J Darrin Gross Podcasts -

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

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 0:57

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

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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

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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

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

Announcer 46:42

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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.

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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

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 1:02

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

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Benefits of Green Healthy Buildings with Zach Flora – CRE PN #348

Zach Flora 0:00

There’s a various ways you can think about green and healthy buildings. And if you tend to bubble to the surface as ones that are easy for for people to look at, and one of those might just be simple as accessibility, are our commercial properties industrial office multifamily, are they in walkable neighborhoods, pedestrian accessible access to public transportation and bike infrastructure. These type of things kind of promote physical activity, promote mental health outcomes that optimal mental health outcomes. But also the use of public transit and active transportation can help reduce things like air, air pollution and congestion and just create overall greener environments.

Announcer 0:43

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

J Darrin Gross 1:03

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 Zack Flora. Zach is the vice president of market growth at the Center for Active Design, and Active Design Advisors Inc. And in just a minute, we’re gonna speak with Zach about how commercial and industrial building owners can increase their property valuations through green ins initiatives.

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 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, Zack, welcome to CRE PN Radio.

Zach Flora 2:22

Darrin, thank you for having me. It’s a pleasure.

J Darrin Gross 2:24

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

Zach Flora 2:34

Sure, absolutely. So I have been working for the Center for Active Design and Active Design Advisors Inc, on the kind of fitwel platform, which is a healthy bidding platform for the last four years. And my primary role is to work across the real estate community with some large real estate investors, owners and managers on how they can optimize their properties, looking at green and healthy building initiatives to kind of maximize value or or maximize impact and how to bake those things into some broader sustainability or, or ESG initiatives. And, you know, in my background is is not necessarily in in commercial real estate directly. I have some experience and then health and wellness and well being and working for some real estate related platforms and research sites. But I’ve been able to, in the last four years really help that real estate community better understand what it means to be a green or healthy building, and how that translates into kind of a return on investment for their stakeholders, whether it be their occupants, themselves or their investors.

J Darrin Gross 3:42

No, that’s great. So talking about green versus conventional, there’s, you know, I guess a plethora of, of whether it be systems or you know, ways you can implement this. Are there some examples that are like some go to examples that that are the easy kind of the low hanging fruit that you typically recommend building owners employ?

Zach Flora 4:16

Yeah, so I think there’s a various ways people can think about green and healthy buildings. And a few tend to bubble to the surface as ones that are easy for for people to look at. And one of those might just be simple as accessibility. Are our commercial properties industrial office multifamily. Are they in walkable neighborhoods, pedestrian accessible access to public transportation and bike infrastructure. These type of things kind of promote physical activity for most mental health outcomes that optimal mental health outcomes. But also the use of public transit and active transportation can help reduce things like air, air pollution and congestion and just create overall greener environments. Secondly, I think nature and just access to nature and prioritizing that. So having things like street trees and neighborhoods or in public spaces or creating well landscaped public spaces, and outdoor spaces, again helps to decrease stress can also often times improve physical activity by making those kind of pedestrian infrastructure more more exciting or or more accessible, but also again, having that natural elements such as trees helps to reduce the exposure to pollutants by controlling some things like air quality. And finally, things like like safe siting, so are you able to locate projects away from environmental hazards such as landfills or power plants or, or contaminated sites, again, going along the lines of helping to reduce kind of stress and anxiety and improve mental health outcomes of your occupants, whether they be commercial office industrial or multifamily, but also kind of its cutting your exposure to those contaminants or pollutants that might be in the air and pose a danger to to your health. Those are three that I think are come to mind for a lot of people. But when we talk about green buildings and healthy buildings, it’s a much more I think, dynamic and comprehensive viewpoint, especially over the last few years, I think COVID-19 has really changed our view of what it means to be a green or or healthy building. Many years ago, there was a study, I think, by CBRE that looked at, you know, what do occupants one buildings and natural daylight was one of the main things and that’s another, you know, aspect of green and healthy buildings access to a prioritization of natural, natural light indoors. But today, I think things like indoor air quality and cleaning protocols are really front of mind for a lot of our for a lot of employers and their employees, in terms of what does it mean to be kind of green and healthy, healthy building or green and healthy sight?

J Darrin Gross 7:11

That’s funny. Everything you mentioned, there was not on my radar as far as what I thought you might, you might identify I had like, like light bulbs, and you know, or some sort of like, more of like a, an energy kind of thing, as opposed to the green. I mean, the actual, the physical green space. I mean, it’s basically about, you know, like I said, creating more of a, I guess more of an environment where people are able to, to kind of interact more with nature and all that, or just having more of that connection there. And and like imagine that, that is a person in that environment that you all sudden, it’s just there’s a, there’s a level of calm or a just a more desirable place to be has that that kind of what I guess the question is kind of what I’m trying to reconcile it. So in the efforts to make more of a green design? Is there something that you can measure or that there’s a way to measure something that’s more green, less green as it is it? Is there a scale? Or how do you how do you measure that?

Zach Flora 8:22

Yeah, I mean, I think at the end of the day, the idea of green buildings has really evolved, right? So from the 80s, thinking about sick building syndrome to, you know, the early 2000s, when we’re thinking really about kind of light bulbs and energy efficiency. Today, when we think about green buildings, we take, I think, a much more human centric approach to say, how are green buildings improving our environmental metrics, or the environmental KPIs that we have set for us, which might be things like, energy use, or waste or and water, things like that. But it also has to have a human component to it that’s much more tangible. So a lot of those things I mentioned earlier, things like accessibility, access to nature, a lot of times are much more tangible to the occupants inside. And they help to really add some texture to the things you’re doing for those to create green and healthy buildings. And they’ll again, the last couple of years have really shifted the conversation from I only need to think about energy efficiency, because that’s going to help reduce operating costs for myself, or reduce operating costs for or reduce kind of occupancy costs from my tenants. But how do I actually look at and think about the tangible aspect of creating environments that improve mental health where tenants or employees can see the things that we’re doing to create environments that are green, and healthy? And I think you actually hit something right on the head there, which is you have to be able to kind of measure the impact on health and the fit well system is really the platform is is crucial to a lot of companies kind of really understanding what it means to be green and healthy building because it allows them to take those evidence based design and operational strategies that are part of the fitwel standard. And use those to prioritize health and green building initiatives across their across their buildings across their sites across their communities, and then ties those strategies. So things like creating access to outdoor space, or having having accessibility to transit or improving indoor air quality. And taking that and showing that there’s a measurable impact on health to through various kind of a health outcomes or various kind of health impact categories, I would say. So if we take mental health for, for example, if you are in buildings that have access to outdoor space, if you have views of nature, from your worksite, if you have access to natural daylight, you can show a true positive impact on the health of occupants. And that positive impact can be shown in things like productivity. Even things like indoor air quality, if we’re able to optimize indoor air quality practices within buildings, were actually able to show not only an impact in things like mental health or or occupant health, but we can also look at things like occupant productivity. And these types of kind of measurements allow companies to really create a strategic plan to prioritize health and prioritized green initiatives and move them one step forward into some broader kind of sustainability or ESG agendas that their investors and the financial community is really looking for, as they evaluate their options and opportunities.

J Darrin Gross 11:48

Right. And again, from an investor standpoint, you know, just basically about, excuse me return, I mean, you know, from just a dollars and cents thing, although baked into that is the the fact that people want to be there, whether that be your your tenant, as a company or the company’s employees, or, you know, that there’s some sort of an inviting space, I would think would be kind of the key to any kind of creating an undesirable environment desirable property. So, I’m curious, as this conversation has changed from like, like, you know, we mentioned the kind of the energy consumption to now more the green space and mental health. In like the energy space, there were like incentives that were there were made available to property owners, through the utilities, and possibly even code change was implemented to kind of promote this and implement this. Are there any similar type? I mean, are you seeing building codes kind of create this space? Or require it? Or are there any incentives for building or for building owners to create these spaces?

Zach Flora 13:16

Yeah, so you know, healthy buildings are really cheap.

J Darrin Gross 13:19

I’m sorry, when I say incentives, I want to make sure that obviously, the incentive to create a nice space for the occupants, but I, but more of like, some sort of financial incentive, where there was like, like a, like some of the the utilities had some sort of money available for, you know, building owners that would convert their their energy. Use it.

Zach Flora 13:43

Yeah, absolutely. So I mean, healthy buildings are relatively new. And this idea that a building can impact your health from the broader real estate community or or investment community, it’s relatively new and green buildings have, you know, that idea has been kind of proliferating for the last couple of decades. So when we think about green buildings, and we think about, you know, incentives, yes, there’s always there’s those regulations or those, you know, financial incentives about, you know, a tax breaks or, or things like that, to help drive the development of kind of your your typical green buildings. But the financial incentive, I think for for traditional green buildings has always been around things like operational protocols. So if you are creating more energy efficient buildings, you can reduce your kind of operation, operating expenses, through savings on that, on those aspects. I think we also when we look at Green buildings, we’re starting to see more and more over the last decade, that they actually can drive higher occupancy rates. So we’re seeing that more and more these buildings that are considered green, are seeing higher sales prices are they’re seeing higher leasing prices. They’re seeing more stable tenants. They’re seeing tenants that are signing on for longer lease terms. And part of that goes back to his operating census, right with the with the growth of triple net leases. Green buildings offer more stability, I think for those employers and those tenants of commercial office and industrial spaces to say, we can reduce our risk of fluctuating energy prices, or of maybe issues related to climate change. So you certainly have those reduced operating costs both for the owner and the employer. And then that’s leading to, I think, some more stability in terms of occupancy rates. And that’s a thing a huge, a huge part of the scope that I think stakeholders and investors are looking at when they’re identifying these different properties. But part of the, the new part of the conversation is what we call LSA, brown discounts. So buildings that are not kind of building to these green codes are retrofitted to be energy efficient. In order to include some of these healthy building practices like access to transit, outdoor amenity spaces access to natural daylight, we’re seeing that those owners are actually struggling to keep and retain tenants. And they may actually have to provide discounts on leasing out space or or renting out that space. And if they’re not willing to make the investment and updates to these buildings, to be able to show those green building practices with those healthy healthy building practices, they actually have to, you know, unload these properties at a discount, because they’re really a, you know, become a risk to their portfolio and a risk to their investment. I’m based in New York. And you know, recently they passed the climate mobilization Act, which you know, there can be fines and fees for properties of a certain size that don’t hit certain kind of emissions caps. So now, some of these additional assets, especially in the office market, there are even fines, and then some legal action risks that can come from the building not being optimized for kind of these green and healthy outcomes. And I think that the financial community is really taking a look at that and saying, there is an incentive not only from the bottom up, so tenants are asking for more of these more of these amenities and more of these kinds of operational savings by having energy efficiency by having access to amenities. But we’re also seeing the kind of financial institutions asking for how are you minimizing risks related to things like climate change, but also health? You know, and COVID-19 has certainly shown us that, that healthy buildings are a must have now and not a nice to have. Because we’re, you know, we’re still kind of going through the, I think the recovery, I mean, many of the office market is only 30 to 40% occupied right now. And they’re struggling to attract employees and attract employers back to the office. And part of that is, these real estate owners and operators and managers are going to have to find ways to build trust among the occupier community, and get back to the office by saying we have considered we are considering your health, your safety, we’re creating more resilient spaces and bring them back through that kind of trust building in that communication. But, you know, a silver lining from the last two years with COVID, at least from my perspective, is that we have a much more

a knowledgeable set of employers and employees and residents who are understanding the link between health and the places they live in work. And they’re understanding how green building practices and healthy building practices are, affect them. So whether it be your office or your home, or the places you learn or the places you shop. There’s they’re asking for more, and they’re demanding more from kind of the real estate community on how they’re delivering, designing and renovating the spaces. And that’s certainly an incentive for a lot of these companies in the financial markets. And the investors have noticed that and they’ve taken into account in their own kind of scopes, you know, how do we ensure the stability of our assets, and they’re saying they have to be kind of looking at their environmental impact, they have to be looking at their social impact in terms of health and, and how it’s impacting occupants, because this rise of maybe ESG, or environmental and social governance issues and standards are really playing a role and the proliferation of green buildings and healthy buildings and changing the markets as as we come together.

J Darrin Gross 19:29

So do you see that the majority of the green is in new construction or is it is there a healthy retrofit for existing buildings?

Zach Flora 19:45

Sure, so I think in many cities and in many municipalities designing to green buildings is becoming the standard I mean, look at across and designing to healthy buildings becoming the standard I look across a lot of fit well users and a lot of fit well. I Um, the real estate companies were using fit well, and they are baking them into their their design centers, they are going to build to be able to stand against the fitwel standard. And they are going to design new developments and new sites or complete major renovations or major repositioning of buildings and sites to be designed to leverage things like fitwel, or other green building certifications and platforms like like LEED. So that I think is definitely a growing body of knowledge that we have to build to the standards, because that’s what the new crop of employees and employers gonna be asking for. One of the real benefits of the fit well platform is that was actually designed for existing buildings. So fit well was developed by the CDC and the GSA between 2010 and 2015. And it was designed for existing buildings. Because when we think about kind of making green buildings or healthy buildings, a part of your just operational protocol and a part of your standard and culture as an organization, whether it be an occupier real estate or developer, you need to be able to use it across your entire portfolio to really show those impacts. And to get back to something we talked about earlier, which is to really measure the impact you’re having on those environmental metrics, or to measure those impact measure those impacts are having on kind of occupant health and safety, you need to roll it out across at scale, it can’t just be on one or two flagship new construction buildings. Because most portfolios out there are going to be you know, 90% existing assets that have another few decades left in their lifespan. So if it will have been designed for existing buildings was really a game changer for the industry to say we can look at not only our new construction projects, but we can also look at all of our existing buildings and find ways to optimize those do some low cost but high impact strategies. You know, we talked about things like having transit or or outdoor space, or even kind of opening up stairwells to allow individuals to circulate at the building. Using stairs, instead of setting the elevators, a lot of these things are low cost to implement, but they have a huge impact in the occupant experience or a huge impact in occupant satisfaction rates and can really drive some those metrics you’re looking for. And because they’re low cost, I think you see some of those financial returns being at a much kind of higher premium, you can roll this out across your portfolio, you can begin to measure and manage, you know, if I’m doing these things at my across all my commercial office assets, are we seeing increased stability in tenants? Are we seeing longer leases, are we seeing higher tenant satisfaction rates, being able to use those things to measure what your investments will be in the future, I think is truly key to to rolling these out.

J Darrin Gross 22:51

All right, you know, a frustration of mine that I’ve seen as more in the consumer space, but it’s just, you know, a lot of the energy efficiency products, they use less material in the manufacturing, but they only last, you know, half or maybe 25% of what the the old traditional conventional product was, whether it be a refrigerator, a washer, dryer, whatever it might be, kind of thing. But I’m curious in in this conversation with with the kind of going green? Is there a cost? I mean, if you had to two projects, one being a conventional one being more of a green model, is there a cost difference in the actual implementation of the the two methods or the two two types?

Zach Flora 23:47

Great question. So every location is going to be different based off the size of the project, region, location, access to materials, I’d say the sooner you bake in things like healthy building practices, or standard like fit well into the design and development of a project, the more you’re going to reduce the the capital cost of implementing those kinds of brain building operational protocols. So there’s green building, or there’s healthy building design elements. So we’re seeing a lot and again, another reason why these companies are baking fit well into their their design programs is because they’re trying to reduce the cost of creating healthy buildings, there’s always going to be a little bit more of a premium if you’re kind of renovating a building to meet green standard or meet a healthy building standard, like fit well. I think the beauty of fit well and the platform that we’ve built is there is a ton of strategies about 70 Plus across each of our different asset level scorecards, and you as the consumer get to choose based off your occupant profile, your budget, your location. How do you want to create a healthy building what strategies will mean the most to you? or occupants, you know, again, a building in downtown Manhattan versus a building out in in Westchester County versus a building maybe in a more rural location, they’re going to have different needs based off their occupants based off their budgets based off their space considerations. So being able to choose strategies that work for you, I think is key to keeping those costs down. And fit was designed, again, some really low cost, high impact strategies that will move the needle and showing how you’re impacting health. But also based off, you know, 100 years of public health research. You know, we tend to think about healthy building practices. Maybe we kind of entered this earlier, and we talked about LED lighting versus, you know, accessibility to transit. Some of these things are not new, some of these things are not, are not things we haven’t thought about before. I mean, it was based off 100 years of public health research, it’s really about how he implemented in buildings to design in a way that it improves the occupant experience, and that it allows companies to roll it out at scale. And being able to use some do something across your entire portfolio, like indoor air quality practices around ventilation or around cleaning protocols, or emergency preparedness is incredibly key. And as we look at you know, our, you know, the industrial developments that are coming down the pipeline, and how they’re optimizing for, you know, occupant safety or occupant health, the more you can bake those things in, in the early stages, the the less expensive, it’s going to be to think about these things. And the the less expensive will be to kind of renovate buildings in the future to meet the to meet this demand or to meet this, this this need.

J Darrin Gross 26:43

Now, it’s great. You continue to mention the footwell thing, and so make sure that I’m understanding you’d said something about CDC and then the GSA created this, but then it sounds like your your group is halfway or partly involved in this. Can you kind of explain the relationship and and what the fit? Well, I mean, the overall concept of

Zach Flora 27:09

Yeah, absolutely. So football is a healthy burning platform that helps the real estate communities and designers kind of understand how a building’s operational and design, operational protocols and design practices are going to impact the health of occupants. And we take a holistic and interrelated approach to helping companies understand and prioritize the health of their occupants and the communities that they serve through evidence based strategies that are proven to remote health. And then we take those strategies and we show you through a series of metrics and health impact data. How exactly you’re impacting the health of your occupants through certain strategies or protocols, and how you can measurably track changes in occupant health outcomes by implementing certain building practices. So if it was actually again, this, like I said, designed by created by poor leading practitioners at the CDC, and piloted across a portion of the GSAs portfolio between 2010 and 2015. And then the Senate rep resigned, the organization I work for was was chosen to bring Phil out to marketplace. So centerback design or I’ll call it C fad from now on C fad is responsible for the platform’s development and growth end. And maintenance and accurate design advisors was rolled out in last year, to help kind of implement our scalable strategy a fit well, and drive kind of market transformation. Our goal is to really motivate the entire real estate design industry, towards thinking about healthy buildings and thinking about how we can include this idea about health, healthy buildings and green buildings into every kind of stage of decision making. Our organizations still still work closely with the CDC to help us kind of provide and understand research alone about it, you know, a dozen other kind of academic and research institutions. And we’ve been very successful, I think our last four years helping to communicate what is what does it mean to be healthy building and what does it mean to utilize our resources to understand how your portfolios are impacting health and how you can make changes to further drive that that impact and how you can measure that impact? So that you can use it for your sustainability or ESG reporting or financial reporting?

J Darrin Gross 29:41

Got it? Is the fit well model designed to apply strictly to to like the office asset class or does it does it have information you know, across the investment spectrum, you know, industrial retail Does it fit all of the all of the different asset classes?

Zach Flora 30:06

Yeah, absolutely. So we’ve got different. We call them scorecards, but different scorecards for kind of the commercial office, asset class, retail, multifamily, residential, senior housing. And we also have one specifically for kind of commercial and industrial sites. That’s been designed for the industrial asset owners and investors to ensure that the sites they develop and manage are tailored to promote health and well being amongst their tenants. So we can we have different scorecards for different asset types. When we you know, the workplace scorecard is certainly our longest and Legacy product. With industrial and senior housing being some of our most recent, we also have scorecards for individual occupiers real estate, so really looking at the tenant and how they can fit out their own fit outs, whether it be within industrial spaces, or retail spaces, or within kind of multi tenant, commercial office buildings. I’ll say our industrial sites scorecard is one of the few available certifications for those industrial sites. And there’s been a lot of interest from that kind of asset class. As they look to kind of better communicate or strengthen the things that they’re doing around healthy and green buildings. There’s also a huge opportunity now to differentiate your products through health and well being. I was reading a report yesterday from from dodge that said, they’re forecasting about 53 billion in construction starts and kind of the warehouse and distribution market this year. And that’ll account for about a third of the entire US commercial construction construction sector. As we see a lot more of that kind of square footage of industrial space warehouse and distribution and logistics hit the market, being able to differentiate yourself through product like fit well using, whether it be commercial office or industrial, that’ll be huge to making sure that you are still accessing those top tier tenants that you’re still being able to stabilize your tenants that you’ve already signed, and continue leasing with them and continue working with them.

J Darrin Gross 32:15

So do you find that most of the the interest comes from the landlord? Or is it is there a drive from the the tenants, too? Are they pushing the market based on what they’re what they’re most likely to lease? Or? Or is it? Is there an action reaction?

Zach Flora 32:36

Yeah, it’s kind of a perfect storm, right? I mean, we actually did a survey of the real estate investment community during and I would say between September of 2020. And they released the report released in March of 2021, looking at, you know, investor sentiment around healthy buildings. And we found that, you know, 87% of real estate investors responded that they were experiencing increased demand for healthy buildings. And that that demand was really being driven by their tenants, particularly in office and residential, that those tenants were demanding things around healthy building practices and protocols. And that was kind of driving them. But at the same time, we found that there’s this rise for kind of ES more kind of material ESG related data. And while I think green building certifications and things around energy and waste and water have really solidified that the E or the environmental component of that kind of reporting, companies and large real estate investment trusts and managers were looking for ways to better solidify that s symmetric, and they found that health and well being and the kind of metrics that fit well provides, through their kind of through the online platform, were great ways to further strengthen that reporting on us and really show how health and well being are kind of becoming proxies for that kind of that s symmetric, if you will. So tenants really driving demand, but I think the need to respond to their financial investors and really show a more material assessment of assets was also a huge driver for that. And I think, again, I’ll say you know, as COVID has changed the perceptions of individuals, individual employees and residents alike, they’re demanding more from their, from the place they live in the place that they work. So we’ve always had a large number of real estate owners and investors using the federal platform. In the last, I’d say, a year or so we’ve seen a huge increase from the multifamily asset class, from the industrial asset class, but also from those kind of individual occupiers and real estate saying we want to make sure that our HR policies, our operational policies, the way we’re designing our own workspaces, are going to optimize employees health, especially when it comes to mental health outcomes or social equity or In, you know, industrial spaces occupant safety and in those environments?

J Darrin Gross 35:07

Hi, it’s fascinating how, you know, these things that, you know, can can affect just the well being and, you know, one’s just having a good day or not kind of hearing, you know, inviting space. That’s, that’s great. The Can I ask you a question, and it’s like golfing slipped my mind here? Well, let me do this. Let me shift gears here for a second. Sec, by day, I’m an insurance broker and, and I work with my clients to assess risk and determine what to do with the risk. And there’s there’s three strategies we typically consider, we first look to see if there’s a way to avoid the risk. If we can’t avoid it, we look to see if there’s a way to minimize the risk. And then if we cannot avoid or minimize, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is, is a risk transfer vehicle. And I like to ask my guests, if they can look at their own situation can be their clients, investors, the market? Government, however, you know, you choose to frame the question, but I like to ask my guests, and I’d like to ask you to what you consider to be the biggest risk. And for clarification, like I said, Well, I’m an insurance broker, I’m not necessarily looking for an insurance related answer. But with that, if you’re willing, I like to ask you, Zack Flora, what is the biggest risk?

Zach Flora 36:39

Yeah, Darrin, absolutely. And I’m going to come at it from the point of their real estate community. And there’s this growing need to be able to kind of measure and implement green and healthy building initiatives. And I think the biggest risk to the real estate community today is to not understand what it means to be a healthy building, not understand what it means to what those concepts are around creating a healthy building and to neut to narrowly focus in on kind of one set of aspects. So if it’s an industrial to narrow to narrowly focusing on maybe things like workplace injury or commercial office space, to narrowly focusing on things like indoor air quality, or to say we’re doing energy efficiency, and that’s going to be enough. Being the healthy buildings are this idea of healthy buildings are relatively new, even though the evidence base has been around for for 100 years, companies and the real estate community specifically, they need to understand exactly how their buildings are performing against a set of related metrics. So that they can begin to figure out how to manage and measure the risk related to health. And, you know, we can come back to that, that office environment, we have low occupancy rates, still, we’re struggling to get people back into the office, if you don’t know how your properties are actually impacting health right now, you’re not going to be able to make the effective changes to build that trust and reduce and mitigate that risk moving forward, you’re not gonna be able to figure out how do I prevent reduced occupancies in the face of maybe a future contagious or respiratory infectious disease outbreak like COVID-19, we are not going to understand how do I control for mental health issues and social equity issues that my employer that my tenants and their employees are asking about. So not being able to kind of look at the broader picture, understanding where you are, where you’re starting from. So you can make a really strategic and informed plan moving forward is, I think the biggest risk to saying you’re not gonna be able to see some of the returns we talked about, unless you know exactly where you’re starting from and setting goals and being able to meet them, you’re not going to be able to see those kind of the suitability of tenants, you’re not going to see that return on investment. Because maybe you were too narrow in your focus, or maybe you didn’t know where to start, and you didn’t know where you are. So you didn’t start appropriately, in kind of retrofitting or designing or implementing healthy buildings in your culture.

J Darrin Gross 39:09

No, it’s certainly a topic that, you know, I’m certain every investor wants their property be the most desirable. So they can, you know, track the highest rents and the highest sale price kind of thing. But it’s it’s not a I think there’s a lot of times when you have some sort of new concept or just kind of a, a kind of trying to get your hands around or you know, try and understand exactly what it is. But it certainly like you said with the old COVID experience, it certainly raised the awareness overall of just how impactful the the environment is an unwanted Health Net. So that’s, that’s great. The question I meant to ask you and this kind of ties in as we wrap up here. The fit well system is Is this? Is it a platform that anyone can access? Or is it something that they have to go through a vendor to get to? Or how can one learn more about the fit wel System?

Zach Flora 40:14

Yeah, absolutely. So anyone can utilize that way. You don’t have to utilize any specific vendor or any specific consultant. Anybody can find out more by going to www.fitwel. That’s fit w e l.org. There, you can learn more about kind of what is fit well, how does it work, and access our kind of our proprietary online technology that will allow you to, like I said, upload your entire portfolio, understand assess your property against the fit, well standard, access some of those health metrics, and be able to make informed decisions about how to kind of improve the performance of the impact that your real estate assets are having on on their occupants. But yeah, open everybody and if anyone’s interested in learning more, from me specifically, they can email info at fit well.org To find out more about myself for or how the platform works or how they can get started with it. And just to be clear,

J Darrin Gross 41:12

fit well as fit W E L is or not two L’s

Zach Flora 41:17

there’s one L so fit W E L your crown. Okay.

J Darrin Gross 41:20

Okay, my sure heard your answer. Awesome. Well, Zach, I have learned a bunch. I appreciate you taking the time to talk today. And I look forward to doing it again soon.

Zach Flora 41:33

Yeah, Darrin, it was an absolute pleasure. Thank you so much. And I look forward the next time we we chat.

J Darrin Gross 41:38

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 41:57

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Multifamily Senior Living with Vinney Chopra – CRE PN #347

Vinney Chopra 0:00

And my senior livings are also going very well. Because what we do is we do all land development things, the ordinance changes and everything. And that gets us the land very cheap. We buy them. But by the time we have done through all the permitting, it’s increased in value by three times already, because we have gotten the permits now to build a senior assisted living. And then the good part is, by the time we are done building it, we start getting residents said, we have 29 residents already given deposits, to move into our apartment complex, brand new. It’s being built right now. So it’s a 2022 construction with everything brand new. And then we have very less deferred maintenance. And there is zero delinquency in this apartment complex because it’s a need driven and, you know, we have to look at the residence they have to show us three years of rent, because usually people stay three years in our facilities.

Announcer 1:11

J Darrin Gross 1:30

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 Vinney Chopra. Vinney is a multifamily syndicator, Senior Living care facility developer, an author, a podcast host, a mentor, family man, he’s a lot of good things. And in just a minute we’re going to speak with any about the opportunities in multifamily and senior living.

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 while you’re there, we appreciate you leaving a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. Without on Welcome back returning guests popular Yes, my friend, Vinnie. Welcome back to CRE PN Radio.

Vinney Chopra 2:52

Thank you. Thank you, Darrin, it’s such a pleasure to be back there with you, brother, I maybe during COVID We didn’t get together did.

J Darrin Gross 3:00

We did once or twice. But it’s I mean, it’s I know we’ve talked at least once a year, but I know that it’s been a long time. And it’s time to catch up and see what you’re doing. I know you’ve been I know you’ve been busy, busy, busy. I’ve met some of your your students here locally. Yes. And I know that you’ve been busy selling and buying so it’s a good time to good time to catch up.

Vinney Chopra 3:31

You know, it really is I mean, you know, many times we feel what the market is doing a market is doing but she got to take action and you know, sell some assets at the peak and buy some in good markets and develop some and you know, I’d love to share what’s happening with me. Yeah.

J Darrin Gross 3:50

Yeah. Why don’t you start to you know, tell us what’s what’s been going on here last year. So

Vinney Chopra 3:58

When COVID hit 2020 We always have managed through the zoom and through remotely and everything, meeting with our investors and so on. So that’s when I got more even heavily into senior assisted living developments and I did five syndications one after the other and raised almost $27 million to get this ground up. structions projects and started them in Florida and Virginia. And they are being built in everything. So that’s something that I also bought a hotel with my another partner Hilton Garden Inn, which happened before COVID. Actually, oh my gosh, turn, we closed the deal on December 31 2019. What a perfect timing is it? And then in 2020 to 2020, about April, we said, oh, my gosh, our occupancy has gone down to 22%. And we were ready to pay a mortgage of 15,000. Each partner, you know, because it’s a pretty big deal. Anyway, but then the office staff of the hospitals, three hospitals, nurses and doctors chose our hotel to live in, what, what is the probability of that happening? Look at that. And then our peanuts became millions, because we went from a 6 million we purchased in an auction this hotel, and we are selling it in just three months back, this is 2022. For 11,000,008 50, we are selling, doubling the money doubling the money in that one year, which is very good. And my senior livings are also going very well. Because what we do is we do all land development things, the ordinance changes and everything. And that gets us the land very cheap, we buy them. But by the time we have done to all the permitting, it’s increased in value by three times already. Because we have gotten the permits now to build a senior assisted living, we could sell that land, but we build ourselves with our own GC CINAHL. And my partner has been doing it for over 10 years. So that’s exciting. And then we build it in nine to 12 months, the whole thing. 66,000 square feet to 77,000 square feet of one story with 88 units, add ADA to 93 units, but we are not using any elevators or anything. Because these are 80 years, 200 years, you know, after age group of our residents, seniors who are living in our communities, right? It’s Hampton manor.co is our brand Hampton Manor. And that’s what is exciting. So we are building in Florida, in Virginia, in Michigan, and in in St. Louis. Right, Missouri. And then the good part is, by the time we are done building it, we start getting residents in like the Punta Gorda deal. I’m opening up like April 1, let’s say right, it’s February. So April 1, oh, April Fool’s Day. But we have 29 residents already given deposits, to move into our apartment complex, brand new, it’s being built right now. So it’s a 2022 construction, with everything brand new. And then we have very less deferred maintenance. And there is zero delinquency in this apartment complex, because it’s a need driven. And, you know, we have to look at the residents, they have to show us three years of rent, because usually people stay three years in our facilities. You know, they go to memory care, dementia, you know, which is also part of our division, or they get very sick, then they go to hospice, and they go to rehab centers and all that. So, so this is a new market for me, but it’s very, very satisfying bear market because it’s apartment at its core, but it’s got the, the that feeling of helping and giving the dignity of living for our seniors, you know,

J Darrin Gross 9:02

That’s awesome. So you mentioned the three years of rent up front, is that do they give it to you up front? No. Show you they have that?

Vinney Chopra 9:12

Sure. Just the proof just to prove it. Yeah, yeah. But they only pay month by month by month, you know? Yeah, yeah. No, we don’t take any money upfront, and they don’t have to pay us any money to live in the community either. I know there are other 55 Plus and independent living, you know, places like in California where I live, where you have to pay 300,000 tries to get in to even get in exactly yeah. But in our case states not. Right.

J Darrin Gross 9:41

No, I know that model has changed quite a bit. And I’m guessing it’s kind of territorial where some places are still away and others are more of that but I would I would guess that the the model you’ve got there where it’s more of just like a rent is probably a more agreeable to If people unless the community is something that, that just got a reputation everybody wants in and that’s some sort of historical model kind of thing like that. So, okay, so you, you you’ve built, how many of the senior care facilities do you have is it’s a five, or how many?

Vinney Chopra 10:15

Oh, no, actually, my partner has built over 30. But together five. Okay, I’ve got nine more on the books. So I’ve got 14 coming up here.

J Darrin Gross 10:27

And are the five up and in running now?

Vinney Chopra 10:30

I’ve been in the construction phase.

J Darrin Gross 10:33

Okay. Gotcha, gotcha. So your April one is your opening of the

Vinney Chopra 10:37

first one in Punta, Florida. Right. Right.

J Darrin Gross 10:41

That’s exciting stuff. I mean, that’s, that’s been a couple of years in the works here with Yes, yes. And a little different timeframe with the construction timeline, as opposed to closing on an asset you

Vinney Chopra 10:53

Already built already built? Right? You know, I’ve been chasing C B, B minus B plus A minus all this time, right? You know, but the exciting part is that, you know, I’m not going after working class, I’m still buying multifamily buy. I just bought in Tennessee. I’m buying some more in Florida. But those are 70 million 80 million daily dollar deals. But these ones are brand new, constructed within 17 million. What? 17 million 18 million, I’m able to build these apartment complexes brand new for seniors.

J Darrin Gross 11:31

Yeah, no, that’s, that’s exciting. And I just like the multiple as you’re saying, like, from the time you guys buy the land to when you get the permits, you’ve tripled the value of the land. I mean, and that’s just that’s it land. That’s, that’s impressive. And, you know, it’s funny, because I’ve talked with other developers and stuff have come to recognize that, you know, the original value add. Strategy was developing, right? And when you start a piece of land, and you add value to it, and you totally know more valuable. Well, your hotel sounds like you really, that that one sounds like the one that you really got away with. I mean, not not got away with what really, from I mean, you bought it, I’m assuming it was a fully operational hotel and COVID Yes. And yes, and was occupancy down, like almost nothing, then

Vinney Chopra 12:22

20 22% I think 22% Still, the weekend traffic was there in that town, some big, big business traffic, you’re right. But then we also had a pip in they call it capital improvements in hotels as Pip. And then we were able to change the roof and put some little bit money into it, then we doubled our price, you know, so we are selling it. And we are buying some more actually, I was over there in Gatlinburg, where dolly wood is there. And that’s the number two spot in the whole USA. We had a lot of people come there, you know, for vacation and everything. After Disney World. That’s number two spot and people drive up there. So lots of hotels have 97% occupancy is what they’re looking at different different locations, you know, and then storage units, what when he is getting into storage.

J Darrin Gross 13:16

Storage too? Oh my gosh,

Vinney Chopra 13:19

You know, Vinney is always looking for different ways, right? So I do have my main heart is with multifamily, which I’ll be keep on buying a minus, or, you know, B plus assets, of course, but the compression of the cap rate has really got me thinking, you know, in the year and a half or so, because the C Class B class and a class, the compression of all these cap rates, it comes so close together, that, you know, people are asking a lot more money for their assets. Let’s call a spade a spade, you know, I mean, the deal I borrowed I’m included in that, by the way. The 2020. I bought a deal in Austin, Texas, turn 308 units, right, because my Melbourne property was I’m collecting 98% rents from the engineers. So my engineering mind says Vinnie, where are the other engineers going? Austin, Texas. So I go there, and I come into bested final on a deal with 15 other bidders. And the listing broker knows me what he says Vinnie, I know you. I said, Hi, Michael. How are you? He know, he says I sold you that Country Club property. Nine years back. You were the easiest guy to work with. I said, Michael, I’m so appreciative what you’re saying. When he’s back with more money. Literally, he told the sellers and we had meetings and all they awarded us the deal. My partner and I had Because 34,000,000,007 50 We paid for 308 units in near to the domain in Austin, unheard of totally got a loan from Freddie Mac at 2.69%. What $22 million loan at 2.69. And the broker friend of mine just called me few months back in December, he says, and he’s the president of a brokerage house, very big one. He says, Vinnie, your property’s worth 58 million today.

J Darrin Gross 15:33

Oh, my God,

Vinney Chopra 15:34

Oh my gosh, from 35 million from September of 2020. And this is now January of 2022. So he told me in December in about a year or so, the property went so high. So it’s just mind blowing. Mind blowing?

J Darrin Gross 15:53

You You are definitely the hits, man. I mean, you’ve got the hits. You’ve got, I mean, everything you’ve everything you’ve done. I mean, you know, I think it’s interesting, you know, the the post crash? I mean, you know, everything’s been going up. And there have been plenty of conversations I’ve had with people talking about, you know, are we in the late ending, or whatever. And, yeah, and I keep talking with people that talk about just the data supports the demand for housing, you know, and like you said, if you’re, you found your Melbourne property and the engineers and the demand, and you recommend where and where are the other engineers going? As long as you’re in that? You’re in the the demand? Yes, yes, he gets the key to it. And, you know, the other question, I’m curious, how do you how do you view the cap compression? I mean, you you mentioned the fact that you’re, it makes you question, you know, what is it should do, you know, should stay in should get out, I think but I’ve come to recognize a compressed cap means that there’s Demand. And demand means that there’s somebody behind you waiting, there’s somebody wants that property, there’s somebody wants to be in that market, as opposed to if you get out and it’s a higher cap rate, he may not have so much demand behind you trying to get what you’ve got. Tell me a little bit about your How do you view it,

Vinney Chopra 17:17

I would love to love to mention it, you know, what you’re seeing is so right bit compression of the cap rate, the value of the property has gone up, even the C Class C plus a b minus people are getting so high price, the demand is there, supplies limited, right? Supplies limited demand is there and people can get cheap money. See, that’s the other part in the whole equation, the mod gauge, you could get afford a bigger board gauge with bridge loans and other stuff. So the money is so cheap. But the thing is, it’s the syndicators are in trouble. Because if your cap rate is, let’s say 3.10, and your mod gauge is that 3.5, then where is the, you know, cash flow for the for the for the for the investors. So a lot of syndicators are raising money from what I see in the packets from the investors and then making it as a heat play, and give the same money back as cash flow. I don’t know if it’s a Ponzi scheme or what it is, you know.

J Darrin Gross 18:26

So you’re saying they’re raising more capital than they need to get the deal. But that gives them reserves so they could maintain the yield that they promised?

Vinney Chopra 18:35

Yeah, exactly. And then put value add, and then maybe in a year or two years, the property operations will start giving the kind of returns, you know, so I saw that coming in the last two years. It’s been tough for me to purchase anything, by the way. I only bought one deal last year in 2021. In the multifamily space, right. Then I tended towards senior living more, because I can build everything in 1314 15 million. And it’s a brand new building. And for senior side of the operation, the rents are much higher than the regular rent because we take care of the hotel, I mean restaurant, right? It’s a cook to order three meals and snacks. It’s got, you know, the movie theater, it’s got Spa Salon, it’s got caregiving, prescription medicine, all that stuff. But we charge 4300 Starting as compared to 1300 in a regular apartment. So my $17 million deal brand new is giving us 4 million revenue. So that’s where the differences so can get much high cap rate for building brand new apartments in assisted living. So that’s something engineering mind. I’ve been trying to put this all in equation together. Now my goal is $2 billion in this decade to construct 2 million. 2 billion Yeah, 2 billion. Yeah,

J Darrin Gross 20:10

you’re on a good pace. That’s for sure. So So tell me, you know, we you you started in multifamily actually go way back, you started single family then you went to multifamily syndication, Senior Living hotel. And now storage, what was the appeal of the storage,

Vinney Chopra 20:30

storage, I mean space, I’ve looked into it quite a bit, it’s very, very good. Multi, it’s a multi unit two, if you look at it without tenants tenants up there, but they just come they put their own lock on the storage unit, you know, it says shutter and four walls that solid is very little different maintenance. And it’s totally automated through cameras and everything. And through the software, they get the lock, log in, you know, to go into the gate. And then once they are inside the storage unit, they are able to go to their storage and do this stuff and everything. So the cost of operating the Self Storage Unit is so low. And not only that, more and more I’m doing the research, every zip code has many storage units, you could just say self storage and put the zip code, you will not even believe there are so many because within three miles, everybody, I think how many, four out of 610 families maybe need storage units. And we like abundance, we were to buy stuff and stuff and stuff. And you know, then, you know, move people move and things like storage has been especially very big market and very high good cap rates and everything good returns, you can increase noi i, you know, one of my students actually he’s doing so well. He left his IT job. For storage units, he learned the business in multifamily and raising money. And now he’s big time into storage units. So you know, and that’s where I’m also, you know, I’ll be buying everything. Again, my diversified Fund, which is right now $50 million fund, it’s got four prongs to it. What that means is I buy already built apartments, I do the Senior Living ground ups, I also buy already built senior living by us into fully operational, we buy those also by hotels and storage units. So anybody who gives me quarter million dollars, same money is buying all these things. So they love it because it mitigates the risk, because all these asset classes are there, and also different locations.

J Darrin Gross 22:58

So you’ve definitely kind of muted the risk there by doing that. So So let’s looking forward here many I know when we first talked or talked about almost two years ago, and COVID, we just started and kind of the crystal ball was, you know, ever nobody knew specifically but it was always a question of, you know, vacancy rates at proved not to be an issue with multifamily. With all the money that’s been printed and all of the the demand and just the you know, the capital out there the seeking return be do you see any kind of a softening? Concern? I mean, is there I am, you’re an engineer data man.

Vinney Chopra 23:52

The thing is, we are losing, you know, dollars losing power by putting so much pumping of the money in 2020. By the way, we put I think there was one statistic we put what 60% of the the, you know, meant produce so many trillions of dollars in just 2020 and 2021. To give out to all these people, right? Inflation is at 6.5%. Right now, government is trying to, I think there will be some upward pressure to the interest rate. It is going to be up we’ll be probably in April, I hear point two, five, maybe another one in October. So that is going to put downward pressure on to the valuation because as the interest rate rises, you can afford less of the product. Mortgage is going to go up. Some people were into breach lending, and a lot of people have gone that route in the last couple of years because they can get 80% rather than 70% which the other Fannie Freddie Mac’s were giving a lot of people have gone into bridge lending but then the bridge people will be also looking into How the whole equation is going to work, you know, with these people who are bought to 80%, if the occupancy goes down, we are very close to defaults, you know, as compared to as compared to 60%. You know, LTV, right, so I see a downward pressure coming, you know, but the thing is, you got to be very, very articulate and do assumptions very conservatively, because the rents may not increase that much either. Because if the inflation is high, people have less money, because they’re buying, you know, stuff and eating and gas and everything more money is going there. So they won’t be able to give the higher rents. So, the rent increase will be also very, it may be only 1% increase, or 2% increase, unless you are buying with a big, big gap in the rent differential, you know, already with the value add. So, I think in the crystal ball, nobody’s got a crystal ball. I don’t either, but I really see that the millennials have been taught but three Millennials big time. One is millennial. Yeah, tsunamis, 3d tsunamis, I should have said, one is millennial 74 million of us, you know, Z that may or may senior, you know, but they are the ones who like portability. And they don’t like to buy homes. So the renter, we will becoming a renter nation again, there are so many articles in globe Street in Fortune Magazine, in Forbes magazine, where there is a pent up demand for rents. Immigration tsunami is another one. Because you know, our birth rate is so low in USA, the immigration kind of helps a lot, you know, it’s going to be 441 million population in the next 3040 years. But where is that going to come from, is from immigration, birth, and then seniors, which is 10,000 Baby Boomers turning 65 Every day, until 2020 31 or 2033 10,000, every day getting into senior writers. So that’s 100 million will be seniors in America, never ever before that has happened. So there is a pent up demand for housing for senior living see. So those three tsunamis are going to continue boosting our pressure into rentals. And of course, you know, downsizing by the baby boomers, that’s going to affect also because more single family will be available of course. And then I don’t know about industrial also will be on a good spur up because we have warehouses and all opening up, you know, industrial strip shopping centers are downsizing. We know that very much. Office space is downsizing, but storage units and you know, our I just I have gone. Oh, can you hear me? Okay, from there? Okay, okay. Okay. I usually I do through my microphone. Yes. I had another meeting before this one. So

J Darrin Gross 28:22

Are you have you looked at any industrial? Is anything you’ve looked at?

Vinney Chopra 28:25

No, no, no, I will not be in that. Yeah, I wouldn’t be I think I like to stay the course in multifamily. I love the hotels because it’s multifamily. And you can, you know, look at people have to pay at the counter to stay in the room, you know, and so forth. Storage Unit is also multi family kind of thing, because each one resident owns that space storage unit. And that way, so I’ll stay in the conventional job workers, you know, our multifamily, but I’m loving the retirement communities now. So in other words, I don’t have to change jobs, jobs, jobs where Amazon is gonna open up. Now I can look for demographical numbers, where people want to retire in serene locations with lakes and golf courses and everything. So I’m looking for a piece of land in the neighborhoods where there are no jobs. i That’s why I’m in Florida, and I’ll be in Arizona, all the states because people really need to retire near to their grandchildren. That’s what we are finding. Even from the north cold country. They are moving to their, you know, children and grandchildren so that they could come and celebrate birthdays and, you know, meet with them at the assisted living. That’s the frame. I mean, I’m not into the 55 plus communities or golf courses or condominiums. I’m not in the rehab centers or nursing homes. That’s a business in itself, you know, very big medical equipments and all. I’m only in the safe environment, right in the middle, independent assisted living and memory care. We need no doctors, and only one nurse. And then one chef one, you know, helper, Chef, Deputy chef, we call it and then activities director and all that stuff.

J Darrin Gross 30:26

No. Well, I love the the mix and you know all the success you’ve had and just thank you to be able to take things full cycle I’ll be interested to next time we speak more about how your your senior living, you know, actually to have residents and see what you’ve learned there. Although I’m guessing you’re probably pretty, pretty attuned to that based on your partner having been there so long.

Vinney Chopra 30:54

We are we are and very vertically integrated. In our senior living side also, like ours in the multifamily. We have color in a soul, so many assets. So we have dwindled down in our manpower there in multifamily. We had 135 people full time working in my company, you know, but now, what we are doing is before even the Senior Living opens, during we hired the executive director and leasing agents. So my Punta Gorda, I have 29 deposits already, what 29 seniors who have given me deposit, as soon as I open the door in two months from today, they’ll be coming inside. And I’m going to breakeven, within four months or so I’ll breakeven because, yeah,

J Darrin Gross 31:48

That’s fabulous. Any new construction, the capital improvements, I mean, you’re, there’s no deferred maintenance or anything

Vinney Chopra 31:56

Zero deferred and all brand new appliances, all brand new flooring, brand new roof brand new parking lot. So that saves a lot of money. And then it’s a plus plus luxury living, which I built it from scratch 2022 model. So if I were to buy an asset to give me $4 million revenue, in multifamily, right 4 million to 5 million, let’s say, I may have to pay 40 to 50 million, for a plus plus, I may have to pay 100 million, by the way, you know, 100 million for that asset, which is built brand new, which will give me 5 million revenues. But in this one, I can build it for 17 million to 18 million, and have that revenue of 5 million. big it’s a big equation change.

J Darrin Gross 32:50

Yeah.

Vinney Chopra 32:54

And it saved for for my, my investors, you know, and now the investors are coming Ultra Rich into my fault. We have 430 investors right now. But then the ultra rich are putting 1 million, 1 million, 1 million, 1 million. So in other words, they don’t need cash flow at all. Generally, that’s the beauty of it. So they’re saying we don’t keep the ordinary income, cash flow, you know, which a lot of people pay monthly, and quarterly say I don’t need it, because I’m at 50% bracket, if they give me seven and a half percent, half is gone in the taxes. So just give me capital gain. In three years, when you have done, you know, stay semi stabilized your ground up construction, it’s dirt first year, second year, we build it, and third year we stabilize it, right. So they say just give us the lump sum, or even give us a 1031 option. So I love it, I that’s the key is to just get the money right here. After we have all the permits, and we have a construction loan. And then we gave it two and a half, three years 60% return, let’s say and they can take 60% on that million that 600,000 You know, or they could say Vinnie, put my 1.6 million into your next project 1031 Then they never have to pay tax and we can take it over and over and over again. So it’s a very beautiful model that I have, you know, device now, you know, I’ve been designed it so that people can make 2x Even 2.5x quickly within six years investing in brand new buildings see?

J Darrin Gross 34:42

Yeah, yeah. What is a million your minimum investment in that or is it No,

Vinney Chopra 34:47

no, no, no, no Ultra Rich, we are giving 2.5 250,500 or 1 million. So those are my three levels now. In the ground constructions

J Darrin Gross 34:59

Gottcha. And isn’t that your is that your way of doing those in more returning capital games? Or is it just on the the million plus people, they’re saying I would I don’t want anything just, I mean, okay,

Vinney Chopra 35:11

Even 500,000 people to they say, really, I don’t need to 20,000 you know, each quarter or whatever, right? They say if we can just give you the money, and you show us the progress of everything, you know, that what we have done so far and everything, then in 2.5 to three years, we’ll be able to cash them out, we call them, it’s cashing out, right? You get your full money back, plus the return because we’ll be getting a new loan. See, construction loan is paid out V five,

J Darrin Gross 35:42

Okay. That’s that’s the event that’s giving you that opportunity. Yeah, that’s construction loan, then you’ve got a completed, completed building with occupancy, too. So you’ve got now your occupancy. So you can show revenue. Noi, and you can you can do like just a conventional.

Vinney Chopra 36:00

Exactly, exactly. Yeah, it’s like, building 17 million, it’s worth 24 million. So this is 7 million increase, as I start putting, you know, my tenants in there, and residents, you know, yeah, yeah,

J Darrin Gross 36:14

Right. Now, and in the like said the monthly rents, I mean, the the cap rate, that’s pretty impressive compared to, like you said, how big of a property you’d have to buy in order to get that same kind of level of rents. So totally, totally, definitely impressive stuff. Hey, Vinnie, if we could, I like to ask everybody about risk? And you’ve answered this question multiple times? Yes, I’m kind of curious if if given just your recent experience, in kind of how you’ve changed from, you know, asset classes, or you’ve expanded, I don’t know, you haven’t changed, you’ve just, you’ve added additional asset classes. But I’m wondering if there’s not something that you can, you can look at across the spectrum of what you’ve, you know, what you’ve invested in and just identify what you consider to be the biggest risk, you know, of just the current marketplace? Or, or let me ask you this, what do you see, is the BIGGEST RISK that you face in this marketplace? And just kind of the near future, as you, you know, work with your your investors and trying to totally coach steward for their money?

Vinney Chopra 37:29

Totally, you know, I’m so glad you’re asking that. I’ve raised like, close to 200 million or so. But you’re right, investors want to save money? What if when you die, you know, or something happens to you, right? What what’s the risk involved in that, and then when I took the key man’s insurance, and then our daughter is in it, now, she’ll step up as President, my wife is also injured, our legal, you know, team and everybody, our accounting department itself, the other parties, you know, during the properties we buy, so there is insurance to be gotten at every point of the property, the loss of income insurance, those are the risks also, if some burning, you know, something fire comes, are like that. So, that is other risk. The other risk, which I got hacked, you know, I think I’d like to mention, is the cybersecurity risk. And that’s a big one nowadays, you know, with everything going through, through the computers and everything. So, you know, there are so many different directors, insurance risk is another one. You know, the big thing is contractors who work with us to do capex jobs and everything, we try to save money, but it’s not worth saving money, unless we want to make sure contractors are well bonded in also have, like, you know, millions of dollars of insurance, right, you know, when they come to work at our assets? I don’t know if that’s the question, you were really posing, the biggest risk I find is that you want to do legal way to raise money, and then take care of the investment of the investors. They know, fiduciary responsibilities the right. So as a CEO, I definitely have always felt each asset I bought, I bought 37 Now or something, you know, and I’m on the loan on all 37 Not too many GPS, you know, cold GPS or anything, I don’t believe in that. Maybe just three I have done it, you know, and then with my partner integration now, you know, like that, but other 27 or eight, I was the only person but, you know, the key thing is, you got to mitigate the risk for investors and mitigate the risk for the well being of your company. So you are in the right business. You are there, you know, Because insurance, it’s an investment, I always look at it as an investment. It’s not an expense, because I had lawsuits of $3 million $4 million lawsuits, which I, because of insurance, I walked away with giving zero money, zero money, and they settle the mediated and all that stuff. You know, so when you are in a business entrepreneur, like me and anybody, there are risks involved in people suing you and other stuff like that. So I always feel insurance is an investment, you know, yeah.

J Darrin Gross 40:41

No, I appreciate you sharing that. And I think that, you know, oftentimes the the focus is how to make money on the, you know, the buy and the sell and, and all that and, and the insurance gets looked at is, is more of a just an expense. I mean, one thing as opposed to the protection, you know, it messes up your noi if you have too much or you know, too much insurance expense. So, but the flip side, like you said, is it there’s, you know, the protection you get, and, and when you are facing a claim, that’s when you know, you’ve got some good insurance, so appreciate it, too. So true. So Vinnie, where can listeners go if they’d like to learn more connect with you?

Vinney Chopra 41:23

Oh, my gosh, you know, I’ve got a really great promotion going on right now. I’m so glad you know, I wrote that book, apartment syndication Made Easy, which really helped me a lot to raise money. And I’m giving this book free, by the way to everybody listening or watching as you could go to Vinnie chopra.com That’s my website www. Vinny just like the word v i n e, why not smile, don’t put smile in there but Vinnie chopra.com and slash free book slash free book and I also have Academy I’m also have a $50,000,000.05 or six C fund where I can talk about it and everything it say, you know, for accredited investors only. You know, if you’d like to invest with me, you could come there also, you know, invest with me yes, go to Vinnie Chopra slash invest. Or if you would like to, to learn from me, which I mastermind actually at four o’clock, I have a very good guest speaker, real estate attorney or no CPA coming to my mastermind. I’ve hundreds of students who are doing millions of dollars, I’m so happy, you know, who have taken my teachings. And now they’re doing 200 $300 million portfolios within two years, within two years and three years. It’s amazing. It’s amazing. And it’s not me. It’s them. It’s totally them. I tell them. I say I knew you when you join my academy. You were a mover and shaker. And you know, they’re doing very well.

J Darrin Gross 42:59

It’s great. They were very, I can’t say thanks enough for taking the time to get to connect and talk. It’s always great to hear from you and talk with you. Thank you. Looking forward to it again soon.

Vinney Chopra 43:13

Totally Darrin and if you’re in Florida, love to invite you, brother. You come to Punta Gorda, or Cape Coral on purchasing that one Palm Bay, Sebastian or Carla? I mean, Venice coming you name it. We are all over here.

J Darrin Gross 43:30

We will talk because I got some travels coming up some pesky.

Vinney Chopra 43:36

Thank you. Thanks. All right.

J Darrin Gross 43:38

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

Announcer 43:55

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Hedge Fund Real Estate and Cryptocurrency with Blake Templeton – CRE PN #346

Blake Templeton 0:00

We find the treasure, do the value add, sell it. Now we’ve got massive capital gains consequences for our investors. So the difference in a hedge fund for a so not a REIT, not nothing tied to the stock market, but a hedge fund with real property in it is that we have 10 to 15 properties that go into a fund. And then our structure is quite unique. We realized that instead of selling, we could actually start with a lower LTV lower loan to value. And then, after a specific amount of years have all the investors principal back in their pocket. They stay invested with a vested interest and then we refinance the property every three to five years. And those distributions are tax free.

Announcer 0:55

J Darrin Gross 1:15

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 Blake Templeton. Blake is a seasoned real estate and cryptocurrency hedge fund manager who is passionate about helping investors invest confidently into alternative asset classes like blockchain technology, cryptocurrency and specific sectors of real estate. And in just a minute, we’re going to speak with Blake about wealth building through alternative assets.

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, I want to welcome my guest, Blake, welcome to CRE PN Radio.

Blake Templeton 2:37

Hey there, and I appreciate it. Look forward to chat.

J Darrin Gross 2:40

Yeah, before we get started, if you could take just a minute and share with listeners a little bit about your background.

Blake Templeton 2:48

Sure, absolutely. started back in oh six, without a dime to my name dropped out of college, no one to own my own business someway somehow, and then didn’t know you couldn’t defer student loans anymore. So had to humbly move back in with mommy and daddy. A parent’s got a letter in the mail to go to a real estate conference knew nothing about real estate flips, valuations or innovations. But I was numbers driven a clicked I could do formulas that was my gig. So ended up getting a mentor in single family. We did between single family and small multifamily did 300 Plus transactions from oh six to 2012 from wholesales to foreign innovations, and then 2012 into commercial real estate builds corporate housing development and apartment complexes did value add deals went into a position where this is where we sit now which is realization that to build accumulate massive wealth, it’s way easier to inside hedge funds. So we run hedge funds for self storage and mobile home park communities and then hedge fund for cryptocurrency.

J Darrin Gross 4:13

Interesting, the the hedge fund thing is something that I hear all the time about, but I don’t I don’t know that I fully understand exactly what differentiates a hedge fund from a from a another fund. Maybe a good place to start is just what is a hedge fund?

Blake Templeton 4:33

Yeah, a quick skinny is most people are used to doing like a syndication. So someone says, you know, I’m going to do a, you know, six or $7 million, say a $7 million apartment complex. And so we’ve got maybe 3 million of renovations we’re going to do and so they’re going to syndicates a pool of money from investors for a portion of that, which is the remainder Have what the mortgage company is not going to loan. So that loan to value ratio between investors and then the mortgage company. But the problem with the syndication what we found out we exit syndications quite well with strong greater return. But the problem with the syndication, so one single property in a one single, you know, LLC or you know, partnership structure or PPM structure private placement memorandum. But after we do the massive value add, we find the treasure, do the value add, sell it, now we’ve got massive capital gains consequences for our investors. So the difference in a hedge fund for a so not a REIT, not nothing tied to the stock market. But a hedge fund with real property in it is that we have 10 to 15 properties that go into a fund. And then our structure is quite unique, we realized that instead of selling, we could actually start with a lower LTV lower loan to value. And then out after a specific amount of years have all the investors principal back in their pocket, they stay invested with a vested interest, and then we refinance the property every three to five years. And those distributions are tax free. And so those distributions are paid out. And so instead of them having this massive capital gains hit, it’s as if we sell the properties, you know, every three to five years, and they actually get to keep the interest, keep the the asset, keep the net worth, but then have tax free distributions. So massive difference that allows them to have diversification amongst multiple different properties. So let’s say 10 properties, proportionally, their interest is in all 10 properties proportional to the opposite, you know, the value of the whole portfolio versus being in one single property. So as the main differences.

J Darrin Gross 7:16

Got it. And I guess, I like the concept and stuff, but I was kind of curious, what is the word hedge? differentiate itself from just a quote, fund. Is there, Is there a?

Same thing? Yep.

Same thing. Okay. Okay, because that’s, that was okay. But no, I like I like the strategy. I mean, I, I’ve always felt like if you’re, if you like the asset you’re in, you know, and it’s cash flowing positively. If you’re selling, you know, you’re just getting out, you know, you basically you’re flipping, you’ve got to find someplace to park that and hurry if you’re, you know, if you’re acting by yourself, it’s really hard to get everybody act together, if you’re, if you have multiple investors, uh, you have to, you know, coordinate there.

Blake Templeton 8:03

It’s a great point, it’s really like, you know, for the person who says, Well, I do 1031 exchanges. In the hedge fund model like this, when they invest, and every, every refinance as it’s as if they already found the property they want to invest into, they already reinvested the funds, and they didn’t have to do any paperwork. So it’s way more seamless. And we never sell inside the hedge fund. So it’s a where they get all their principal back, they get the reinvest that it’s creates massive asset accumulation, is say they invest 500, grand, you know, eight years later, somewhere in that ballpark, they get all their principal back, then reinvest that into another fun with, say, 10 properties. So now that same 500, now they’ve got investment in 20 different properties, and they’re eight years, they’ve got all their money back principal back, and they’ve made the 8% preferred return each each year. Now they invest that into another property. So this massive accumulation of wealth, you know, you want to stay on the cash flow side, and you want to stay on the exit side of the appreciation without paying taxes. That’s the goal. So, yeah, it’s a it’s a fantastic model. And it’s something that you can, you can do, it’s just realizing the difference in structure changing to millimeters changes everything.

J Darrin Gross 9:36

No, I like that. Hey, before we get too far down the real estate side of things I wanted to just ask maybe the or even kind of a better place to start is if we just frame the question, you know, alternative assets. What are alternative assets?

Blake Templeton 9:56

It’s a great question. So the standard position In in a asset or an investment would be maybe the main frame would be the stock market. And so how our whole system was set up would be when the 401 K’s started would be, you would create this entity that you would put money into. And then that 401 K goes into a, you know, mass bucket or a mutual fund goes into a mass bucket of different things and stock market alternative would be just something outside of that norm, we’d call that the public market. And then the investments that are alternative will be in the private market, the private markets were all wealth is made. So all all real tangible wealth, it’s accumulated that preserves, it’s easy to make money, but it’s hard to keep it all wealth truly made, is made in the private market, sustainable, it’s kept, it’s asymmetrical. So asymmetrical, would mean it’s the highest and best potential opportunities with the very lowest risk. And so self storage and mobile home park communities is in the cryptocurrency is where we would put our main focus on alternative investments.

J Darrin Gross 11:15

Got it? So now we’re we’re talking about the the investments and kind of go back to where we started with this with the fact that your hedge fund or, or your funds distinct in that one is a real estate fund and another is a crypto fund or is there an interplay between those two?

Blake Templeton 11:38

Yeah, great question. So they’re completely separate. One is B, specifically Self Storage complexes, and mobile home communities. So these are a large assets, you know, 10 to 10 to $40 million in asset. So massive assets versus like a mom and pop asset. And so then the crypto side is a portfolio of the proprietary system of how it’s actually strategically, a portion aligned with what cryptocurrencies. And when someone invests in they’re investing specifically into that portfolio of assets. And then as a portfolio manager, we manage that portfolio.

J Darrin Gross 12:31

Gotcha. In any. So, going back to kind of just the concept of the alternative assets. He mentioned kind of how they’re different from the stock market. The benefits, you mentioned that that’s where the wealth is really created, is that pretty much the bottom line benefit? Is that the opportunity to create significant more wealth, or are there other benefits that you recognize that the alternative assets provide, as opposed to the, you know, the the public market?

Blake Templeton 13:09

Yeah, so in the, in the private market, again, all investments are equal, right? So it’s the mindset of the strategic investments in the private market. And then the structure, all structures aren’t equal suck the syndication, you got into something but you sold and you’re still an alternative investment, but you got to pay capital gains on it. So the but the big portion are the focus of self storage, mobile home parks, is that they provide mat that provides strong way to returns, there is the recession resistant, their stable asset class, so even apartments takes a massive dip when when specific things of volatility happen in the market. But in self storage, and mobile home parks, these are two asset classes that are in abundance, everyone needs storage, and a down market, everyone downsizes and put stuff in storage. in a down market, the funnel of housing everyone downsizes and the bottom is the mobile home communities. And so they’re stable asset classes, they have low capex, low maintenance costs, and versus apartments, co you’re in a 15 year deal. You You better sell before then if that’s your model, because you’re gonna have to do a full renovation of all those units in that time period. Again, there’s low delinquencies and the structure again. So the main thing for us for self for alternative investments is that we can control more of the actual investment around the circumstances if you’re in The stock market, you know, good luck, you’re gonna have to ride the way and that’s why you’d have the mindset stay in for the long call, it’s always going to turn back around. But in cryptocurrency, for example, we have the ability to move, move funds out of Bitcoin, when it takes a downturn, and then put the funds back into Bitcoin and write it back up. So we kind of have an unfair advantage we get to see behind the scenes of what’s happening in cryptocurrency. And so we get to make chess moves, before something actually happens. So I’ll turn investments for us specifically, I can’t speak for anyone else, but just specifically, self storage, mobile home park communities. And cryptocurrency and the structure in which we manage the investments gives us much more ability to make a strong return.

J Darrin Gross 15:58

I want to ask you something you mentioned and with the cryptocurrency the ability to see kind of behind the scenes. What do you mean by that?

Blake Templeton 16:07

Yeah, that’s a great question. So everyone has a phone. And so we’re just gonna say the iPhone, when text messages came out, I was like, Man, why would anyone need text messages? You know, no one’s gonna do it, just pick up the phone, well, then, text messages became very convenient, or text messages as a software. So the iPhone has software’s on it. Then the the applications where you have an app, so if the App Store software, all the little apps on software, and even my grandma uses some apps, you know, on her phone, because it’s convenient. There’s all software, like Facebook, putting it on your phones application, one would have thought like just go to your desktop. Now you’re like, why would I ever go to my desktop? I’m just going to go to myself, my the application on my phone? Well, Bitcoin, for example, has different apps, different software. So Apple has a phone technology. And there’s a platform called an app store. Bitcoin is a technology. And it has a platform called blockchain. The iPhone has apps on the platform called the App Store. Bitcoin has apps on the blockchain. So these applications are businesses. And these businesses run lots of volume of money. And so there’s literally businesses living on the blockchain. And the more velocity the more money that’s it’s, it’s does that’s like, does business creates more value in Bitcoin. So when we’re looking behind the scenes, we can see all the things that are happening, we see the legitimacy of it, we see the practicals of it, we see the logistics of it, and we see the value of what it will do for an economy. On the front side, however, you might see drama, you might see certain news from the media, you might see turbulence and you know, emotional volatility, but we can see what’s happening behind the scenes. So even though the value might follow the false narrative of the drama, we would just pull our funds and park them safely in another cryptocurrency while that drama takes place, knowing that in the end, Bitcoin will naturally adopt a more truthful value. And then we obviously ride those funds and that’s with every cryptocurrency. So just quick skinning. There’s probably 16,000 cryptocurrencies. Most of them don’t have a blockchain, most of them don’t have a platform. Most of them don’t have other businesses living on it. So you could you and I right now, Darrin could create the Blake and Darrin cryptocurrency and they would just be as many people thought that you and I were going to be amazing and who would put put money into it? But there’s only a handful that have a blockchain that are really tangible utilized that utilize currencies, technologies, software’s so big picture, we can see behind the scenes because we’re looking at all the analytics we’re seeing the wisdom behind what’s happening, we’re not listening to all the noise.

J Darrin Gross 19:41

Gotcha. So let me ask you, just to the point that you brought up the the number of different cryptocurrencies I mean, it doesn’t take a lot to create cryptocurrency I mean, as far as a concept, I wouldn’t bring other but the technology behind it So is there a, I don’t know kind of mature ation? Where are we in the blockchain or not the blockchain with a cryptocurrency? As far as early adopters? Have we reached critical mass where we’re where are we at on the cycle?

Blake Templeton 20:18

Yeah, I think it’s really important to understand that and I appreciate you bringing up. We’re very, very early. And so I’ll tell you, as an investment firm boron capital as an investment firm, it wasn’t something that we when invested into until 2019 and 2019, it grew legs, specific cryptocurrencies, like Bitcoin grew legs, and they created a actual system of blockchain that actually had adopt adoptive businesses in it, and money flowing on it. So but until then, it was, it was still up in the air just as much as a new IPO in the stock market. You know, it’s like, I could do good, I could totally bottom out, like, it’s still over overvalued at the time, you know. So understanding that we’re very, very early. And what’s important to understand is the question why why would we even invest in cryptocurrency at all? What is it why, like, why go that direction, and you have to understand inflation, inflation is the largest risk to everyone. On the real estate side, you know, we just, you know, keep on plugging along and try to produce cash flow properties. But if you don’t understand inflation, the Federal Reserve has a chart of M one money supply. Essentially, that’s how much money they’re printing and what it looks like on a graph 2008 now looks like a blip on the radar, it literally now has gone catabolic, straight up like a jet going straight up in the air. And then inflation has has gone from what we might call two or three or 4% to 15%. So, the real inflation not CPI, where it can be in a manipulated, but the real inflation rate is 15%. So we have to ask ourselves, how might I produce or outpace how might I outpace the inflation rate. So if you understand inflation, guys is literally the US dollar becoming less valuable. So it becomes less valuable, meaning it takes more dollars to to buy the thing. Like for example, in renting cars and trucks, the price for renting cars and trucks, the price has gone up 87% Over the last year, fuel fuels going up 44.5% furniture and bedding gone up 8.6% Sporting Goods GM 7.5% My point is, if you understand the US dollar is going to continue to be the value that the inflation rate is going to continue to eat up your value, then you have to outpace it, you have to make more than 15% and so cryptocurrencies specifically, you know, a handful of cryptocurrencies that have a blockchain there have tangible business running on them. It’s, it’s a hedge to the US dollar, it’s a way to actually get outside of this system. It’s a way to literally quit, quit making your money in US dollars, and make your money is an actual different method. So bitcoins not just like digital gold, it’s digital gold. It’s a bank in cyberspace, it’s thermodynamic, there’s literally methods where you can make more money in cryptocurrency, then we can actually do in real estate and right now in our current season of volatility on both sides, so there they know that the reason is, because you’ve got to outpace the price of inflation, and that’s the most important thing right now.

J Darrin Gross 24:30

So I get inflation and I think that if we want to come back to just the you know, the US dollar I mean, I know that this a fiat currency and that we’re basically what you and I believe $1 is worth is what would the dollars worth and that’s where, you know is is there’s more dollars pumped into the system, the whatever the good, cost more dollars, because it’s still the same. It’s still the same asset but Just based on the the flood of money, it takes more of those dollars to to buy that, that asset. What’s to keep these blockchain cryptocurrencies from somebody, you know, having a split or something like that we’re also now you’ve created inflation, like, you know, and love the stocks, they’ll split. So they keep the price down. Is there anything built into the crypto that that prevents it?

Blake Templeton 25:28

Yeah, it’s a good question. Um, they have specific, specific growth has actual splits. And there’s the most important thing is, is cryptocurrencies that have a limited supply. So just like the stock market, a publicly traded company that’s drowning, matter of fact, right now, 21% of all, companies that are publicly traded, or called zombie companies to 21%, can’t even pay their debt service, they literally can’t pay the debt service. So what do they do? They they split their stock that’s worth less is worth less, is split that stock and they sell it again and sell it again. So what we don’t want is that if you invested into a cryptocurrency that does that, yeah, that’s completely the same world as the US dollar, the US dollars, doing the same thing. They’re quote, unquote, splitting it by just printing more of it, and making it worth less. So we invest in the cryptocurrencies that have a limited supply. So for instance, Bitcoin only has 21 billion coin. That’s it, it’s done. That’s it, that’s all you got. So when it when you have a limited supply, then then you’re not going to, you’re not going to be able to continue to make these splits. And when you can’t make these splits, then you have a rare a rare property that can that then the value of that item continues to go up, versus it continuing to be multiplied down. So I said 21 billion, it’s 21,000,020 1 million coins. And so what then happens is the FET, there’s 21 million coins, once fully mined, that becomes a stable base, those 21 million coins becomes a stable base, and it can’t continue to split. So it’s a great question. However, certain getting cryptocurrencies are not set up that way. And that deters one from realizing it to be a good investment, because you can’t outpace inflation, if they decide to continue making splits because it’s doing the exact same thing. So the number one thing for stewardship is you have to be able to accumulate wealth, you have to be able to accumulate wealth, you’ve got to be able to remove yourself from tax ramifications, as we talked about in self storage, mobile home parks, where you aren’t paying the capital gains, you’re refinancing versus selling. And then you’ve got to be able to have a stable way to actually increase your value of your assets like through cryptocurrency verse is the, you know, having your money in your cash flow in US dollars, and then your cash flows deteriorating, even though you’re making it. It’s deteriorating, because the US dollar is deteriorating as a whole.

J Darrin Gross 28:51

Right. So let me ask you this. So if there’s 21 million Bitcoin, and when they originally issued there was a price equivalent, however many dollars, right. So beyond that point, the value is based on a, a supply demand, because there’s only one you said, there’s 21 million and now it’s demand people are wanting this as currency, right? And I’m assuming that is directly tied to the value of the dollar, meaning as the dollar decreases in value than the inverse happens for the crypto because crypto has a limited supply, while the dollars have a an ever growing supply of dollars. Is that a lot of what drives it? Or is it or is it just the thirst for investors looking for some sort of an alternative that’s driving the demand? Or is it both?

Blake Templeton 29:42

Yeah, you ask really good questions. Darrin. So let me just kind of back out for a second and put that on a silver platter. So it’s a it’s a very good question. Because the thought line is is is what’s driving its value. Is it just supply and demand or is it as the US dollar goes down? It’s directly correlated. So it goes up and out of out of oil and commodities and US bonds and silver, out of anything. Anything else in the stock market? Bitcoin is one of the least correlated to anything else. And it’s not correlated to the US dollar. So the US dollar, if we had some mass of it, they decided to print, you know, God forbid, 100 billion, or excuse me up, you know, 100 trillion tomorrow, where we’ve just printed about 10 trillion over the last, you know, 18 months, two years, it wouldn’t be directly tied to that, because it’s its own system. Now, if you’re proportionally using it to the dollar, then obviously, in dollars, the price would go up.

J Darrin Gross 30:58

Right, but, you have to in order to Buy a Bitcoin, you have to use dollars to buy the Bitcoin, right?

Blake Templeton 31:03

Correct. Correct.

J Darrin Gross 31:04

Okay. So some of there’s got to be there’s an exchange there between one for the other?

Blake Templeton 31:09

Sure. Sure. Yeah. from the, from the mindset of, you’re just trying to find a valuation of $1 to $1.

J Darrin Gross 31:18

Just kind of curious, what drives the the, you know, the valuation? Is it supply and demand? I mean, that’s the main the main

Blake Templeton 31:26

That’s really the question, so what actually drives the value, because you could compare it to anything. But if you compare what drives the real demand, not just so you’re seeing volatility at times, and that’s all that’s a false narrative, or it’s a big fish trying to get in the market. So they’re using persuasive techniques to, you know, push the market down. Or they’re having drama on the front side. So they’re having, you know, a lot of the small people who are in like your Robin Hood app, and so forth. They’re having them sell off. So it looks like it’s going down. But that’s a in a big way. It’s a way for them to get in. So what’s really driving it what’s going to drive it let’s look over the next decade, because we’re very, very early over the next decade. What will drive it it’ll, it’ll be the blockchain, the businesses on the blockchain and the amount of money, the velocity, how fast the money moves inside the actual blockchains of the cryptocurrency. So that’s the as, as the value grows here, the value of that coin grows.

J Darrin Gross 32:40

So let me ask you, is there I mean, the velocity because I, my sense of things, and again, I’m by far, the least knowledgeable about crypto, other than I know that some of the names, but if if people are investing in and they’re buying it, I’m assuming that most are buying it and hanging on to see it go up before they sell it? If they sell it, how, how much velocity of Bitcoin is there as a as a currency for goods and services?

Blake Templeton 33:15

Yeah, so here’s kind of where everything gets confusing for most people. If we remove the word currency from crypto, so 99% of crypto are not currency, there’s not a model for them to be utilized as currency. If we look at crypto as software, so just like we talked about Apple is software, Google software, Amazon, or the grocery store in cyberspace. Yeah, kind of their software, their software company that’s brokered relationships, it’s created a way to make money in a software. So you can go online and click buttons and then have stuff delivered to the software. Bitcoin is software. So we processes software, then you’re saying, Well, John has put his money in the software, and he’s waiting for to go up. Okay, so that’s on the front side. Behind the scenes. There’s businesses. So like, if I pulled out my if I pulled out my phone, and I showed you all the apps that I use, paid for memberships for iPhone is making apples making money on all those apps, that makes Apple more valuable because they have very low margin on the apps and they’re making 30% on everyone’s apps. So Bitcoin works the same. There’s business literal businesses that run the backend, and Bitcoin, specifically the blockchain will be used For more businesses that we would ever have time to talk about on this actual channel, but to give you a couple examples is Bitcoin will the blockchain for Bitcoin will be used in real estate transactions? So all deeds of trust all actual transactions in the actual

J Darrin Gross 35:25

Chain of title kind of thing I’ve heard it’s kind of that’s where the blockchain will actually

Blake Templeton 35:29

be on the blockchain. And

J Darrin Gross 35:33

but not to be confused with it won’t be the the Bitcoin it’d be it’s a just a blockchain just more of an open ledger. Right, where the you can see who has what if, and allows you to transfer fractional ownership, etc.

Blake Templeton 35:50

Yeah, correct. I mean, this is education from a digital content locker from digital rights to have holding escrow to, to record, you know, to a record keeping from voting, voting would be on the on the blockchain. So instead of it being where you mail out a ballot, it’s literally on the blockchain. And these are all businesses that will be set up on the blockchain. And so all the voting in the US could be done on the blockchain secure ledger, everyone can see everyone, you had to actually have a wallet to actually vote, you could have a KYC know your customer, which basically just simply means it’s a real human being to crowdfunding and equity and private markets. And there’s so much so the realizations is, is that’s what actually provides the value to it. And what we do at boron capital, to kind of like make it real simple, what we do is we hold a portfolio of specific cryptocurrencies, and we ride the narrative on them. And then we hold a portion of Bitcoin. So a goal is, as these are growing, and they’re going back and forth, we find out the best positions to be in. And in that portfolio for last two years, we’ve outpaced the price of Bitcoin, or the value of Bitcoin. And it gives people an ability, a, a, a backdoor entrance, or a way to get into what I’d call institutional size, you know, deals where you couldn’t be in something like this, unless you’re just going to do it yourself and knew all the ins and outs, and we’re doing all your analytical data yourself. Same thing for self storage, mobile, home parks, to grow assets, to be able to build massive wealth, you’ve got to get into something where there’s large deals, you got to get into, we can accumulate massive wealth for you and again, massive wealth on, you know, 10 to $40 million deals and get a small portion of a ton of them. And that’s how you can accumulate massive wealth. And that’s what we do at moron capital.

J Darrin Gross 38:10

Well, it’s fascinating, all of the the crypto currency and in blockchain, I do see the other blockchains kind of, you know, it becoming more and more integrated. Yeah. And just record keeping. I mean, I think it’s, it’s, it’s brilliant, especially for, you know, real estate, just transactions, like we’re talking chain of title and that certainly would have kept us from the 2008. fiasco.

Blake Templeton 38:37

It’s so true.

J Darrin Gross 38:41

Alright, so we talked about the the crypto and then as far as the the assets, or I mean, sorry, the the real estate, you guys your focus is the mobile home communities and then also self storage, correct. Correct. And your strategy there is you you buy, refinance, return the capital hold, and then refi periodically to create more return to your to your investors. Correct? Correct. Got it. Got it. How many of you got between what 10 or 15 assets right now on that port.

Blake Templeton 39:21

We’ve got a fun that just opened and we’ve got in this one boron fund. He currently owns an interest in three assets, manufacture housing community and to self storage communities totaling 1500 rental units. So from Alexandria, Virginia, which is right next to Washington DC, just down from just minutes from the Pentagon, and Amazon’s headquarters to 209 units in infection housing in Washington, DC Metro and then 600 units sell storage in Tomball, Texas. So in the growing suburbs of Houston. So we go into specific markets that have a sustainable foreseeable future who or where there’s a massive, calculate guru, people moving into where supply and demand is in our favor. And then obviously, in these two specific niches of real estate, what I’ve shared already is how they bring massive cash flow, low capex and so forth.

J Darrin Gross 40:36

Got it. And the ultimate plan is to not accept a property but more do the refinance. Are there any what ifs? Or would you potentially what what would cause you to exit a property? And I’m assuming then reinvest in another one?

Blake Templeton 40:54

Yeah, that’s a really good question. I mean, it would only have, it would only be where a large, massive Blackrock type firm wants to buy the entire portfolio, and then the amount of money that they would pay after it’s moved in 1031, or something, you could still make more money than what you’re going to make. So if we can do it tax free, you know, it makes it so even on the cash flow, even cash flow, you only do a, a advanced cost segregation. And so we’re able to shorten the time of the the depreciation, which allows the majority of the cash flow to even be tax free. So when we can provide that to our investors, it really makes it very hard to ever want to sell knowing that you have a golden egg that can continue to be able to produce long term. So big picture on on fund eight self storage and mobile home park communities. John, invest in, say, John invest 500,000, John’s making a preferred rate of return. And he ends up getting paid back his initial principal. And somewhere around your eight or so he’s, we, as we refinance, the first refinance, he receives back his principal and his 8% preferred return for as long as those years were. Now he has this preferred return. He’s got his principal all back in his pocket. And now he’s in the deal long term with no direct risk to the deal. And he’s able to read through rewards of the continual refinances and being able to stay positioned in accumulating wealth. Got it?

J Darrin Gross 42:49

Got it. People like it, we couldn’t like to shift gears here for a second. As we talked before, we started recording 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 at, we first look to see if we can avoid the risk. If that’s not an option, we’ll see if we can minimize the risk. And when we cannot avoid or minimize a 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 their clients, investors the market, however you’d like to frame the question, but I like to ask my guests if they can identify what they 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 if you’re willing, I’d like to ask you, Blake Templeton, what is the BIGGEST RISK?

Blake Templeton 44:05

Yeah, the BIGGEST RISK hands down Most definitely. For every single investor across all industries, is the inflation. The inflation is the largest thing that’s eating away. Unbeknownst to you. It’s a largest tax known to or unknown to you. It’s the largest expense you had that you don’t calculate. So inflation now being 15% When it was supposedly 2%. A decade ago, you could probably do pretty well. It’s just kind of forgetting about it. But now 15% is the largest risk. Because if you’re not producing more than 15% Especially if on your cash flow. If you don’t have a good strategy and you’re still having to pay taxes on it. You’re not producing 15% on your money, then your company pletely losing in investments the whole time while you think you’re producing good results. So what we have to do as a good steward, we’ve got to realize that, you know, unconventional world events, beckoned us to be good stewards with unconventional strategies. And we have to back in and reverse engineer into what good strategies are in an unconventional time. And what we do at Warren capitals, we do that with self storage, and mobile home cart, and mobile home park communities and then cryptocurrency in two separate funds, limiting the downside and making sure we outpace inflation, and in the fund, self storage and mobile home park fund. Once all your money’s back in your pocket, then it’s an infinity return. So now your these funds get to go back and go back to work. So we beat that risk in that way. And then in cryptocurrency, our mission is to always outpace a Bitcoin. So that that allows us to, we take that cryptocurrency is like digital real estate. So if you think about it being digital real estate, then we’re able to go in and tray narratives or sell narratives back and forth and create a much much much higher return return, which allows us to always outpace, which allows us to outpace inflation. So that’s the largest risk that if we have a set it and forget it mindset, if we kind of have our head in the sand and don’t really know what I’ve got, I just know I have a lot of something that a lot of something can become nothing really quickly if you don’t have a good stewardship set in place.

J Darrin Gross 47:00

Hmm, very, very true inflation. big risk. Blake, where can listeners go if they’d like to learn more connect with you?

Blake Templeton 47:11

Yeah, if you have any, any interest at all into as an accredited investor and investing into self storage, mobile home park communities, or you have an interest into investing into cryptocurrency, or for those of you who are not even accredited, okay, I’m just trying to get started. I’m just trying to get my feet wet. I know I need to be in cryptocurrency. We also have a, a coaching program, inner circle that allows you to just get started even if you’re not accredited. So the best thing to do is pull out your cell phone. And I’m gonna have you send me a text message makes it so much simpler. And then we’ll build I’ll communicate with you directly support your cell phone, text, the number 877-771-0615 You’re going to text invest to invest to no space, just the word invest. And then number two, so 877-771-0615 And then in the message you’re gonna put invest to. I’ll know you came from Darrin, I’ll take great care of you.

J Darrin Gross 48:28

Awesome. Like 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.

Blake Templeton 48:39

Hey, Darrin, my pleasure, my man. Look forward to it. All right.

J Darrin Gross 48:43

Announcer 49:02

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Commercial Real Estate Deal Software with Mike Sowers – CRE PN #345

Mike Sowers 0:00

But once I figured it out and started building a network and did some deals with some people, I realized that I never needed all that cash in the first place that I could raise capital from other people. And it realized that that skill itself is really the most coveted skill of all skills in real estate investing, because once you learn how to raise capital from other people and establish credibility, for the equity piece of it, you can do an unlimited number of deals.

Announcer 0:28

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 0:47

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 Mike Sowers. Mike is the CEO of Commercial Investors Group, a private equity company that repositions commercial real estate assets across the United States using their proprietary software cre tools. And in just a minute, we’re going to speak with Mike about the opportunities for our listeners that you opportunities to invest in our franchise with his software, or also opportunities for accredited investors to invest passively in one of their deals.

But first, a quick reminder, if you like our show, CRE PN Radio, there’s a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe with no one welcome my guest, Mike, welcome to CRE PN Radio. Hey,

Mike Sowers 2:21

Thanks for having me on.

J Darrin Gross 2:24

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

Mike Sowers 2:34

I went school for finance and entrepreneurial studies, I ran a franchise for college pro painters for a couple years while I was in college, and then I started my own real estate and construction business. And for 12 years after college, I remodeled a little over 1000 properties mixing in flips, wholesales and some rentals built up a portfolio of single family properties. And then one day I looked in the mirror and realized that I built a system that I was completely a slave to. I had like over 50 employees and I was I just felt like I couldn’t escape. And at the end of the day, I wanted to build something that was a little more scalable, where I didn’t have to do as many deals. And I never got into commercial because I thought it was a little bit outside of my reach. And I needed way more capital than I always had. So I was looking for condos, we live in Minnesota, I was gonna move to Florida with my wife and a business broker got ahold of me and convinced me to sell my business. So we ended up selling the construction division of our company in 2017. And that’s when I had an influx of cash and started buying commercial properties at that point. And then I ran out of money and was forced to start but I still had a ton of great deals coming in. So I was forced to learn how to raise capital from other people.

And once I did that, and that that was tough. But once I figured it out and started building a network and did some deals with some people, I realized that I never needed all that cash in the first place that I could raise capital from other people on it realize that that skill itself is really the most coveted skill of all skills in real estate investing. Because once you learn how to raise capital from other people and establish that credibility for the equity piece of it, you can do an unlimited number of deals. And then the sky is the limit in terms of scaling up. So once I did my first couple of commercial deals and made as much on one deal as I would on like 30 or 40 House flips with just a little bit more work than maybe one flip. I realized that I was in the wrong business from the get go. So I got rid of all my residential properties and duplexes and things like that. And I moved full time into commercial real estate. But it was I realized it was kind of a good old boys club. So I I actually put together a podcast, a Creative Commercial Real Estate Podcast to try and interview a bunch of other people to finally get them to open up. And it worked. And I learned a lot of secrets. And I still still do that show, because I’m always learning, I truly believe you don’t ever arrive at the knowledge. But over the last four years, we built that business up and put a lot of systems in place. And we built a proprietary software and our deal flow is so amazing, we wanted to start duplicating into other markets.

So we actually set a franchise up. So now we’re officially the only commercial real estate investing specific franchise anywhere in the world. And that’s pretty exciting. We’re opening up locations in most major metros and partnering with people to basically be our boots on the ground. The idea was, we wanted to buy properties and other markets. But we don’t I didn’t, my lifestyle, I didn’t want to become a slave to the new system and be flying all over to all these markets, having to analyze deals and setting up asset managers in those locations as employees. And then if they quit, I got to go live there for three months to try and replace them. And that just wasn’t my vision. So I decided to franchise where I get a local operator, it’s their business. And we just get a small royalty on the production that they do. But we help them take their business from where they’re at now, to really scale in that thing up. And we focus on all asset classes, office retail, industrial and multifamily. But within those asset classes, our niches really value add projects where we can create some kind of value or solve some kind of problem. And that’s really how we mitigate our long term risk is because we create this equity cushion with sweat equity. That way, if the value ever drops down, it’s not eating into capital, we contributed from our investment partners, but it’s just eating into equity we created from sweat equity.

J Darrin Gross 7:01

That’s awesome. I love the the whole history spectrum there from, you know, doing the work and then and then realizing that you’re kind of a slave to it. But I think throughout all of what you said there is basically the systems that sounds like you’re you’re very systematized kind of guy to to, you know, replicate, duplicate, you know, your your success. And as opposed to the the handcrafted solution for every every option, or every opportunity. That’s That’s great. So let’s let’s talk a little bit about the the the software the the system approach you have with with in the name of the software, did I get that right, was it?

Mike Sowers 7:50

Yeah, CRE Tools, which stands for commercial real estate tools, it’s pretty basic.

J Darrin Gross 7:55

Okay. Tell us a little bit about what it is and how it works and what the opportunity is. Sure.

Mike Sowers 8:04

So it’s one day I was sitting at my computer and I had 13 tabs open in my Chrome browser. And I was doing my work. So I’d be researching and properties in one software that I’d be paying a subscription for. And I’d be researching or getting skip tracing them to get their cell phone, email and a different software. And then I’d be launching an email campaign through like HubSpot or Active Campaign. But they don’t do text. So then I do texts or a different program. And then I do ringless voicemail through sly broadcast, and then I do you know, I’d hire a marketing company to do direct mail for me. And then I’d have to go analyze a deal using a spreadsheet and then I got to write up an offer. Okay, well, now I got to get out a Word document. And so I realized that like, there was such a duplication of effort to try and streamline this and the worst part beyond the double entry issues are the left hands not talking to the right hand. So I have no way to look at a 40,000 foot view of all the properties I’m targeting, what are the different lists within those properties? How am I managing a sequence of direct marketing? Who are the brokers involved with these properties? And how are they related to all the different deals we’re doing? And so it was just it was really chaotic, right? We were working out a tons of different things. And I was spending like 4300 bucks a month on all these software’s and I was like This is nuts. There’s got to be something out there that does it all. So I went on like a three month mission it was a big quarterly rock for me was to find a software that did it all and and and I found a couple that came dangerously close, but they really didn’t hit the mark and I even reached out to them and was gonna see if I can pay them to like cost them develop some features that were missing that I wanted. And the more I thought about I kind of woke up one day and I was like, I need to build it. Because if I build it then I have have full flexibility over it. And I remembered when I sold my construction company, one of the biggest things that the buyers were interested in was the fact that I had created a software platform that made it super easy for people to estimate jobs. And so I was like, Well, I bet if I invest the money, it’ll create value for our company. And at the time, I was writing my book that I published now on Amazon, and that’s where I give away my system that I’m using to go out and do this. And so I hired a development company, and I looked at a bunch of different platforms. And we settled on a platform, a coding platform, and we built on top of their existing platform. So we kind of started 90% of the way, and then we could fully customize this series of apps. So now it’s super simple, right? My franchisees and our corporate location here and the people who are responsible for that. It’s basically a marketing, a deal analysis and a workflow, streamlining software. So we can go in, I can take, it’s loaded with all the properties, all the commercial properties with all the key data points, the owner’s name, cell phone number, and email. And then I can design and launch multi sequence. Direct marketing campaigns to brokers and property owners, generate leads track those leads through our deals app. We have a CRM built in and our contacts app. And what’s really cool is it’s a true database. That’s what was the issue with this one that we almost went with. It wasn’t like a one to many, and many to many relationship between the apps like a true database was, and we looked at like Microsoft Access, and some other things like that, that are kind of true databases, but they’re super clunky and not user friendly. So I wanted to build something that was just kind of dummy proof so that my team could go in and do their work. So now, it’s been amazing. Like, I can go in and launch a campaign in less than five minutes. Each campaign I launched generates from 50 to 100, leads for off market properties. We work the deals, I go into my deal analyzer app, I analyze the deals, I have a renovation estimator app, I basically recreated what I had for my construction company to estimate the cost of all these things on a piece rate. And then all that tells me exactly how much I can pay. And then literally all I have to do is click a button, choose what I want to merge that data to do I want a full purchase agreement offer summary letter? Do I want it to go into a lease template? Is it a property management template, depending on the deal type, I can have it merge all that data into a final document, I can even send it out for a signature. And then at that point, there’s checklists and all these other cool things built in just to streamline our workflow and make sure everybody’s on the same page. So.

J Darrin Gross 12:58

But this definitely sounds very comprehensive. And having spent some money on some of the different software’s out there to try and, you know, make things work. I know the frustration. It’s like there’s like this one does this, but it doesn’t migrate to here and in trying to get it all to talk like that. I’m curious, so that the way that you’re you’re offering the software? Is it only through franchises or somebody can buy it? Or is it a monthly subscription? Or is it a one time price? Or how’s it set?

Mike Sowers 13:36

Yeah, that’s a good question. I had a bunch of struggles with whether the software itself should be its own for profit company, like more software as a service where any commercial real estate company can subscribe and I build an enterprise value out of that company and maybe exit out of that someday. What I realized is my passion is real estate. It’s not building a software company. And the support required around building a software company. I was like, hey, look, what’s the bigger and play if I start franchising the company and I give all the franchisees This proprietary tool, they’re gonna have a leg up against everybody else in their market, hands down. And that long term is going to be worth way more than the software company ever would be. And so why would I spend all this money to basically give my secret tool to all of our competitors so I chose to keep it in house. I’m sure I’m leaving money on the table on the software side, but at the end of the day, for me, it’s not all about creating more money. Really, what what drives me now is is partnering with other people and just having fun doing deals and watching them, you know, go from zero recurring revenue to 1020 30,000 a month and passive income and the way that that changes people’s lives so that they can kind of design their own life and live it the way that they want to, you know that that gets me excited. Those are the stories that really drive my life forward. That deeper meaning

J Darrin Gross 15:15

down and so but just to be clear, so that the franchisee somebody who would buy a franchise, there’s not something that they have to sell it’s for them to find investments and create the passive income through real estate or some sort of an income stream through through real estate investing, correct?

Mike Sowers 15:36

Yeah, so when you buy a franchise, you get a series of tools that all come in a toolbox, so you get access to the software, you get full support and training. So first, you go through the online course, then you go through our three day launch bootcamp, then you have a weekly goal setting review with an accountability coach, you have access to a deals couch whenever questions come up throughout the week, and then you have the deals committee meeting, where you can actually submit your deal and have all their people in the group scrutinize it. And so you have all the support for success. And then we even fly into your market and help y’all make sure your business is set up. So that’s the support piece. And then we really train you, it’s all about training on the system and the strategy to make sure that you know exactly what types of properties to target, how to analyze them, how to estimate repairs, everything, we fill in the missing pieces, like you can learn all that stuff on your own, but I’m just going to be able to get you there so much faster. When you come under our umbrella, you’re joining our company, it’s different than like a coaching program I used to I’ve been doing coaching since 2007. And the challenge with coaching is I can give you all the systems and all the support. But at the end of the day, it’s your own business. So you have to rebrand it, you have no credibility, when you’re starting out, you have to kind of recreate some of the systems, even to something as simple as setting up your entity and doing all that when you open a franchise, like I don’t have to change anything, like it’s my same exact letter with the letterhead and language I’m sending that out. And the challenge was, if I had coaching students in all of these markets, they would be competing against the franchisees. So we actually shut our coaching program down even though it was quite profitable.

J Darrin Gross 17:19

And how long have you been doing the the franchise model here?

Unknown Speaker 17:23

We just started this last last fall. Okay, and it didn’t really officially launched until December of last year. So just a few months now. So the thing is it just in the beginning stages, and we’re going to be building this thing out, we just opened our first two locations in Denver in Colorado Springs. And we have about seven more locations coming down the pipeline.

J Darrin Gross 17:50

And in the the markets, or the the franchise, is it based on the demand? Or is that based on the information you have? Or how is it that the the territories are determined? Yeah,

Mike Sowers 18:05

Great question. We sell them by county. And and really what we’re looking for is primary markets. So large MSA is with at least, you know, 750,000 people typically, and like 10,000 commercial properties is what would comprise a market that’s kind of the minimum for a market. There’s people making buku bucks out in rural America, but that’s not our gig. Our gig is really to concentrate in higher populated areas so that you know, we have access to a large buyer pool. And it’s one of the ways that we mitigate risk, because you might get a smoking deal and be cashflow like crazy. But if that dollar tree in small town, America goes out of business, there might be nobody that ever wants that warehouse again. And that’s a huge risk that we don’t want to take.

J Darrin Gross 18:55

And I’ve come to appreciate the lower cap rates equals somebody ready to buy your deal when you want to exit as opposed to, you know, higher cap rates and there’s nobody wants to buy your deal. So definitely something to understand there. That’s interesting. So the first two, how did you? I mean, did they approached you? Did you have relations with the people before? How did you arrive at the first two territories sales?

Mike Sowers 19:30

Yeah, it’s a good question. You know, our our marketing strategy has really been one about attraction rather than promotion. And so what we do is we just focus on putting phenomenal content out that blesses people’s lives and allows them to move forward. And what we find is that some of those people want to join our team, and they come to us and they seek us out on our website, whether they want to invest passively in our fun which we have an equity fun, or they want to come take our online course or they want to come, you know, explore opening a franchise in their territory. We just we’re doing podcasts like this, we’re doing a free book giveaway, I have like a free audio book giveaway. And then some of those people read the book and are like, hey, I want to do deals with this guy, right? That’s what it’s really all about. I mean, my goal is to just partner with people in other markets to do deals. And that’s really what spawned the whole franchise system. It’s so that I have somebody who’s bought in who’s committed who can’t quit. And they’re in the market. And they’re the boots on the ground. They’re the ones overseeing construction, leasing, and property management, but I give them all the systems and the coach and the support to succeed and find deals and get them under contract, we solve two really big problems for them, we do most of their direct marketing for them. And we have our equity fund available. So if their big fear is I can’t fund my deals. That’s one of the reasons why people are really excited about this, because they’re never obligated to partner with us on the equity side, like they’ll own the property, they can raise the cash from their own pool of ambassadors and and teach them how to do that. But in the beginning, it’s hard to get started, there’s, you know, people sugar coated, I think. And so, when you’re getting started, you can just be like, just take that whole fear off the table, because we’ll partner with them on qualified deal. So if it’s like, a nice value, add multi tenant warehouse deal and a good location, like I’m all in on that deal, right? As long as we can get it at the right cost basis, then we’ll do a deal like that. So they’re never obligated to partner with us. But but in the beginning, they have the option to do that as a franchisee.

J Darrin Gross 21:53

Got it? You mentioned capital raising, you know, when we first in the very beginning, it didn’t quite catch it does the the software include any capital raising features.

Mike Sowers 22:11

It has some light features in there like it allows you to put together the statements and cash flow forecasts and what’s called the sources and uses, which is where you list out all the sources and uses a capital, we were going to build it out as an investor portal. But then I realized there was another software that’s just so much more advanced, and it would be a really, really high dollar item. So I prioritize the development of some of the other things that there aren’t good replacements for on the market. And right now we’re using a third party for our investor portal, but eventually we will migrate to that, but I gotta, I gotta sell smart franchises to fund this.

J Darrin Gross 22:48

Well, but I think the the, you know, again, chicken, or the egg kind of thing, if you don’t have the pipeline full of opportunities, having the software to manage the investors is, you know, kind of, not necessarily, so kudos to you to keep the focus on creating the pipe and how to fill the pipe, which I’m certain that that’s, you know, that that’s definitely one of the the biggest challenges is to try and, and I’m assuming being a software, you know, automation that, that these communications and you’ve got the email the cell phone. So in the mailing address, you’re, you’re doing the multiple touches with a potential buyer or potential sellers to make certain you’re in front of the seller if when they want to sell in I’m assuming the primary focus is just off deal or an off market deals. Correct?

Mike Sowers 23:51

Yeah, off market or pre market, we do buy quite a few deals that are listed online, though, from other people who we have relationships with brokers, and they’re like, Hey, I’m listing this one Monday and we just either get our offer in first or sometimes the property will sit on the market for a long time. And we can come in and see it from a different lens, you know, maybe the rest of the market house or uncover some kind of way we can get the deal done creatively. Because it’s not just all about price. I mean, that’s what everybody thinks it is. But it’s about how it’s going to get financed to I mean, if I got to go put 30% down and raise that from my Fund, which pays 15 to 20%. That’s expensive money. Right? But if the seller is willing to let me put 5% down on a contract for deed, maybe I can just do that deal. You know, with my pocket change and pay a little bit more I could probably pay 10 or 15% more if I don’t have to raise capital from other people.

J Darrin Gross 24:54

Got it? And does your your software and the the menu of Have offers or or contracts that you want to submit? Does it kind of pre formed those those options for you?

Mike Sowers 25:10

Yeah, it does. So it allows us to analyze a traditionally bank finance deal versus like a contract for deed and a seller carry back scenarios, ways out your weighted average cost of capital, what’s your cash flow, you can change like the purchase price assumptions and see how that all flows through to, you know, what’s the equity multiple and yield on the investments for under the different scenarios. And then I click a button, and it merges all of the data points into an offer summary letter with three offers, the purchase price, the terms, the payments, all that stuff, I don’t even have to fill any that auto calculate any of that my software is puts it automatically in the letter, it’s like, saves me like two hours every time I’m doing an offer.

J Darrin Gross 25:53

I love it. That’s great.

Mike Sowers 25:55

I mean, we’re doing like, you know, five to 10 offers a week. So I mean, that’s like, you know, think of the labor involved in all that. I mean, that’s like a 20 to 30 hour week job just for an analyst that our software cut out the picture.

J Darrin Gross 26:12

Yeah, no, I, I love all of the computer generated, you know, things when they work. Yeah. As opposed to, like you said, In the beginning, it was this, you know, the multiple entry thing, I it’s just a source of frustration for me how all of this stuff, all of these different programs, they’re not able to, you know, see each other and the requirement to put in the same information that I put in here and put it in there and put it in there and put it in there. It’s just like a time suck. And it’s just very frustrating. So I never

Mike Sowers 26:45

realized this. But I think I was born to be like a software designer engineer in another life. Because time just passes. Like I geek out, I get into our software. And it’s like, the platform was built on the low code platform. But it allows back end coding to change the user interface and API’s with other software, so as full, full power, but it’s easy for me to like add fields and create formulas and stuff in there. So I just geek out on that stuff. I get in there. And I love like, what if I move this, oh, here’s a field we need, I can add that. And so it’s super cheap. Like we can continue just build these things out. And so the software is is getting better every day. And then all my, you know, team members and franchisees or whatever, given me feedback, like hey, you know, what about this feature, whatever. And so it’s just a matter of time. Like, I’m building out a due diligence app right now that’s going to streamline the entire due diligence process with like checklists and dropdowns. And status, who’s assigned what’s going on with this, attach the files over here, that kind of stuff, just to de risk the process? Because there’s human error when you don’t have a system?

J Darrin Gross 27:54

Oh, yeah, no, there’s plenty has been scientifically proven. You know, trust the data, don’t trust your gut kind of thing. So can you talk a little bit about the size of the deals that you’re you’re seeing through your, your offerings, and that is it? Many, you mentioned you you cross multiple asset classes? But is there a sweet spot on the deal size that you found that works best?

Mike Sowers 28:26

Yeah, there is. And I think it’s different for each, you know, location owner, like the newer franchisees will probably target one to $3 million deals, right, just so they don’t overextend themselves. That’s where we started. I mean, I think my first property was 700 grand. I’ll still do I’ll do that $700,000 deal again, today. I mean, that thing, cash flows me five grand a month, and I got no money into it. I’ll do a couple of those a year. Why not? So I’m not, you know, I guess like if the deals 700,000 Plus, I’ll do it. But that’s not to say like, you know, look, an office condo deal came across my desk the other day, and, you know, I can pick it up for 350 and turn around sell for 425 Maybe 10 hours of work, you know, what will I do that deal? Why not? I just I love doing deals. So but but my business plan and my exit strategy changes based on the deal size and the metrics of the deal. There’s some deals that the price per square foot is such a high multiple of the rent per square foot that they gotta be flips. So if I can buy it for, you know, 70 to 80% of the as stabilized future value after and then, you know, fix it up and fill it with great tenants and then sell it and make a good margin. I’ll do that. Like we just bought a portfolio of five properties clause, September 30. chunked them off individually renegotiated a couple leases, which really was the value add on that extended Some leases out with a credit tenant gave them some discounts, and some people out of the other ones, sold them off individually made like $1.7 million. That’s an exciting deal. But that deal would never cashflow that well as a long term rental. On the flip side, I got properties where we just bought one for like 3.3, put a half a million into it, and it’s worth almost $6 million. But I’m not going to flip it, because it generates 20 to $30,000 in cash flow month. And so that’s a great long term hold. So I’d say right now to answer your question, the bread and butter is probably the one to 10 million, but I just made a $54 million portfolio offer. So that’d be our biggest deal we’ve ever done. But I’m expecting them to get back to us and maybe award a small portion if any of the portfolio was kind of it was a request for pricing by a large group in town. So they’re just such a powerful marketing engine that it’s hard to get deals when one of these big brokerage firms gets involved, which is why you got to do the direct marketing and create relationships to get in on deals before everybody in the market sucked at it because by then you’re just sent you end up in an auction scenario.

J Darrin Gross 31:14

Right? Right. Now if you if you can create their relationship and have an in based on some trust and you can execute it that’s a big win. So in as far as the the the franchise he fee, is there an upfront cost for the franchise? Is that you mentioned kind of an ongoing relationship based on deal flow, or How’s that look from a from a franchisee standpoint? With a franchisor? You?

Mike Sowers 31:48

Yeah, well think about this, let’s say you wanted to buy one commercial property, you got a couple 100 grand, somebody gave you this idea, I’m gonna go buy a million dollar building, you hire me as a broker, you’re gonna pay me two to 3% 2030 grand. And I might help you show you some listed properties, maybe negotiate the deal and help you through some of the paperwork. But that’s about the extent of what you get for a franchisee they get so much more. And it’s a long term commitment, they get me for seven years, and then they can renew again, for free for another seven. It ranges from 25 grand for a small territory, up to 150 grand for like a mega territory. And we would only sell that much territory to somebody if they already had an existing business with multiple people in place to handle the capacity. Most of the franchise, stuff skin probably land in the 50 to 100 range for the amount of territory that somebody would want to buy to get started. And our Franchise Disclosure Document outlines all of that. So nothing I’m saying on here is an offer to open a franchise little disclaimer on that, that can only be done through the Franchise Disclosure Document. With that being said, you know, if anybody’s interested, you know, I’m always happy to have a conversation.

J Darrin Gross 33:06

Gotcha. And as far as the franchise Oh, is that is that fee then? Is that like the initial purchase price? Or is that something that turned out through the, the the deal time? Or how’s that?

Mike Sowers 33:17

How the franchise fees paid upfront? Gotcha. And then these are paid over time.

J Darrin Gross 33:23

Gotcha. Gotcha. And then, let’s talk a little bit about your investor opportunities for the deals that you’re doing. Are they are you primarily do you have a fund? Or how are you doing deal specific? Or how are you going raising money?

Mike Sowers 33:43

I have a fund it’s a 506 b securities offering filed with the SEC, it’s called the CAG value add fund. And it’s $100 million equity fund and accredited investors only. So net worth of a million excluding your primary residence or you’ve made 200,000 each of the last two years and expecting to do the same this year or if you’re married 300,000 The last two years and expecting to do the same. That’s what an accredited investor is. When I first started off, I started doing like crowdfunding and taking 25 grand from Grandma’s IRA and things like that. And I realized that, like that’s not my gig, that’s where everybody wants to start. But there’s so many people out there with a ton of money that are generating four or 500,000 a year in salary. And but they’re only spending 200 And every year they got a couple 100 grand to get put to work and they’re accredited investors. This is a phenomenal opportunity for them to get in on the action. It pays a fixed dividend so they get like a debt instrument preferred return of like six to 8% per year on their money first before we ever take a penny. And then absolutely

J Darrin Gross 34:56

it’s a debt instrument. So it didn’t stress close to the end

Mike Sowers 35:01

Operates like a debt instrument. So they get paid a fixed interest rate on their money first, and then we split the upside beyond that.

So it’s an equity position in the fund, but it, the payout they get a preferred return it’s called. So if the funds generate enough cash, they get paid up to a certain percentage on their money per year first, and then whatever’s left over gets split between the investors as a whole and art group for doing all the work.

J Darrin Gross 35:37

And, and when what’s the minimum investment?

Mike Sowers 35:40

100,000 100? And that’s the minimum liquid cash you have to have to open a franchise as well.

J Darrin Gross 35:50

Gotcha. And the value add, is there a specific market you play in as an investor? Or is this does this kind of then feed back through your franchise? franchisees?

Mike Sowers 36:05

Yeah, the fund will invest in any qualified deals in any market commercial investors group operates in, but it will only partner with commercial investors, group deal sponsors. So that would be our local outfit here in Minneapolis, which is our corporate location, or any other franchise location. So so if you got a deal on the table and you came to the fund, we wouldn’t, we wouldn’t partner with you, we’re only partnering with CAG franchisees or our corporate location here in Minneapolis.

J Darrin Gross 36:36

Got it, got it, and currently, how many properties you have in the fund.

Mike Sowers 36:44

So we just launched the fund, actually the first tranche just got subscribed to so we’re on the brink of closing some deals right here for the first tranche of the open ended fund. But we’ve done 32 single asset funds up until today in the past, and that’s really our deal history. But we realize we’re getting way more deals coming in, then we have the capacity to do a private placement memorandum for each and every deal which can take like a month or two. And that’s like the whole time that I have to close on the thing. So instead of finding the property, putting together the group of investors doing a PPM doing the web pitch for that deal, and then closing, which is the way we’ve been doing it, we’re doing in reverse now, we’re getting, we’re always pitching now, and then we get people to subscribe. And then when I have the deal on the table, they’ve already been pitched and already agreed to invest, and then they wire their money in right away. But they’ve already seen a PPM and things like that and already subscribed to the font. God, we don’t take their money when they subscribe, we take their money when I have a deal for them to invest in. And I’ll call that money down as we need it.

J Darrin Gross 37:53

Gotcha. Gotcha. Now, in the, the assets, again, asset classes are, you know, all across the spectrum, value add deals as the primary focus.

Mike Sowers 38:08

Yeah, primarily value add, what makes him like, if we’re going to buy a portfolio and a couple properties are stabilized, we’ll take those two. At the end of the day, we want to be able to give people of loss of capital, it’s the only way I’m going to get the kind of returns, you know, that that are high teens returns, you know, if your goal going by and the nice mega pretty apartment building that somebody else already renovated and raised rents on if I go pay top dollar for that, I might make a decent yield and it might feel risk free. But at the end of the day, if the market metrics change or something like that, I could wind up with the the net market value being less than we have into it. And that’s really, the biggest risk that you take is that you can’t pay back your investors their money or pay your mortgage payments off the cash flow generating.

J Darrin Gross 39:03

Yeah, that’s that’s definitely some words of wisdom there somebody that’s, you know, thought about it and has experienced in it. My mike, if we could, I’d like to shift gears here for a second. Because I mentioned you before we started by day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with a risk. And there’s essentially three strategies we typically consider. We look to see if first we can avoid the risk. And when that’s done an option we’ll see if there’s a way to minimize the risk. And when we cannot avoid or minimize the risk then we look to see if we can transfer the risk and that’s what an insurance policy is. And so I like to ask my guests, if they can look at their own situation could be their clients, investors tenants, however you would like to frame the question and identify what you consider to be 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, Mike Sowers, What is the BIGGEST RISK?

Mike Sowers 40:20

I think the BIGGEST RISK is that your ego gets too big, and you think you have it all figured out. Humility is, I think, the strongest asset that any company or individual can have in life, and it’s one of our core values at commercial investors group, our system is working really, really well, our software is super sweet. We feel like we have a really good grasp on the market metrics. And we feel like we have the ability to analyze deals, but at the end of the day, we are always humble, and making sure that we’re constantly staying in the zone of learning, and getting better, and trying to find new ways to do things that might work better and trying to stay on the cutting edge. That’s the mistake, I think at a corporate level a lot of companies make is they do really well. And they’re one way and they put the blinders on and they lose sight of what’s happening in the market. And the markets change quickly. And so that’s why during COVID, a lot of people went under, especially people in offices, and we’re heavily invested in office, and we did better in COVID than we’ve ever done in any prior year. And I think I would attribute that to the fact that we maintain humility, and are willing to learn and willing to admit, in areas that we have issues. In fact, every single week, I spend 90 minutes with my entire management team, putting the issues on the table and working through.

J Darrin Gross 42:04

That’s great. Mike, I want to say thanks for taking the time to talk today. But before we wrap this up, where can listeners go? If they’d like to learn more connect with you?

Mike Sowers 42:19

Yeah, you can follow us on YouTube, or listen to our podcast or on any podcast. It’s the Creative Commercial Real Estate Podcast. If you want to check out a free copy of our book or learn more about the font or anything, or contact me and schedule a call, you can do all that through our website, which is commercial investors group.com. And in my book, I have a full diagram, I actually thought a lot about risk. I have a full diagram where I thought of all the risks related to a real estate business, and actually put together a really cool one page diagrams called risks in real estate. And it shows you all the risks and how they happen. And then it shows you how you can use system and strategy to combat short term and long term risks within that.

J Darrin Gross 43:07

Awesome. Well, Mike, again, I want to say thanks for taking the time to talk. I’ve enjoyed it. Learn a lot, and I look forward to doing it again soon.

Mike Sowers 43:18

Yeah, I’m looking forward to interviewing you on our show. And thanks for having me on yours and and make sure you book that and thanks a lot.

J Darrin Gross 43:26

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

Announcer 43:44

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Commercial Real Estate Investors and Deal Matchmaker with Daniel Cocca – CRE PN #344

Daniel Cocca 0:00

It’s really that we grew this group. It’s a private capital network, everyone who’s part of it has been invited by one of the founders or has come in from an existing investor. And they go through a process where they get to meet one of the firm’s principles, they do really exactly what we’re doing here, just kind of telling each other’s other story. And we want to make sure those people continue to have access to the projects that we’re going to share on a going forward basis. Right. You know, there is a limited amount of equity, and projects that we think makes sense, particularly in this market today, right? And so for us, like we’re happy, you know, deploying, you know, 100 100 $50 million a year with the group of people that that we have, and that’s really what we’re trying to do just kind of build this network and keep keep doing right by the folks who have kind of helped us get to where we are.

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 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 Daniel Cocca. Daniel is a New York corporate attorney by trade. And he co founded Alpha Investing a private capital network that connects investors with institutional real estate private equity investments. As a firm Alpha has invested in over 4 billion of real estate assets. And in just a minute, we’re going to speak with Daniel about some of their investments and how they go about investing at Alpha.

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, Daniel, welcome to CRE PN Radio.

Daniel Cocca 2:36

Thanks for having me on the show. Darrin, excited to be here.

J Darrin Gross 2:39

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

Daniel Cocca 2:49

Yeah, absolutely. So I came out of law school, arguably the worst time you could possibly come out of law school and in 2010. You know, the, the market had more or less crash, the you know, I was a corporate lawyer attorney are slated to be a corporate attorney and, you know, the credit markets were basically shut down the IPO markets were not existent, like not the best time. That being said, I find myself in a really interesting high yield debt practice. You know, working on a variety of these, like small little mid market transactions in that space is, you know, you’re probably looking at, you know, 200 to $750 million, you know, debt offerings, which seems like a lot, but in the grand scheme of that world, not not all that large. And then, you know, over time as the credit markets opened up, the IPO markets started to get more active, you know, worked on more of those types of capital markets transactions. So as a security lawyer, at my core, I never really had the lawyer mindset about me. It was a fun job and a great experience a lot of really interesting transactions and people and personalities. But I was much more interested in kind of building my own firm and I headed over to another shop called Goodwin Proctor, another law firm in New York City. And they had a pretty well established what they call the technology companies practice, but was really a venture practice. Right. And so I started representing a lot of very early stage companies. And that’s kind of the point where I met my co founders at alpha. And we started to kind of hash around this idea, because all of us were in this position where we were we were high earners, right. I think they call us Henry’s, you know, high earning not rich yet, right. And so we were trying to take our money that was pretty much parked in the stock market or investing portfolios and get it into real estate, but we wanted to do it with, you know, institutional, very experienced and seasoned owner operators. And unfortunately, we weren’t in a position to write seven figure checks into the system. transactions. And so we’re looking for a way to, you know, basically get the best of both worlds right high caliber operating partners and low minimums. And, you know, this all happened kind of on the heels of the jobs act in 2012, which led to, you know, real estate crowdfunding really starting to become popular. And when I was at the law firm, I saw a lot of those real estate, crowdfunding FinTech platforms, really start to get off the ground, a lot of them, you know, financed by venture capital, and good and bad to that, they definitely broke down down the door, they got people as a whole, very excited in real estate investing, there was finally access because, you know, we all know, historically, it was a country club, friends and family, right? If you weren’t writing seven figure checks, you had to find the smaller, more local operator that maybe a new or your friend knew or your colleague knew. And that’s how you invested and you know, your options are just very limited. And that’s why as a country, we are or have been multi, massively under allocated in real estate, just the access didn’t exist, right. And these platforms popped up. And all of a sudden, there were these big marketplaces where you could look at transactions from hundreds, if not 1000s, of different, you know, real estate sponsors, owners, operators, and potentially invest in them if you wanted to. And, you know, in theory, that’s a really good thing. The challenge, of course, is that, you know, a marketplace concept benefits, the sponsor side, and the people putting those deals together much more than it does the investors who are kind of forced into this weird world where they’re term takers, but force term takers, right? You know, a deal pops up, get three hours, if you don’t say yes, and commit your money in three hours, you’re out. Right? And, you know, listen, I’ve been doing this for a while I can’t underwrite a real estate transaction in three hours. I think most people probably can’t. And so it created this weird set of rules that didn’t really work for investors. And that’s where my partners and I decided, hey, let’s start Alpha investing and create something that’s really designed for us. We were working professionals at the time, we said, hey, we want to invest with top caliber groups. But we want to do it in a way that works for us. And that’s effectively what we’ve done, I can, I can obviously talk a bit more about the specifics of alpha. But that’s my story, you know, leading up to the last, I guess, seven years of my life now.

J Darrin Gross 7:19

Awesome, I love the kind of the background story. My guess. And yours is clearly kind of a timing thing. Like you said, when you entered law practice and just the economic cycle we were in and in, I think it’s, it’s, it’s really key, and you kind of hit on that, I know that a lot of what we talked about, and how real estate is invested in now is central to the Jobs Act. You know, it’s funny, I remember that, but I don’t always think of it that way. And I appreciate you bringing that up. Because that really did kind of, you know, open the floodgates as far as the opportunity for non accredited or even accredited, but just just be more of a public unknown opportunity kind of thing. So I appreciate you sharing that. So let’s talk about this. So you knew you wanted to get into real estate selling, he also knew you didn’t want to be dealing with small, less professionally managed opportunities. So how did you, you know, you frame your, your kind of go forward point, or, you know, when you guys started out? What was it that you guys were looking for? What were the types of opportunities or the properties of asset classes that you were you were looking for?

Daniel Cocca 8:48

Yeah, for better or worse, you know, as I guess, at the time, I left a mid level senior associate at the law firm, you know, I had very little time outside of work, right? You know, we always joke that we’d often more likely than not, we would leave the office on a different day than we arrived. Right? And so that was just kind of my life. And, you know, I wanted to invest, but the question is, when you have very limited free time, how do you go out and you know, go through the normal iterations of, Oh, I’m gonna buy a rental property, maybe I’m gonna buy something, I’m gonna fix it up, I’m gonna flip it. You just don’t have the time. There aren’t enough hours in the day. And you always have to remember like, hey, my core competency, what allows me to make money and be a high earner is not investing in real estate, right? It’s being a lawyer or being a doctor or being a professional, whatever, right, you know. And so that’s kind of what we were sitting at. And for us, it was really important to be able to be passive investors and to create an environment whereby I could look at a transaction, I could evaluate it, but outside of making an investment decision and funding my capital, I wasn’t obligated to do anything. Now all the information was available to me, I could pour through rent rolls and lease audits and run scenario and sensitivity until I was blue in the face, right. But I didn’t have to, if I didn’t want to, I could focus on whatever my core competency wasn’t. And that was really the impetus for trying to create alpha and what we did. And I think as we think about, you know, how do we invest in real estate, our strategy at a very high level, like most high level strategies is fairly simple, right? We’re need based residential, real estate investors, and we believe people need a place to live, people need a place to grow old. That’s true in a good economy. It’s true in a bad economy. It’s true, and whatever, we’re, whatever economy we’re in today, none of that should be controversial, right. And we focus on acquisitions of properties that have in place cash flow, so we’re not doing you know, development deals or new construction, you know, even though I think those those deals can make sense. We want to buy properties, typically in that small mid market space, where we can partner with an institutional operator, and buy from a mom and pop or at the very least an unsophisticated seller, hopefully find ourselves an off market deal or pre marketed deal. But always outside of whatever value add renovation business plan, we may put into effect, we want to be able to reduce the expense side of the financial statement, that’s where you create a lot of value as well. And I think a lot of times that gets overlooked, because people think about renovating, and increasing rents and increasing revenue. And that’s certainly important. But you know, these properties all trade, you know, based on their net operating income, and so whatever we can do to improve that number is a good thing. And so in that small mid market, which used to be 25, to $50 million assets is probably more like, you know, 70 to $100 million assets, today, that’s where we think we’re able to find those types of opportunities, the ones that we believe, create a bit more alpha, and you know, hence the name Alpha investing.

J Darrin Gross 12:05

I like your, kind of the way you broke it down there for the strategy, I mean, need based, haven’t heard that, per se, but that’s, I mean, it’s very clear, a roof over one’s head is a need shelter. And then also how you, you distinguished you know, your your value add, mindset is more to look in a way to cut expenses, as opposed to full, heavy lift, renovation, you know, capital improvement type type of thing, which God, I mean, what I’ve learned over time, is, that’s where you can really make some monies, if it’s just a matter of, you know, reducing some expenses, as opposed to becoming, you know, too friendly with a plumber or electrician or contractor kind of thing. That’s, that’s definitely a better way to go. So, with that being your strategy now, and clarify for me, are you guys taking possession of and acting as an asset manager? Or are you are you looking for others who have syndicated a deal and and participating as a, as a, an investor or in raising capital for that deal? How is it that you guys are set up with respect to a particular property?

Daniel Cocca 13:29

Yeah, so we go out, and we find what we consider to be best in class operators. And these are the folks that are boots on the ground in any given market. They’re the ones that have the right relationships to source these off market deals. And then they’re the ones who are typically executing the strategy that, you know, we kind of come together collaboratively, right. And you know, our team plays an asset management role. We’re going to go out, we’re going to obviously tour all the properties in the comps. We’re going to underwrite the deal collaboratively, we’re going to select debt with our partners, what have you, our investor network will bring the majority of the LP equity into any given transaction. And you know, what comes with that typically will be control or approval rights over major decisions, sales, refinances, budgets, what have you, right. And that that’s effectively the role that we play in these transactions. We have maybe four or five of these operating partners that you know, we work with in joint venture agreements, really on a recurring basis, sometimes more programmatic, but basically the idea is we want to be in long term partnerships. We’re not out there searching for individual deals or transactions to invest in we’re looking for groups that have foundations that set up well for long term partnerships because real estate at the end of the day, it’s a relationship based game. You know, it’s something we talk about a lot. We joke about, you know, in the in the public markets, you trade on insider information and you get caught You know, you’re getting fined, maybe you’re going to jail if it’s bad enough, in real estate, you just head to the bank. And that’s kind of how it works in this space relationships are very, very important information is very important. These are private capital markets, right? And so that’s that’s kind of the game that that we’re playing. And then, yeah, we work with this number of groups. And people often say to us, alpha, like, when are you going to start doing your own deals like you understand how these things work, you put the strategies together, you you help find and select the day you asset manager on the property management calls, like you’re doing all this work? And the answer is, the boots on the ground is incredibly important. And it’s also requires a ton of work that I don’t think people fully appreciate. You could fly into a city like Nashville and talk to some brokers, and they’ll show you four or five, six, you know, multifamily assets that might be for sale, and they’re probably going to be within a few miles of downtown. But all those deals, they’re they’re marketed, you’re going to pay top dollar for those assets. And they may end up being good investments. But usually the opportunity there is not the same as when, you know, you have someone who can tell you the difference between know the east side and the west side of any given Street, right. That’s where you really find these embedded opportunities. And for a group like us, we’re not trying to deploy capital into 100 transactions a year, we look for eight to 10 that we think present really well on a risk adjusted basis. And that’s why you being able to minimize expenses or reduce expenses or increase the role of the manager and these transactions is really important, right? That’s a risk mitigation. Measure, rather, you know, we’re still doing on a lot of these assets, particularly on the multi side, you know, we’re renovating, we’re increasing rents, we’re improving the way the property looks, what have you. But that’s all upside stuff. What what the the other side is really reducing your your downside. And, you know, when you buy, right, you take a lot of risk off the table. And that’s one of the challenges in the current value add workforce space is that going in yields are just so low cap rates are in many markets sub 4%. And so your margin for error is not the same when you’re buying a five and a half cap deal. Right? And so you need that downside protection in order for these transactions to make sense.

J Darrin Gross 17:20

No. And like you said, to the boots on the ground, the local knowledge, I mean, you can’t be more. I mean, there’s nothing more clear than actually knowing the neighborhood and knowing, you know, the opportunity or don’t buy on that side of the street. I mean, that’s, I can’t tell you how many times I’ve had the opportunity somebody presented, somebody started looking at it, and, and Something’s just not right. And then you find out, you know why. And it’s clearly something with local knowledge, he would, you know, wouldn’t struggle to make that decision. So definitely a good point.

Daniel Cocca 17:58

One thing I’ll say to that, I think is important that when you’re a sponsor, you’re an operator, right? You develop expertise in one very specific thing, right? If I buy apartment buildings in the Pacific Northwest, I do that when it makes sense to do it, then I also do it when it doesn’t make sense, right? Whereas a group like us, we’re out there finding these groups, but we’re only investing with them when it makes sense. We invested a ton in the Pacific Northwest and 1415 and 16, haven’t written a check into a deal. They’re probably three years, right. And if we were a normal sponsor, where that was our core business, we’d have had to fire the whole team. And you know what, none of us would be making any money anymore, right? But the ability to kind of jump around, not just from asset classes, but sponsor partners markets, even deal types, you know, focusing on cash flow versus appreciation in certain markets. That flexibility is what allows us again, to go out and achieve that idea of alpha.

J Darrin Gross 19:00

No, that makes a lot of sense. As such, your internal structure, are you are you a fund? Or do you have a fund where people invest? And then you deploy capital from the fund? Or is it a one one deal, one raise cooperation,

Daniel Cocca 19:18

investors can participate with us in two ways, we do have a fund that we basically do one every 12 months, give or take whenever the capital from the prior fund has been deployed. That’s a smaller portion of the total equity we deploy in any given year. But it’s a product that works for folks who say, hey, look, I want to write one check. And I want to get exposure to 678 real estate assets over the next year. I don’t really want to pick them out. I’m going to give you guys discretion to do it. That’s a model that that works well. And I think we’ll continue to do that in perpetuity. The vast majority of our capital probably 80% Give or take is deployed. what are called individual transactions, they really are set up almost like single transaction funds, right? So we aggregate the investors in our network who want to participate in any given deal, we create a new investment vehicle, where they’re all housed. And really, the sole purpose of that investment vehicle is to deploy capital directly into one of these transactions. And so, you know, our investors in the aggregate, in our writing multimillion dollar checks, you know, typically our equity checks are anywhere from five to $20 million dollars per transaction, right. But you as an individual, maybe you only wrote $100,000 check, but you get the benefit of tagging along with all these other investors, and you’re getting the same terms that you would get as if you were a much larger investor in these deals.

J Darrin Gross 20:52

You mentioned kind of the recycling meaning, you know, investors, they they exit one dealer, I guess, a deal sold, and then they, they typically, what’s the percentage of persistence as far as your your clientele as far as reinvesting in, in the next opportunity?

Daniel Cocca 21:11

Yeah, the significant majority of capital that comes into our network, after a sale of an asset is redeployed. So you know, you get a million dollars back, you’re gonna pay your long term capital gains. And then the rest of that is likely being reinvested, there are some folks in the network who, who are a bit older, and either in retirement or approaching retirement that, you know, are investing to generate cash flow to fund their lifestyle, but I think the vast majority of people that are network, you know, this is capital, that they’re kind of putting in an account or putting an investment, and they’re just gonna keep rolling it over and over and over and over again, until they get to the point that maybe they need to down the road, or more likely, it’s going to end up, you know, being inherited by their children or heirs, or what have you done down the road. And so the vast majority of capital that’s returned, comes back into the network. And it’s interesting, because it does create some challenges, right? When you have a deal cell. And you know, let’s say we put $5 million into a deal, and now $10 million comes out. And there’s a new opportunity that needs $15 million. Well, now, there’s going to be a massive overflow of capital, right? We have to figure out well, how do we, you know, a good problem to have don’t get me wrong, but we have to figure out, hey, how do we get all of these existing investors from, you know, the last 2345 years? How do we get their capital back into this new deal, and we have other investors coming in. And that’s a big part of the reason why we’ve done what many people think is crazy wishes cap our network, we we have a somewhat arbitrary cap of 1000 investors. And, you know, we very infrequently let new people into the network. And it’s not because we don’t like new people, it’s not because, you know, we have some weird idea that, hey, we don’t need more money, we don’t want you know, more investors, it’s really that we grew this group, it’s a private capital network, everyone who’s part of it has been invited by one of the founders, or has come in from an existing investor. And they go through a process where they get to meet one of the firm’s principles, they do really exactly what we’re doing here, just kind of telling each other’s other story. And we want to make sure those people continue to have access to the projects that we’re going to share on a going forward basis. Right? You know, there is a limited amount of equity, and projects that we think makes sense, particularly in this market today, right? And so for us, like, we’re happy, you know, deploying, you know, 100 100 $50 million a year with the group of people that that we have, and that’s really what we’re trying to do just kind of build this network and keep keep doing right, by the folks who have kind of helped us get to where we are.

J Darrin Gross 23:51

I love the fact that you, I mean, just the concept of capping an investment or have been the number of of investors. One of the things that’s always kind of rattling around in my head is more of just that. More is not always more when you have when you’re answering to more and more, you know, more and more people kind of thing, but actually kind of, you know, foster that relationship, and continue to grow together, and kind of create more of a community kind of a thing, as opposed to just constantly be out looking for new investors. And I’m assuming that that, that speaks volumes to the work you guys have been able to do and the returns you’ve been able to provide, and that people continue to reinvest with you and are pleased with the outcome and and, you know, the relationships you’ve created with them, as well as the relationships you’ve created and maintained with your investment are your syndicator the deal sponsors. So that’s, that’s great.

Daniel Cocca 24:54

Yeah, I think that’s exactly right. You know, when we bring people in, we always say, hey, let’s We’re gonna chat on the phone for an hour and get to know each other. And this may not be what you would typically do with an investing partner. But understand if you do invest with us, we’re going to be in at least a three, probably five, maybe seven plus year relationship, right? We hope we’re in a 30 year relationship, but at the very least, we’re going to be in a three to five year relationship. And so let’s make sure it makes sense. Today, let’s get on the same page on day one. And the weird thing or the funny thing, or maybe it’s more of an unfortunate thing is that that whole idea is very foreign to most of the people we speak with, you know, it’s usually this business is transaction based, like, hey, like, Sir, Ma’am, you want to invest in this deal? Awesome. I’ll sign you up you’re in. And that’s the end of the conversation. And especially when you’re dealing with investors who are not professional real estate evaluators or investors just don’t know how this space works. There are so many things that come up that people have questions about people don’t understand their expectations were off. And that’s always the issue, right? If you expect something and it doesn’t come true, or it’s different than what you’re told, that’s where you start to develop a bad taste in your mouth and right or wrong. You know, that’s just what we’re trying to avoid that right. And, you know, at the end of the day, having the smaller network allows us to have personal relationships with everyone in the network. Do I spend a ton of time on the phone? Yes, I do. Right. But it’s for the best, I think, in the long run. And yeah, it’s just part of our model.

J Darrin Gross 26:32

Yeah. I’m curious. See, in the beginning, your fundraising, how did you? How did you go about? I mean, clearly, it sounds like you’ve been successful now. And you’ve got a track record. And and people are referring others to you? How was it in the beginning?

Daniel Cocca 26:52

Well, it’s funny, because we often joke, once we started telling people, the network was capped, and we were only going to be able to take in a few people a month, like everyone’s come out of the woodwork, and all of a sudden, you know, once you join the network, and invest with us, like where were these people in 2014, when, you know, we were, we’re begging every, you know, friend and colleague and former professor to invest $10,000 with us, right. And that’s really how it happened. It started out with a group of about a dozen people who, you know, we’re closer friends, family, you know, immediate work colleagues mentors that we said, Trust us, we think this works. And then the challenge in our business is that you’ve got this constant chicken and egg problem, right, you have investors, but then you also need investments and deals to deploy that capital and to and when you only have, you know, a dozen investors who maybe are writing on average $50,000 checks, you’re looking at half a million dollar investments. And that’s not interesting to institutional private equity. And so what we had to do was leverage our personal relationships with these operators and say, Listen, cut us out a piece of your deal, give us an allocation so that we can go out, build a track record, use it to bring in more investors show people why this makes sense. And yes, we can only send you a half a million dollars today. And it’s probably going to take us two and a half to three months to pilot together. But we’re telling you down the road, we’re going to be writing you 510 15 $20 million checks on these deals, and we’re gonna have a great long term relationship. And fortunately, we didn’t prove ourselves to be liars. And we were able to ultimately get there. But I think it was really important that we set out understanding has to be a constant balance, there’s been periods of time and alpha, where we’re saying, We really need new capital, we need new investors, we have great deals, we need to get it out there. There are other times where we say, we have so many, so many investors, and we just don’t have enough equity for them. We need to pump the brakes, like we have to stop bringing new people and I think that’s kind of the world we’re in today. Not because we’re not finding interesting deal flow like we certainly are. And again, we’re looking for eight to 10 Interesting deals a year, I don’t think I could find 50 or 100 Interesting deals a year in this current market, at least in the asset classes that we invest in, but eight to 10 we can find. But you know, when you deal with small and mid market acquisitions, your equity checks, checks could be anywhere from like eight to 20 25 million, you know, in total. And so, you know, there is a ceiling on the amount of equity and capital that can be deployed in any given year. And you know, because of that we operate in the way that we do.

J Darrin Gross 29:41

Oh, it’s awesome. So today, we’re in February of 22. As we as we record this, how many deals have you seen go full cycle that you guys have been in?

Daniel Cocca 29:57

So I think we have invested I think it’s like 57 or 58 transactions. Now transaction could be a single property acquisition or it could be a portfolio, you know, property acquisition, right? We recently started doing a lot of single family rentals. And so we have a lot, you know, the, the numbers of properties are very high right now. But within the our more traditional multifamily or senior housing, assisted living memory care, but where we’ve done a lot of work, I think out of, let’s say, 60 properties, I think maybe 12 have gone full cycle. You know, we’ve been in a very, very good period over the last five or six years, to the point that, you know, we actually don’t share our weighted average returns, because they set an outrageous benchmark, right. And that’s not to like, low key kind of tout our success. See that there’s a lot of people have been successful. rising tide raises all ships, I think that’s the the phrase, you know, a 20 IRR deal on the sale in 2021, is probably some amount of execution failure. And that sounds crazy. And I hate saying it, because all we try to do is benchmark people that you should be happy with 1214 IRR deals, particularly if you’re getting them in perpetuity, it makes all the sense in the world. But you know, and your listeners know as well as I do, you know, you throw a bunch of 4050 100 IRR, deals, you know, all of a sudden, you know, a 15 IRR isn’t that appealing. And so we do spend a lot of time trying to make sure we’re framing the people in our network. And another reason why having a smaller private network is important because we actually get the opportunity to explain to our investors and get feedback about this is what we’re doing. And this is why we’re doing it. We’re not marketing to people in our network, right? We’re, you know, writing strategy, white papers explaining why we’re taking a certain course of action. And I think because we get the opportunity to get in front of these people, they know who we are, it makes it much easier for us to actually communicate why we’re doing the things that we are.

J Darrin Gross 32:17

Yeah, no, I think that that makes a lot of sense is that just having that community community that has kind of a sense of expectation and an understanding of the way you operate, and in some sort of realistic expectation is, is, you know, key to that. I think that, you know, a lot of times the social media and just, you know, the wave of real estate right now, it lends itself to you know, everybody’s just picking up gold. I mean, there’s, there’s, you know, nobody’s having a problem, nobody’s struggling, it’s all just like, homeruns. And, and, you know, it’s a lot of times it’s when you have the problems where you really learn the lessons and, and kind of course, correct and make certain you don’t do do that again. But that’s great. What your due diligence process, you talked a little bit about, kind of, you know, finding the the sponsors and a little bit about deals, how involved do you guys get with the due diligence process?

Daniel Cocca 33:17

On average, we spend around six months between the time we first meet an operating partner, and when we’ll start looking at potential investment opportunities with them. And one of the challenges is that this isn’t a process where we get on the phone, I send you a six page diligence request, and a week later, you send me back absolutely everything I need, right. When I was an associate at the law firm, that is exactly what happened. And it was very efficient. And we could churn through diligence on deals in you know, a week or two, right? That’s not the case. In our space, there’s usually a lot of back and forth getting information we need. And I think it’s also important, you know, this is not a space where every operator looks at or evaluates or tracks performance in the same way. Right? You know, you may have to go back and look through a bunch of, you know, case studies, models, financial statements to get the data that we need. And the goal is really always to make sure that, you know, the groups we’re working with have certain tangible and intangible qualities, right, we want to make sure that they’re able to execute. We don’t want to take the risk that something’s going to get messed up outside of, you know, the broader economy or the market, that your renovation pace is going to be off or you’re not going to be able to source materials or, you know, if you plan to refinance the debt on a property in year three, you don’t have the net worth to do it. Right. You know, those types of things are incredibly important. And you know, we’re never going to take any amount of risk as it relates to those you know, specific components, right? And then part of it too is just, you know, when, when you send me a document and I follow up with some questions, how do you respond? Are you quick to respond? Are your are your answers thoughtful? Have you thought through the intricacies and the details of these things in the same manner that that we are, you know, if I ask a question, you know, to you about, here’s your deal, and here’s your rent premiums. And we noticed this, one thing happened, that seems inconsistent with the rest of the data, when you say, oh, I need to go back and look at it, that’s usually a sign to me that you’re not quite as involved in the process as maybe we we want you to be right. And it’s always a bit of a balance, because, you know, that doesn’t mean that group or that person can’t be successful, they absolutely can, right. But the folks that we try to work with, and again, it’s four or five operating partners at any given time that we’re looking at investment opportunities from, so we don’t have to go out and find 1000s of very, very different standard that that we’re applying, but we’re looking for groups that you know, we think get it like and we say best in class, we don’t just mean you’ve acquired $2 billion worth of properties over the last five years, that’s a part of it, right? Experience does matter. But we want to actually believe, from our conversations that hey, like you get it, and the stuff that you don’t get you acknowledge it, you explain why you made these mistakes in the past, and now give you reasons or solutions that you’ve come up with the fix these things, right. That’s a much more important part of the process. And I think a lot of people think about, and that’s one of the challenges too, and full transparency, and just being an individual investor who’s writing a $50,000 check, right? You can’t get 40 or 50 hours on the phone with a real estate sponsor, when you want to write a $50,000 check, right? But our team does, because we’re writing substantially larger checks. And that’s where we really get through a lot of it. And, you know, if if I met 100 operating partners, you know, this year, let’s say, you know, probably, I don’t know, 70% of them would immediately be written off off the bat, either they don’t have the right experience, don’t have the right pedigree, you know, they’re too new, they’re in the wrong, you know, sector, they’re not doing markets, we think makes sense, etc. And then when you really get into the weeds with that remaining 30, by the end of the year, there’s maybe two or three that you say, okay, like, there’s some opportunity here, right. And then out of those groups, you know, everything has to kind of align right, like, we have to find a transaction that we think makes sense that we think on a risk adjusted basis, works for not just our investors, but ourselves. Because, you know, we’re invested in these deals as well, right? And it just, it takes a while. And so when you find these partnerships, they’re long term in nature, right? Like we didn’t, we didn’t invest six months, you know, building this partnership to invest in one deal with you, and then never again, right. And then on the other side of the coin, what’s what’s great about being in multiple transactions with the same groups is that, you know, I see all your performance data, right, I’m tracking your actual verse, you’re projected every single month on every single asset. And so when you bring me a new deal, and we underwrite this transaction, we can feel really comfortable that the numbers we’re using the assumptions we’re making, are as close to what should happen as as possible. Right? And these are projections, they’re not, you know, we don’t know, anything could happen, as we’ve learned over the last couple years. Right. But it does provide a great framework by which we can more confidently underwrite deals.

J Darrin Gross 38:46

Yeah, it’s an interesting balance you have there with having to, you know, continue, continuously search for a new deal sponsor, somebody that you can, you know, deploy capital with, and then also, that the investor side of the thing and on, you know, continue to nurture those relationships and possibly look for additional investors. That’s a little bit of a balancing act there. So that’s great. If we could Daniel, I’d like to shift gears here for a second. By day, I’m a real estate insurance broker, also do a little bit of real estate myself, but 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 as an option. We first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And when neither the avoided or minimized strategy will work. We look to see if we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests if they can look at their own situation. It could be their clients investors, the market interest rates COVID. However you would like to frame the question. But take a look at your situation and try and determine what is the biggest risk? And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Daniel Cocca, what is the BIGGEST RISK?

Daniel Cocca 40:39

So as a, I call myself a former lawyer, I guess you’re always wire risks are near and dear to my heart, right? You’ll see 10 pages of risk factors in the documents that we send out. It’s something we think about a lot. The over simplified answers, your question is that we look at deals really, with a matrix with two columns. One column is execution. The other column is market driven appreciation, right? Execution is something that we can mostly control. There are some things like supply chain and whatnot that may fall outside of our control. But usually, we can figure out ways to get ahead of the curve on those things. And the partners that we work with, we have zero doubt about their ability to execute. These are not newcomers to the real estate world. These are your tried and true groups with with long track records of success, right. And so that leaves the other column, the market driven appreciation, and that’s the real unknown. And there are a lot of factors that go into that. But I think in this present moment today, you know, February 2, the thing that we’re all thinking about is interest rates, right? And, you know, it was a day or two ago, that Bank of America shocked the world and said there’s going to be seven rate hikes this year. And everyone said, like, what, like who like what’s going on over there, right? And it wasn’t, though that long ago, like, four or five, six months where, okay, rates are gonna hike up the middle 2022, maybe we’ll see one or two. And then it was like three, and then it was like maybe three or four. And so we’ll see what happens with with interest rates. Because, you know, as I’m sure your listeners know, the cost of borrowing is a very important component of pricing, whether you’re a buyer or a seller, right. And in the historical wisdom has been that interest rates and cap rates move together, right? Meaning, you know, interest rates go down. So to cap rates, because your cost of borrowing goes down, you can pay more for a property, right. But what we saw and 1718, give or take, especially during that period of time, where we had seven rate hikes in a quarters was that that really wasn’t the case, you know, rates were going up, but cap rates were still compressing. And I think what a lot of people concluded is that there’s a lot of dry powder in real estate right now. Some of that is from the crowdfunding world, a lot of that is from no just general real estate, private equity that has record amounts of money on the sidelines. And so the real question is what will happen? You know, once rates really start to pick up, will you see, cap rates start to go up? If that does happen, I actually think would be a good thing, particularly for folks in our position, because, you know, we underwrite pretty heavy cap rate expansion into our deals. If cap rates stay flat, or compress, that means a home run, right? Investors get a ton of proceeds at exit, right? But also means it’s very challenging to redeploy that capital, because pricing is so aggressive. And so there’s a happy medium where you’re getting really strong returns, but then you also have places to redeploy that capital, where where it makes sense, right? And what we’ll find out over this year is really what happens to pricing. You know, a lot of the deals that we invest into, are you know, floating rate variable rate debt, right. And people like that type of debt over agency, you know, government, Freddie, Fannie get because there are very seldom are very small prepayment penalties, which allow us to exit much faster when you’re in a rising price environment, right. But will people then transition to longer term fixed rate agency debt again, like that’s certainly certainly possible. And so, that’s a long way of saying not just interest rates, but the response to interest rates is, you know, the biggest risk to this space. The worst case scenario, and this isn’t a bad worst case scenario, but but it is a worst case is that rates continue to move upward and cap rates stay flat or continue to compress because what that means is that when you’re buying a three and a half cap today You’re buying a really a two and a half cap at the end of the year, right, you know, apples to apples. And so that just starts to get really uncomfortable. there supposed to be a positive spread between interest rates and cap rates. And so, you know, if you buy, you buy to two and a half, and you have four and a half or 5% debt, you know, even a cash flowing deal effectively looks like new construction, right? Because there’s no cash flow in the first year or two. And you’re basically making a bet on the residual value. And so long answer to your question, probably not a particularly unique answer, but in this moment in time, February 2 2022, you know, interest rates and pricing response to interest rate change, that’s the biggest risk that I see.

J Darrin Gross 45:47

So stay tuned. We will see where it goes. But I think they’re here right on that as, as much as a lot of people are, you know, kind of thinking the same thoughts and and wait and see just exactly how the market responds. And, and we will know when we know, I guess. Daniel, where can the listeners go if they would like to learn more connect with you.

Daniel Cocca 46:12

So you can check us out? Our website is alpha i, the letter i.com. alphai.com We have a lot of information on there to share with potential new members. If you’re interested in joining, you can please feel free to request access mentioned, you know, you heard me here today. In full transparency. We’re not admitting a ton of people to the network right now for the reasons we talked about today. But you know, we do have a pretty lengthy waitlist, where we’re happy to chat with people who seem like they could be a good fit. And we’re always happy to make, you know, connections and introductions, you know, we’re people too, and we’re always trying to be helpful. But that’s where you can find more about us.

J Darrin Gross 46:50

Awesome. Daniel, 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.

Daniel Cocca 47:00

Thanks, man. Appreciate it.

J Darrin Gross 47:02

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 47:22

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