

Alison Williams 35:08

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

J Darrin Gross 36:01

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

Alison Williams 36:27

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

J Darrin Gross 36:55

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

Alison Williams 37:06

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

J Darrin Gross 37:09

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

Announcer 37:26

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

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

Rod Khleif 0:00

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

Announcer 0:38

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 0:58

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

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

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

Rod Khleif 2:09

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

J Darrin Gross 2:15

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

Rod Khleif 2:23

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

J Darrin Gross 5:35

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

Rod Khleif 6:27

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

J Darrin Gross 6:31

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

Rod Khleif 7:44

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

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

J Darrin Gross 20:26

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

Rod Khleif 21:06

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

J Darrin Gross 21:53

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

Rod Khleif 22:18

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

J Darrin Gross 22:30

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

Rod Khleif 23:35

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

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

J Darrin Gross 29:35

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

Rod Khleif 30:07

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

J Darrin Gross 32:55

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

Rod Khleif 33:42

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

J Darrin Gross 33:58

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

Rod Khleif 34:17

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

J Darrin Gross 35:21

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

Rod Khleif 36:15

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

J Darrin Gross 36:19

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

Rod Khleif 36:25

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

J Darrin Gross 38:41

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

Rod Khleif 38:48

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

J Darrin Gross 38:56

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

Rod Khleif 39:20

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

J Darrin Gross 40:25

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

Rod Khleif 40:36

Thanks, buddy. Good to see you again.

J Darrin Gross 40:38

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 40:56

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

Land Deals with Brent Bowers – CRE PN #356

Brent Bowers 0:00

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

Announcer 0:51

J Darrin Gross 1:10

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

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

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

Brent Bowers 2:21

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

J Darrin Gross 2:33

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

Brent Bowers 2:45

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

J Darrin Gross 4:57

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

Brent Bowers 5:06

Yeah, that’s the land sharks. Absolutely.

J Darrin Gross 5:09

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

Brent Bowers 5:14

You got to go to YouTube to check it out.

J Darrin Gross 5:16

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

Brent Bowers 6:46

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

J Darrin Gross 9:14

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

Brent Bowers 10:44

Opportunity comes with a change, right?

J Darrin Gross 10:46

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

Brent Bowers 11:57

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

J Darrin Gross 12:03

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

Brent Bowers 13:26

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

J Darrin Gross 18:39

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

Brent Bowers 19:20

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

J Darrin Gross 20:11

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

Brent Bowers 20:14

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

J Darrin Gross 20:37

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

Brent Bowers 21:14

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

J Darrin Gross 22:28

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

Brent Bowers 22:51

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

J Darrin Gross 23:20

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

Brent Bowers 23:49

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

J Darrin Gross 25:56

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

Brent Bowers 26:30

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

J Darrin Gross 28:45

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

Brent Bowers 29:11

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

J Darrin Gross 30:31

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

Brent Bowers 30:44

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

J Darrin Gross 32:28

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

Brent Bowers 32:33

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

J Darrin Gross 33:04

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

Brent Bowers 33:30

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

J Darrin Gross 35:36

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

Brent Bowers 35:46

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

J Darrin Gross 36:02

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

Brent Bowers 37:26

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

J Darrin Gross 38:56

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

Brent Bowers 39:06

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

J Darrin Gross 39:32

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

Brent Bowers 39:36

God to your channel. Yeah, no.

J Darrin Gross 39:39

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

Unknown Speaker 39:54

My pleasure. Thank you. God bless.

J Darrin Gross 39:57

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

Announcer 40:14

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

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

Marc Pégulu 0:00

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

Announcer 1:05

J Darrin Gross 1:24

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

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

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

Marc Pégulu 2:56

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

J Darrin Gross 3:03

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

Marc Pégulu 3:10

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

J Darrin Gross 4:26

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

Marc Pégulu 4:37

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

J Darrin Gross 4:49

Okay, open so an open platform

Marc Pégulu 4:51

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

J Darrin Gross 5:02

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

Marc Pégulu 5:46

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

J Darrin Gross 7:15

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

Marc Pégulu 7:22

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

J Darrin Gross 10:25

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

Marc Pégulu 11:01

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

J Darrin Gross 12:01

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

Marc Pégulu 12:40

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

J Darrin Gross 13:35

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

Marc Pégulu 14:06

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

J Darrin Gross 16:18

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

Marc Pégulu 16:36

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

J Darrin Gross 17:19

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

Marc Pégulu 18:55

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

J Darrin Gross 22:06

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

Marc Pégulu 22:54

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

J Darrin Gross 26:24

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

Marc Pégulu 26:38

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

J Darrin Gross 27:47

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

Marc Pégulu 28:18

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

J Darrin Gross 31:11

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

Marc Pégulu 31:31

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

J Darrin Gross 32:51

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

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

Marc Pégulu 34:27

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

J Darrin Gross 35:39

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

Marc Pégulu 35:47

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

J Darrin Gross 36:26

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

Marc Pégulu 36:37

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

J Darrin Gross 36:51

I appreciate that.

Marc Pégulu 36:52

Thank you.

J Darrin Gross 36:54

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

Announcer 37:13

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

Raising Money for Multifamily with Marcin Drozdz – CRE PN #354

Marcin Drozdz 0:00

Expensive compared to what? And when you use that analogy, you’ll recognize that the US even during this run up is still some of the best priced real estate dollar for dollar as the asset classes represented compared on the world on a world stage. So for example in Canada, multifamily trades at a two cap sometimes even in the one caps, it’s insane you look at other parts of the world Europe, Australia, other developed countries it you know and when you look at the US trading at four caps, five caps and people like that’s crazy that’s insane. Well, compared to what?

Announcer 0:37

J Darrin Gross 0:56

Today, my guest is Marcin Drozdz. He is a managing partner at M1 Real Capital. And they’re focused on acquiring value add properties throughout the southeast us. And just a minute we’re going to speak with Marcin whoreson, about attracting capital for multifamily syndication.

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

Marcin Drozdz 2:13

Thank you sir really happy to be here excited.

J Darrin Gross 2:15

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

Marcin Drozdz 2:24

Sure. The 30,000 foot view was I picked up the book Rich Dad Poor Dad while I was in high school like so many other people read it blew my mind thought to myself I could do this and you know one thing led to another bought my first rental property and my was was 20 or 21 years old learned about negative cash flow right away all the all the fun creative techniques to kind of make make the most of it sold that property did quite well. You know several properties later got recruited into private equity moved out west ended up working in the real estate side in the equity area there and you know, it was I was tremendous because you went from from buying single family homes or small multifamily and on a personal level to you know, here’s this 200 unit 55 Plus community here’s this you know, a 300 unit purpose built rental property, here’s this x y Zed fill in the blanks and you’re just like your mind is just blown like that the quantum the size of transactions was just this tremendous to see it in your early 20s. For me, I thought I died and went to heaven. It was it was amazing. So I did that for a few years had a lot of success on the equity side learned a lot of you know, really good lessons worked with a lot of really smart people. And after a few years realize that you know that business is great as was didn’t lend itself to me building a business but fitting within the context of somebody else’s business which which is great. And that’s a great you know, outlet for many people didn’t really work for me. So after a few years I broke out started putting together my own funds focusing on opportunities so if you recall after Oh 809 The carnage that ensued in the commercial sector we put together an eight figure fund went down to AZ and sort of buying up you know, whatever we whatever we thought made a good idea back then and you could buy seven eight cap buildings you know a third occupy or pardon me two thirds occupied and pay just for the remaining no why and you know, we sold out a few years after that and you know, I thought I thought when we sold that was you know close to what was the top and boy boy were we wrong and then you know fast forward to today, you know, still buying multifamily at south southeast mostly value add and having a lot of fun doing it. So

J Darrin Gross 4:52

I appreciate you sharing that it’s funny the the oh wait, crash you And for as long as I’ve been doing this, people have been saying, Yeah, we’re about the end of the cycle, you know, the, the we’re in the second or late innings, maybe we’re in a doubleheader, whatever analogy you want to use. But I think one of the things that I find that be kind of curious to get your take on this, I mean, as a student of the market and kind of an inventor, as an investor, and just kind of, you know, I think one of the things that I keep looking for, and I think that it’s kind of a memory situation that we have with just as humans is that when we see something, we look for it again, or we look for the reoccurrence and we go back on charts and graphs. And we can always point to the point on the graph where this is the cycle that happens. But one of the things I think it’s really hard to account for is the corrections that are made in those cycles. And, you know, what, were the corrections that were made this last cycle, did they prevent major crash? Or? Or is it more of just good times have been going on or just or even financial policy that’s that’s continued to propel us in this this way, but?

Marcin Drozdz 6:16

Well, it’s, it’s interesting that you say that Darrin, because the crash in, oh, 809. Everybody knows us by now, that was a debt crisis, there was a tremendous amount of water supply, there was a ton of credit out there. And, you know, when the party ended the banks, you know, and in hindsight, they would have probably done it much differently today, when they stopped lending, and they actually would drew out of the market, it created a tremendous hardship on the economy. And, and it’s easy to talk about it. And in hindsight today as an expert, because we’re, we’ve all seen the movies, we’ve all seen the documentaries, it’s it’s pretty self explanatory where the thing broke last time around. I think the difference today is even after all those restrictions were put on and in the CMBS market in the debt be the collateralization. And you know, the repackaging of securities and all this stuff that created these, you know, the over just just the market that we had, I think the major difference today that I certainly didn’t account for was the sheer volume of government intervention with the stimulus over the last, you know, take 2008 Right up until today, I mean, the the quantum like the sheer volume of government intervention, I mean, I’ve seen statistics anywhere from, you know, the last 12 months, they’ve added 40 to 80% of additional dollars to the money supply. Right. And, and I think the thing today, that’s so different. And it’s very difficult to quantify with traditional risk metrics and how we were trained to view risk and how we were to, you know, like, even in your underwriting, when you’re buying apartment buildings, we were always told to use one or 2% for your rent growth, one or 2%, for your expense growth. Today, those numbers are out the window, all of them, whether it’s your rent growth, whether it’s your expense growth, there’s your financing, like all of these components today, are flying in the face of how those in the space have been trained for the last 1020 years. And I honestly think that’s a function of we’ve never in North America, we’ve never seen run up inflation. I mean, you know, fair enough, there was inflation in the 70s and 80s. And that was addressed in a very different way than than today than it’s being addressed at this point today. But, you know, there’s other parts of the world where this story repeats itself over and over and over again, and I’ll give you an example. I was born in Poland during communism, and we had something called renumeration in 1995, where they rolled back the dollar, the Polish dollar, from 10,000 to one. So if you had 10,000 in the bank, they rolled it back to $1. And, and we’ve never had this US Canada we’ve never experienced this other parts of the world because you know, us being the world reserve currency and all commodities throughout the world being priced in US dollars that that dollar has never been scrutinized in that way. They we’ve never we’ve never had those types of issues here. And you know, I remember my grandma would go to the grocery store or or went back to visit my grandpa when he was getting getting a little bit sick. And I remember my grandma gave me a million dollar bill and this was like 93 and I went to I’m living I got my goggles from here, right? So I’m there and I’m like, grandma’s a baller, like she she gave me a million bucks or I go to the grocery store. I buy I don’t know bag of chips or Coke or whatever, some gummy bears. I get 300 grand and change 300 pounds like Oh, I’m like, alright. And I don’t know what’s going on. I’m a kid, I just, you know, I think it’s all Monopoly money anyway as a kid, right? So you’re in the My point is that in 95, a few years after, when they renumerated, the dollar, it was $10,000 to one, they rolled it back. So the people that got wiped out, were in cash, cash equivalents, they were holders of debt, they were holding the debt on someone else’s asset. And the people that maintain their purchasing power, potentially disproportionately grew their wealth were people that held real assets, whether it was real estate, whether they had the means of production to producing food, whether they had, you know, winery, farms, farmland, timber, whatever Mills, whatever it was, those were the people that really maintain their wealth and their standard of living. And if anything, they disproportionately benefited from that. So I think that’s something that we really haven’t seen here in North America just yet.

J Darrin Gross 10:59

I appreciate you sharing that perspective. And I didn’t mean to get off on a tangent to start here. But

Marcin Drozdz 11:04

That was my tangent, sorry.

J Darrin Gross 11:07

I mean, I, I’ve been just, you know, the bring it up here. But just Yeah, I think the key to this whole, this period we’re in and I think you nailed it, talking about the, the stimulus money that the government has put into the system, period. And whether it be from the economic, or the lessons learned from the depression, in whatever, and trying to keep things afloat, as opposed to having them, you know, crash hard, and, you know, despair and blood in the streets. And so, the only the only thing that I think that not the only thing, one of the many issues with that, and we’ll we’ll move on here in a second is that every time you tamper with the market, if you say the markets are pure in it, there’s a there’s a point where buyers and sellers meet, and that’s where supply and demand, you know, in the price is set. And that’s that’s a pure market, when you, you know, you, you kind of bastardize the market when you inject an unknown, the government currency, and today we’re all setting the values. I mean, it’s everybody’s like, Wait, we, and you have all this additional money pumped in and you, you know, these things that would happen naturally don’t happen. So now you’ve got this kind of artificial baseline. And, you know, I, I hope that we don’t end up in a situation like you. You shared with an in Poland, so But you’re right, though, I mean with, with other other countries and their currencies and the devaluation of it, and all that. I mean, it’s, it’s not that, you know, it’s not impossible to see something like that happen.

Marcin Drozdz 12:48

And in fairness, Darrin, I mean, you and I both know, this, we we typically and human beings, I don’t know what it is, it’s probably with within us where we sometimes overestimate the proximity of short term events, and totally disregard longer term trends, because they’re there, they’re over such a long period of time. And, and I say this because typically with weather, whether it’s a fiat currency, or you know, inflation, inflation doesn’t just go from zero to 100, in a day or a year, or five years, for that matter. This is a compounding annual, even if you look at historically, Argentina, Venezuela, other countries, and I’m not equating the US to those countries because apples and oranges, but even those types of countries before they hit their stride is the wrong word. But before inflation really became pernicious, where you’re in hundreds of percents per year, there were run up years of three 712 2383 90 It takes years sometimes decades for this thing to play out. And you know, the one thing is is there is no fiat currency throughout the history of the world that has ever survived ever and before the US was the world’s reserve currency. The Pound was the reserve currency before the pound I think Denmark had the guild I forget the name of it but but there have been various different reserve currencies throughout the world that you know, empires were built around and you know, they’re no one Empire lasts forever but also they don’t come down overnight either. Right so

J Darrin Gross 14:30

Well, and to all that, hopefully the landing is you know, we can all stick the landing and continue on and and although having said all that, you know, typically the opportunity lies in the down.

Marcin Drozdz 14:45

Well and Darrin the counter to everything I just said not to sound totally talking out of both sides of my mouth, but that’s what it’s gonna sound like is the counter to what I just said is the US is also the world’s largest exporter of technology. So there’s things that If we don’t even know that the US is going to manifest within the next five or 10 years, that’s going to fundamentally change how everything works. Right. So, you know, we may not have the coal mines and the steel and all the means of traditional production. But, you know, some of the biggest companies in the world as far as technology goes, that comes from here. And whether it’s AI or all the different various forms of what the future is going to take. A lot of that is coming from the US. So you also have to look at that as the counterbalance. Right. So what is the net result of it all? And you know, I’m sure there’s people 100 times smarter than me, that can probably speak to that. But it is a trend like this inflationary trend is a very real trend that we do have to contend with.

J Darrin Gross 15:49

Well, and as I understand the Feds continuing to try and slow it down, and you know, get it under control. So hopefully, they’re successful without too much pain. And there’s plenty of opportunity to, to recapitalize and do more. So. But anyway, let’s talk a little bit about multifamily. I want to hear a little bit more on you mentioned how you had your first property, you said you were in your early 20s, when you bought a family,

Marcin Drozdz 16:21

I think I was 20 or 21, when I bought my first house and you know, I listened to the realtor, they told me I’d get 2000 A month rent and this was way back then. So I bought it by you know, it turns out that I didn’t. And you know, you you learn how to do your own due diligence very quickly, when when it starts to cost you money.

J Darrin Gross 16:41

Well, what a powerful lesson so early on, in fact, even the fact that you said you read Rich Dad, Poor Dad High School, and I think that’s, that’s awesome, just to get that kind of a frame, you know, to frame the world and the opportunities as far as what you can do and taking control of it as opposed to just listening to the message of you know, get a good education, get a good job. Go work for somebody else kind of thing. I think that’s, that’s awesome. Yeah. So when you were working for the real estate equity firm, were you guys we strictly working in multifamily? Or did you work in other asset classes, or

Marcin Drozdz 17:18

We primarily did multifamily. We did do some other assets. We did some commercial, we did some land assembly as well. But I’d say three out of four deals that came out of our shop were multifamily. And by and large, it was us based in just for context was a Canadian firm at the time. So even back then we were doing mostly us multifamily. And here’s something else that I’ll share with you. A lot of people think that whether you’re investing in Florida, Tennessee, or you’re on the West Coast, and you’re buying whatever you’re buying, I know prices have gone up a lot in the last well pick a date, two years, five years, 10 years, but I’m going to borrow this from Jason Hartman, he always has his comment, expensive compared to what. And when you use that analogy, you’ll recognize that the US, even during this run up is still some of the best priced real estate dollar for dollar as the asset classes represented compared on the world on a world stage. So for example, in Canada, multifamily trades at a two cap, sometimes even in the one caps, it’s insane. You look at other parts of the world, Europe, Australia, other developed countries it you know, and when you look at the US trading at four caps, five caps and people are like, that’s crazy. That’s insane. Well, compared to what. And then when you combine that with the fact that in the US, and I I’m pretty certain of this, I think the US is the only country in the world where you can get a fixed term and fixed rate mortgage for 30 years, whether it’s residential or commercial, you can’t do this in well, Canada, for example, five or 10 years is the maximum term you can get with your rate, am schedule sure you can get the the extension, but the term you can’t lock your dead in for that long. And I’m almost certain that there’s nowhere else in the world where you can get 30 year fixed term debt as well. So you combine the pricing, the income relative to the purchase price, your worlds with with, you know, reducing risk, the replacement cost, the the cost to replace the asset. You know, regardless of what’s happening on a world stage. I still think the US multifamily market, obviously market by market is a tremendous opportunity going forward, especially with the inflation potential.

J Darrin Gross 19:40

Yeah, I love the perspective there because I think that for me that the challenge is not so much that I’m waiting for the crash. Because I feel like it’s a different different set of circumstances like we’ve been talking about, you know, there’s all this new capital in the market and it’s kind of invented money From the government that kind of inflates everything, just by sheer introduction of the, you know, the money into the marketplace, but, but I think just mentally, you know, you if before I got used to a certain price as being expensive, or then I adjusted to that’s the market, that there’s a lag for my brain to go, Well, this is the new new price. It’s not until you go spend some money and you realize that whatever you were used to spending is not enough. Now, you’ve got to spend more than now you realize there’s that, that delta and that becomes the new baseline, that all of a sudden recalibrates because it especially when it when it’s sudden, or it feels sudden, you know, within like a year that the transitory number, the number, you know, translates from from x to x plus. So I think you really have to, you have to be in the market and play in the market and run the numbers in the market on a regular basis, otherwise, you will, your reference point will be back, whatever, you acquired something out, or the last transaction you did, and if it was, you know, a year 234 Or five years ago, you won’t have that your reference point won’t be current, you know? And so at least that’s kind of my answer. I guess, I’m trying to reconcile my own brain, it’s just that that’s, that’s really the, that’s the exercise I have to do to just to try and, and, you know, for a reference point, mentally, to make it to make sense.

Marcin Drozdz 21:31

Yeah. Well, in there, and I’m of the same mind, I mean, even most recently, I was I was dealing with my underwriting team, on a property we just we just wrote on here in Florida, 90 is 90 units, it’s hoping to buy it for 11 million, whether whether my offer is considered or not, is another story. But that equivalent property a few years ago, wouldn’t have been 11 million. And I can tell you that it took me a minute to get to 11 million. And, you know, my underwriting, I mean, traditionally you would take, you know, the business, you would take a one or 2% rent growth assumption after your value add and, and that’s, that’s responsible that standard. Today, one or 2%? Is not what we’re seeing. So the question is, do you believe in risk? It pardon? Not risk? Do you believe the risk? This is the risk? The risk is do you believe that inflation was is in fact transitory, and we’re going to come back to normal? Or are we going to be at an elevated level for the next few years. And I can tell you, our insurance providers are underwriting for elevated levels, because the new premiums, the new quotes, we’re seeing, you know, they’re they’re, you know, Marcus and Millichap put out a report on, they were one of the charts that they put out was the replacement costs. And construction costs have gone up almost 20% year over year, and they’re expecting the same increase year over year on top of the last year over year, this year. So, you know, what is that going to do to premiums? What’s that going to do to rents? What’s it going to do to construction? You know, I had somebody just send me a development project with some 50 doors on the property and a few acres to build on to get up to 250. And I’m looking at this thing, and I’m like, How do I price this thing? Like, how do I price construction? And because the markets moving so quickly? You know, it’s, it is a different game. And on top of that today, compared to compared to, oh, 809, there is a deficit of over 4 million houses. That is for four and a half million, I forget what the numbers, but there is an acute shortage of housing. And, you know, you combine all of that together. And, you know, regardless, interest rates are going up, and you know, I don’t have a crystal ball, how are they’re gonna go, but from what I’m seeing is, if you’re running inflation, seven 8%, as far as what it’s posted. So, okay, if rates go up to 4%, or 5%, you’re still below inflation, which means you’re getting paid to take that. I mean, when was the last time we had something like this?

J Darrin Gross 24:09

No, exactly. And the just, I think the key thing to this whole, you know, the market of of multifamily housing period is just what you cited, there’s demand. And so I don’t care how you slice it, whether it be inflation, or the cost of replacement cost, or just your operating cost or whatever, whatever, you know, fill in those numbers that that you’re used to being more now than what they used to be. The fundamental concept that I’m I’m trying to remind myself of on a regular basis is there’s still a shortage of housing, period. And that’s not going to change overnight. It’s going to take years now, if if all of a sudden every obstacle in the way of development gets green lighted then the money just gets pouring into that, you know, you could have a rush to development that could that could over develop, and then you could have a crash on that direction. But just based on the numbers, it’s really hard to see that that would be the case in the short term.

Marcin Drozdz 25:15

Well, I mean, on top of that, we can talk about the labor shortage, the fact that people aren’t going back to work, for whatever reason, valid or invalid. And on top of all that, you can talk about the fact that they’re, I mean, okay, so on the heels of the, oh, 809, crash, builders literally stopped building, right throughout the US and, and that deficit grew and grew and grew. And I think if I look back at the chart, it wasn’t till 13, or 14, that they got, they even started getting close to fulfilling to bring new units on to market as properties were, you know, beyond their useful life. So you have this huge hole, and you have this massive demand you’ve got, I forget how many millions of additional households you have, since the last time construction was was on pace to meet supply, and all of these things. And now in an environment where a people aren’t going back to work, be you have lumber through the roof still through the roof. I had a gate that we put out one of our properties. Two years ago, that same gate got quoted for two and a half times the amount, literally a year, year and a half later, like really,

J Darrin Gross 26:30

I think I’m in construction right now. If you if you get a quote, and they’ll honor it, you need to lock it in.

Marcin Drozdz 26:35

Lock it on, everything is cost plus now nobody’s doing I’m not seeing fixed rates?

J Darrin Gross 26:43

No, it’s it’s very, it’s very hard for everybody to price. I mean, you can, you can run the numbers. And in your mentioned insurance, I mean, you know, we try and do a replacement cost estimate, but it’s still just kind of a kind of a shot in the dark. You’re hoping that that’s the number that holds up. But anyway, Hey, Luke, let’s talk a little bit about raising capital, you’ve clearly you’re you’re an experienced investor, you you’ve worked for others, you have your own fun now, and you’re, you know, doing deals and that what, you know, as long as you’ve been doing this, what are some things that you see is key for somebody that’s looking to raise money to be successful? raising money for multifamily investment?

Marcin Drozdz 27:33

So it’s a really good question. Because you can, you can have the best deal in the world. But if you don’t know how to get the equity together, then, you know, you’re, you don’t really have much in front of you. So and I’ll obviously preface all this with you know, when you when you’re raising money, it’s a regulated business. So get the legal get the accounting advice, don’t cheap out on this stuff, get the right lawyers get the right accountants, because capital raising is a business. It’s its own business. And US, Canada, it’s a regulated space. So let’s make sure we address that first. As far as actually practical tips for somebody to approach fundraising, I created something called the easy system, which is it’s an acronym easy as E, exclusive a abundant s scares, why your allocation? So what what the system does is it creates a reminder for people to look at their their fundraising activity, number one from an exclusive standpoint. So in other words, what makes your deal exclusive, and in the context of something that the everyday person can understand. Don’t immediately say to me, well, the going and cap rate is three and the exit cap pre, you know, we’re gonna bump into a five and then we’re gonna bring it down and scoop up couple million bucks. That’s great. I understand you 3% of the population will also understand you What about the other 97? That could write a check. So exclusive speak to me in the context of, okay, rents are 1000 They shouldn’t be 1200. Great. There’s $200 a month in the rent. There’s 53 units that we can raise the rent on. Okay, great. I understand that. That makes sense to me. If I’m an entrepreneur that sells widgets, and I’ve got money to invest, you’re speaking my language, I get you something else. Okay. It’s on the corner of Maine and Maine. There’s 50,000 cars that drive by every day. There’s no vacancy in the area. Great. These things make sense. What else? This thing was built for $10,000,000.20 years ago today, it would cost you 35 million to build. Okay, I get that I understand the tangibility of that thing, especially now when I see cereal going up, you know, $1 every three months that I go back and I’m buying the cocoa puffs for my child, I see the box going from four bucks to five bucks. I understand, like, speak to me in a way that I can relate to it. So again established thanks passivity of what makes your deal unique. That’s really important. And that applies for whether you’re marketing your deal talking about your deal, trying to get lenders, partners, property managers, whoever it is, they need to understand what you see, in a brass tacks way. That’s number one. Number two, a for abundance. Make sure you have a lot of people to talk to, obviously sounds obvious, most people don’t go out until they have a deal. And then they think the deal is going to quote unquote, sell itself. If deal sold themselves, you wouldn’t be here,

the deal would be done, there’d be nothing to talk about, there’ll be no opportunities out there for you, it would already be done, it would have already happened. The truth is you need a network of people that want to engage with you in in, in the conversation, whatever it is, whether it’s real estate, finance, and you got to find a way for people to want to engage. It’s, it’s not about selling your deal. It’s about positioning yourself as a thought leader and having a large network of people to talk to now again, what is large mean? Well, it depends. Are you raising 100? Grand? Are you raising $10 million? You’re, the size of your network will determine your capacity. I mean, you know, in my first year, if I got a check for 50, grand, I was tickled pink today, that is a rounding error. And it’s all context based, right? So where are you in that, but make sure you have a lot of people to talk to, in your world that are constantly looking at you, as someone who’s credible. As for scarcity, there’s two types of scarcity. One is the amount of equity that you require. It’s finite, you know, you need a million dollars, you need $10 million, what do you need? There’s a finite amount. Two is the time. So when is the transaction closing? Those two things will give you the ability to create urgency without being pushy, because you’re factually stating where you’re at. And it can be as simple as, actually, I’ll get to this in a sec. And then the why is the I call it the Euro allocation, but it could be your action items. So what’s your next step? What is the what is the compelling reason for somebody to engage in the next step of the conversation? So for example, Darren, if you and I were talking, I might tell you, Hey, there’s this building, there’s 200 units, it’s on the corner of Maine and Maine, there’s about $300 in the rent. Look, the vacancy here is 2%, someone moves in, someone moves out, there’s literally no available real estate, abundance, you know, as you probably know, I’ve got a bunch of people that I’ve got to get back to, you know, we’ve got our group, last deal sold out in, you know, 13 days, or whatever it is, whatever your story is, with, with where you’re at, it’s important that you essentially that it’s not showing off, it’s just factual. Here’s the deal, I have to present it to this many people, I’m only looking for $2 million. We’re closing on, you know, X date, whatever, date 45 days, not 30 days from now. And look, I know, you’ve got to do your due diligence, and I’ll send you the package. But if this if this, if this opportunity didn’t check out for you, what kind of allocation would you potentially consider. And it’s just a very soft, professional way to get to brass tacks. That’s what it is. Now, everything I just said can layer into dozens of other conversations. And that’s one of the things we do at m. One is with our students and our clients, we help them position their equity raises, in addition to buying our own buildings, but if nothing else, that es y will give your listeners some structure to be able to pursue the conversation in a more meaningful way.

J Darrin Gross 33:46

No, I love the way you set that up, you know, just in one, you know, speaking in language, that’s understandable. And, but in softly getting some commitments along the way, and one of the things was a abundance about having, you know, having this conversation with a lot of people, you know, if you need a million dollars, and you only talk to one because you think they’ve got it, chances are you won’t get it. But if you speak to you know, 100 and you’re trying to raise, you know, 100,000 per or whatever, there’s a good chance you’re going to be you can over subscribe, and, you know, when it comes down to it, especially if it’s a good deal. It’s really if it’s attractive, and you’ve communicated. I had a coffee this morning with an investor not a syndicator and we’re talking about just that, you know, if you don’t have enough in the pipe, and you get down to it and all sudden to pull out or you know, somebody starts, you know, kind of wobbling or whatever, you can all sit down end up in a more precarious situation than you thought. Just based on you know, not having that abundance of subscription and people lined up there’s that’s, that’s a that’s a great As you know, from Gregg Keizer.

Marcin Drozdz 35:02

So when I left when I left the firm, and I started doing my own thing, we were putting deals together. And I won a one month, I had three closings on three smaller properties that I was contemplating. And I developed the system out of necessity, because I had the investor, call me days before closing and back out of the transactions. So I was committed, everything was set keys had been provided instructions, provided everything was there. And once you know what I need, I’m, I’m short. And I’m really short. So I swept my way through that figured it out, resolved it, everything was fine. But I swore to myself, that I would never be caught in a situation like that again. And at a pure necessity, I created that system for myself, because I, I didn’t sleep for a few days, and I never wanted to have that, again,

J Darrin Gross 35:59

let me ask you something, because this came up in this conversation this morning, almost in as much as that the the investor that committed the funds, it will almost like a game to them, like there was you know, if they’re bigger fish, they had kind of more control, and they had some sort of sense of that they could and, and maybe we’re trying to get a better return than what the original thing was. And I thought was, that’s kind of interesting. I’m not always the guy that’s thinking that far in advance. I think that if you and I agree to something that, you know, we’ve got that agreement, I’m not thinking, you know, that you’re going to come back to me and try and work me around kind of thing. Do you do you find you know, some of the some of the larger, more established capital? You know, sources? Is there any kind of, uh, I don’t know, I don’t know if it’s ethical, or is it? Do you have you ever found that that the chair that some of the larger, more experienced players find might be more game, game oriented, or,

Marcin Drozdz 37:06

I mean, you know, the the old saying, He who has the gold makes the rules, right. So certainly, some of the largest holders of the gold are the largest private equity firms in the world. And they, they they know, their position at the table. And you know, the the people that ended up working with them, either for asset management or the equity piece, you know, you’re you give up the freedom of running things the way you want to run them, because you accept cash from one group, you effectively become, you know, and fair enough, if they’re putting up all the money, they’re going to want certain controls and processes in place, that make may run counter to how you’re accustomed to doing things. And that’s one of the perils of having one, I think that’s kind of your point is that if you have one investor, that is supplying all, you know, the cash, then you’re that is, you know, that’s who you report to, whereas, whereas if you develop the skill set, where you can diversify your capital pool, and not be beholden to any one group, you’re better off as an entrepreneur, because ultimately, you’re able to retain your autonomy. I mean, you’re still providing the reports, and you’re still running good business, and you’re still doing things the way you’re supposed to. But ultimately, if your largest investors a couple percent of the equity, and there’s dozens of these types of people, then you’re in a much more favorable position to be able to run the business as you see fit, as opposed to having one person with 50 or 80% of the equity investments. So it’s the devils in the details, but you know, giving up the so most people don’t want to admit this, but they don’t want to raise them. They don’t like the act of raising money. They don’t want to do it. But at the same time, they don’t want to be beholden to the person that writes them that one check. So it my whole thing is if you don’t want to be beholden to any one provider, you got to suck it up and learn the skill set. And if you have smaller check sizes smaller, perhaps six figure check sizes instead of seven figure check sizes, you have more of those partners. But ultimately, you do have to do more work upfront, but then you can focus on the business more as opposed to dealing with that one particular partner. And yes, I’ve heard stories of seven figure eight figure commitments, and then three days before closing. Oh, by the way, yeah, it’s not 7030 it’s now 9010. So I have heard of that. It’s typically not well received in the community. Those groups are typically here for a short time now. They’re here for a good time, not a long time. Word gets around the campfire pretty quick. If there’s groups doing things like that, and, you know, operators talk to operators entrepreneurs Talk Talk entrepreneurs, anybody who’s trying to build a long term business from the P side typically doesn’t do that the people I’ve come across are typically very genuine, sincere. But, you know, from time to time you hear about the villain, you know, the wolf in sheep’s clothing? Yes.

J Darrin Gross 40:18

Well, it was, I mean, I’ve heard I’ve heard about people committing to something and then right when they get to it, there’s something that came up, you know, there’s something legitimate came up and stuff and, and that that was enough for me to say, okay, yeah, you do need to over subscribe, you know, you need to get some reserves or, you know, people in second position ready, if a position opens up kind of thing, but, but again, I think I mean, your your easy system, there to me is ideal is an easy way to remember kind of the key fundamentals to make sure you have more than enough that you’re communicating. And in, you know, you’re gonna get to the finish line. So I appreciate you sharing that. Hey, Marcin, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker, and work with my clients to assess risk and determine what to do with the risk. And typically, we consider one of three different strategies, 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. And we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is, it’s a risk transfer vehicle. And as such, I like to ask my guests if they can take a look at their own situation, could be the market interest rates, you know, the the inflation, the politics, what however, you want to take a look at the the or frame the question and the answer. But again, with respect to your situation, you know, answer the question, what is the biggest risk? And just for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. With that, so, if you are willing, I’d like to ask you Marcin Drozdz, what is the biggest risk?

Marcin Drozdz 42:20

I was gonna say if it’s an insurance question, I’d say the replacement risk right now is the biggest thing that is certainly ringing in my head. But if we’re speaking in general, contextually as the biggest risk, I think, right now, the biggest risk is not doing anything, and sitting on the sidelines and pontificating on what’s going to happen next. Because you know, regardless of where we think things are going to go, and regardless of political leanings, left, right center, wherever you’re at wherever you’re going. Ultimately, if you stand still, if you stood still, for the last 12 months, you’re you you experienced erosion of purchasing power, like you’ve never seen. And we’ve always known that inflation was kind of never we never, I don’t know anybody that believes that inflation historically was 2%, or 3%, or whatever. We were told it was historically, but let’s assume that was accurate for what it for the purposes of what we’re talking about. Today. They’re flat out telling you, it’s six, seven, whatever, 8%. And that trend is only compounding. So for anybody who’s sitting still and figure trying to figure out how to move forward. I think that is the absolute biggest risk right now.

J Darrin Gross 43:37

Oh, that’s great. Question, where can listeners go if they would like to learn more or connect with you?

Marcin Drozdz 43:44

Sure. What’s the best way is my website Marcindrozd.com, Mar cin drozdz.com. And on my website, we’ve, we’ve got free resources as well for the people that are in real estate. And they liked the whole easy system. Actually, even if you’re a business owner, entrepreneur, and you’re, for whatever reason you’re trying to raise capital or scale your business. I’ve got a free download there for the easy system where it actually there’s there’s a few videos, that’s about 15 minutes of content where you can actually walk through it in a more orderly way. So that’s available there. We do. We do boot camps, we do trainings. We also have our own apartment buildings that we buy. There’s there’s a ton of free resources on that website.

J Darrin Gross 44:31

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

Marcin Drozdz 44:42

Yeah, no, really appreciate it. I think Darrin, if I could say one thing, your listeners today, more than ever, I think they need to relook or relook at how they’ve minimized the risk or like you said transfer the risk on the insurance side because it is it is a very timely conversation to have so that you know, the fact that you’re, I like how you frame that where you either transfer the risk and remove the risk, or what was that? What was the third one? Minimize or minimize the risk? Yeah. You know, I think today that is a very timely conversation on the insurance side. Certainly, that’s something we’re seeing across the board to

J Darrin Gross 45:22

Appreciate that.

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 45:43

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

Investing in Multifamily Real Estate with Jeff McKee – CRE PN #353

Jeff McKee 0:00

But then quickly after all of that, we moved on to commercial real estate to basically scale up to scale up the number of doors, and then also to have them in close proximity and have the equipment, the infrastructure be all part of the same versus having 10 or 20 or 50 Single Family rentals that have all different components and your repair and maintenance people are going all around town trying to keep up with your rentals. And so we just felt that this commercial real estate business was mostly in one location mostly with a similar components a lot easier repair and maintenance, and that was just more scalable that we found for us.

Announcer 0:38

J Darrin Gross 0:57

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 Jeff McKee. Jeff is a real estate syndicator. He’s a limited partner in 1500 doors. He’s also a general partner on 10 properties with over 2500 doors, and 200 million assets under management. And in just a minute, we’re gonna speak with Jeff about multifamily apartment investing.

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

Jeff McKee 2:15

Thank you, Darrin Great to be here.

J Darrin Gross 2:17

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

Jeff McKee 2:26

Sure. So a longtime w two employee read Rich Dad Poor Dad Cashflow Quadrant, tax free wealth, you know, five years ago got into real estate to drive multiple lines of horizontal passive income. And so we invested as a limited partner and in several deals, apartment deals. And then we decided to go bigger faster. So then we joined another mastermind group and started investing as co sponsors, general partners, and then those are the 10 deals that we’ve closed the 2500 doors from Texas to Florida, basically. And yeah, so I’ve been ramping up in this multifamily world over the last year, four plus years.

J Darrin Gross 3:09

Got it. And you mentioned you you read all the prerequisite books. I love the Kiyosaki books, they’re the Cashflow Quadrant, and it’s one of my favorites. Was that basically the impetus that made you rethink or go from W to to to investing in real estate?

Jeff McKee 3:28

You know, I’d say right before that, Darrin, I was I was turning 50 years old and my father had passed away from heart attack at the age of 55. And I started thinking to myself, Well, geez, you know, like the W twos man, good. My wife and I, you know, socking away the 401k. But then, you know, we’re basically relying each on one vertical income, we hadn’t really driven much horizontal income from other investments, and it’s all about the retirement. And then it’s like, well, you know, life is short. And what could we do to accelerate you know, our wealth and repeatable passive income? And that’s when I started doing this research. And then I and then like the Cashflow Quadrant, like you were saying, it’s like I find myself as the employee, you know, the the high w two the high federal taxes paid. And I want to become that investor, you know, where it’s like the 0% federal taxes paid, and lots of passive lines of income and reaching that financial freedom. So you know, I read vivid vision as well and the 10 year vision, the five year and then my wife and I started working on that we hired you know, tax planning and strategy. We hired a company called provision which is actually a Tom wheelwright wealth ability company and started going down the path of, well, hey, strategically, what are the things that we need to be doing differently? And part of that was passively investing in real estate is great. In order to get some of the W two, you know, write offs against that income, you have to be more creative, sophisticated, and that’s when we went down the real estate professional Pat, where my wife ended up quitting her W two job and focused on real estate, commercial real estate, as well as short term rentals. So so that was some some things that we’ve learned along the way. You know, we join masterminds, we’ve hired great professionals, you know, like pro vision, we’ve got a CPA that focuses specifically on real estate investors, because it gets kind of complicated when you’re dealing with 15, or 20k ones. And some, some of them, you’re limited partners, some of them you’re a general partner, and you’ve got all this carried interest and different entities that we’ve structured, including, you know, a Wyoming holding company, and things that were recommended to us. So again, we surround ourselves with some very good professionals in this space. And and then teams of people to go work, work these investments for our investors

J Darrin Gross 5:49

on it. Now, you mentioned kind of your education there. And just how you’ve gotten kind of going here, what what are some of the benefits of real estate that you saw that really attracted you to real estate?

Jeff McKee 6:06

You know, initially, you know, five years ago, we joined a single family mastermind group. So we did one fix and flip with a partner, when we realize that all of that income that we made on the profit, and that seven month flips was all current income, it wasn’t any depreciation. And so we thought we’re getting into real estate. And it turns out that we’re just adding to our top lines. So then I started rethinking that we also did a buy and hold of a duplex. And we just did one of those because we started looking at the numbers and saying, I don’t know that we can scale if you’re getting, you know, 100 $200 per door. And I mean, to get to the passive income number of let’s say, 20,000 a month, that’s going to take a lot of single family homes. And we did one of those. So we did one fix and flip one of those that then we did this homestead strategy where we were here, and we live in Austin, Texas. And in just south of downtown, we bought a teardown house, so three and a half years ago, and we went down that path. So we built two houses on that. And that’s part of the Homestead strategy. Again, more single family, we live in the front house, that is our homestead in the back houses and Airbnb that my wife self manages. And so that’s been a good strategy for us. But then quickly, after all of that, we moved on to commercial real estate to basically scale up to scale up the number of doors, and then also to have them in close proximity and have the equipment, the infrastructure be all part of the same versus having 10 or 20 or 50, single family rentals that have all different components and your repair and maintenance. People are going all around town trying to keep up with your rentals. And so we just felt that this commercial real estate business was mostly in one location mostly with a similar components a lot easier repair and maintenance. And that was just more scalable, that we found for us.

J Darrin Gross 7:55

That’s that’s definitely some words of wisdom there. If you don’t mind me asking who was the the mentor group that you are working with?

Jeff McKee 8:04

So the single family group that we joined, you know, almost five years ago, they refer to themselves as the big dog group, but it’s still in Shinola Grove, based here in Austin, but they also have chapters in Dallas and Houston. Then we joined, you know, Brad some rocks group and turns a limited partner investor went through all the training invested in a bunch of deals through those groups. And then eventually, we decided to become more active. And we joined mark, Kenny’s, I think multifamily group, which is basically just general partners and looking for large commercial apartment buildings. Yeah. Mostly from Texas to Florida.

J Darrin Gross 8:40

Yeah, no, all those. I am not familiar with the big dogs. But definitely Brad and Mark, Kenny’s group, there that definitely are are noteworthy groups and do a lot of good, good work there. So when you when you made the decision to go from being more of an LP to participate in, in the GP, what were some of the things that appealed to you, or were, you know, the considerations that you had to overcome or, you know, think through to do that,

Jeff McKee 9:13

yet, part of it was the tax implications of having you know, your your spouse become a real estate professional means you need to be actively involved in real estate, not passively involved. And that meant that we need to move more to the general partner side on future investments, as well as let’s say, self managing properties, like the duplex that we that we still own, the long term hold is really managed by third party property management. And so you can’t really count those hours towards you actively managing that. But the Airbnb, for example, is self managed by my wife. So all of those hours count all the hours towards real estate investing as a general partner doing the due diligence, you know, meeting with investors and all that those hours count. And so it was really around into working with pro vision on what would it take to one of us to qualify as a real estate professional, so my wife ended up leaving her job to do that full time. And that was a large part of shifting over to the general partner side was to have those hours count towards active investing was a large part of our consideration.

J Darrin Gross 10:22

Got it. And so the the, you made the switch, and then you kind of overcame some of the the hurdles, what you know, having I mean, made the switch, and now you’re acting more on the on the general side of things. If you were to kind of convey to some of the listeners, you know, some of the things that you’ve learned, that would expedite their learning curve, what’s like a number one thing that stands out in your mind,

Jeff McKee 10:56

you know, joining paid mastermind groups has certainly accelerated, you know, our, our involvement in this space gets you more confident, it surrounds you with other like minded people that are going down the same path. And, and, you know, the whole thing about a mentor or mentoring group is just the speed up your time. And, you know, we go, we’ve had enough resources that we could pay for those things, other people may join, you know, bigger pockets, and, you know, do some of the three, a mastermind mentoring groups, we just felt, you know, joining some of these paid organizations would accelerate our time to get to where we want to be faster. And so that would be my number one recommendation is to, to join relevant, you know, mastermind groups that you’re interested in what they’re doing. And people, I mean, that’s part of being a mentor versus a teacher, like a mentor is actually doing that they’re, they’re out there buying, they’re investing and then they’re they’re coaching you on how to do it, versus someone that has learned something theoretically, and is trying to teach you what, what they’ve learned from a book. So we basically follow people that are doing this day in and day out.

J Darrin Gross 12:09

And now that you’re on the GP side, what what are some things you’ve learned on the GP side, as opposed to being passive on the the LP side? Yeah,

Jeff McKee 12:21

so you know, you’re definitely closer to the brokers and what goes on in the front end of the transaction. We’re very close on the underwriting. And so basically, going through the detailed underwriting tool, again, each group typically has their own tool that they use, and they update. Basically, it’s a, it’s an Excel spreadsheet, usually with a series of 15 or 20 tabs, and it gets pretty detailed. So there are actually classes just on underwriting like we’re about to go to a follow up on a deal analysis workshop, that’s a basically a three day class on just the underwriting piece. And so that’s always changing, like during COVID, it changed, you know, what the reserves and you know, the lending, you know, changes. And then you know, so we have a loan broker, we have an insurance broker, we have other people, you know, sec lawyer, other people that are that are members of the team, so you get closer as a general partner to all of those activities than a limited partner. The other thing that, you know, we’ve learned along the way is, you know, I’ve been able to be a key principle like a guarantor on some of this debt, this is typically non recourse debt. So being a general partner can also enable you to be a key principle on some or all of the debt, depending on how much there is, but then also, we’re able to provide earnest money down at risk capital as a general partner on the front end of the deal. So you’ve got to meet certain deposit requirements from the lender, you’ve got to pay for the loan at fee, you have to pay for the due diligence up front, you’ve got to pay for, you know, some of this inspection and some of the environmental studies and all that stuff’s out of pocket from the general partner team. And they need, you know, liquid bonds. And so some of us have those funds, and we can put those up at risk at the front end of the project. And then there’s also the capital raising part. And so that’s what I’ve been spending a fair amount of my time on is, is learning that side and and then bringing along friends and family, because I’ve been in the high tech, you know, WT world for 30 plus years. And so I have a lot of high tech friends that don’t understand maybe this type of commercial real estate investing. And so that’s what I’ve been doing is been writing blogs and newsletters and videos and trying to educate people on this type of investing. And so those are some things we’ve learned along the way as general partners, that as a limited partner early on, we didn’t really know existed and how all that worked. We were just basically listening to the finished product of the investor webinar. Hey, here’s the PPM you can read through and then here’s the subscription docs and then you know, wire in your money and then you know, get the monthly updates from the GPT So, so this being a co sponsor are, um, has really opened us up to understanding what goes on on the front end. And, and also a lot of the deals that never make it to getting funded, right, a lot of the deals that loi falls through the purchase and sale agreement falls through. And so you get access and visibility to a lot of a lot of those things that happen.

J Darrin Gross 15:21

And it definitely takes it from a very passive thing as an LP to a very active thing. You know, while you’re on the on GP side looking for the deals to present to the, to your investors. And I wanted to ask you, you know, you mentioned, kind of educating some of your friends and family and, you know, the work you’re doing kind of in the education realm there with blogs and videos and all that kind of stuff. What do you find that some of the the the points that potential investors don’t know, and also some of the benefits? Well, what is it that really appeals to them?

Jeff McKee 15:57

Yeah, I mean, I think sometimes, you know, the jargon in commercial real estate, for example, a cap rate, you know, capitalization rate, can, you know, it confused people initially on like, what does that mean? It means, you know, basically, if you were to pay cash, what would your return the, and we typically put 70% debt on these. So we’re, you know, reasonably leveraged with a typically government that, I mean, I didn’t know what that was going in, I didn’t realize that Fannie Mae and Freddie Mac are subsidized by the government, and you can get, you know, below market rates, because the government wants to incent investors like us to provide housing for Americans. So the government doesn’t have to build all these houses. And so it’s not only you know, Freddie and Fannie being subsidized to get low cost long term debt in the United States, it’s just amazing compared to what other countries have to do to get debt. But also the tax benefits that we get, I didn’t really realize, you know, if you’re helping to provide housing for others, the government has all kinds of incentives for you and your money on on how you’re able to either use, like, nowadays, we have bonus depreciation. So if you do a cost segregation study, and the five and 15 year components in an apartment complex in this example, can get accelerated to year one, and you get, you know, basically, a phantom loss, you get a k one with a big negative number, based upon how much you invested and how much bonus depreciation was allocated to your investment. And that could go offset, you know, your long term capital gains and other asset classes. And then if you take it another step further, if you happen to qualify as a real estate professional, then those losses could then offset your W two federal taxes paid, which is what we’re able to do now not not everybody is able to do that. And initially, when I went through some of this training early on, it’s like, oh, wait a minute. So as a limited partner, I could invest, let’s just say 100k. And I’ll get a negative 60k k one, and I can take that negative 60 and offset it against my w two, it’s like no, so are you can’t do that as a limited partner. But you’re on the right track, you could offset you know, any long term capital gains you had that year with that, but but you’d have to become a real estate professional in terms of the IRS designation, to get the full benefit of offsetting your active income. And so So then, you know, I’ve learned a lot along the way, as it relates to, you know, the benefits. And like Tom wheelwright talks about, you know, the US tax code is what I don’t know, 1000 pages, and only like 10 pages are all the tables of what you owe, and how much you owe. The other, you know, like 900 Plus pages, it’s a series of incentives for the government to incent you to do certain things, you know, whether that’s to buy an electric car to help fund, you know, solar or wind energy, or in this case, provide housing for other Americans, there’s like the 1031 exchange still exists, you know, which is a tax deferred kick, the the capital gains tax down the road. And so there’s all those kinds of things that are there in the real estate world, I didn’t fully understand I understood about the, the, you know, from a single family perspective, the homestead exemption, if you live in a house to have five years, if you’re single, you get up to 250,000 of exclusion of capital gains tax, and if you’re married, it’s up to 500,000. You know, for that, I knew that part. But I didn’t know all this commercial real estate, I didn’t know about bonus depreciation, which you know, this year still 100% Next year, it drops down to 80%. But all those kinds of things I learned along the way. And so that part’s been fascinating.

J Darrin Gross 19:35

I have to say that the learning and and I’m kind of curious as you start to attract investors and appeal to you or anybody you’re raising capital from. Do you find that the depreciation is something they they’re completely? I mean, it’s a word they know, but the how it applies to their situation. Is that is that a familiar thing? Or is that I like, oh my gosh, kind of, you know, what’s their reaction when they, when they come to understand that

Jeff McKee 20:07

it’s mostly in oh my gosh moment, it’s like, okay, wait a minute walk through some example, you know, for me like just to help me run through and just you know, knowing that most of the people I talked to are W two employees, I explain what benefit they can get. And then if they ever become a real estate professional, what benefit you would get from that, you know, like if your spouse as an example, became a real estate professional, or vice versa, you know, and so I walk through that those scenarios too. But yeah, mostly, it’s eye opening. The other one that I didn’t realize five years ago, and that I talked to a lot of w two employees about is that you can use a former IRA, you know, towards real estate investing, but you have to change the vehicle that you’re in, you know, like, I’ve been trained to max out, you know, the 401 K, it’s all about stocks, bonds, mutual funds. And, and there’s this whole world of alternative real estate investing, which, you know, they consider commercial real estate and alternative investing, like, I didn’t know that you could do this kind of stuff as an individual. And then, of course, you know, fidelity and all the big brokerages don’t really want you to know that because they want you to invest in the real estate investment trusts that they offer, they don’t want you to do private placement investments that you can do as an individual, like, you know, in the SEC, these are governed by the SEC as well. But these are separate from, let’s say, Wall Street, these are Main Street investments. And so I actually I had worked at Compaq Computer Corporation in Houston for 12 years, I had an old IRA. And then through my education, I originally moved that to a self directed IRA with a company here in Texas called Quest. And then I had heard about this ubit tax, this unrelated business income tax, that if you invest in a asset that uses debt, even though it’s in your self directed IRA, the government can tax you on the gain of that. And it’s not a pretty situation, or if you move in investment, and if you open up a solo 401 K, also, there’s another EQ RP thing. But if you have a solo 401 k, that is not subject to this ubit tax. So that’s what I ended up doing is moving my limited partner real estate investments into a solo 401 K. And as those deals go full cycle and they sell, now I’m not subject to the special ubit tax, I’m able to keep up all of that in their tax deferred and keep investing in more and more deals. And so that’s another area that a lot of w two people don’t know about that you can take an old IRA and move that over to a solo 401 K and invest in real estate, and you’re the custodian of your account, etc. And so that’s, that’s open, and that frees up a lot of capital for people. Now, of course, when I contacted fidelity to roll that money over, they go, you can’t invest in real estate assets with that money. It’s like, oh, yeah, you can. So I just had them cash out, you know, the stocks, bonds, mutual funds, you settle it to cash, you do a straight transfer to the other account, you make sure it never comes into your name personally, it gets transferred, in my case to a solo 401 K in my name, and then you manage it, you know, you’re the Managing Member type of a thing, you’re the custodian of that account, and then you invest, you know, as long as it’s not a deal that you’re personally involved in. So when it’s a retirement account like that, that I’m in control of, there’s certain prohibited transactions, one of them is I can’t invest in my own deal. And I’m a general partner, so I invest in other people’s deals with those monies, there’s certain rules that you have to follow.

J Darrin Gross 23:41

And I gotta tell you, the, as many times I’ve talked to people about these things, you know, and I love the fact that there’s a continuum of knowledge and the opportunity to continue to learn the fact that you just mentioned that the solo 401 K allows me to invest in other deals that have debt, because I had somehow in my head limited, that to more like, lending was kind of the ideal thing if you made private, private, you know, private loans, maybe for a flipper or whatever. But you know, again, if it was outside of you or your your, whatever, forget it, your Ascendance and descendants, you can’t can’t do it to your kids or to your parents, but you can do it to like a nephew or anybody that’s that’s not directly related to you up or down. That you could then you know, interest was like one of the best or the cleanest, I guess, ways to go in and out but I hadn’t I hadn’t realized that the solo and gave you that the ubit free investment thing there. So yeah, yeah, show us your number

Jeff McKee 24:51

1k Is, is not subject to any unrelated business income tax that the self directed IRA is subject to for any product that uses debt now if someone is is doing fix and flip, and they’re a private lender, being in a self directed IRA is totally fine. The key though, is that you need to fund 100% of it, you know, you don’t want to mix it with debt or anything. And so like I did that, like I had the solo 401k, there was a gentleman in Dallas that I knew from this big dog network, he wanted help buying and doing the rehab. So my, my self directed IRA funded all of it, there was no other debt involved. And I was the single lender, and that was fine. You know, you make two points. And then it’s a 10%, interest rate and all that kind of good stuff. And but it’s a reasonable amount of work to go do all the documentation and to do well. But that is perfectly fine. When there’s no debt involved, you’re the lender using your funds. And you’re not related to that person, you know, you don’t have an interest in that property, all that stuff that that that scenario is perfectly fine. It’s when you want to invest as a limited partner, as an example in like, say, a apartment investment and syndication, you can use a solo 401 K and not be subject to you. But the other thing I did is I invested in a hard money fund here in Austin, that funds other people, and they provide good returns to me as an investor, but they also use that so I had to move that investment from a self directed IRA to my solo 401 K. So whenever I would go full cycle and sell any of that, that wouldn’t be subject to ubit. But I had to ask that company, do you guys use debt? And they go, Yeah, we do. And so part of it, they use equity from us, and then they use debt from other people. And so that part that is leveraged would be subject to tax on the gain if I had left it in my self directed IRA.

J Darrin Gross 26:47

Right, right, right now, just a subtle difference. I mean, somebody here is, you know, Ira solo, but the solo 401. K, is the one that gives you that option, if I understood what you just said,

Jeff McKee 27:00

That’s right. That’s right. And then there’s some providers on a solo 401 K, that people can research and they’ll want you to set up an LLC, which is fine, you can do that there’s just an expense. And then there’s other providers that don’t have you go through that they have different things they follow. And, and so but there’s multiple providers out there for a solo 401 K. And so I would encourage people to do their own due diligence, obviously, consult with your, you know, your your your CPA, your tax provider on your situation, and maybe you know, your financial advisor. But But yeah, definitely get some professionals around you. And not just don’t listen to me.

J Darrin Gross 27:37

No, but I appreciate you making that clear, because like I said, it’s a I hear people and sometimes there’s there’s such a blur of terms and stuff and you think you understand and what I think also is, is somewhat confusing is the difference between an IRA Ira versus a 401k. And, you know, you go solo, I get the everybody gets the concept of taking it out of your employer sponsored plan, but the options beyond there. That’s, that’s good. So, how has the capital raising done Have you have you coming? Sounds like you’re in a lot of doors. what’s your what’s been the response? From Yeah, yeah, no,

Jeff McKee 28:21

it’s been good. You know, another book that I read, you know, in the last year was who, not how and so that and I also read, you know, Tim Ferriss Four Hour Workweek, so I basically hired a virtual assistant in the Philippines to help me with social media and, you know, strategize and execute on some of the capital raising stuff. So I’ve tried to expand, I’ve hired a part time writer, so I’ve actually put out some blogs and things around, you know, this, the this tax situation and trying to educate my investors on these kinds of topics. And so part of that, and then, yeah, basically giving, you know, mentoring and advice on on capital raising, as well as you know, following some of our SEC lawyers and their advice in this area, because right now, the 10 deals we’ve done have been, you know, the reg D 506. B as in boy and and that allows us to do up to 35 non accredited investors that are sophisticated, that are familiar with this, and an unlimited number of accredited investors. But when you do the 506 B, you cannot advertise. So you have to have a substantial relationship with these investors. So I basically have one on one calls to understand people’s situation, and to end to talk through these types of investing. And so that’s part of the 506 B there’s the other exception you could do a 506 C as in Charlie and that’s for accredited only and you can advertise you can post your deals you can look for brand new investors that you haven’t met before. We don’t do that kind of capital raising that regulation at this point. We could in the future but but but yeah, so Paul, Part of my situation is I have one on one calls with all potential investors and, you know, obviously follow up calls with them too, when they have questions on deals.

J Darrin Gross 30:10

So, how many you had 1010 deals? You’ve done your last four years, is that right? Right. And you’ve raised money for each one of those, correct? Yes. Sounds great. That’s, I would think that, you know, the first one, I just, I’ve never raised capital myself, we’ve done all of our investments, just, you know, my wife and I, but, but, you know, what I recognize is really the the limitations based on the lack of capital, it’s, it’s really a matter of, you know, raising capital in order to really get into some bigger deals and have some more, you know, measure of safety, and some of those larger deals based on, you know, what the, the larger properties can afford, based on, you know, in house management and staff and, and all that kind of thing. Are you actually involved in the operation management, then? Or is it, do you get involved in the asset management,

Jeff McKee 31:05

typically, we will hire as part of our team, a full time asset manager that manages the full time third party property manager. So, I personally will join some of the asset management calls once we own the asset, but we have someone on the team day in and day out, they’re managing the property, with the third party property manager, these properties are so large, and they all use basically agency debt, and the agencies require us to use third party property management, they don’t really want investors self managing their property, which is totally fine. And we don’t really want to self manage these either. And so then we have people on our team that are either former property management people or former construction people there are designated asset manager as part of our general partner team. And then they manage the third party property management, and then the other co GPS, like me, will join the asset management calls just to make sure we’re staying on track.

J Darrin Gross 31:57

And would you have any deals on your plate right now that you’re working on to close or

Jeff McKee 32:05

I do, but I can’t talk about them? Right, right. Right, right. Yeah, yeah. But I do. Yeah. So we have two deals that are under contract that are in the works, people that are part of my investor database, or are seeing those in the webinars and the decks and all that kind of good stuff. But But yeah, so we so that’s the thing, like getting back to the capital raising one of the things I noticed about our group is we have great deal flow, we’re able to get on market off market deals under contract, the critical success factor is having more capital involving others, other outside investments, on the large deals, like when we’re purchasing apartments that are 4050 $60 million, you know, we’re raising 1012 $20 million. And sometimes we’re using private equity for a part of that investment. And most of the time, we’re using, you know, the private equity that we’re raising from friends and family, and we’re just trying to expand the friends and family. So we’re not relying on any private equity groups to cut a big check. And so that’s just one of my personal goals, is to help bring more people along, to show them this path to financial freedom, to give them the opportunities to invest in these deals, like I mean, who would think that, you know, you would get internal rates of return that average between like 15 and 18%, like on real assets, you know, an annual percent like that, I was just used to, you know, five to 8%, stocks, bonds and mutual funds. And, you know, after all the asset fees, you know, from, you know, the companies and your advisors and all that stuff, there’s a little bit left for the investor. But when you get to this, this private world of investing in real estate like this, the returns are just amazing. And then, you know, we’re in a little bit of an abnormal cycle right now, where our deals are starting to sell faster than we had planned, we had planned for five to six year holds. And now, some of these deals are selling in 18 to 36 months from when we own it, which is great, you know, for the investors, and we typically will just sell and then, you know, give people the opportunity to invest in the next deal, they can do a 1031 exchange, which means they can roll those funds into that next apartment investment, they could do a 1031. And, you know, get out of the deal once we sell it, and they can roll them into something else that they want. But that’s again, another tax advantage and strategy that the government allows us to use is just to keep deferring this long term capital gains tax, and when it’s more than 12 months.

J Darrin Gross 34:30

Yeah, no, I was gonna ask her the whole time. That’s, that’s sweet to try but to get, you know, up to where you were intending in just a couple of years that makes her so happy investors. Do you find most your investors reduced sign up for the next deal?

Jeff McKee 34:45

Yeah, yeah, yeah, I take most of them sign up for the next year because they they go well, geez, I had planned this money to be out five to six years now. You’re telling me you’ve doubled my money in 18 months. That’s good news. Now I just need to find a place to put it and out, what we’re starting to do is to say, well, here’s the next deal, if you’re interested, here are the numbers, we can roll you straight into that deal with all of your gains rolled in, or, you know, we can do a 1031 and give you the money. And then you have to identify and work with an intermediary and make sure you follow all the rules. Or you can just take the money out, and you can pay your 20% capital gains, or you can choose it, maybe you need that money for something other than a real estate investment at this point in your life. And maybe you’ll just do something else with that. So we just give people the option. But you know, it’s this whole thing about velocity of money. And that’s what you’re looking for is, hey, I want that velocity of money. And then I want to be in control as an investor, do I want to reinvest in another multifamily deal with this group that did really well? Do I want to go take that money and invest maybe in a short term rental, or maybe I want to do mobile home parks or self storage, or maybe I want to take it out, and I’m gonna go, you know, pay for a wedding or a big trip or a college education, and I want to take that profit, and I’m willing to pay that the 20% tax, capital gains, and then it’s, it’s free for me to do with it what I want. And so we just want to give investors options. But we do want to try and provide, you know, that high velocity of money at the same time, we want to be conservative when we do the underwriting and say, hey, it looks like it’s an 18% internal rate of return with a six year hold. So just plan on your money being out six years, if we have an opportunity to sell sooner we will, you know,

J Darrin Gross 36:25

yeah. No, I was just saying the burden hands with two in the bush. And if you can get it faster, I’m sure that most investors appreciate that. And again, even though it creates new challenges on what to do with, do with it, just to recognize it and move on. It’s contrary to what I’ve always thought, I mean, I been in this doing this long enough that I just I always thought, you know, kind of invest, buy and hold. That was kind of my my mindset, I just didn’t realize, like you said the velocity of money is really where you can create the substantial gains. Yeah,

Jeff McKee 36:57

yeah. Well, here’s another difference, too, that I’ve learned over the years. Dear, like when you think of residential, you think of comparables, how is the property valued? It’s valued based upon the comparables in the area that are similar to that that sold and that’s just the price per square foot. So everybody understands that? Okay, that’s fine. And appraisal? Well, when you get into commercial world, there’s this whole thing called the net operating income. It’s like, okay, what’s the net operating income, okay, it’s your revenue minus expenses. Well, in the commercial world, let’s just say it’s 100 unit apartment complex in San Antonio, Texas, when an appraiser comes in, they don’t look for other 100 unit apartment complexes and look at the the property tax roll and say, Oh, it’s worth, you know, $10 million, they look and say, well, give me the numbers like, show me your books, show me your profit and loss, show me your, your, your trailing 12 of your financials. And I’m going to tell you how much we’re going to value this property at that, then some lender will will, will give you a loan, let’s say up to 70% of the value of that. And they look at that. And so then as an owner operator as a syndicator, we’re able to force appreciation by improving the outside but also the inside of the units and increasing rents over time, while holding expenses, let’s say relative at a lower growth, then your rent increases. And that spread that gap adds to your monthly profit, which is the net operating income, which is before your debt service. That’s what we’re able to do is there’s also you know, a concept called loss to lease. So in this kind of COVID world, let’s say maybe almost post COVID world, we’re coming out of a time where there have been a lot of concessions on rents where people were able to stay in these properties without paying rent, but also to keep the occupancy at a reasonably high level to get people to renew, we might have have offered, you know, get the 13th month free or we’re we’re going to you know, reduce your rent by 100 a month. Well, now the rents are going the other direction, they’re starting to go up. But oftentimes, the rent of this particular apartment community that we’re looking at my they haven’t increased rents to market rent, the difference between their in place rents, and what the market will bear for that area. That’s the gap. That’s the loss to lease that we plan on matching over time. As those leases expire. We go let’s just say it’s a one bedroom going from 600 a month to 800 a month, the new rents in that market, let’s say are 800 a month when that lease is coming. Do we let the tenant know, hey, instead of renewing at 600, it’s now going to be 800 a month, you have the option to renew or you know you can go somewhere else. And then there’s other people in line that are willing to pay the 800 a month in this example. And that’s where you’re able to what you would call force appreciation now, there’s also the classic units and the modern units, the rehab units if you will Well, we put money sometimes 2000 to $10,000 per unit, you know, per door to improve the inside. And that’s what really justifies a lot of the market rent increases, we’re able to charge if someone walks into, Oh, these are new countertops, refinished cabinets, new flooring, All new appliances, you know, LED lighting, low flow toilets, you know, that save money, all these things that we’re doing on these, these units, then command higher rents than the classic units that maybe they were in. And so that’s what we are able to learn. And just a small increase in that net operating income makes a huge difference to the value, when you’re dividing it by the capitalization rate of a five cap 5%, or a six cap that increase is it’s amazing what it can do to the value of your apartment community when you’re able to manage and increase the NOI.

J Darrin Gross 41:05

Right? Well, and then as a measure of the percentage at your end of the property. It’s, it’s the exponential returner, it’s Yeah, exactly. So now, I appreciate you going through that. Hey, Jeff, if we could, like 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 a couple of strategies we typically consider, we first look to see if there’s a way we can avoid the risk, if that’s not an option, and we look to see if there’s a way we can minimize the risk. And when avoid nor minimize our options, 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 I like to ask my guests, if they can look at their own situation, and frame the question, what is the biggest risk? And provide an answer and you can look at it from any one of a number of different things could be interest rates could be the political environment could be taxes, it could be weather, it could be the market, however you choose to frame the question. If you’re willing, I’d like to ask you, Jeff McKee. What is the biggest risk?

Jeff McKee 42:29

Yeah, I mean, I would say, you know, from like a property casualty, some of the areas that we invest in are on the Gulf Coast, you know, whether we’re invested in Corpus Christi, Jacksonville, Florida, you know, all these places. And so, you know, we do you review and have great insurance on our properties. And so it’s in case there’s, you know, fire flood, you know, that kind of of a damage, which, you know, it happens occasionally, in these communities. And then you also need the business continuity insurance in terms of, if we displace guests, maybe to a hotel or another community while their unit is getting repaired, maybe there was a flood or there was fire, we also need the business continuity, to make sure any rents that we would have lost that were covered on that. So yeah, we’re basically, you know, well insured. And so that’s something that, you know, we’re very cognizant of, of in terms of, you know, where are we with, you know, FEMA flood map, you know, where are we, with this, and in terms of any hazards that we got on the property. So that’s probably the first one. And then lately, you know, in a rising interest rate, the second area of risk, and we’re trying to mitigate is trying to put a rate lock, so trying to lock in the rate before it keeps creeping up on us. And so then that would, would be another one, basically, we’re fortunate in the US to have a lot of fixed rate long term debt. So we’re just very careful of the adjustable rate mortgages, the arm products out there, because, you know, they could, you know, creep up over time. And so when we’re putting a lot of debt on these properties, you know, 3040 $50 million loan, or trying to look at the rate law, and be able to manage that. And sometimes, you know, we pay a bit extra to get that type of insurance, the rate lock cap, so we try and put a cap on any interest rate, that we’re locking in long term debt. And so those would be two areas, you know, kind of the property casualty and business continuity. And then the second area in rising interest rates, having a rate cap and paying for a lock and, and underwriting that expense. To give you some assurances of your debt payment won’t escalate much over time.

J Darrin Gross 44:38

Yeah, definitely. Some some areas of risk and anything you can do to mitigate that is going to help your investment perform them much better. Jeff, where can listeners go if they’d like to learn more or connect with you?

Jeff McKee 44:54

Yeah, you bet during they can go to the McKee capital group.com. So just McKeecapitalgroup.com. And then My email is Jeff@McKeeCapitalGroup.com. And on the website, you know, you’ll see the 10 close deals plus some of my LP investments. In the portfolio section, you’ll see a resources section with a bunch of blogs. Again, some of the topics we just talked about, and also have a download of a best selling book I was in last year it’s bringing value solving problems and leaving a legacy. And that was part of another mastermind. I’m part of this Kyle Wilson mastermind but in that I wrote a chapter about scaling from single family investing to multifamily investing and what I learned along the way, and then that PDF is a free download and I’ve got a short video about multifamily real estate investing for a lot of people that are just, you know, getting familiar with it. So it’s an intro video on on exactly what we’ve been talking about.

J Darrin Gross 45:47

Awesome. Jeff, I 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.

Jeff McKee 45:58

Well, thank you so much for hosting Darrin, I appreciate your time.

J Darrin Gross 46:01

You bet. 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 46:21

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.

Commercial Real Estate Team Building with Chris Prefontaine – CRE PN #352

Chris Prefontaine 0:00

I was a solopreneur with maybe a team member or to like, let’s say back in the relative days, I had that hat on for about five years. I had, you know, a really good executive assistant, I had someone that did just buyers and I had a runner. Okay, so that was a team. However, a lot of people and I don’t want to water this down in any way. But the fact is, a lot of people, most of us can muscle our way to a million dollars in revenue. That’s my opinion, meaning you just do more you do more follow up, you get up earlier, stay up later, you know, you can mostly Wait 2 million the challenge I found coming out of the crash is if I want to scale and have a life and not just be on a treadmill as a solopreneur I didn’t need to build a team. So a whole new set of coaches a whole new set of meeting rhythm, etc. And that’s that there instead of the team

Announcer 0:49

J Darrin Gross 1:08

Today, my guest is Chris Prefontaine. Chris has 25 plus years experience in real estate as a builder, developer, realtor, real estate investor. And he’s also a best selling author. He’s got a couple of books, real estate on your terms, the new rules of real estate investing and real estate investing for women. And in just a minute, we’re going to speak with Chris about building the team. 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’d like to see how handsome Our guests are, be sure to check out our YouTube channel. And you can find us on YouTube at commercial real estate pro network. With that I want to welcome my guest, Chrisc welcome to CRE PN Radio.

Chris Prefontaine 2:29

Thanks, buddy. Good to be back. And I guess you’d had the whole fam in your in here. So I’m glad to be here.

J Darrin Gross 2:36

Ya know, we’ve had the pleasure of speaking before and also got a chance to speak with Zack and Nick and, and I love what you guys do. For the listeners, if you could take just a minute and share with the listeners a little bit about your background.

Chris Prefontaine 2:50

Sure, so I’ll be brief. It’s I’m actually going on 30 and a half years that that whole beginning of my career was span went from building homes, to owning a brokerage to doing some condominium conversion projects to coaching people throughout US and Canada ran up to the crash, post crash, we revamp everything we had to and kind of redefined how it is that we’ll buy. We now by when I say we myself, my salon, my son who have been on your show, as you said, we buy everything on terms in our area of knowingly, which is owner financing preferred subject to existing financing and lease purchase. And that can be we teach a lot of single family but we it can be commercial it can be my office building was bought that way. So it can be any kind of property. And then we go out and teach that to students. And the big difference is, as you probably know is we don’t teach it we get in the trenches and do it with them. And that’s a big, closing a big gap I feel in the industry of letting people actually get stuff done instead of learn about it and try it on their own. So that’s a that’s a high view of it.

J Darrin Gross 4:00

No, I’m always a big fan of somebody that’s done that as opposed to just read the book and, and gets all excited about it and ready to share the gospel kind of thing. So definitely a fan of that. Well, let’s talk about this because you and then the introduction, we just talked about all the different ways that you’ve operated in real estate. And and you know the changes and how you’ve morphed into what you are now. And so if our topic is how to build a team may ask you this. At what point did you realize you needed a team in that progression of where you were or did you always have a team just a different, different team members?

Chris Prefontaine 4:48

Hey, this is interesting because the way I’ve segmented is pre 1 million and post 1 million and here’s why I say that for my career. Gosh, I’ll get to the crash I can say so let’s call it 18 years. I was a solopreneur with maybe a team member or to like, let’s say back in the relative days, I had that hat on for about five years. I had, you know, a really good executive assistant, I had someone that did just buyers and I had a runner. Okay, so that was a team. However, a lot of people and I don’t want to water this down in any way. But the fact is, a lot of people, most of us can muscle our way to a million dollars in revenue, that’s my opinion, meaning you just do more, you do more follow up, you get up earlier, stay up later, you know, you can mostly Wait 2 million the challenge I found coming out of the crashes, if I wanted to scale and have a life and not just be on a treadmill as a solopreneur. I didn’t need to build a team. So a whole new set of coaches a whole new set of meeting rhythm, etc. And that’s that there instead of the team, it did start with us having Zack micellar and Nick, come to me and say, Hey, I’m gonna be proud of what you’re doing. And I will share in deals, I’ll make this work type thing. And then the necessity came to build a team and hook up with an organization that could show us how to do that, because I frankly, didn’t know how to do it. I never did it before. And then to go post 1 million is a totally different animal. So that was a long answer. I hope that that answered your question.

J Darrin Gross 6:14

No, I that’s that’s kind of what I was looking for. And I’m assuming that the post or the more than a million came after the crash is that when you kind of want you had retooled, and

Chris Prefontaine 6:28

Yeah, yeah, it did. I was tired of a few things. Aside from the way we buy, I was tired of being on the treadmill. So every January thinking, Okay, I hustled my butt off, I gotta do that again. So let’s tie it to that piece. I was tired of zero leverage when the market pivoted. And that was because of the way we did deals. But also because we had no team it was just me. only so much that can go around. So yeah, it was post crash. And now it’s been scaling since then. But I do owe a lot of it’s not like I brilliantly came up with something. I owe a lot of it to the organization. We joined back in man, it was December of 17. We joined a lead entrepreneurs out in Arizona, and I credit them all the time with all the scaling and all the work we do with them. So they’re amazing.

J Darrin Gross 7:12

Got it? And how did you find them? Was that you were seeking help? Or did you Did somebody recommend them? Or how did you

Chris Prefontaine 7:20

A little of both. Every four to six months? Definitely not more than a year depending on who the mentor or coach is we’re looking for. Okay, what do we need next? Like one year it was we got to figure out how to get more leads in here. We muscled our way to this. So we had to get someone lead gen funnels going in in December of 17, or halfway through 17. It was, hey, if we’re gonna scale we’re gonna get to find someone who knows how to scale because I never did it. And I asked around, we came down to two people. One was someone inside of the Dan Kennedy camp where they were doing some big mastermind groups for business owners. And then one was this group called the lead entrepreneurs who were at that time inside of Infusionsoft. It was a bunch of Infusionsoft guys and gals that were teaching their clients how to scale then they broke off to lead entrepreneurs right around then like January of 18. So was asking around and it was pointedly saying what’s the next mentorship? We need? It was that and that’s how we found him.

J Darrin Gross 8:18

I haven’t heard the Infusion Soft mentioned very often I think now they call themselves keeper whatever. But yeah, we we’ve been using them for quite a while and, and probably have not leveraged all of the tools that they have available. Because it’s I feel like I’m kind of like sometimes driving they are using the VCR with flashing 12 Just for the play button as opposed to pin tool. Alright, so you you realize you don’t have the skill set. To grow the team you recognize you need to grow the team you find a potential mentor or some some vehicle that can help get you there. What what was, what did you recognize once you found somebody with some direction as to the hurdles that you had and the hurdle she needed to solve first?

Chris Prefontaine 9:16

What comes to mind with that question is we have these things we build up these muscles we build up right? Our protocol, our daily rhythm, all this stuff as a solopreneur. So part of it was doing what I tell our students to do, which is you gotta let go, you gotta wipe the white boy clean and you gotta be you gotta trust this you gotta put blinders on but three years, I tell our students that but it was hard for me to do that because now I’m in the trenches, you got to take my own advice. That’s the hardest thing like don’t trust the playbook don’t second guessing system. These guys had already scaled and so each time I had a doubt I just said, no, stop, get the drunk monkey off his shoulder trust these guys. And I always say three years but now we’re going on five years this am I’ve been with them. So I’ve sort of made it past the hump of this this work the way that teaching me you know.

J Darrin Gross 10:08

So in In, he joined in 17. You, you realize that you had to kind of focus in lakes and let go and trust the playbook. How quickly did you start seeing the results?

Chris Prefontaine 10:26

Okay, so the first meeting rhythms, so to speak, let me back up, the first thing they have you do is develop your mission and not case it was a five year mission ends this year. But developing mission, then develop your values. And I had the team which was my family at the time and one one staff member, now we have 14, but at the time, we all voted on those values. And I started to see the benefit of that piece right away. Here’s why. Especially with family, when decisions come to the table, emotions can get involved, especially with money, and especially with family. But when there’s a set of values set up, whereby you hire fire, make decisions on those in a mission that you hire, and fire and make decisions on. There’s no personality that can come into it, you doesn’t meet this or not. So that helped a lot. We realized that soon as we set them up, because we started acting and thinking and talking about, we’re like, oh, this is weird. We’re actually living it. And then it started coming to fruition after the first off site, which to me was a foreign concept. Leave the office even with this, when there was little team five of us do an off site planning day now after three days. And that’s not to come to fruition like, like never before a crystal clear. Whereas before you couldn’t get me to take three hours. I think that was a waste of time.

J Darrin Gross 11:41

Yeah, no, it’s it is incredible. And I’ve heard it often said about, you know, working in the business versus working on the business kind of thing, just the, you know, the, it’s so easy with, I think solopreneurs just, you know, the the nature of how you got to where you are, is basically solve the problem that’s in front of you, and be the one that’s doing the work as opposed to recognize who you can assign to it, and know that the task will be completed and letting go of it. And you know, just in and also just sitting on your hands when you you see things aren’t going the way that you would have done them yourself kind of thing. Yeah, yeah. So when when you you started the group, or started working with the group, you’ve got the off sites, you’ve got your your mission and your values in place. What were some of the things that you identified that that were key to building your team?

Chris Prefontaine 12:47

Again, what comes to mind knee jerk is I always tend to I think a lot of solopreneurs tend to load the plate up. Right. So the first few things that came up in the off site where I was trying to treat it like let’s just add things to the to do list well it’s not one off site is an off site is to prioritize those and so that the team members aren’t feeling like okay, I got all this off site, I’m going to walk out with 1000 more things to do now. So the first offset have made that mistake then we hired a facilitator who we met through that company and they run the off sites now. And so now the team members feel empowered when they leave there they feel like that part of the decision when they leave there, and instead of feeling overwhelmed with to dues they feel like they have we call them smarts but they feel like they each have their sort of two or three smarts that they’re going to work on and that’s it that’s it they’re going to live by for this trimester we do trimester instead of quarterly but whatever it is you run on I think it helps the team members a whole lot versus me as an owner going let’s just keep whipping things at this in half we do this trimester throw more at it doesn’t help it just frustrates everybody.

J Darrin Gross 13:53

So isn’t it if I’m hearing you it sounds like kind of you were really kind of the the impediment to a lot of progress until you you made the decision to go with the team route and and bring in outsiders just based on my experience that’s pretty rare. There it’s pretty rare that the person in charge that gets assigned the front of the check is willing to do that. Are you are you finding that that’s you know when you coach others are you finding that people are buying right away or is that that usually kind of the primary resistance

Chris Prefontaine 14:36

you’re you’re spot on it is a resistance the other resistance is the overhead piece comes to mind meaning I’ll take our high level students I still coach and so I’ll say from third party looking in I’ll say Hey Mike, this is what you need to do next you need to hire an executive assistant. Here’s why. Oh, I don’t know you know the dollars come to mind the cost versus the the reach Turn on investment. So now my mind shift that I’m trying to help them is, okay, an employee’s not when done properly a cost an employee, in most cases, unless it’s accounting or revenue, non revenue is revenue generating, almost all our revenue generating have to put in the right place, they’re either freeing you up to generate more revenue and do what you do best, or they’re literally generating revenue. Like we have a person who’s ahead of director, she’s director of JV relationships, her sole function is to book us on events, to do live workshops, and to go ahead and work through relationships with sponsorships and things like that she more than pays for us out. Well, that’s a position that some people go, Oh, that’s a cost. No, it’s a revenue generation spot to be filled. So we’ve got to help them nail in your question. But that’s, that’s my take on it.

J Darrin Gross 15:52

No, I love because I think that most people would stop at the cost, not recognizing how they could convert that into a revenue generator. That sponsorship kind of opportunity then? And that seems pretty like outside the box? Is that something that came out of one of your off sites? Or was that just something that you guys are constantly thinking outside of the box? Or how did you,

Chris Prefontaine 16:16

ah, the gentleman that produces that podcast with us has become a good friend. And he also has a weekly accountability partner with me personally, we just do that one on one. And he had helped me understand the power of once you have the authority to answer you have what we call the wicked smart community, once you have this smart real estate coach podcast built to the size it is, vendors near you in other avenues, but vendors want to be in front of that audience, right? It’s second animals. So people like credit repair people, like a funding company, they want to get in front of the audience. Okay, so they pay for the right to do that now that that’s the only difference. And part of this whole process is the conference that that’s what you have the conference that you have to put a person in place to then go do what you’re best at to generate more the conference, you have to say, Yeah, we’re worthy of this. A lot of that stuff, mental growth, I know that sounds like off B. But a lot of this is going to be mental growth, because you don’t come as a solopreneur. Or you don’t come from the Gob and obviously know all this stuff. It’s a different mindset. So there’s a whole different growth factor there relative to building a team, it’s you and your mindset.

J Darrin Gross 17:22

And the confidence piece is really a hurdle that I think that I think personally, it’s not always easy to identify the benefit I bring, or that the value that I have that that you know, translates. And, you know, recognizing that and being able to flip that recognize that I am bringing value and then there’s there’s worth and that somebody else would be willing to pay for that. That’s a huge. I mean, it gives you the chance to really launch and you know, momentum and then really springboard into something much bigger. That’s, that’s great. So you, you identified the wellness, talked about the different people on on the team that you you have, and at what point were they recognized as being needed and how you went about adding them?

Chris Prefontaine 18:22

Yeah, give a few examples. And you can tell me if you need me to go deeper. So as I look back, the people that were needed are usually result of somebody being maxed out. And one example comes to mind as in fall of 18. We hired first mediate real in house media person that could do filming and in video editing and all that and how did that come about? We were outsourcing. So usually, we’ll go to outsource. First, we are outsourcing to a company, that we’re taking our homemade videos, editing them, make them presentable, posting them on YouTube, things of that nature, let’s just say that got to the point where one month we did 100 hours with them. And we said, oh, wait a minute, look at this expense, we could bring on our own person for that. And this went on for like several months. So even though that was an enormous decision in my head back then to bring that kind of employee on that kind of pay. It was it paid for itself tenfold and the quality went through the roof and people realize that instead of usually it’s your subcontract out, that’s simple for you, you don’t have payroll and payroll taxes and all that related. And then once you you’re maxing that out, or you can justify replacing that that’s one issue. The second issue is if you already have a team, and the team members is so stressed out and it’s so maxed out that they can’t take on more, and they’re actually you can see and feel that stress. That’s usually time to look around and start divvying up things to is that make sense?

J Darrin Gross 19:45

Oh, absolutely. Absolutely. I think that, you know, again as a solopreneur if your primary job to generate revenue is sales, and you’re doing especially a lot of this marketing stuff, which is basically time consuming in It’s, it’s into production put out a high quality product, if there is a lot more involved than just taking out your phone and you know, videotape your video on something and posting it. So, you see, that’s, that’s a great example of marketing. Are there other positions that you recognize where you guys had ever at any point prior to outsourcing it subcontract? And were you doing it in house?

Chris Prefontaine 20:30

Yeah, we had, when we were just doing a few videos, we had a girl Lauren, just taking my homie videos, and then you know, cutting the ends off and the front and the back off, and then we post it. And then it went to a VA in the Philippines, and then it went to a higher quality, outsource and then it came in house. All the jobs that are really easy, in my opinion, if you’re a solopreneur out there listening, I don’t care what position you’re in, frankly, you the very first thing I would do if I were in your marketplace and started my business, in any niche is out getting an executive assistant. There, there are companies that hire great ones, we’ve hired many from one company, because to your point, just then if it’s sales, or if it’s the phone, or whatever it is you’re good at. If there’s any task less than a $20 task, why are you doing it worth $20 or less? Just hire an executive assistant. So if someone said, Chris, if you had little money, what would you do and you opened up in I don’t know, pick it Alaska, Florida doesn’t matter. I get there and I hire an executive assistant to get to work. And I would do only what I was qualified to do it on the phone. In my case, it’d be effective in structuring deals, they would do everything else. They would do the CRM, they would do the callbacks, they would do the paperwork, they would do my personal errands, they would do all that. That’s the first thing to do with anyone Why We Should I should have said that first. That’s a no brainer, in my opinion.

J Darrin Gross 21:46

Yeah. It’s, it’s again, I think part of it is when you are the solopreneur and you’re doing everything yourself and you can’t make the distinction as to what’s what and and you just have your like you said your your list of more things to do. Kind of taking a step back and and get some clarity on it as is important. So that the couple of examples you’ve you’ve cited, kind of the marketing and the executive assistant. Are there any other positions that are production oriented, that you have identified? That you’ve brought on?

Chris Prefontaine 22:30

Yeah, a couple of things come to mind there. There’s our podcasts, right? I can go either business, but from the coaching business, our podcasts, we were paying people to book interviews, which you’re probably familiar with. And instead we had an in house person get really good at doing that and secure in that. And so although we still use outside sources, because they’ll call us from time to time, we have an in house person that now probably does maybe a quarter cost wise of what we would paid out. So it’s that so that’s on the on the on the coaching side, on the and internally on the property side of things. We have duplicated for us it was I duplicated myself with my son in law, Zack and then Zack then duplicated himself and put we call himself a specialist of the issues column acquisition as but we put two people on the phones, trained him set parameters up, and they do all the lead gen now, so that Zach and I aren’t necessarily doing that. But we’re doing a high level deal structure only. So you can rip apart any piece of this. And it’s always how can we duplicate ourselves to do what we do best?

J Darrin Gross 23:33

Yeah, no, I, that whole lead gen thing I’ve found to be so freeing and that, you know, before when I was the one doing all of the calling all of the outbound stuff, there’s an exhaustion that happens to finally when you do have an opportunity, you’re like, you know, you’re not necessarily your best perhaps. Whereas if you have a lead that’s teed up, that is wanting to talk to you about the opportunity, that’s that’s just an entirely different conversation, at least a different energy I found just as a, you know, able to kind of have a repeatable swing, you know, and that you’re constantly in that sales mindset as opposed to the, you know, hunting, hunting 9090 9090 nothing being, you know, kind of thing. So,

Chris Prefontaine 24:20

yeah, there’s good. I mean, we have virtual assistants still to this day, not in house. We have virtual assistants who are well trained to do our calls for us that we’re talking to a low hanging fruit, like, to your point like, why would I go sifting when I can just take everybody that’s sifted?

J Darrin Gross 24:34

Yeah. To me, it was just an amazing, amazing opportunity then to shift like that. Yeah. So training, I’m assuming or do you? Obviously you guys have been doing the jobs or somehow it’s been, it’s been done in house. Do you? Kind of have write input the job is so that you can then get the quality output you’re looking for how do you go about, you know, off, or I guess transferring that to where that whoever you get is able to do to do the job.

Chris Prefontaine 25:16

The only time you write something up, I’m not big on job description, because I think it puts people in a box and doesn’t leave for flexibility. So are our values, things in our values are things like, constantly innovate and improve? Well, that’s hard. If you’re in a box, you feel like you just got to do X, Y, and Z. So what we do to answer your question is when someone comes on board, each trimester remember I mentioned the word smarts earlier. So we’ll have priorities for the trimester. And team members will volunteer for one of those priorities. And with a priority will come a bunch of smarts, and you’ll be assigned some of those you know, that’s what you own the trimester. Second thing is, so that’s strategic. On the operational side of the business, every trimester, every employee, every team member has what’s called the Big Three, the three things that they own part of their operational function, they’re like, for me, it’d be driving revenue, I’m the I’m the chairman and founder for Zack, my son in law might be, I’ve got to get the coach’s department up to this level or producing this level, like that’s what he owns for the time. So he might own an extra semester too. But they’re called the Big Three and what you own. That’s, if somebody does that they’ve they’ve successfully accomplished a trimester versus this some job description kind of keeps you limited, these are very, very focused on what we’re doing.

J Darrin Gross 26:36

And then with that, does the employee or the team member have an opportunity for input feedback on how maybe things could be different? Better?

Chris Prefontaine 26:49

Yeah. So they’re meeting their meeting with what we call the one on one sessions. As far as meeting with them. They’re meeting one on one with their direct report every single week, for about 20 to 30 minutes. And then monthly, we have an all hands meeting. So we’re all following up on how this milestone how the Big Three doing. So there’s some built in accountability there. And they get to say, like, everyone’s voting on this stuff. This isn’t standalone stuff.

J Darrin Gross 27:16

No, I love the the team input. Again, I think the more you have the input, the more you have the ownership. And, and the ability to Why are you just giving them you know, ownership of it and the opportunity to perform? How do you do you have any kind of rewards for performance?

Chris Prefontaine 27:38

Ah, good question. They, there’s a lot of incentive built into the revenue generals by percentages, overrides and things like that, if they’re in a revenue, Gen. Rev Gen roll, like the ones I mentioned, there, they get small overrides. So if we have a base product, it’s in our workshops, they’re gonna get an override, if there’s sponsorships, they’re gonna get an override. So they have their base, they have their operational big three, but they get overrides as well on success.

J Darrin Gross 28:08

So you mentioned this, is your five of your having joined the exam? Or was entrepreneur executives, elite entrepreneurs? How have you seen the the revenue and whatever it was you were trying to grow? As was revenue? Primarily the the focus then are what are you measuring? Today, in comparison to what you were measuring back then?

Chris Prefontaine 28:36

Well, we started the five year mission is to answer their revenue has grown every year between 25 and 100%. But that wasn’t the mission. The mission was set up five years ago and ends in December of 22. In the mission was to dominate the real estate mentoring market by helping our associates our students, complete 500 transactions. So that’s the mission. But now what has to feed that? Well, we’ve got to get our foundation Academy courses out there, they can’t learn to do that. We’ve got to, you know, build the coaching problem, or they can’t coach them to do that. So there’s all kinds of things that feed that. And then of course, revenue follows, right. But that was to do transactions not to, like so many people do, sadly, go sell a bunch of stuff. Right? It was how do we get them to complete transactions? I don’t know many companies that do that. So that’ll end this year, we’ll we’ll be starting to reset the mission for probably a three year mission after this.

J Darrin Gross 29:29

Awesome. So looking forward from where you are now. Any any thoughts on what what you might reach for in the next five year plan?

Chris Prefontaine 29:41

Yeah, a couple of things. It will be transaction driven again, where we’re starting to count families we’re affecting meaning. When we do a transaction on creative real estate. We’re really affecting the seller and the buyer plus our student. So we’re affecting three families minimum per deal. So we’re starting to track that and I think that might play in To the reset the mission, we’ll be meeting at the end of this month to do that. Because as the markets turn a little bit here, I think we got a perfect storm going on, we got forbearances come and do we got interest rates going up, all these things lead to us really being able to guide more people in thriving. Whereas I know some people are frustrated that I want to say that I can’t wait, I look forward to it. Because the banking is not going to get easier for buyers and sellers. And we can help them through that, navigate that and as a result will will get rewarded well, because we’re creating generational wealth for some of these families and generational knowledge on how they can do deals and how they can have homeownership without going to conventional. So it’s pretty cool.

J Darrin Gross 30:36

Yeah. Now, like we were talking before we started recording the opportunities in the storm. Yeah, yeah. So that’s great. Chris, if we could like to shift gears here for a second? Sure. My dad, I’m an insurance broker, and work with my clients to assess risk and determine what to do with the risk. And there’s three different strategies we typically look to to to try and manage the risk. The first is we look and see is there a way we can avoid the risk, when that’s not an option, then we look to see if there’s a way we can minimize the risk. And if we cannot avoid or minimize the risk, and we look to see if we there’s a way we can transfer the risk. And that’s what an insurance policy is. And I like to ask my guests, if they can identify what they consider to be the biggest risk. And it could be the market could be interest rates could be you know, politics. Whatever it’s it’s for, it’s for you to frame the question and provide the answer. But with that, I’d like to, if you’re willing, I’d like to ask you, Chris Prefontaine, what is the biggest risk?

Chris Prefontaine 31:50

Probably gonna throw a different twist at this fire, especially coming from the insurance side of things. Look, the market my opinion, the market is going to keep changing. It has for decades, I’ve been out for three decades, it will continue to change. So people get all caught up with the media and all it’s going to change. And the risk is that the risk is not there. The risk is you not knowing how to navigate. As it changes, you call it the storm. And when you know how to navigate when the market changes. You’re not You’re not at risk, because you’re not a bob and weave, you’re not a pivot, you know how to structure the deal after the deal. And you know how to be keyword adaptable. That’s it. It’s not the strongest, it’s not that smart. It’s the most adaptable. And then how do you do that? How do you mitigate that that risk? How do you get in that mode? My opinion, you find someone that’s been through at least two or three storms to use your word, and then you lean on them? Constantly. There were two times in my career, I didn’t have that person 1994 ish in 2008. And the only times I had a headache. So every other time in life, I’ve had a mentor that I could call up and go, Hey, Darren, what do you think about this? What would you do here? I’m a little a little perplexed. That mitigates your risk, and that lets you be more adaptable.

J Darrin Gross 33:05

No, that’s that’s definitely a kernel of knowledge there. And based on experience, I love that. That’s a great, great input there. Chris, where can listeners go if they would like to learn more or connect with you?

Chris Prefontaine 33:20

I’ve got two things I mentioned wanting to begin and as we’re talking, I’m thinking I’ll give you two avenues. They’re both free. I’m big on free. I want you to be able to look at what we’re doing. And if you if you get excited about a great I can’t wait to talk to you if you don’t, it’s okay. You spent a little time and resources. So the first one as we put together just for this audience, a free book, you probably get a couple but it’s our best selling hardcopy hardcover book. You don’t have to go to Amazon we will give it to you you won’t put in a credit card even for shipping. We’ll ship it totally free. Just go to wicked smart books wicked smart books.com/crepn. CR e PN so it’s easy to connect it to the show where it gets my books.com forward slash CR e pn, you got a nice package give us five or 10 days it will get out. The next thing is if you don’t want to would not if you don’t want to if you want to fill the gap before it gets there, and you don’t mind listening to me babble for 55 minutes we have a free mashes class, it’ll let you know what we do in the trenches. Just go to smart real estate coach.com/masters class. That’s it simple.

J Darrin Gross 34:28

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

Chris Prefontaine 34:38

I love it. Thanks for having me. Thanks for having the family. I appreciate it.

J Darrin Gross 34:40

You got it. 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 35:00

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.

Commercial Real Estate Cost Segregation with Erik Oliver – CRE PN #351

Erik Oliver 0:00

The idea of Cost Segregation is well, instead of depreciating that office building over 39 years, is there a way for us to depreciate that faster so we can get more deductions sooner. You know, I may not own that office building for 39 years. And so how do I get those deductions quicker? And the way you do that is through a cost segregation study. And really all we’re doing is just what the name implies we’re segregating the cost of that building into different buckets, for lack of a better word. And so we are, you know, when you buy an office building, you’re not just buying the land and the walls but you’re also buying a parking lot. You’re buying some flooring, some window coverings, some cabinets and countertops, there’s all these different components that make up that building. And the IRS says you can depreciate those over a much faster schedule. For example, carpet can be depreciated over five years, not 39 years carpet doesn’t last 39 years.

Announcer 0:50

J Darrin Gross 1:09

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 Erik Oliver. Erik is the regional manager for Cost Segregation Authority. In just a minute, we’re going to speak with Eric about cost segregation, what it is, how it works, and the benefits for real estate investors.

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

Erik Oliver 2:20

Oh, thank you, Darrin, I’m glad to be here.

J Darrin Gross 2:23

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

Erik Oliver 2:31

Sure. So my degree is actually in accounting. Math always kind of came easy to me in school as opposed to English and so or science for that matter. So I was in college and said, How am I going to get this done quickly. And so I decided to go into accounting, not really knowing what I wanted to do at the time. And so my background is in accounting, and then my careers have taken me through business development and and those types of things. And so I came across this company, I moved from Salt Lake City out to the east coast to Virginia, and then to Long Island, New York, and was looking to head back home to Salt Lake and came across this job about six years ago. kind of fit what I my background was, you know, it’s kind of a niche accounting firm that we work for here cost segregation authority. And, and so I’ve really loved it, I’ve really been able to learn more about real estate and you know, work with investors and CPAs across the country on on saving tax dollars. So it’s been great.

J Darrin Gross 3:34

Awesome. Well, to start the conversation, I mean, cost segregation, I think is it’s a term that many are familiar with the term, but I don’t know that everybody understands the what it is or how it works. And for the uninitiated, could you give a brief? What is Cost Segregation answer?

Erik Oliver 3:55

Sure. So Cost Segregation really is just accelerated depreciation. And so you know, one of the big benefits of owning real estate is being able to take a depreciation expense against your income. And so what that is, is typically if you were to buy a commercial property, you get to depreciate that property over 39 years. So let’s just to make the math easy. Let’s say you bought a $390,000 office building, you would get a $10,000 write off every year for 39 years against your income. So if you make 100,000 a year, instead of being taxed on 100,000, you’ve got this $10,000 write off that now you’re only taxed on 90,000, which is great. It’s a non cash expense. That is a huge benefit for real estate investors to offset income. And Cost Segregation says or the idea of Cost Segregation is well instead of depreciating that office building over 39 years, is there a way for us to depreciate that faster so we can get more deductions sooner. You know, I may not had on that office building for 39 years. And so how do I get those deductions quicker. And the way you do that is through a cost segregation study. And really all we’re doing is just what the name implies we’re segregating the cost of that building into different buckets, for lack of a better word. And so we are, you know, when you buy an office building, you’re not just buying the land in the walls, but you’re also buying a parking lot, you’re buying some flooring, some window coverings, some cabinets and countertops, there’s all these different components that make up that building. And the IRS says you can depreciate those over a much faster schedule, for example, carpet can be depreciated over five years, not 39 years carpet doesn’t last 39 years. So. So that’s what we’re doing. We’re segregating, we’re putting values to that purchase price and breaking up that $390,000 purchase price in that example, into those different buckets. And that allows you to take those deductions much sooner.

J Darrin Gross 5:54

And when you do that, does it change the the what I’m trying to say? Like when I think of like a building, and you talked about the 39 year depreciation allocation, or a straight line schedule, as opposed to a an accelerated depreciation schedule? Are you taking that from a quote, structure to like then making it personal property? Or is there a, is there a, like a conversion there? Or is it just a matter of now that you’ve done the study? You can accelerate this?

Erik Oliver 6:32

No, no, you’re exactly right, we’re taking that purchase, you know, and we’ll go I’ll go back to that example, that $390,000 purchase, we’re gonna say of that 390,000 20,000 of that was for carpet 50,000 of that was for a parking lot. You know, 60,000 of that was for trees, bushes, and shrubs, and irrigation, and fencing and all these different components. And so yeah, we’re taking what we call in the industry, 1250 property or real property. And we’re allocating portions of that property to personal property, things that can easily be removed without damaging the building, there’s a certain criteria of tests that have to be met in order to qualify for personal property. But we’re identifying that personal property and putting a cost to it. It’s, you know, if you think about it, then when you build a new building, that’s easy to do, right? You have an invoice for the flooring, you have an invoice for the parking lot, you know, you get an invoice from the guys who lay the asphalt that say, you know, you spent $80,000 on asphalt. And so you get to give that to your CPA, they can depreciate that asphalt over 15 years, because that’s the depreciable life that the IRS has established for asphalt. So a new construction, it’s a little easier. But when you think about existing buildings, they don’t give you an allocation. When you get your settlement statement and you go buy a million dollar office building, they don’t break it out line by line and say you bought X amount of parking lot X amount of flooring, X amount of window coverings, right? They just say you bought a building one big lump sum building for a million dollars. So that’s really where a Cost Segregation company comes in. And puts values to those different components that allows you again, the IRS has established these there’s a book that’s, you know, 1000 pages big that tells you the useful life of just about everything. So the IRS, there was a court case somewhere at some point, and someone argued that carpet should not be depreciated over 39 years, it should be depreciated over five, they won that court case. And so now carpet has a five year asset versus a 39 year asset. And so, again, you just don’t know the value of those when you make that purchase. And so that’s what a Cost Segregation company comes in and does.

J Darrin Gross 8:43

Got it. And I think one of the the things that is worth repeating, you mentioned, you know, if you if you build a new building, you know, you’re starting at point zero, I mean, that’s the zero point or the beginning. Whereas if you’re if you’re buying an existing property, and some of those items are near their, their end, how does that how does that factor in if you’ve got, you buy a building and the carpets got maybe a year in it? And then you’re gonna have to replace it? Are you can you can you walk through how that as opposed to the five years that the the IRS allows for depreciation on the carpet, you’ve got maybe one year left before you replace it. What happens then?

Erik Oliver 9:31

Sure. So when you do a cost study, we’re still going to put we’re going to put a value to that carpet. And you still get to depreciate that carpet over five years. But let’s say that the previous owner had had it for four years like you had mentioned. When you buy it, you still get to depreciate it over five years, which is way better than the 39 years by doing the cost study. But you’re probably going to get rid of that carpet after year one, you may even go in and get rid of it right when you move in because it’s dirty, it’s old and you want fresh new carpet when you move in. So there’s something called a partial asset disposition that allows you to take the remaining book value of that carpet. And you actually when you dispose of that asset, or you replace that asset, you get to write off the remaining balance of that asset. So even though the roof is, you know, roof is a 20, a, in that example, a roof is a 39 year asset, even though the roof has been on there for 20 years, and it’s not going to last another 39 years, when you bought the building, we still put it in that 39 Year category, you get to take 1/39 of it. But when you replace it, you get to take the remaining book book value and write it off as an expense because you’re disposing of that asset. And so if you think about it, Darren, what we oftentimes see picture this is that you buy a building for a million dollars. And on your depreciation schedule, it says that that building went into service January 1 of 2022, for a million dollars, you start taking your depreciation, five years later, you replace the roof for 100,000. Give your CPA your invoice, they’re going to put on your depreciation schedule right underneath where it says building, they’re going to put new roof, and they’re going to start depreciating that roof over the useful life of a roof. But what happened to the old roof, it still stuck in this building that’s on your depreciation schedule, right? So you’re really depreciating two roofs now, because you never pulled it out of this building, because you never had a cost study done initially. So you’re depreciating two roofs at the same time or one of them, you can actually write it off as an expense, and only depreciate the new roof. And so that’s oftentimes we correct a lot of depreciation schedules when we see that because we’re like, Hey, you’re double depreciating all these assets that shouldn’t be you should be able to expense them. So that’s just what we call a partial asset disposition. But just wanted to note that

J Darrin Gross 11:48

no, I think to me, that’s that’s one of the the real magic things because, you know, as investor myself before I and I have done a cost segregation study, and I’m a fan. The before that it was basically expensing things. And, like you said, if you replace something and you expense, the replacement, but you still had the original, that was depreciating, you didn’t get to, to capture that, like said if it’s 19 years or whatever, that that big chunk of, of depreciation that was available just to write that off, and then essentially recapitalize, because you’re, you know, if you take off of a roof that has on your schedule, you’ve got, you know, 35 years left, but you you’ve replaced it, you’re taking off at that value, you’re expensing that, but then you’re recapitalized it with a new roof. Right? And so it nets out I mean, to me, it may it makes a lot more sense the way it the way it works, as opposed to just the expense and, and depreciate an old roof kind of thing. So it just occurred to me because like, I’m assuming when you when you do a cost egg study, the allocation of the value is based on acquisition costs, right?

Erik Oliver 13:05

It is, yeah, so ever, you could do one cost study every time a property changes hands, because let’s say you bought it for a million, we’re gonna put values to all the different components, but then in five years, when you sell it to me for 2 million, all those different components now have new values. Right? Right. So every time a building changes hands, you have the potential of doing a new cost study on that building.

J Darrin Gross 13:28

No, no, that that to me would be, you know, extremely valuable, because, you know, the, the, just to reset the values, right, so you’re getting the proper amount accounted for there. So in another thing that came to mind, and I think it’s fairly obvious, but it did present a question to me. So the accelerated depreciation, you’re not getting more depreciation, you’re just getting to use the depreciation sooner, correct?

Erik Oliver 14:00

That’s exactly right. Yeah. But at the end of the day, you know, we’ll go back to that office building the paid a million dollars, for at the end of the day, you still gonna get a million dollars of depreciation, whether you take it 1/39, every year for 39 years, or you front load a portion of that and take a bigger chunk up front, it just means you get less on the back years. And again, there’s a number of reasons why you would do that. You want to get your deductions up front, especially in today’s environment, where inflation is what it is, you know, $1 Today is worth way more than $1.39 years from now, in terms of buying power, and everything else, then you’ve got time value of money elements. And so instead of letting the IRS hold on to those deductions, give me my deductions. Now. Let me use that to free up cash flow, right instead of me paying the government taxes. I have this big deduction that frees up cash flow for me that I can either pay down debt, I can go invest it in new properties. There’s a number of things I can do with that money to put it to work versus letting the IRS just hold on to those deductions. Uh, and I’m kind of oversimplifying things here, Dan, I should probably point out that land is not depreciable. Let me just make right there. So when I say purchase price, it’s the purchase price of the building. So when you buy a building, you’re buying land and structure, you never get to depreciate the land. And so you always have to back that number out of your purchase price to get what we call your depreciable basis, at which point you start depreciating on that that number there.

J Darrin Gross 15:25

Right, right. Do you have any kind of a ballpark number as far as the the cash flow improvement with with somebody who’s done a casa segue study?

Erik Oliver 15:38

Sure. So I’ll kind of take a step back, there’s something called bonus depreciation we should probably touch on. Sure. It’s been a huge benefit to our industry to investors. You know, back in 2017, at the end of 2017, Congress passed the tax cuts and Jobs Act. And that was kind of the the tax overhaul that was initiated by Trump. And as I’m sure many of your investors know, or many of your listeners know, Trump owns a few pieces of real estate. And the tax law was very favorable to real estate investors. And something came along called bonus depreciation. Now bonus depreciation had been around, it’s kind of something that government uses to stimulate the economy. And so every year, they’ll look at the economy and say, Okay, how are things going, oh, you know, what, we need to stimulate the economy a little bit. So we’re gonna, we’re gonna bump up the bonus percentage to, you know, 50% bonus. And all that means is, and I’ll, again, kind of simplify this. But if you were to buy a bulldozer, and let’s say a bulldozer has a 15 year asset life, you would be able to depreciate 50% of that, if bonus was 50%, you would be able to depreciate 50% of that bulldozer in the first year, the remaining 50% gets depreciated over the next 14 years. So they’re giving you an incentive to go out and buy new equipment to build new buildings. There’s a number of reasons, you know, creates jobs, all this just stimulates the economy. And so back in 2017, with the tax cuts and Jobs Act, they increased bonus depreciation to 100 100%. Which is huge, and it’s a massive benefit for real estate investors. The other thing they did is they removed one of the just some small language in the in the tax law, but basically it says it no longer has to be new. You can go buy a used bulldozer and still apply this this bonus depreciation. So one of the provisions under bonus is the useful life has to be less than 20 years. So if you think about real estate, it doesn’t really fit into real estate, because real estate is a 39 year asset or for your residential properties. It’s 27 and a half. But then what if you do a prospect study, and we come in and we identify Well, part of that 39 year building is a bunch of five year assets, things like carpets, countertops, cabinets, etc. Part of that 39 year building is a bunch of 15 year assets, things like parking lots, curbs, gutters, asphalt. So if now if you do a Cossack study, this is great. This was like the best tax law for our industry. Because now there and when you buy a building, you have to call me if you want to take bonus depreciation because you don’t have any five, seven or 15 year assets, you just have one big 39 year asset, right? So you call me we do a cost study. Now you’ve got a bunch of five, seven and 15 year assets identified that are eligible for bonus. And you get to take 100% of those deductions in the first year. And so going back to your question, you know, is there a kind of some quick math that we can calculate this? Currently, the 100% bonus tax law goes from any properties purchased from September 27 of 2017, to December 31, of 2022. So this year, the end of this year is the end of 100% bonus. And if you’re eligible for that 100% Bonus, and you buy a property within that timeframe, essentially you’re going to get about 30% of your purchase price minus the land. So you take your purchase price minus land, that gives you a depreciable basis and you can take about 30% of that depreciable basis in the first year. Wow. Yeah, it’s a huge advantage for real estate investors.

J Darrin Gross 19:25

So and let me ask you something the depreciation because he you know, part of one of the caveats is you have to be a real estate professional to take the full amount if you’re if this is a in this way I understand and correct me if I’m wrong. Versus if you are if you’re a full time insurance broker like myself, that invest. I had an accountant before that was like, Well, you know, you can’t really take it because you’re, you’re a W two, guy. But I’ve since learned that no, no, no. Okay. Fair as the real estate income grows, the cost segregation study was even more valuable, because then I could offset that that income in and I didn’t lose the depreciation, it was still available for me, you know, in, in whatever years in the future, right is that am I

Erik Oliver 20:21

know you’re you’re on the right track, you know, so let’s just use you as an example where you’ve got, let’s say w two and Kevin, you also have investment income, your W two income is treated as active income, that’s your active day to day job is that w two income, your passive income as your investment income, you’re just invest on the side. And so you’ve got active income versus passive income. When we do a cost segregation study on your real estate, which is in that passive bucket, the deductions that we create through the Cossack study are going to be treated as passive deductions. So they can only be used to offset your rental income, not your W two income. And so, you know, let’s say, let’s say you’ve got 200,000 of w two income and only 30,000 of rental income. If we do a Cossack study, and we create a $300,000 deduction, that $300,000 deduction can only go to offset that 30,000 of rental income, not your 200,000 of w two income. Right? Unless, like you said, you become a real estate professional, which there’s a set of rules and regulations around that. But basically, essentially, you have to spend 750 hours a year doing real estate, or not or, and 51% of your working time doing real estate. And then you become a real estate professional for tax purposes. And what that means is, hey, I really do real estate for a living. So now all of my real estate activities become active. And so now I can use these deductions to offset any income. So they’re like someone like you, I don’t know, your marital status if you’re married or not. Yes, you are, I see. So a lot of professionals and I’ll use a doctor as an example. But a lot of professionals who have high w two income, they may have a spouse who’s able to stay at home, and that spouse becomes the real estate professional and manages their real estate portfolio. And because the spouse is the real estate professional, and they file a joint tax return, now those deductions can be used to offset the doctor income. And so we see that quite often. And so that’s a great way to get around paying taxes on your W two income is, you know, can you yourself become a real estate professional, which if you have a full time job, the answer is probably no. But if not, do you have a spouse who maybe could qualify and file that joint tax return? So that’s a great point, and you’ve got this passive versus active and you want to make sure that you’ve got enough passive income to justify creating those passive losses, otherwise, they do you don’t ever lose them, like you mentioned, they just carry forward and they use them in future years.

J Darrin Gross 23:02

Right. Right. Now I had the good fortune to have some properties where the cashflow increased significantly. And and it really, I mean, it just had helped to offset the income dramatically. So that was a win. So let me ask you, as far as the we’ve talked about all the benefits of basically some some paper losses that offset the the income to to reduce the taxable income. Is there any downside to this whole thing? I mean, I, it to me, it sounds like it’s just like, you know, candy and recess and vacation, and you know, there’s, there’s, and I’m just gonna, like, usually there’s, there’s something somewhere that’s like, Okay, well, there there is this?

Erik Oliver 23:53

Sure. So I’ll give you some of the objections we get quite often. And I’ll kind of talk about two of them. Most importantly, one is, well, if I show this loss, then how am I going to go out and get a loan for my next property, right? Because I’m showing no income because I have this massive paper loss that just offset all my income. So now I’m basically showing that I only make $10,000 a year, how am I gonna go out and get a loan for my next project? And the nice thing is, is that’s not actually true. So depreciation always gets added back into your income for lending purposes. So for tax purposes, obviously, you want your income to be low for lending purposes, you want it to be high, because this is just a paper loss. They’re always going to add depreciation back into your income for lending purposes. So that’s great. That’s the first thing. The second thing is is there is something called recapture tax. And the question we get quite often so when you sell your asset so let’s say I buy a building for a million dollars, and I sell it five years later for 2 million. When I sell that asset, I have to pay two types of tax I have to pay capital gains tax, assuming I’ve held it for more than a year and Then I also have to pay recapture tax. Now your recapture tax is calculated on the amount of depreciation you’ve taken on the asset. So people will say, Eric, if I’m gonna front load and take all this depreciation up front, don’t I just have to pay that all back in five years when I sell it? And the answer is no, not necessarily. And I’ll kind of walk through this example. The idea behind Cost Segregation is you’re going to take there’s a rate arbitrage. So you’re taking your deduction against your ordinary income, which, you know, let’s say I’m in the highest tax bracket of 37%. Plus, I live in California, and so that’s another 13%. State. So I’m getting taxed at roughly 50%, you take your deduction against that 50% combined state and federal, when you sell that asset, even if I had to pay it all back, right dollar, either pay the whole amount back, I’m only paying it back at a capital gains rate, or a recapture rate of maximum 25%. So you take your deduction against your income and 50, pay back at 25 and save the spread. So that’s the first thing Yeah, you do have to pay some of it back, but it’s at a lower rate. That’s the first thing. Second thing is you don’t pay it all back, you pay a portion of it back, depending on how long you own it. And I’ll kind of back into this deck, because I think it makes more sense. Let me ask you this, if you buy a property for a million dollars, sell it five years later, for 2 million. When you go to settle up with the IRS and pay your taxes on that transaction, you’re telling them that everything doubled in value, right and went from a million to two, that means your land doubled in value, that means your walls doubled in value. But you’re also telling them your dirty old carpet that you’ve had for five years is now worth double what it was when you bought it. And that’s just not the case, carpet doesn’t double in value over time carpet goes down in value. So by doing a caustic study, you actually get the pull that carpet out of the transaction and say, I’m not selling my carpet for a gain, my carpet has a book value of zero. carpet is a five year asset in this example that I laid forward, that was a five year hold period, I bought it in 2020 sold it in 2025, I’ve owned it for five years, what’s your carpet worth after five years, it’s worth zero, right? It’s a five year asset, you fully depreciated it, you don’t pay any capital gain on that carpet, the gain goes to the building and the land. And so you’re just reducing. And to summarize, I’ll try to summarize without getting too far in the weeds, but take your deduction at a high rate, pay back a portion of it at a lower rate at a future date and save the spread. And that portion is dependent upon how long you own it, the longer you own it, the less you pay back.

J Darrin Gross 27:48

And that that was helpful there. The the example there of talking about the life left in whatever it is that it’s still in the building there. Right? Because I again, I’ve always heard about, okay, you’ve got depreciation recapture and capital gains. And, you know, I think there’s, there’s two types of investors, I’ve always tended to be one that was thinking hold forever, or at least just grow and grow and grow the assets, better than then cash out. I know a lot of times with, if you’re, you’re syndicating or, you know, working with others and stuff, it doesn’t, it’s not always as easy. And so this becomes more of a natural resolution as you’re you’re going to sell and and pay the tax and move on to the next deal. But in the in the instance, where you are able to roll out and roll into another property. Is there any issues with the cost segregation study and doing a 1031? Exchange? Does it create any, any issues?

Erik Oliver 28:55

No. So if you do a 1031 exchange, the nice thing is, is obviously you’re deferring your taxes, but you’re also deferring your recapture. So you’re referring you’re you’re deferring your capital gain and your recapture. So you could do a cost segregation study, take your depreciation, do a 1031 exchange into a new property and you’re just kicking that can down the street and not having to pay any of that recapture or capital gains. And so they actually work very well hand in hand. The other thing is some investors, especially with this bonus period that we’re in right now, you know, even if you sell your asset, let’s say I sold my I sell an asset in January, and I sell it for you know, a million dollars in gain, I sell for a million dollars, and I’m going to have this big tax bill at the end of the year. Well, I’m gonna go buy a new property and do a Cossack study and get a huge write off, and that’s going to offset my gain on that sale. And so even if you do want to cash out, if you have other investment properties or you plan on investing in other investment properties, you can do the cost take from one building to offset the gain from it. Another. And so that’s another strategy that oftentimes we’ll see utilized is just, you know, if they don’t do a 1031 exchange, maybe they do caustic studies on some of their other holdings, to create that massive deduction to offset the gain from the sale of an asset.

J Darrin Gross 30:17

Realizing that, you know, if you are rolling out of one and into another, and you’ve got the cost segregation study, you know, option available to you, which obviously would just, you know, with that much of depreciation, how much, you know, it almost begs the question of why do the 1031? I mean, I guess, you talk to your accountant to figure out, you know, which ones, which one’s better, whatever. But,

Erik Oliver 30:46

Yeah, but you’re right, it’s a great opportunity to pull money out of that deal, and have this massive deduction to offset it with so you’ve got options, which is nice.

J Darrin Gross 30:59

So, who is this most ideal for? Is it? Is it strictly the big guys or I mean, ordinary investors or? Or, everybody?

Erik Oliver 31:11

That’s a great question, because the answer is changed. And so we hear quite oftentimes, people will talk to their CPAs. And their CPAs will say, hey, this only applies to those who are buying, you know, large office buildings or large apartment complexes. And that was true prior to this bonus, depreciation, bonus, depreciation has really opened cost segregation and depreciation up to all investors. And so we’ll work on we do single family homes where they bought it for 150,000. And, you know, the study might cost you 2000, but you take $150,000 home, you get 30%. Of that, that’s a $45,000 depreciation expense. Let’s say you’re in a 30% tax bracket, that’s a $15,000 tax savings. And so you know, pay to to save 15, I’ll do that all day long. And so we work with anything from single family rental homes, up to, you know, large, larger office complexes, ski resorts, golf courses, etc. So, it really has, like I said, this bonus depreciation, and I’ll just add to that bonus, depreciation isn’t going away at the end of the year, it’s just simply being reduced down to 80%. For 2023. In 2024, it drops to 60%. So it drops 20%, every year after this year, until zero and 2027. So even next year, in the following year, you know, at 80% 60%, those are still really good bonus years, where you can buy assets, take your bonus depreciation, and, you know, pay very little taxes. So it’s really opened the door for big investors, small investors, you know, everybody really, right.

J Darrin Gross 32:53

And, you know, we talked about new construction, we talked about, you know, buying an existing building, is there any issue if this is the first time you’ve heard of cost segregation, and you’re, you know, working with your account now, and you’re going to IO what? And, you know, you say, Wow, I heard about this cost segregation study? Does it work on something that you’ve had for a while? Or is there a number of years where, like, you know, obviously, if you’ve, if you’ve had a building for 25 years, it’s probably not a good thing. But if you’ve had a building for, you know, two or three years, is it still an opportunity?

Erik Oliver 33:33

Yeah, absolutely. So there’s something called a look back study. And we do those all the time, especially this time of the year, because like you said, you go get your taxes done. And then your accountant says, Well, you owe X amount in taxes, and you’re like, wait, wait, wait, what? You know, you if you have existing properties, it’s worth getting the numbers run, because the IRS actually allows you to go back and do a look back study. And take all that missed depreciation that was available to you from 2017 1819 2021. When you own the property and 20 and 2017. You get to take all that missed depreciation and drop it on your current tax return without having to amend any prior years. There is an additional form that needs to be filled out. And we actually provide that as part of our service most kossei companies do. It’s a 3115. I shouldn’t say most of them do. A lot of them do. Some of them don’t. But there’s a 3115 tax form that basically says, Hey, IRS, I bought this property and 17 I’ve been taking my standard straight line deduction for the last four years. It’s now 2021. And I want to drop and I want to change my method to accelerated depreciation. And here’s the difference in those numbers. And you get to take that large deduction on your 2021 taxes again, without ever having to amend a prior year’s return. So good news is for your listeners is even if you filed your 2021 taxes because you know, those are due here in a few days. He’s, even if you if you file them or you’ve extended, you can still go back and do cost thing. Now, it doesn’t have to be done in the 2021. calendar year, we really have until October 15, to finish Cost Segregation studies for the 2021 tax year. So it’s, it’s a great opportunity. If you’re paying taxes and you own real estate, you should definitely look into cost segregation, because the market or the environment we’re in right now is so favorable to real estate investors that you should be paying very little taxes if you own real estate and can absorb those deductions.

J Darrin Gross 35:35

Yeah, and I can give a testimonial, I haven’t worked to you with you specifically, but just the whole nature of the cost segregation study, I did do one. And it was exactly that my accounts. Well, you know, you did this, and then they you owe this much. I’m gonna like, Why do I owe how much you know? And, and so we did a cost segregation study in that, like that little bit of investment, more than was, you know, the benefits were far exceeding the costs. And it totally eliminated the, the big tax bill that we’re looking at. So definitely, I’m a big fan of and, and encourage anybody who has not to, you know, check it out? And and, you know, if you don’t know any, I mean, get a hold of Eric, I mean, I gotta say, you’re, you’re one of the most clear spoken. People I’ve met. I’ve talked with him about cost segregation. So I think that’s a great, you know, great opportunity for anyone who’s gonna ask you, you know, just with the compressing cap rates, and just the the competitive market that we’re in? Do you see that cost segregation studies, and like, interest only financing are like really kind of some of the keys to really making these these properties cashflow? Or is, is that just more of like, just the nature of just the market are?

Erik Oliver 37:08

Well, you know, I, you know, we’re all seeing those, those cap rates come down throughout the country. And I think that cost segregation can play a significant role in freeing up that cash flow. You know, if you think about again, let’s just throw some numbers out. But if you buy a, let’s just say you buy 1,000,002, you know, an office building for 1,000,002. And let’s say land is worth 200,000. So you have a million dollars worth of depreciable basis. If you do a Cossack study and we create a rough on average, we typically segregate around 30%, like I said, so if we segregate 30% Of that million, or 300,000, into short term assets, and you can write that off in the first year 300,000. And let’s say you’re in a 30% tax bracket, that’s 90,000. So that you know, on 1,000,002, what’s the downpayment on 1,000,002, I guess, if you put down 10%, who honored

J Darrin Gross 37:58

or 20

Erik Oliver 38:02

might get, you might get 90,000 of that back in the first year by doing a caustic study. So you’re getting half of your downpayment back by simply doing the cut. Now, that’s again, assuming you can absorb those deductions, and you have the income coming in from out of that property or other properties. But it’s a huge opportunity. It’s essential right now, I think, for investors, and we work with a lot of syndicators, who, you know, they use this as a way to go out and drum up money to say, Hey, give us some money to put down on this asset, and we’re gonna give you almost half of that, if not more than half of that, because we’re going to leverage it right, we’re going to leverage this deal, we’re going to give you a great portion of that back as a write off in the first year. And so use it as a way to help drum up money or for yourself to lower tax bills. I think

J Darrin Gross 38:54

it definitely seems to be one of the kind of lubricate and you know, just make it just makes the deal really work, you know, having the the write off there and, and so that’s good. If you had to kind of guess, is there a sweet spot for you know, the type of property strategy that a investor may have that the works best or that you seem to work with most?

Erik Oliver 39:22

Sure. So, you know, I mentioned you know, everything from small single family rentals to large office buildings, you know, the smaller single family rentals, you’re not gonna get as big a return if there’s kind of a basement on what we have to charge for these studies. So you know, you might pay two and save 10 or 15. But we want to see at least a seven to 10x return and so anything over you know, a million dollars even 500,000 That’s really where we start to see this just explode. You know, you might pay us 4000 For a study or 5000 for a study on a larger building, but if you’re saving 300,000 in taxes and he wants to What’s the rate of return there? Right? I can’t do that math in my head, but it’s huge. So, you know, I would say that the ideal properties for caseta are usually over 500,000. But even on those smaller ones, it’s worth having the numbers run, because there’s still significant savings in some of those smaller assets.

J Darrin Gross 40:18

No, agreed. Hey, Erik, if we could like to shift gears here for a second, my day, I’m an insurance broker, and work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if we can avoid the risk, 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 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, and frame the question in a way that the, you know, fits their their situation could be there, your clients, your investors, tenants, the market, you know, tax rates however you want. But identify what you consider to be the biggest risk. And again, for clarification, while I’m a 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, Erik Oliver, what is the biggest risk?

Erik Oliver 41:29

Yeah, you know, for me, as you know, I didn’t have any investment properties when I started doing cost segregation. And so by working with clients all the time, and seeing the value of owning real estate, I’ve started to get into real estate myself. And I think the biggest risk for me is, I went back and forth, do I need a property management group? Do I not? Do I manage these myself, you know, I actually live by my investment properties, I can don’t step over what is the saying don’t step over $1 to save a penny, you know what I mean? Let the experts do it. There’s a reason that they’re property management experts, there’s a reason that your CPA should be filing your taxes, and you shouldn’t be doing it yourself unless you know what you’re doing. And so I think, the biggest risk for me that I’ve had to learn just that let the experts do it. And I see it all the time in my industry, where people do their own taxes. You know, I’ve seen people who make, you know, in the millions of dollars and have very sophisticated tax returns, and they’re doing their own taxes on TurboTax. Because they don’t want to pay a wealth advisor or a CPA who has the experience. And I’m like, what you’re gonna pay that qualified CPA who understands real estate to do your taxes, you’re gonna get back tenfold in the amount of deductions. And you know, the left the reduction in your tax liability. And so I think, if I can just share one thing, and that is surround yourself, you can’t be an expert in everything, right? And so know where your faults are, and be humble enough to say, I’m not a tax expert, or I’m not a property management expert. I’ll tell you just a quick story. I learned that the hard way. My very first investment property was actually when I lived in Virginia, I moved out of Virginia, I moved to New York. And I said, I don’t want to sell my house. I’m going to just rent it in Virginia. And I’m going to do it myself. So I put an ad out there I met with some potential tenants, I found some they seem like the nicest people in the world. I didn’t know I should do a background check. I didn’t know that I should run their credit. There’s my first gig, right? So Micah, they’re nice. They sat down, they talked to my kids, we had a great conversation. They rent I rent the house to him, I moved to New York. And I never hear from him again, right? They paid their rent, the first two months. Great on time was perfect. But then the people that kicked them out of their old place started garnishing their paychecks. And that’s when they stopped paying my rent. And had I done a background check. This all would have showed up but I didn’t want to pay the 10% management fee. I’m like, I want that for me. And so surround yourself with I didn’t know what I was doing. I thought I did but I didn’t. And I should have been humble enough to say, Erik, you don’t know what you’re doing. And so humble yourself and say, what are you good at? And you’d be the expert in that. But we can’t be experts in anything and in everything. And so surround yourself with people who are good property managers, good lenders, good CPAs good attorneys, good insurance agents, right? And let them be the experts and take their advice and be okay paying for that expertise, because you’re going to come out ahead in the long run.

J Darrin Gross 44:43

In there, done that. So baptism by fire, right. But I appreciate you sharing that. Erik, where can listeners go if they’d like to learn more or connect with you?

Erik Oliver 44:56

Absolutely. So you guys can go to our website. Our website is just www dot cost CLS T seg s eg authority.com. My contact information is on there, feel free to use me as a resource we don’t build by the hour. You know, if you have a depreciation question, please call me send me an email. We do free benefit analysis. So we’ll look at your property before you ever engage us to do a study and say, Hey, this is what the study would cost. This is what your potential tax savings would be. And then you can work with your CPA or we can even get on the call with your CPA and say, Hey, based on their whole tax situation, does cost segregation makes sense this year? It’s never a matter of, should I or should I not do cost saying it’s just Is this the best year for me to do costly? Or should I hold on to that? And do that play that card in a future year? And so, again, we’re kind of a niche accounting firm, where this is all we do. We don’t do tax returns. Don’t reach out and ask me questions about child tax credits or earn business income because I don’t know the answers to those. But use this as a resource. If you have any depreciation questions, please use us as a resource.

J Darrin Gross 46:09

Awesome. Erik, I can’t say thanks enough for taking the time to talk. I’ve thoroughly enjoyed it, and learned a lot and I look forward to doing it again.

Erik Oliver 46:20

All right, sounds good. Well, thank you for your time. I really appreciate it.

J Darrin Gross 46:23

Announcer 46:42

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.

ASC 842 Commercial Lease Accounting with Lauren Covell – CRE PN #350

Lauren Covell 0:00

842 changes the game and says all leases regardless of classification should be on the balance sheet in the form of a right of use asset or lease liability. And so what is happening is that historically under 840, the leasing obligation would be just this tiny, tiny, tiny piece of the balance sheet. Now, under 842 financial statement users have way more transparency into the present leasing obligations of that company by bringing everything on the balance sheet in the form of that right of use asset and lease liability. And then there’s an enhanced disclosure requirement as well. So it was a very, very big change in the accounting role, but also very warranted, because most companies besides what payroll is usually the first expense, but besides that, second is usually real estate related expenses.

Announcer 0:55

J Darrin Gross 1:14

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 Lauren Coville, Lauren is a CPA and the Vice President of Finance at Occupier. occupier is a lease management software solution, empowering real estate teams, finance professionals and tenant rep brokers to collaborate on the entire lease lifecycle, and maintain compliance with lease accounting standards. And in just a minute, we’re gonna speak with Lauren about how new lease accounting standards are impacting organizations and their care processes.

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 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, Lauren, welcome to CRE PN Radio.

Lauren Covell 2:44

Thank you so much for having me today.

J Darrin Gross 2:47

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

Lauren Covell 2:56

Yeah, of course, I started my career in PwC (PricewaterhouseCoopers LLP) and the audit practice and transitioned into a consulting role. And from PwC, I then went to a more boutique consulting firm where I helped firms with shoring up their monthly closed process, making it more efficient, more scalable. And then while I was there, I had a whole voice of clienteles that we’re transitioning into the lease accounting standard ASC 842. So based on my experience with that the opportunity to come work for occupier then presented itself and it was really a perfect fit for me based on my background, and startups being the head of finance startups and then also my risk accounting background. I have been with Occupier for almost a year.

J Darrin Gross 3:47

Okay? No, that’s, that’s great. And so but you you’ve worked also you’ve made it sound like you’ve been working with startups and in the real estate accounting, the lease. How long did you spend focus on the lease accounting?

Lauren Covell 4:05

Yeah, all in all, so when I was at PwC, we had a ton of clients that were transitioning to the standard, and then also at my consulting firm to and then in the private industry world, I had to transition to 842 and and now of course, we’re gonna occupy around it all the time. So I feel like you know, all in I’ve probably done 20 to 25 842 implementations, which is quite a bit.

J Darrin Gross 4:36

Okay. And for the uninitiated or the the people that aren’t aware, can you explain what the 842 is and what the prior accounting method was? Or there was a what it was before you convert it to the 842?

Lauren Covell 4:51

Yeah, definitely. So historically, only finance or capital leases would be on a company’s financial statement balance sheet 842 changes the game and says all leases, regardless of classification should be on the balance sheet in the form of a right of use asset or lease liability. And so what is happening is that historically, under 840, the leasing obligation would be just this tiny, tiny, tiny piece of the balance sheet. Now, under 842, financial statement, users have way more transparency into the present leasing obligations of that company, by bringing everything on the balance sheet in the form of that right of use asset and lease liability. And then there’s an enhanced disclosure requirement as well. So it was a very, very big change in the accounting role, but also very warranted, because most companies besides what payroll is usually the first expense. But besides that second is usually raw sent right in expenses.

J Darrin Gross 5:57

Okay, got it. And like any kind of a transition, it’s changed. And I’m assuming that it’s disrupting the way businesses have looked at it is is how is this a requirement? Or is this more of a, an opportunity or an option that that firms can take advantage of?

Lauren Covell 6:27

Yeah, so it’s a requirement. But I also think it’s a great opportunity to create more sustainable, scalable processes. Because the current processes under a 40, a lot of our customers are in this very manual, labor intensive, just segregated management of the real estate portfolio, there can be different Excel files that are tracking different lease level details and critical dates, different things that you need in order to manage that lease. And then the finance team is just kind of the end all receptacle of all of this information. And they’re trying to sift through everything that they need to in order to be compliant with this new standard. And so because the State of the Union for most people are living in this Excel file world, that even though it is a requirement, I think it’s also a great opportunity to start looking at your processes and enhancing what you currently have.

J Darrin Gross 7:34

Makes complete sense. So let’s talk about occupier is occupier a, a one stop solution for this. How does it? Is it an application? Is it a subscription? Is it an accounting software?

Lauren Covell 7:53

Yeah, so Occupier is a web based application. And it’s just like a normal software application that you would run for other parts of your business. And it totally is a one stop shop. And my favorite thing about occupier is regardless of your role in the lease lifecycle. Because lease is one of those areas that touch so many people can touch it touch legal real estate, HR, finance, of course, but financial planning and analysis, internal audit. So there’s so many people that need to be involved in leases. So my favorite thing about Octa is it allows everyone to collaborate under one solution. And so we have three main modules on our tenant. So we have a site selection. So a lot of customers that are high growth that they’re planning to expand from five to 10 to 20. You know, whatever expansion plans, I have the leverage occupied to manage that site selection process. Once they’ve signed that lease, it then feeds into our lease administration tool, which will summarize everything that you need to know for that lease not only rent schedules, critical dates, but also clauses too. It does it on a macro level too. So for instance, if you wanted to, for instance, with some snow that happened on the east coast a couple weeks ago, a lot of our customers were going through occupied sand. Okay, snow removal clauses, which locations do I have to physically shovel the snow versus the landlord is required to do that. So we’ll summarize everything in a very friendly way. And then the last piece of it is taking all the information within lease administration feeds into lease accounting, so that your transition from 840 to 842. If that hasn’t happened yet, can be extremely seamless. And then even if you have transition, we can still generate all of your monthly journal entries and your financial statement disclosure reports and Everything that you need to be compliant with ACA 42.

J Darrin Gross 10:04

Got it. So then it the end of the day, the end of the quarter end of the year are all of the is the information that occupier contains then migrate? Does it migrate on to the the accounting of the the the owner or whoever it? Is that needs that further owner? Or does this? Does the occupier platform provide an opportunity for accounting? You know, in total?

Lauren Covell 10:35

Yeah. So basically, how we have is we have based on monthly reports. And so if you wanted to pull your journal entries for the month of February, you could do that, and pull everything and then do with that within your ERP, or your QuickBooks, NetSuite, whatever you’re doing to manage your financial transactions, you can be exported from Akbar and import it into that software. Okay. And goal is really to automate a lot of the accounting side of that,

J Darrin Gross 11:08

Yeah, no, I can appreciate the anything automated with accounting to me as a

Lauren Covell 11:14

Right, oh, my gosh.

J Darrin Gross 11:16

The brain cells lost trying to figure out how the stuff to make it work.

Lauren Covell 11:20

Gosh, the number of tabs that I’ve seen from our customers, I mean, it’s basic, massive Excel files come over to us. And just the risk of manual error is just so apparent, even if you think you reviewed this data month over month, there’s still always a high likelihood of something, something being buried in there, some sort of formula or human error, or whatever it is,

J Darrin Gross 11:49

I was gonna ask you so that the your clients when they come over, and you mentioned these spreadsheets, or most of these spreadsheets? You know, one off that they’ve created for their own use? Or Is anybody following the same?

Lauren Covell 12:02

No, everyone has their own template that they’re using. And what’s interesting is that sometimes the real estate team, like different parts of the organization will have different spreadsheets. And then what happens is, when we bring everyone together, you realize that some of those details were inconsistent. And then it gets to be into a very lovely conversation. Well, which one’s right? And you kind of have to duke it out, but not really, but you know, and so definitely inconsistent and maybe not updated that timely. And everyone’s walk into the beat of their own drum.

J Darrin Gross 12:44

Yeah, no, I can see that. I’ve created my own misery many times with custom spreadsheets that don’t add up, even though it’s in the in the moment. They were right on, but explain it later. Up here, but don’t blink. So it’s an app and is it to annual subscription? Or how is it? How do you guys

Lauren Covell 13:13

usually an annual subscription, of course, we’re open to the idea of having longer term subscriptions as well. But most of our customers are on an annual subscription.

J Darrin Gross 13:24

And then, as far as the the platform? Do you guys help with the migration of the data? Or do you basically introduce the Okay,

Lauren Covell 13:35

we do I think that that’s one of our biggest differentiators actually, that, from my experience, I’ve used other lease management software providers, and we had to do a lot of the legwork. And to be honest, accountants are not the best at reading leases. Because just that’s just not what we do every day. And our customer success team is absolutely wonderful, very hands on that. As soon as you provide all the leases to us, we will go through the data extraction process, where we basically extract all of your clauses, and then start to build your rent schedules. Of course, it’s a more of a collaborative process to because there’s going to be things that we just don’t know, like, Hey, when did you gain access to x, y, and z space? So very collaborative, but we’re also taking a massive step forwards and handling that implementation for our customers.

J Darrin Gross 14:33

Got it? So if you were to summarize this specific problem you guys solve is it? Basically one one stop? Is it all of that leasing stuff in one?

Lauren Covell 14:45

Yeah. Yeah, our company motto is kind of like where real estate happens online. So ditching the spreadsheets and making sure that everyone is collaborating over one solution so that everyone’s on the same page. She, even one of the things that I’ve had troubles with too is the finance team sometimes is the last person to know. Excuse me. My allergies are so terrible around this, I’m here. So the finance team is oftentimes the last person to know. But now, they’re in the know. So whenever there’s a new lease or modification, they’re getting updated in real time.

J Darrin Gross 15:35

Got it? Is it really the adoption of the standard? The 842? That’s really kind of made, occupier you know, more of a need or, you know, previously, prior to 842 was occupier was her need for Occupier?

Lauren Covell 15:56

Occupier was definitely a need before this, because the state of the union, again, is so bad. Even some customers, I read that 60% of lease agreements are stuck in a drawer somewhere, they’re not even scanned in anywhere. So you can imagine the pain that these people were going through during COVID when they’re trying to negotiate their rental agreements, that if you don’t have that digitized, that’s gonna be a very painful process to sit there. So the need for occupier or always existed, but I think the push of the transition 842 just really enhanced the need for that.

J Darrin Gross 16:40

Got it. And as far as the the clientele that occupier serves, obviously anything to do with leasing? Is it primarily the brokers and the landlords that you’re the investors that you guys find that are most interested in? Or are you more of a prospect or the property managers and in the tenants themselves? Also?

Lauren Covell 17:11

Yeah, we have two main modules, we have a tool for brokers to help them manage all of their clients, basically, more of the site selection piece, then we also appeal to tenants as well. And so these could be retail companies or companies with a lot of office spaces that need to get their leases under control.

J Darrin Gross 17:40

So it as far as the, the the field here, is there a lot of competition in your space?

Lauren Covell 17:50

There is in different segments? And so there’s no great solution that truly does it end to end, like we’re trying to do, we’re trying to make the best product for each role in the lease.

And lifecycle versus you may really, really good at least administration, but is not great for the other sides of that least lifecycle. So we’re trying to be the best for every single person and involves.

J Darrin Gross 18:26

Got it? And and going back to the who you serve? Is it more of the or what’s what’s like a standard or not a standard? What’s your sweet spot as far as like a client size? I mean, if it goes got one location, I’m assuming that may not necessarily be as good a fit as if they’ve got 100 locations?

Lauren Covell 18:46

Yeah, no, I think our sweet spot has definitely changed. But the one consistent read that I found it in our customers is that they are high growth, that they may only have two or three leases right now. But they have really big expansion plans over the next two years. And they’re trying to establish a robust lease process right now before it gets way out of hand. Or maybe on the other end of the spectrum, they have 300 leases, and they definitely need a way to be tracking all of these things in a much better manner versus our Excel file. But a lot of our customers are high growth.

J Darrin Gross 19:30

And even with that, I mean, you know, I’m constantly seeing like these drugstores come to mind from a standpoint of just there’s a new one on every corner and they’re constantly you know, the lease in the deal flow. There’s always a one for sale for, you know, a triple net lease kind of thing. You Is there a you know, obviously you said high growth, but I’m just thinking like, if it’s not high growth, is it something that you could work with from or a prospect that has a lot of locations would be, you know, what would be? I mean, obviously, high growth, I get that. But if I didn’t if I’m a mature business that’s growing, what would be like an ideal number? Yeah.

Lauren Covell 20:13

So, you know, to answer that, I think, from a company’s perspective, you want to evaluate if your company has the necessary resources from a capacity perspective, and also an expertise perspective. So even if you have 10 ways we serve 10 leases, we certainly have customers with 10 leases. But when you’re looking at the capacity as far as time do you really want your team focused on being ingrained in these Excel spreadsheets? Versus Do you want to save that time and utilize Akbaruddin to streamline those processes, and then from an expertise, to be quite honest, now a lot of finance people want to be experts in ACA, according to and they usually don’t have the time to do that either. And so you can also leverage an accounting software to kind of pick up some of those missing expertise gaps, too. So depending on you know, really the need in my mind to think that the value of accounting software, or at least administration software is going to come to fruition is like 1015 leases, you really start thinking about it?

J Darrin Gross 21:27

And is there any industry that you find is more? You no more desirous or that’s more of an early adopter?

Lauren Covell 21:39

No, no industry? You know, we’re, we’re kind of agnostic on industries where our software is so flexible, that you can create a lot of custom configuration that suits a lot of different industries.

J Darrin Gross 22:00

And are you limited to the US are you worldwide are

Lauren Covell 22:05

No, we are worldwide. So we do support. ASC 842 is the US standard. We also support IFRS 16, which is the international accounting standard as well. They had to adopt a few years back,

J Darrin Gross 22:24

I was going to say that you see everything you’ve talked about from accounting, I’m currently working on my own taxes with my accountant and stuff. And it’s just like, just an aggravation, it feels like I mean, I said all its stuff made sense to me, it’s like not make it sounds like you’re trying to make sense of it. But to have one format, where you could easily pull it out and and regurgitate it or provided whoever needed it. I think they just it streamlines a lot of I mean, removes the friction makes the the or takes away the frustration, and makes it more user friendly. I would think that’d be a win for everybody involved.

Lauren Covell 23:02

So yeah, you know, I loved we had an onboarding call with one of our customers this week, and our customer success associate said to our customer, hey, my job here is just to make your life a little bit better. And that’s why I come to work at occupier because I know I’m making your life just a little bit better, just by maybe removing some of the burden that you have, or saving you five hours a week or month, whatever it is, I’m helping you in some capacities. So I thought that was pretty cool.

J Darrin Gross 23:35

No, I’m sure and also that employee that, you know, that’s their, their mission is to, you know, make your life a little bit better, as opposed to you

Lauren Covell 23:50

know, our customer success team is wonderful.

J Darrin Gross 23:53

That’s awesome. Hey, Lauren, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I like to work with my clients where I try and work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically consider. The first is we look to see if there’s a way we can avoid the risk. If we can’t avoid it, we look to see if there’s a way we can minimize it. And when we can neither avoid nor minimize and we look to see if there’s a way we can transfer the risk. And that’s what a an insurance policy is. It’s a risk transfer vehicle. And I like to ask my guests if they can look at their own situation. Could be clients, the market, political situation, you know, COVID however, whatever that might be that that you’d like to to take a look at and frame. The question is with regards to risk. And I like to ask my guests if they can do that and consider what they can or identify what they 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 with that, if you’re willing, I’d like to ask you, Lauren Covell, what is the BIGGEST RISK?

Lauren Covell 25:19

The biggest risk in my mind is understating the level of effort required to maintain compliance with ASC 842, a lot of people are just rushing to get implemented under a 842. But really, in my mind, it’s a race to the start, that where the going gets tough is maintaining that compliance. And if you don’t have those processes established, or if you’re not leveraging software, you know, you’re going to open yourself up to a lot of risk. And so without, if you can, maybe give the standard a little bit more credit, then you can think about, okay, where do I need to improve my processes? What people do I need, what resources do I need in order to maintain compliance with ASC 842. Because what got you to comply with the old standard is not going to get you where you need to be, as we talked about, there’s massive risk in manual error, even if you are certain that everything is accurate, there could be a fat finger, that will be a formula reference error, there are so many things that can go wrong in these massive XML files. And then you have the risk of not interpreting ASC 842 correctly, that if you don’t have the technical expertise in house, that’s also going to be a pretty big risk. And I think, you know, of course, when you think about the insurance policies, you’re never going to absolutely move that risk to someone else besides the finance team or transfer it right. But there are ways that you can mitigate that. And I think the biggest way that you can mitigate is start thinking through your processes. And whether or not you should be leveraging software to help you from a capacity standpoint, really helps you like leaps, make leaps and bounds in your transition to 842. And also, obviously, make sure that you’re compliant with everything.

J Darrin Gross 27:27

Anybody that’s, that’s a not a fan of easy to counting, and I don’t know what to say, but, but yeah, makes a lot of sense to me.

Lauren Covell 27:40

Yeah, yeah. The, I think it’s one of the most underestimated standards. But once you get into the nitty gritty, you start to realize, Wow, this is extremely complex. And it’s going to take my team double the amount of time than I had originally had a lot into this. So that’s why I say that’s my biggest risk is understanding the level of effort because if you give it the proper treatment, then some of this can be mitigated. A little bit easier than waiting until the last minute to do all this.

J Darrin Gross 28:17

Ya know? Hey, Lauren, where can listeners go? If they’d like to learn more connect with you?

Lauren Covell 28:25

Yes, so you can reach out to me directly at Bourne occupier.com. You can also go to Occupier.com. We have a wonderful lease accounting resource hub, they’ll find an ASC 842 checklist, a Lease Acounting memo template that will help you think through your transition. I also teach webinars pretty frequently, like two to four times a week, I go through a basics, 842 course and also an advanced course. And the feedback from those webinars has been overwhelmingly positive because we go through examples and you really start to learn the standards a little bit more. I like to teach by doing so. Those are really fun to be a part of as well.

J Darrin Gross 29:09

Oh, that’s great.

Lauren Covell 29:11

Yes, we also have a YouTube channel as well. That I break down every nitty gritty part of 842 in bite sized increments.

J Darrin Gross 29:23

I gotta tell you, God love YouTube and the instructional video it’s amazing what a resource it is. And, and I’m sure anybody listening looking for help on 842 would be wise to check out your channel there and and learn some more. Hey, Lauren, I want to say thanks for taking the time today to talk. I’ve enjoyed it. I’ve learned a lot and really the whole kind of the 842 sounds something that I necessarily in that familiar with, and you really did a great job of explaining it and Uh, I can see how Occupier would be a great help for anybody. And with that I we can do it again soon.

Lauren Covell 30:08

Yes, I hope so.

J Darrin Gross 30:11

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 30:30

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

Small and Midsize Multifamily Portfolio Investments with Omni Casey – CRE PN #349

Omni Casey 0:00

I kind of define investors in one of three categories cashflow is that second tier that cashflow, investing for financial freedom. The income is really what you’re looking for the first tier is someone that’s doing it as a profession, you know, that might be a broker that might be a fixin flipper or a wholesaler. But that financial freedom aspect is really cashflow dependent. And then the third category I put us as generational wealth once you maybe don’t need that cash flow or that financial freedom, then you can do bigger things that are probably more tuned into equity appreciation, path of progress and things like that. And so I do all my investments in one of those three categories. And that helps me at least to just clarify Alright, not every investment is going to be across the board. Everything

Announcer 0:43

J Darrin Gross 1:02

Today, my guest is Omni Casey. Omni has been a real estate investor, broker and coach for nearly 20 years. He invest in small to mid size multifamily, cash flowing real estate from Virginia to Hawaii. And in just a minute, we’re going to speak with him now about investing in cash flowing small to mid size multifamily properties.

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’d like to see how handsome Our guests are, be sure to check out our YouTube channel. And you can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe with that, and I want to welcome my guest Omni Welcome to CRE PN Radio.

Omni Casey 2:22

Happy to be here. Big fan of the show. Thank you for having me on.

J Darrin Gross 2:26

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

Omni Casey 2:35

Absolutely. So I My story started in Hawaii, I’m born and raised in Hawaii, that’s where my family is grew up there. Fairly entrepreneurial family, father owned construction, roofing businesses, my my mother had home based businesses and allowed them the flexibility to kind of create a life that by design and and my mother homeschooled us, and that’s something that she wanted to do. There’s eight of us kids. So it sounds crazy for someone who wants to homeschool eight kids, but they were able to do that because they kind of controlled their, their, their income and their time there. And I didn’t know what I want to be when I grew up, I just knew I didn’t want to be an employee. They kind of set that mindset for me real estate wasn’t really a part of the discussion, or picture but I did love business. Fast forward a few years found rich dad poor dad as a book and realize, okay, business is what it is and eventually got into the real estate side of things after a few other businesses and got in as a real estate investor, and then became a broker coach trainer, you know, over the last 20 years as well helping real estate agents and our clients investors as well. So that’s been my focus and that’s kind of how I became alumni for the investor guy and for the last few years.

J Darrin Gross 3:53

Awesome. And I’m sorry, how long did you say you’ve been investing?

Omni Casey 3:57

About 20 years now 20 years?

J Darrin Gross 3:59

Okay. And did you start in multifamily? Or did you start in single family or what asset class did

Omni Casey 4:04

I did not. I took a very meandering path probably I probably tried every single type of real estate investing there is started out with whatever I can afford and I had no money so I couldn’t afford much. You know, but lucky enough to find the right partners and the right and really mentors as a young kid that was willing to guide me or let me tag along for the ride and learn so started in Hawaii on the condo side of things and I quickly realized that Hawaii was outpacing my available cash flow or available funds and learned how to invest long distance and and so I’ve done condo rentals short term rentals multifamily I’ve done wholesaling. I’ve done fix and flip. I love the burst strategy. I’ve done mixed use. So I’d love to say I picked one path and stuck with it for the last 20 years but I’ve I’ve dabbled in just about everything else.

J Darrin Gross 5:00

Got it. And for our listeners and kind of get some perspective here, you currently now focus on the small and the mid sized or small to mid sized multifamily. I’m curious, what do you define as small? And what’s the differentiation between small and midsize? What? What’s the real

Omni Casey 5:21

Great question and I don’t know if it’s the official definition, but how I define it. Small multifamily is two to four units, that’s the residential side of multifamily. And that really defined by the the debt that you can put on that, but 30 year fix is much easier when you’re in that space, and then anything over five, and I say five to 20 is mid size for me. And basically things that you can take down by yourself, I invest just me and my wife got three kids. So we don’t have a big company by any means. And we don’t take on many partners or syndications or things like that. So things that we can do within our scope, versus taking down a you know, 300 unit building, you typically need a big syndication or some sort of fund to be able to do that.

J Darrin Gross 6:07

No, I hear you loud and clear. That’s kind of a mirror of what we do. So let’s talk about the cash flowing. You know, a lot of people they get all excited about real estate. There’s definitely tons and tons of upside. You know, from from all angles, I mean, the tax advantages, the asset accumulation to the cash flow. But I’m curious, from your perspective, in your experience, when you acquire properties, are you able to experience cash flow from day one? Or how are you? How do you find that, that that starts and are where when do you find that you’re most likely to have your positive cash flow start?

Omni Casey 6:59

Yeah, absolutely. And so that the cash flow side of things is I kind of defined investors in one of three categories. cashflow is that second tier that cashflow, investing, for financial freedom, the income is really what you’re looking for the first tier is someone that’s doing it as a profession, you know, that might be a broker that might be a fixin flipper or a wholesaler. But that financial freedom aspect is really cashflow dependent. And then the third category I put us as generational wealth, once you maybe don’t need that cash flow or that financial freedom, then you can do bigger things that are probably more tuned into equity appreciation, path of progress and things like that. And so I do all my investments in one of those three categories. And that helps me at least to just clarify, alright, not every investment is going to be across the board, everything. And so when I focus on cash flow, I go all in on the cash flow aspects of it. And I typically do find something that is either already rented out and and I’m able to inherit tenants or a few tenants as well, or, really, the majority of what we do now is what we call portfolio repositioning. And so we actually buy portfolios, from small Mom, mom and pop shops, and so someone that’s been doing it for the last 2030 years, and they’re thinking about it ready to exit, you know, they’re depreciated all their assets down to two to zero at this point. So they’re not seeing the same return. Average mom and pop that we work with is anywhere between 10 and 20 properties. And those properties are mixed between single family and smaller mid size multifamily. And the reason I like this one, it’s it’s a different strategy than most are working on and allows me to scale that up at a higher volume versus buying one at a time is just that’s a lot of transactions to deal with. But if you look at it from the perspective of a mom and pop portfolio landlord, there’s, they typically have great investments and they have some headache investments, right? And there’s there’s a mixed batch of them, we all have that, right? We all have like if I could just get rid of this one, right? And but unfortunately, if they’re thinking about exiting at some point, they’re like, I could definitely exit my good ones. I’m worried about exiting and being stuck with just my my bad properties or my headache properties. And then the other option or obstacle that many of these landlords are coming up against is, at some point, they paid off debt, or maybe they bought them cash, and then they decide to pull out equity. But you know, maybe they’re smaller properties and you can’t get a loan on just one small property. So they say let’s just do a portfolio loan across my entire portfolio. And they’re cross collateralized, which is is great for many people until you try to sell it. And often you can’t sell one property at a time you have to sell your entire portfolio because every single property is you know, collateral to that bank, and they want you to sell them all at the same time. So not many smaller investors are able to go buy an entire portfolio So we try to position herself where we buy out these smaller mid sized portfolios all at one time. And then we reposition them, because we are willing to buy all their good properties and their bad properties. Clearly, we don’t want to keep the bad properties, we either want to fix them up, make them better, or sell them off, you know. And so, in a typical portfolio, I would say, somewhere in the realm of 60, plus percent, we actually keep as long term rental properties, and then the rest, we look at development, whole selling them off, or fixing them up and actually selling them out. And so we keep the best parts of the portfolio, it’s a lot more work, but compared to buying 100 unit apartment building, you can’t really just go sell off one of those or two of those, you know, bad units there. So allows me to be a little bit more hands on and really create the value in a very difficult, you know, process that there’s not a lot of people in that space.

J Darrin Gross 10:56

I like the approach, you know, because like I said, the, the portfolio loan, if you if you have everything cross collateralized, it does make a little more difficult to exit in, you would be a solution there. Let me ask you, in the intro there read how you invest from Hawaii to Virginia? Are you employing the strategy with the mom and pop nationwide? Or do you try and focus in an area that you already have a footprint.

Omni Casey 11:28

So the last few years, I’ve been trying to focus more in my area, I’m in Northern Virginia now. So I’ve said the last five years, I’ve really put a heavy focus on buying more in this area. And not because it’s the best place to invest, I believe you could be successful investing in almost any market, if you understand what you’re looking for, and you employ the right approach. I have three kids. 13 is my oldest, my daughter’s nine and seven. And I started to although I’ve been talking about this for a while with them, and they understand it on paper, I really want them to have this financial education, I didn’t have things to point do things to take them to. And so most of what I do now, a huge percentage is in the Virginia, Maryland, you know, West Virginia market somewhere within a two hour radius of where I am, specifically so I can keep my kids involved.

J Darrin Gross 12:18

That’s, that’s great. I was just talking with an investor yesterday about how he had employed his kids to help with some janitorial duties, you know, and, and he’s talking about just some of the duties they were ever getting involved in. And, you know, some of the early lessons in life, it really does make you appreciate some of you know what hard work is. And that sounds good. So your strategy, basically, are you finding or airless back? How are you marketing or finding these sellers that you’re that you’re able to work with?

Omni Casey 12:55

Yeah, the reason. So I guess starting out, it was the same way that everyone marketed right at you. It’s direct to seller calls, texts, emails, postcards, build broker relationships, one of the reasons why I became a real estate agent and broker and I’m a licensed in five states, I don’t actively sell myself, but I coach people doing that. One of the reasons I got into that space was so that is one less barrier of entry to find these leads. And so that was a traditional way, I would say, since I’ve established myself in several markets. And once you find a really good team, whether it’s a real estate agent, or property manager in that area, they become your main lead source. So huge percentage of my business comes from my existing property managers, my, my goal in when I’m connecting with a property manager now is to not have them manage 1234 property, I want that I want to be their number one client. And I actually asked him that, like, what would it take for me to be the most important works person on your books, and they tell me a number and I figure out can I, you know, achieve that at some point. But my goal is to for at least my rockstar property managers to be their number one client. And once you make that commitment, or get there, every single one other person in their database or clientele, they don’t want them to sell to anyone else, they would rather sell it to you. So they know when the mom and pop is ready to exit they know before anyone else. And rather than going to the market, they say Well, let me let me introduce you to a guy, I think he can help you. And so I get warm handoff leads from my property managers more than anything.

J Darrin Gross 14:34

That’s great. I mean, you’ve kind of stepped out of the competition and before you make a comp or competitive situation. That’s, that’s great. And also I think one of the things that I think that not everybody understand is that selling a property is not always easy and there’s a lot of tire kickers out there and you can get beat up quite a bit. As a seller. A lot of the the market is full of people that are ready to work you down. Kind of thing. And and if you’re especially if you’re a less sophisticated seller, maybe you you’ve been doing it on your own and you’re not as clued in or you’re not as aware of, of what you have, or whatever there, it’s easy to to feel like, oh, yeah, does have this does have that problem does, you know and, you know, just succumb to the pressure as opposed to just have a chance to deal with somebody straightforward. And that’s, I’m assuming that you probably did a lot of the sellers, like working with somebody that they’ve been referred to, as opposed to just call it out on the open market? Do you find that to be true?

Omni Casey 15:42

I think they do. And not every seller is the right fit for, for us or for any anybody, right, some sellers need to go to market because they, they need to get max value, or whatever the case may be, and they have time, right, they have three years to parse out their portfolio and sell them off one by one. And that’s probably what they should do. For those who are whether there’s time constraints, like they gotta get, they got to sell out 22 properties in the next 30 days, right. And, and it has to be sold to one buyer, there’s not many buyers out there that can do that, you put it on the MLS, or close or wherever, it’s tough, because most buyers are not looking for that, because they’re gonna look at the portfolio and say, Well, you got some gems in here, but you have some dogs in here as well. And I just buy the gems, and no one wants to inherit the properties that they don’t really want in their portfolio, we’re able to, we’re willing to absorb them all. And just know that we’re gonna parse those out and eventually offload them to the right buyer that that specializes in that type of property. So the mutual connection that I typically have with the people I’m dealing with, is we both employ the same property manager, and it’s usually a great property manager that we both love. And so we already have this mutual connection about that person might must be smart, because he hired a person that I did as well, right? So you have that connection, and it usually works out well, not everyone falls into the category of people we work with, but we’re typically able to help them on the brokerage side as well, like, so if I can’t buy them, we’ll help them go to market and sell it as well.

J Darrin Gross 17:07

I mean, think about that. The the broker option, there’s definitely powerful, that’s, that’s good. So, when you acquire these these properties, whether they be you know, portfolio or or individual properties, do you do you look to to buy and hold? Are you trying to reposition them and sell them? You know, talk a little bit about what’s your, your big picture plan? And how you, you operate with your acquisitions?

Omni Casey 17:40

Yeah, that’s a great question and are keep revisiting and I’ve adjusted strategies over the years, and I get asked quite often, it seems like the next step for everyone is to start a syndication or a fund of some sort, right, if you get good at investing, and it makes sense to kind of go bigger and bigger and bigger. And the one reason why I’ve never done that is I don’t like the requirement to reposition and sell in five years or seven years, because most of those are tied to some sort of balloon debt of five 710 years, where you have to make a decision. And obviously, there’s value there. And that strategy worked for some, my strategy is, if I can buy it and never ever need to sell it, then then I’m okay with that not to say I don’t sell properties, I absolutely do sell properties. But if I can buy it, and never ever need to sell it, then that’s a safer investment for me, and I’m buying it, you know, for that cash flow aspect of it. And so when I purchase and that the reason why I’m seeing in this space is I’m typically able to, I usually buy cash most often and then I reposition and I refinance, do what’s called the burst strategy, maybe fix it up a little bit, add some value and pull out some equity on 30 year debt for that property. So that’s my goal is to put 30 year debt individually on most of these properties, some of them we grouped together, and the ones that just absolutely don’t fit, then we either redevelop it altogether, or we sell it off to another investor or you know, a buyer that wants to just you know, live in that single family home and it just didn’t fit our portfolio.

J Darrin Gross 19:13

So you mentioned that you do your you don’t raise capital and have any outside investors. In the initial there you were the intro there. You talked a little bit about how you started in Hawaii and kind of realize he ran out of capital. How did you overcome or what is it just been a matter of momentum that you’ve grown your portfolio large enough been able to refi and cashflow enough now that you have enough capital to go out and buy these are you are you getting any kind of creative finance strategies or or how are you? How are you doing?

Omni Casey 19:50

Great question and it is something maybe all of the above is probably the best answer. I wrote a book a few years ago never actually published it actually I’m publishing it this is the cash flow Breakfast Club and it kind of put that my story into it right of what I’ve done. And it really is stacking, it’s buying, buying these small little incomes. And then I’ve been really good about not, I think most people, the more money they make, the more they spend, like, alright, I met this income bracket now now I need to go buy a bigger house, I mean, this income bracket, I need to move to a different zip code, right. And so I think I’ve been able to convince my wife, it’s probably my biggest feat of not have that income, lifestyle creep with with our investment income increases, and all we’ve done is put that into an account and just recycled it and every single year, we’re just buying more properties and buying more property. So it has nothing to do with any active income that I have. It is my properties by my properties. And over time, they built up cash flow funds that we’re using. And then clearly as appreciation happens, if we’re able to refinance them, they still are positive cash flow, but now we have equity that we’re using to buy other properties. That’s been our main strategy. So we do a lot of what’s the called the burst strategy on the residential side, on the commercial side, it’s just like a regular repositioning or taking down a building. But typically, in a six month period, you can add value to the property, you rent it out, raise the rent, put a new tenant in there, and refinance out upwards of 75%, on average of the new higher value equity. And often that’s everything that you put in purchase price and renovation. So you get your money back in about six months. And the end result is you still have a property that’s bringing you any cash flow every single month.

J Darrin Gross 21:35

Now, that’s that’s great. And and I think the thing I’ve learned most of that is speed, if you can get in and get your renovation done as fast as possible and get somebody in there and get those higher rents. That’s actually kind of the key as opposed to some sort of lingering project that takes longer and more capital than you intended. That’s, that’s kind of a slowing death, or at least a painful situation. So Gotcha. So if you were to identify more, or say, this is an ideal opportunity, what’s an ideal opportunity for you?

Omni Casey 22:13

Ideal opportunity is is a portfolio. It’s a landlord, who really needs to sell wants to sell, maybe has tried to sell in the past and just could not find the right buyer. The majority of what I buy, still more small multifamily. So if someone has 20 single family homes, I’m typically not buying it from them. It just doesn’t fit my my strategy, cashflow strategy and portfolio. But we might have other investors in our group, you know, we currently created a mastermind group locally where people are doing similar what I’m doing, but maybe in other asset classes, but someone that has a portfolio of duplexes, triplexes, quad plexes, up to 20 units or so that’s the ideal buyer, because we can typically pay more than most buyers out there as a whole and let them exit at the exact entire time. And you mentioned, sometimes there’s creative strategies involved, sometimes there’s seller financing involved, because, you know, they take back a note and then that allows us to pay even a higher price up front, because our lending costs or out of pocket cash cost is much less.

J Darrin Gross 23:18

Well, that’s one of the things I love about, you know, the whole real estate opportunity is he’s, you know, the limits are basically your imagination a lot of time, so it’s good. He on a if we could like 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 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, then we look to see if there’s a way we can minimize the risk. And when we can either 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 risk transfer vehicle. And so I like to ask my guests, if they can look at their own situation could be their clients, investors, tenants, the market COVID however, you would like to frame the question. But take a second 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 on the KC, what is the biggest risk?

Omni Casey 24:44

That is a great question. I think there’s a lot of little things you can point to you mentioned environment and and you know what’s going on in the world. You know how that might affect your individual acid at the time or your strategy at the time, but my answer is probably a little bit more abroad, you know, because what I’ve found over the years, no matter who’s in office, right, no matter what’s going on in the world, you can be successful in what I do in real estate investing, and you just got to be willing to change your strategy, when you understand what’s happening there. So I think the biggest risk is really not understanding the rules to whatever game you’re playing. So understanding the rules is so important. And some people don’t even understand the game, so maybe not understanding the game. And then, like what I’m doing, you could actually choose to play a different game, right? There’s, there’s a very common game out there, I’m like, Well, if I can get good at my own game, no one was actually in my space playing the game that I’m playing. So I don’t have a lot of competition. So it’s actually much easier for me, because I created the own rules to my game. Once this picks up, then maybe I gotta go figure out how to create a new game. And so when you’re looking at some constants that we think are constants, and maybe they change, how does that affect vote, for example, um, a lot of talk about inflation, right, we’re north of 7%, and who knows where it’s gonna go. And, but that’s a rule, that’s a rule in the game. And if, you know, I use the analogy of gravity quite often, like if gravity changed today, like if the like, if, for whatever reason, gravity was at 50%, and people like borderlines started to float away, we would have to change the rules to how we live our day, right, we’d probably have to wear heavier clothing and you know, not jump around, or whatever the case may be. But we’d have to adapt and get used to it. And so 7% 8% 10% Inflation is crazy. But as long as we’re adapting, and we know what to do, we have to invest differently, like my investment decision today is different than it was five years ago, based on inflation. Same thing with insurance. Well, same thing with interest rates, if the interest rates continue to rise, alright, that changes my strategy, my strategy is drastically different. But understanding that all they are just rules to the game, I gotta shift what I’m doing. So it’s really a self analysis of what your goals aren’t what you’re doing, and understanding that everything that’s going on around you are just rules to a game, if you understand them, you can use it to your advantage.

J Darrin Gross 27:05

That’s, that’s a great way of looking at it, it’s a game. And I think, to me, that’s a way more healthy way to look at it, then it’s not fair, you know, the the child expectation that that, you know, should be equal for everybody, as opposed to being able to identify what the opportunities are and how you can take advantage of it. I think that’s really well put. So appreciate that. Um, no, where can the listeners go if they’d like to learn more connect with you?

Omni Casey 27:39

I have a website, it’s on nine, the investor guide.com. So they can find me there. They can find out information about the book, a lot of the free training and coaching that I offer. There’s links to it there as well. I am mostly on Facebook and Instagram. Same handle on now the investor, guide guide.com. against my will I have a tic tock account as well. I don’t do any dancing on there. But my publisher said that’s something that we got to have as well. So anywhere, if you just Google it investor guy, you can pretty much find me.

J Darrin Gross 28:10

All right, well, we will post that in the show notes. And I encourage any of our listeners to check you out and learn more. I’ve enjoyed this tremendously. I can’t say thanks enough for taking the time. And I hope we can do it again soon.

Omni Casey 28:27

I look forward to it. Thank you very much.

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 28:49

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

1
2
3
…
36
...Next Page

RECENT PODCAST INTERVIEW