Archives for July 2020

Richer Than A Millionaire with Bill Danko – CREPN #259

Bill Danko 0:00

The greater your net worth, the greater the probability that you had investment real estate. Right now those folks who are below the median net worth in America, the vast majority of their net worth is their home value. Those who are the millionaires and living in these, you know, $300,000 houses, which is relatively modest in many respects, are also invested in office buildings.

Welcome to CREPN 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’re here to learn from the experts.

J Darrin Gross 0:48

Welcome to Commercial Real Estate Pro Networks CREPN Radio, Episode Number 259. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focus 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. Let’s get into the show.

Today my guest is Dr. William “Bill” Danko. He is the co author of The New York Times bestseller, the Millionaire Next Door, and also his newest book, Richer Than a Millionaire. And in just a minute, we’re going to talk with Bill about happiness and money. But first, a quick reminder, if you like the show, CREPN Radio, there are a couple things you can do. You can like, share and subscribe. And as always, you can leave a comment. We’d love to hear from our listeners. And if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And that’s Commercial Real Estate Pro Network. And also please consider subscribing. It helps all the algorithms and and lets other people know about us. With that I want to welcome my guest. Bill, welcome to CREPN Radio.

Bill Danko 2:11

Thank you, Darrin. Glad to be here.

J Darrin Gross 2:14

And this is truly the Frankenstein addition here. Bill has been very, very generous with this time already. We’ve been trying to string this one together. So but I’m so delighted to have you on today and did not want to waste the opportunity. Before we get started, though, if you could take just a minute and share with the listeners a little bit about your background.

Bill Danko 2:36

Sure. I was a Professor of Marketing for 31 years at the State University of New York at Albany and I was also a consultant during that time and public speaker. Just having my career path as a as a marketing been, it’s been very rewarding. But at the same time, I’m also a family man. Married for 45 years and three adult children, five grandchildren and life is grand.

J Darrin Gross 3:15

Great. Well, I got to tell you there are a few books in the 90s or before the 90s that I ever read cover to cover and made notes on and highlighted and and kind of set a real frame of mind for me and, and one is my copy of the The Millionaire Next Door. And I’m just so delighted to have the opportunity to speak with you today. As we kind of jump into the topic here. I’d love to get a little bit of a sense of you know, you mentioned you were a marketing instructor or professor you know, How much of your your what were the course of your tech? Teach me in marketing? That’s kind of a broad spectrum of, of, you know, study. Can you get into that a little bit?

Bill Danko 4:16

Yeah, I mean, it really comes down to one course in particular I took with Professor Tom Stanley in 1973. And then that course a consumer behavior course which I did very well in, I got an A. He asked me to assist him with his very first study of the affluent market. And that’s when the ball really got rolling. I mean, so right marketing has so many aspects. I mean, I like to think of there’s marketing and then there’s everything else. Right? Well, in this particular vein of research, we concentrated on survey research and statistical Analysis of who really has wealth in America. And so Tom encouraged me to get an MBA and continue studying with him. And I did. And he also then encouraged me to go get my PhD, which I did at Rensselaer Polytechnic Institute. And the point is, during this period from 1973 to 1993, Tom and I had done a series of academic studies together, as well as a number of consulting studies. But in 1993, kind of a pivotal year he called me up. He was then working in Georgia and I was still in New York. He called me up and described a new project called “Big Hat, No Cattle”, and it was about the illusion of wealth in America. So using our survey, research skills, In fact, while I was at the university, one of the favorite courses that I would teach would be Marketing Research, Statistical Analysis and Computer Analysis of Datasets to infer something about market segment. So using those skills, we did another nationwide survey for the Big Hat, No Cattle project. And by 1996, the book was published. And the rest is history. It’s, it was a New York Times bestseller for three consecutive years. And it changed a lot of lives, changed my life in many ways, in a very positive way. It paid a lot of bills, that’s for sure. And it keeps on giving. It’s It’s wonderful. But that’s how we got there with the plan for a Millionaire Next Door.

Then in 1996, though, when the book was launched, that was also a pivotal year in my life. Which was really life changing in so many ways. I was still teaching, still doing the research. But at that same time, it was when my mother had a stroke. Now, that’s unfortunate, but she happened to be the primary caregiver to my quadriplegic brother. So guess what? I became more involved on a daily basis. Dealing with my brother, his care, and I followed my wife and I vowed to keep him out of a nursing home, which we did. We bought him a house, it was great. And all the problems that go with maintaining somebody outside of a nursing home, but we helped him age with dignity. And he really, during the visits, in fact, that was the weekend aid most of the time because it’s so hard to hire an aide for a weekend. We would have these discussions about life and you know, you Here’s a guy who couldn’t even scratch his nose. And he really had to have everything done for him. And it was really an act of love. And but here I am a New York Times bestseller being a home health care aide. Now. I would do it again in a heartbeat, that’s for sure. But my point is, it’s a humbling experience. And when you realize we’re all on the same path together, you know, we get born we live and we die. It’s what we do in between. That really motivated the research for the Richer Than a Millionaire, which I did with my colleague, Rich Van Ness, who lives in New York State. He’s another professor. And we looked at it in the sense of what lessons do we want to give our children and our grandchildren and in fact our students, who we look at our as children in a figurative sense What life lessons do we want to extend? And the idea is, money is good, but money and happiness are better. And that is how the two books diverged from each other. Millionaire Next Door shows you how to make the money, Richer Than a Millionaire reiterates many of the lessons in Millionaire Next Door, but it takes it to another dimension. It looks at your psychological health. Are you well adjusted, or are you maladjusted? And what are the correlates of those who are happy and wealthy? That’s the path we took. Now want to talk about both of those in more detail of course.

J Darrin Gross 9:45

Yeah, no, I would love to I mean, what a what a crazy kind of a, you know, combination of paths. I mean, in one end, you’re studying the millionaires and you’re having great success and and The way I think most Americans would look and you know if you were to describe wealth or success you know being a best seller on the New York Times and you know all that and then the the human factor strikes and you know the opportunity to have such a human experience with your immediate family like that or I mean your extended family your brother and and that and wow what a what a what a fascinating ride you had there Yeah. So I’m curious you know, because in the The Millionaire Next Door You know, there there are a couple things that I remember you know, specifically it was basically looks are deceiving I guess, because of the way I would summarize it and that the you know, if somebody looks like a millionaire it’s kind of the like you say the no hat or the Big Hat, No Cattle kind of thing. The They may have all the the newest nicest cars and, and all the vacations and all that stuff. But chances are after spending all their money, they’re probably gonna keep it all keeping any of it.

Bill Danko 11:11

This is true. Yeah, this is looks hard to see being that’s probably the number one lesson to be learned here. You know, if you look at the appendix in the Millionaire Next Door, we have a litany of about 150 job titles of millionaires we’ve interviewed over the years, and it’s really quite an eclectic group. Yeah, there are physicians and there are attorneys and there are executives, and there are architects. But also on that list are things like trailer park owners, car wash franchise owners, bovine semen distributors. Yeah, that’s a auctioneers Right. I mean, if you do a content analysis on that list, you find that about 80% of the people on the list would be considered blue collar millionaires, and the other 20% the professions which are, you know, wonderful people. But here’s the problem. We have found, and this has been, repeatedly study after study, that for every person who can actually afford one of the high end items like a fabulous house, or a brand new car on a regular basis, there are four to five others who buy the same item because they want to look like a millionaire. And so we have these people who, again, it’s the Big Hat and No Cattle. They have all the looks, but they also have the mortgage and the expenses that go along with it. But this stuff dove tails into the happiness issue. You know, in the book of Proverbs in the Bible, Chapter 22, verse seven, there’s the line, “the borrower is a slave to the lender”. Well, when you have a wall to wall mortgage, and you have onerous car payments, you can’t get off your economic treadmill. You have to keep working to keep that lifestyle going. On the other hand, when you have these satisfied, in many cases, blue collar millionaires who live in ordinary neighborhoods, drive pickup trucks or older cars, they’re not worried about car payments. They’re not worried about a burdensome mortgage, but they have a lot of financial independence. And that makes all the difference in the world in terms of your outlook on life. You know, having money that’s free and clear, and a positive cash flow is a lot better than Saying I have to get up to work because I am a slave to the lender who lent me this money. And look at the problems we had, you know, 2008 and 2009. I mean, didn’t we get to the point of like zero down payments on houses?

J Darrin Gross 14:16

Oh, yeah, they were they were paying you for a while to take out a loan.

Bill Danko 14:19

And 100% mortgages. I mean, yeah, it was folly. All right. So anyways, we bring these problems on ourselves. When we don’t understand what we’re really getting into.

J Darrin Gross 14:34

Yeah, no, the, the, you know, the whole book. I mean, it really kind of gave me an appreciation for the way my dad lived, not that he was any kind of, you know, Uber, wealthy guy, but there was a contentment in his life that as a child growing up, I couldn’t understand, you know, I, I wanted the new, flashy, whatever it was, and then is As I, you know, got a job and started a career and was trying to, you know, make my way I, there’s a certain sense of like, yeah, my dad didn’t know what he was doing, you know kind of thing.

Bill Danko 15:14

Yeah, in fact, you know, on one of our surveys and and, and the results are included in Richer Than a Millionaire we have a graph that answers the question How much is enough? Now listen to this perspective. When we ask people, what is their net worth? And we’ve asked hundreds of them about this very issue. What is your net worth? And the follow up question is how much you think you would need to feel rich? And basically it goes like this. It’s it’s a curve that says if you have $500,000 in net worth, in actuality, to feel rich, you say you need five times as As much for 2.5 million, and then we ask the people who have 2.5 million, how much do you need? Unfortunately, they don’t need five times they only need twice as much on average to feel wealthy, or 5 million. It’s ridiculous. But right now in America, and it’s hard to say with the adjustment in the stock market this past couple of weeks. You know, one report says we’ve lost 500,000 millionaires in this meltdown. But irrespective of that, basically, of all the households in the US the median net worth is about $100,000. And from 100,000, tough to the million dollar mark, that puts you in the top 12% of all households, to be a one percenter. Basically, $11 million dollars will do it. And so when people say they need these lofty amounts Like, I have two and a half million now I need 5 million. You know, you’re in the stratosphere in terms of where most people’s are not even close to having that wealth accumulation. And so people have this distorted perception as to how much is enough. And so when you talk about your dad, you know, he was well adjusted, I hope, I suspect from what I gleaned from what you’ve said,

J Darrin Gross 17:29

Oh, yeah, he was. Yeah, he was not, you know, chasing some crazy thing. He was, you know, certain he had had leisure, but he wasn’t he was not a spend, didn’t spend every dime he had, you know, he was kind of tight with a purse

Bill Danko 17:47

and was probably brought up during the Depression era.

J Darrin Gross 17:50

Yep, yep. Yep. He’d drive the wheels off a car, you know, it was, you know, which I fully respect now. As opposed to You know, constantly being in the newest, latest, greatest model and, and like you said, just being a slave to the lender kind of thing. And the fact he was a banker too, I think also kind of shaped a lot of that too he was recognized the, the weight of of debt kind of thing and how it affects you. You know, I, there was a blurb in the book, I remember and it was it was talking about, I mean, here you were asking kind of the question is how much is enough kind of thing there was there was a an equation kind of thing that I remember and just refresh my memory here just a bit about how to determine if you’re wealthy. And there was essentially there was a calculation of if you take your age times your your annual income divided by 10. Right. And I was kind of curious because it was funny in my book, there was like a weathered page and I can’t tell you because I think I’ve read this thing, a couple of times how recent it was that I was doing them the calculations, but I’d asked you given the recent times and just all the economic differences we’ve been through. If Do you think that measurement still holds?

Bill Danko 19:16

Yeah, I do. Look, when you’re on the tails of the age distribution, it kind of falls apart. But if you’re between 30 and 60, basically prime working years, that’s tended to be a pretty good predictor. In fact, the way it’s used is, you know, your age times income times 10% are divided by 10. That gives you the number of expected net worth. And if you’re four times that amount, you’re designated a prodigious accumulator of wealth. And if you’re one quarter of that amount, you’re considered to be an under accumulator of wealth. So it’s it’s pretty robust But it’s uh, it certainly was a very useful device in the book to contrast and compare the pause and the odds. And you know, there’s some good illustrations for example, Dr. North and Dr. South in the book, for example, Dr. North and and these were actual surveys but Dr. North meaning Well, you’re, you’re, you’re, you’re you’re going in then above and beyond direction, he would buy used cars. Whereas Dr. South, on the other hand had the equivalent income, but every year or every other year, he would take time out and do a lot of shopping for a luxury car. So you look at how you allocate your time. And Dr. North says, Look, I just need transportation. In fact, having a good luxury car that I bought used, having somebody else give me the gift of early depreciation is probably one of the best gifts I could ask. Whereas Dr. South when he has his new baby goes into a parking lot of a shopping center and gets as first ding kinda takes it personally. Right so it just changes your mindset all together in terms of you know what you expect your money to do for you. And Dr. North says Look, I have good cars but they’re good used cars. And I’m not a slave to that car. It’s already paid for and I don’t want to abuse it but at the same time if it does get damaged, I’m not bent out of shape. Okay, that’s just one illustration, take to heart.

J Darrin Gross 21:43

Yeah, no, no pain and agony for the door ding if it’s, you know, if it’s already got a scratch on it, you’re, you know, you’re not worried about it like you would be if it has got it’s got no scratches and you get the first

Bill Danko 21:56

but it really comes down to also the time value of money doesn’t Right, it’s, you know, like, I used to drive a Mercedes. And it was great. But, you know, then I, you know, I was a sinner, what can I say? But the Mercedes was a wonderful car. But now I drive a Subaru. And it’s great in the snow in upstate New York, I can tell you that. And the point is, I look at the car as just a mode of transportation. And the Subaru is a very reliable mode of transportation, quite frankly. And my wife drives an 11 year old Volvo. It’s, it’s wonderful. But what do we do that, you know, we have these older cars, so we’re not paying for car payments. And so you can take that extra money and start accumulating and investing in a diverse set of assets. And that’s another key here.

J Darrin Gross 22:54

Right. Now, speaking of the asset, I did want to ask you a little bit about some of the diversification that some of the the people you interviewed in the first step, or the first edition there. Can you describe the percentage of people you interviewed that were invested in real estate?

Bill Danko 23:18

Well, I could can’t give you exact percentages. But I remember a graph that I had created, or one of my talks that looked at the greater your net worth, the greater the probability that you had investment, real estate. Right now, those folks who are below the median net worth in America, the vast majority of their net worth is their home value. Those who are the millionaires and living in these, you know, $300,000 houses, which is relatively modest in many respects, are also invested in office buildings.

In my own example, if If I could share this with you?

J Darrin Gross 24:01

Sure.

Bill Danko 24:02

I have some standing timber in the Adirondack Mountains. And you know, you have to wait every 20 years to do a harvest. But the point is, you know it, there are cherry trees. There’s there’s some good lumber there as well as some pulp lumber I understand that. And interestingly, once you own a profit property like that acreage, I got a letter the other day from a solar panel company, saying we would like to lease about 40 acres of your property to put up solar panels. Well, I don’t even know if that’s legal on the Adirondack Park, whether you can do that. But the point is, I am not inclined to let somebody clear cut 40 acres to put up solar panels. It’s just not a good stewardship. I mean, I love the mountains. And I think I have an obligation to help preserve the mountains and doing selective timbering is one thing clear cutting 40 acres is quite another. So it’s but it’s an investment piece of real estate that I own as well as a rental property and as well as some other things besides my primary house. But the point is, you know, more things to keep track of right? More than zero. Well, that’s for sure. But, but it’s good to have each one of these elements as a purpose of my portfolio. Some is enjoyment, some is timbering and the other is a rental property.

J Darrin Gross 25:34

Right. It kind of diversification there, too. It sounds like, you know, in just the, I think the chart that you described there about, you know, the percentage of people that that had some, some wealth attached to real estate, I think is is one of the things that I’ve come to recognize and it’s it’s not exactly buy low, you know, hit the hit the you know.com stock or whatever the newest latest greatest stock is, but it’s it’s a slow path to pretty sure thing I mean, depending on how you do it, I mean it’s obviously if you if you buy in a, in a super depressed market at a low price, your chances of, of having a significant win are greater but but just across the the, you know, all of time. There’s there is some, you know, kind of the the boring. I think the other thing I took away from your book was just how many of the, the occupations were boring. You know, they were

Bill Danko 26:47

Dull normal boring. Yes, like, okay, like owning standing timber. Every 20 years do a harvest. Yeah, you know, there’s a long lead time, but you can keep it in the family. And it’s protecting nature as well. So, right

J Darrin Gross 27:04

in, but just that whole thing and it’s not a flash in the pan kind of thing. It’s, it’s, you know, you basically you put your nose down and you do your work and you, you know, kind of be smart about it, disciplined.

Bill Danko 27:23

I mean, there’s so much talk about, of course, the stock market, especially this past month, but, you know, the stock market portfolio is less and less important, the richer you are, because you have these other diverse assets. Yeah, whether it be artwork, whether it be timber, whether it be rental properties and office buildings, like I’m not minimizing the stress, our economy’s under right now. I mean, everybody is feeling the pinch, that’s for sure. You know, these are unprecedented times.

But at the same time, if we Your wealth is not in the stock market. But you have other assets like physical properties, you can tend to weather the storm somewhat easier.

J Darrin Gross 28:12

Right? And if you if you’ve been able to achieve some sort of equilibrium where you’re not totally beholden to debt, you know, if there are some rough times you’ve got a much better chance to withstand, you know, whatever,

Bill Danko 28:29

Not only that, I can go hunting I my property if I if it comes down to that, and I have a lifetime supply of firewood. I mean, it’s Right, right. I hope it doesn’t come to that. But you can go into survival mode if you have the resources, that’s for sure.

J Darrin Gross 28:48

No, I certainly hope we don’t get to that point. But it is certainly comforting to know that you’ve got that option available to you. So let me ask you, the The newer book Richer Than a Millionaire. I kind of described to you what I considered the the summary and I want to give away your you know, the book I want to urge everybody to go out and and get your book but the this balance Can you describe what, you know, how would you summarize it and specifically that because I think I read a little bit in the, the, some of the stuff I was reading about is kind of like this recognition of the the younger people that basically rudderless not really having that they want to be rich, but they don’t have at least

Bill Danko 29:40

They don’t know what it means. That’s right. You know, well, first of all, the, you know, Richer Than a Millionaire came out in 2017. And that’s readily available on Amazon.com. So I encourage your folks to look into that.

The again being a marketing researcher, there’s a psychology professor, Ed Diener, who made a life work out of looking at subjective well being or happiness. And he put is reliable and valid scale on measuring your subjective well being or happiness, he put it into the public domain. And he has five statements that you respond to on a seven point scale. And the details of course are of a book. But if you score low like a five out of a possible 35 points, you are very unhappy with your lot in life. And if you score high, close to 35, you are very satisfied you have achieved your goals. Well, what we have found when we send out thousands of questionnaires and we look at net worth, whether you’re between 100,000 and a million or a million and above, we’ve purposely left off the under the less than hundred thousand because it would confound me it’s kind of hard scramble when you don’t have any money, and yet there’s something going on. So 100,000 to a million as one group called the near millionaires, and then the millionaires and above what we found using Diener’s scale, that 73% of the near millionaires are pretty satisfied with their lot in life. And 88% of the Millionaire’s are pretty satisfied. Well, the point is, we have a minority in each group, but what makes the happy, different from the unhappy and what we found is a number of correlates.

We go back to the writings of Benjamin Franklin. He wrote an essay and 1758 titled The Way to Wealth. It’s about a 3500 word essay that can be found on the internet. He wrote it under the pseudonym Richard Saunders. As in poor Richard’s Almanack. In his lessons, he talks about the need to be industrious and frugal and prudent. And all the things we talked about the Millionaire Next Door. But he also says, being prudent and frugal, and industrious, is all wonderful. But it’s all blasted, unless we’re also charitable. And so we’d looked at this notion of, well, what does charity have to do with?

Well, you look at the great religions in the world, and Judaism. In Isaiah, specifically, it talks about giving your coat to the to those who have no coats, feeding the hungry. In Christianity in Matthew 25, that what you’ve done to the least of these you’ve done on to me, you know, Lord, when did we see you hungry or thirsty or naked? That what you’ve done to the poor? You’ve done un to me. In Islam, one of the five pillars of Islam is almsgiving being charitable. In the Hindu tradition, being charitable is part of the mindset. So we have the religions, indicating that being charitable is important. We have Benjamin Franklin saying, You must be charitable to your fellow man. Let’s measure it. Let’s measure how much do you give to charity and dollars? How much time do you volunteer to charity? So we have a couple of metrics now, as well as our satisfaction scale. And so we’re then able to look at these As correlates, and then with pre testing and various psychologists and clergy looking at the questionnaire, you know, they come up with good suggestions. So you got to ask questions like, well, is God really important in your life? Are you at peace with your soul? Are you anxious about the future?

What we find is the millionaires and near millionaires, who are satisfied with life are not anxious about the future. They are God centered. They are at peace with their soul. And in contrast, we have those who are dissatisfied with life, or just the opposite of all these. There’s something wrong, you know, and these are very anxious times, especially with this COVID virus thing. You know? I don’t know what the implications are on the long term. But at the same time, you have to look at Well, what’s really important in your life? Is it your love of family, caring for your brother, for example, you know, realizing that the stock market tends to fluctuate anyway. And we do have things like the plague of polio and things like that have come around. And somehow civilization has survived. What kind of lessons do we want to impart to the next generation? And that’s really the motivation for the book. The What do we tell our students? What do we tell our children? What do we tell our grandchildren about how to live? Sure, save 20% of whatever you make, don’t live beyond your means. Buy a good depreciated car. Yeah, I get all that, but at the same time, be charitable. Don’t be anxious about the future. Try to develop a peace with your Soul. So it really, I think is an important life lesson that we’re trying to impart with this new research on Richer Than a Millionaire.

J Darrin Gross 36:12

Now, that’s a definitely some time tested, you know, mottos or four ways of living I, you referenced all the different religious teachings that have certainly made that a kind of a cornerstone of, of, you know, their belief and just the recognition of kind of the golden rule.

Bill Danko 36:32

Exactly. It is the golden rule doing on others. Right, right, but have them do unto you. You know, some cynical people say, well, the golden rule is He who has the gold rules. Yeah, that is so cynical. But this is the kind of stuff that goes on in our culture, our so called culture Yeah, some some basic values that made this country wonderful. And we’ve been slipping away.

J Darrin Gross 37:04

Yeah. You know, I it’s troubling when you look around and you see, and and I think, you know, part of it is just that level of, of satisfaction. And I think that, you know, maybe if you go back and you look at how, how many people don’t have enough, or, you know, have that ability to feel like you’ve mentioned, you know, you if you have under 100,000, you’re not, you know, we didn’t consider you and then you know, to skew so you would skew the results, but, you know, I think really if you if you look at it even in that broader term, how you know, the percentage of people that don’t have that, which creates kind of that anxiety and then there’s you know, I think there’s, there’s all sorts of interesting things playing out right now. I mean, you know, if you’ve been to the grocery store lately, on your your You know, a provisional run to try and, you know, stay out of the public way and not get sick. You’ve been down the toilet paper aisle and notice that there’s, you know, if there is something there, it’s, you know, very, very little interest you see as people that are, you know, taking all the toilet paper, and kind of that fear thing, as opposed to I’ve got enough and I’ll be okay. Everybody needs some kind of thing. And

Bill Danko 38:27

it is it is fear. And it isn’t an anxiety and I know it’s real thing. It doesn’t have to be that way. If you just get down to some basic values. I mean, one of the problems I think we’ve developed in America is the way our higher education system works. I mean, somehow, we’ve convinced everybody that you must go to college. Well, you know, I just think that’s a mistaken idea. You know how Having been a professor for 31 years. Some of my students shouldn’t have been there, that’s for sure. And the point is, they’re accumulating debt with their tuition and all that and didn’t belong there in the first place, but they still have this obligation and what’s wrong with getting a trade? What’s wrong with being a skilled plumber? What’s wrong with being a skilled Carpenter? You know, all these things are, I think, better paths for so many of our young people where they can build a career without incurring this huge expense that we have in the university and college system.

J Darrin Gross 39:41

Yeah, no, I think there is a little bit of momentum behind that. Kind of rethink that. And I see people asking, you know, that that very question. I mean, if you’re, if you’re looking at coming out of a, you know, for a year and that’s, that’s a hope that you can get it done in four years, based on Just all the people that are that are in line ahead of you. And I know my son, he’s a junior in high school and we’re, we’re in the line and kind of, you know, looking at our options and stuff and just come to the realization of how many people there are in the education system, how available the money is and how willing they are to sign up for the debt that it can really prohibit you from, from accomplishing your education fin four years, which then adds to your your time and costs. And then to come out of college with such an enormous load of debt. before you’ve even gotten started. It just really does make you question. You know, the value of that or, you know, the cost benefit. I mean, I know when I was going, I could basically work a summer job and pay for my way through the year. Fortunately, my parents were able to help and pay for my education. But still, if if it had come to that it was still, it was now out of reach.

Bill Danko 41:06

And, you know, and Warren Buffett gave some pretty good advice about how much help should you give your children. You know, he says, give them enough so that they can do anything, but not so much they can do nothing. And so, you know, get them on the right path of economic self sufficiency. You know, one of the problems and it’s highlighted more in the Millionaire Next Door, one of the chapters, highlights the issue of economic outpatient care. What does it mean to subsidize an adult child and paying for tuition or extraordinary medical bills might be very good use of a parent’s money. However, when you start buying cars, and down payments on houses, and subsidizing a lifestyle, you’re creating something that can’t be sustained without the input of the parents. And that can be really dangerous, really dangerous. So I think every responsible parent wants to see their child become economically self sufficient. I can’t imagine any responsible. Yeah, but but it’s also a matter of, but I’m just trying to help. I’m just trying to enhance what you’re doing is creating an economic cripple.

J Darrin Gross 42:28

Yep. You’re making them dependent on it. And now it is a you know, as a parent, I, I look at that, and I hope that I’ve never faced with that, but I do recognize that we go to great lengths to try and minimize the potential for pain. But yeah, the we teach a lesson without burying them in some sort of painful, you know, situation, but it’s it’s a challenge and I think that everybody has to navigate that as best they can. And you know, Who am I to say you’re doing it wrong? Or I’m doing it right. But I do. I do recognize that there’s value in pain. There’s there’s a lesson to be learned in pain. And

Bill Danko 43:12

You know what, in fact, Ben Franklin in that essay that way to wealth, he says, This is not from Nike, he says the actual line in there, there is no gain without pain. It’s he wrote that 250 years ago. And I think he’s right. Yeah,

J Darrin Gross 43:31

no, absolutely. Absolutely. Hey, Bill, if we could. I’d like to shift gears here for a second. I mentioned you before we had to try and rig this thing up that by day, I’m an insurance broker. And one of the things we do is risk management. And we try and assess the risk and try and determine what you know what to do with the risk. There’s a couple of strategies We look at the first is can we avoid the risk? If we can avoid it and we look to see Is there a way we can minimize the risk? And if we can’t avoid or minimize and we look to transfer the risk, and that’s where an insurance policy comes in, which is basically, you know, a risk transfer vehicle. And I like to ask my, my guest if they can take a look at their view of the world. And, you know, specifically I’m not looking for an insurance related answer. Anything you can see think and frame this it would be would be welcome. But if you’re willing, I’d like to ask you, Bill Danko. What is the BIGGEST RISK?

Bill Danko 44:46

Yeah, I think when people are just so blind to well, for example, in Miami Beach right now. There are a lot of people with very beautiful houses on a flood plain or a rising ocean. And one of the things that they’re doing in Miami is raising the roadways and creating culverts to drain off the water. What seemed like a good idea at the time to build a house next to the ocean is, in retrospect, not a very good idea. So sometimes we bring this on ourselves. And, you know, I remember reading a book from the 1950s, how to build your dream house for $3,500. And it was kind of a classic and chapter one talks about first select the building site on a hill as opposed to on a floodplain. Okay. People walk into these problems, I think in a, in a naive way, saying, oh, there’s land available on the build. Okay, so that’s one thing being just not being prudent, okay. But also in minimizing risks. If you do have some pretty good assets, you know, one thing that I have seen with some high net worth individuals and one thing that I use myself is that for example, my timber, my rental property and a lakeside property, I have not my primary house, they’re all individual limited liability companies freestanding, then all three of them are held in a limited partnership. So my physical assets are divorced from my my might, my liquid assets and so having some good legal structure is certainly very good in terms of minimizing the risk as well as having your umbrella policy from your insurance company, but having the ability to separate your assets through like the LLC s and then that limited partnership. That is something that is Well, one thing I use And I endorse. And it works for me. My accountant likes it because he gets to do all these extra tax forms every year. Right? I don’t. But but but it’s okay. It gives me peace of mind. And then in terms of, there’s a societal risk. You know, we talked about a lot of lessons here you know about frugality and the 20% and living below your means and all that stuff. And that’s all important. Those are good, solid lessons. But at the end of Franklin’s essay on the way to wealth, he really summarizes it so well. The people heard the message, agreed with it, and then practice the contrary. The problem is change is hard. People are going to walk into traps. They don’t understand the risk they’re getting into. What we have to do is be better students. And let’s take on some personal responsibility and don’t expect the government to bail us out. But build, don’t build in a floodplain. You know, don’t drive recklessly. You know, a lot of things depend on how our society behaves. And that’s going to be the thing that minimizes risk. So I think risk is all the stuff that we take on ourselves. Because we just don’t do the homework.

J Darrin Gross 48:30

No, I it’s hard to argue with any of them. You know, definitely. You know, do what you can to prevent yourself from hurt, prevent yourself or prevent putting yourself in harm’s way I think is definitely a

Bill Danko 48:45

Yeah, it’s also from a personal risk. You know,one of the references and Richer Than a Millionaire we alluded to a study from the Centers for Disease Control They did a study of death certificates and marital status of people who died after the age of 50. And they found that those who were married at the time of death lived the longest. Those who never married were in between and those who are divorced, lived the least long. And so, when we look at our behavior, and we outlined this more in the book, The benefits of a positive social relationship, a positive household, a harmonious household, really adds to your longevity, that’s for sure. You know, we have a local attorney, the TV commercial, his marriage, his grand in divorce is 20 grand. You get the proportions, right. In terms of the emotional and financial problems you bring on when you have it dissolved marriage. So, you know, go into marriage for the right reasons, build a nuclear family that is stable and loving. And what we have done so many, you know.

One of our senators from New York that the late great Daniel Patrick Moynihan wrote a he was a very good scholar, he wrote a white paper called defining deviancy down. And he was complaining about all the out of wedlock births that we tolerate in society, and all of the burdens that the government then has to take on to solve these problems of you know, welfare and homelessness and things of that nature. He says if we just got back to some basic values, and built the society that says okay, this is how we build the nuclear family. This is how, you know we got a proper education that can build a career. And this is how we do things like, save 20% of whatever you make, and then invest in a diversified portfolio. Boy, we would all be better off, that’s for sure.

Is that enough sermonizing?

J Darrin Gross 51:19

Well, it’s it’s, yeah, it. I welcome the sentiments there. And I think that they’re, they certainly have proven their, their worth over time. You know, it’s just, it is sad when you look and you see the you know, how people are trying and just, you know, not not understanding that there’s, there’s a lot of work that goes into it.

Bill Danko 51:45

Yeah. I mean, the, the metaphor that I think draws us all together. When you ask, how does a train run best when it’s on its tracks? Right. We have a lot of train wreck stuff. We got a lot of train wrecks out there, right. Had I known all this tuition, these tuition dollars we’re going to go for not and now I have this debt. But I’d like to learn have a fancy new car. I wanted to have Lakeside or ocean side property. Right? It’s nice to be there. I

J Darrin Gross 52:17

I want to be on vacation all the time. Right?

Bill Danko 52:19

That’s right, let’s just be a little more prudent in our life and what we expect of the next generation. And, and again, these are the kind of lessons that we try to drive home in Richer Than a Millionaire. You know, you know, Richard Van Ness. He has three grandkids, I have five grandkids. And you know, we would have these discussions as to what kind of lessons do we want to impart before we depart? What lessons do we want to impart before we depart? And so we put it in writing. And hopefully it’ll resonate not only with our grandchildren, but also Well, millions of others who are struggling on the high seas of life like ships without rudders. Just Just trying to give them some direction. That’s all we’re trying to do.

J Darrin Gross 53:12

Well, I am on my way to get my own copy of your latest book and look forward to reading it and recommend that others consider the same and also again, your your first one they The Millionaire Next Door, I highly, highly recommend that.

Bill Danko 53:29

Yeah, that’s what they’re looking for there. How’s that? Yeah.

J Darrin Gross 53:34

Yeah, yeah.

Bill Danko 53:36

Richer Than a Millionaire. I gotta gotta gotta plug it. You got it?

J Darrin Gross 53:41

Absolutely. You got to toot your own horn. Now.

Bill Danko 53:44

I’m a I’m a I’m a book salesman. What can I say? But, you know, it’s been a very good life. I’m glad I’m able to help those who can’t help themselves or being like, no matter What your net worth for all your listeners out there, no matter what your net worth. Never forget to be charitable. Because there’s always somebody worse off than you who could benefit from your time treasure and talent. I am absolutely convinced of that. And not only being charitable, you know, is the right thing to do. It’ll also truly make you happier. It’s it’s one of the key correlates here of being a giver instead of a taker. So my question is, why not be richer than a millionaire? By having these things internalized in your life?

J Darrin Gross 54:39

No, that’s a great way to wrap this up. Hey, Bill, Where can the listeners go if they’d like to learn more connect with you?

Bill Danko 54:47

Yeah, you can go to our website, Richer Than a Millionaire all as one word richerthanamillionaire.com. And you know, We maintain our own website. And we used to just have the word welcome when you signed on to the website. And Rich Van Ness and I and our spouses were down in Marco Island this past winter. And so there’s a shot of these two guys, namely yours truly and Rich Van Ness with a couple of palm trees in the back and a bottle of wine. That’s the opening picture about Riher Than a Millionaire. Grade. So we enjoy it. It’s a boy Marco Island is a wonderful place to be if you haven’t been there. I encourage people to think about it. So it’s a wonderful vacation spot. That’s great. But you know, it snowed yesterday in New York. And so that was a nice springtime surprise.

J Darrin Gross 55:55

The spring I suppose the spring storm. That’d be a big news story. It snowed on Marco Island.

Bill Danko 56:03

Yeah, yeah. So, yeah, so our BIOS are there and plus various articles that we have written, that are in the press, and it’s all good. It’s, uh, you know, what we we have, we have really been blessed to be able to, you know, bring our message out to the public and we’ve, we’re in a good place in our lives. We enjoy, we enjoy good health, but both of us, all of us, our spouses to so far we’re enjoying good health, despite this virus thing in New York State especially.

J Darrin Gross 56:39

Well, I hope that you can continue to enjoy good health, especially in these times.

Bill Danko 56:46

And I wish very same for you Darrin, really you and your family. It’s absolutely critical to, you know, to really assess what is important in life. That’s what’s important in life. You know, being Being this family unit I can continue to serve others in a very positive way. Okay,

J Darrin Gross 57:07

You got it. Hey, Bill, I cannot say thanks enough. This has been an absolute pleasure. I appreciate you taking the time and, and your patience and trying to do this kind of the Frankenstein way we’ve been doing it. But I’ve truly enjoyed it learned a lot. And I hope we can do it again soon.

Bill Danko 57:27

Yeah, I hope so too. We can have a follow up. And let me show you a big fish that I caught here.Can you see that big fish?

J Darrin Gross 57:38

Oh, wow. What is that a brown?

Bill Danko 57:39

Not it’s a rainbow trout.

J Darrin Gross 57:43

Hello. We’re set up there in New York or we’re to

Bill Danko 57:46

Yeah, right. That was up. In fact, there’s a picture of me and Tom Stanley. We were fishing up in ampersand Bay at the Adirondacks and catch that big

J Darrin Gross 58:00

That’s awesome. That’s awesome.

Bill Danko 58:03

Yeah. So it’s, it’s, it’s everything is wonderful. Really is I wish good health continues for you and in the let’s continue to do the right thing. All right.

J Darrin Gross 58:17

All right. All right. All right. Thanks, Bill.

Bill Danko 58:21

All right, my brother Take care of yourself. Bye bye.

J Darrin Gross 58:23

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. CREPN Radio.

Intro 58:40

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

Commercial Real Estate BRRR with Anthony Scandariato – CREPN #258

Anthony Scandariato 0:00

The most important thing Darrin, is is track record. Yeah, I have Okay, you bought this property? What did you do to it to add value and what were the returns? So that’s what it comes down to at the end of the day. So we just want to continue to provide solid returns and make everybody happy and you can’t complain about pulling all your money out plus an additional 40% in a year and still own the building and collect you know, cash flow. You just can’t complain.

Intro 0:28

Welcome to CREPN 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 CREPN Radio, Episode Number 258. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focus on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their insight and experience to help you grow your real estate portfolio. Let’s get into the show. Today my guest is Anthony Scandariato. Anthony is the co founder of Red Knight Properties. They are a multifamily syndication firm. It’s a vertically integrated doing both investing and property management. And in a moment we’re going to speak with Anthony about both multifamily and property management more specifically. But first, a quick reminder, if you like this show, CREPN Radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, please consider leaving a comment. We’d love to hear from our listeners. And also if you’d like to see how handsome our guests are you sure to check out our YouTube channel. You can find us on the YouTube at Commercial Real Estate Pro Network. And also please consider subscribing. It always helps if we can grow the subscribers so we can also attract more listeners and viewers as well. With that, I want to welcome my guest Anthony, welcome to CREPN Radio.

Anthony Scandariato 2:25

Hey, thanks for having me, Darrin.

J Darrin Gross 2:28

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

Anthony Scandariato 2:39

Sure, so So Darrin gave a great introduction. But in a nutshell, Red Knight Properties is a boutique, you know, value add multifamily and mixed use real estate investment and property management firm. So, we’re based out of northern New Jersey about an hour outside of Midtown Manhattan, Western down. And, you know, we own and manage ourselves about 200 apartment units as well as, you know, mixed use properties and by mixed use I mean apartments above retail on the bottom and both suburban and more CBD infill locations. And, you know, we’ve been growing We’ve been in business you know for me full time I was working for another real estate sponsor for a little over five years over the past, you know, since since last year and I went full time with red Knight this year. So we’re continuing to find good opportunities and our focuses on you know, B and C workforce housing apartments, with average rents anywhere from you know, $1,000 to $1,500 in northern New Jersey.

J Darrin Gross 4:00

Well, I wanted to, if we could, given the fact that you guys are vertically integrated, and, you know, do both the operation and the management of your properties, I wonder if you could speak to kind of the the some of the particulars with real estate management, and how, how you made the decision to do that. And then how you find that it helps, you know, with your overall operations.

Anthony Scandariato 4:38

Yeah, so the decision to self manage, was the locality. So, our properties are within 30 to 30 minutes to an hour of where I reside, and my partner, Brian resides. So location wise it made sense and also from a, you know, investment standpoint, the projects that we’re working on do require capital improvements and a very strategic turnaround when you’re trying to sometimes in cases rent increases have gone up 30 40% at some of our properties, and in order to get those increases, you have to be creative and to understand you know, rent control laws, if any, you have to, you know, just really be on top of your game and managing rollover. So for us, it was an easy decision to okay once we’re done with the value add on our buildings, and we’ve gone through, you know, cycles on three different buildings, you know, already. Once we go to the value add, we stabilize, we either refinance or sell. Typically, it’s refinancing them, you know, if we get our money back, we can be flexible with the holding period. But once we’re stabilized and the business plan is executed, then we can pass on the Management. But we want to be hands on and we want to make sure we’re managing the properties correctly, because I can’t tell you how many times I’ve seen, you know, sponsors, operators just passing along the management to a third party. Now, if you buy an out of state, it might make more sense and they’re very reputable. But just because we were so local and I could drive there I can, I can get in my car be there and a half hour. It just made more sense. The only thing that I don’t really do in house is the leasing and because that’s, it’s a big, time consumer. And, you know, we outsource that to a third party brokerage, which is essentially an extension of Red Knight. But, you know, at no cost to me because in a market where I am in northern New Jersey, you know, 99% of the time tenants pay the one month the realtor fee, so it’s really a no cost to to me.

J Darrin Gross 6:56

I thought I heard you saying in there when you’re working through a value add you guys management, you manage the property through the value add and getting leased up. But then do you consider turning over to third party or? Did I hear that right?

Anthony Scandariato 7:12

Yeah, yeah, once we’re done, we haven’t done it yet. Okay, we might might do it in the future, but we’ve been getting the link to self manage. But to be honest, once you get the value out of the properties are kind of on cruise control, depending upon how large they are, what’s your, you know, what your staff looks like. But if you’re buying in our case, we started out by, you know, 10 family up to 10 family of the same family. So, you know, it got to a point where we had 70 of them, and we were still able to manage it is important to have your systems in place. So if you don’t have if you’re tracking all this, rent roll and exploration schedules and payment schedules, outstanding balances on a spreadsheet, it’s not gonna work. You got to get property management software we use Buildium right now. So if we didn’t We’d be dead in the water

Yeah, no it can get pretty sloppy in a hurry if you have a an organized system with that. What about the value add? Are you guys turning that over to a general? are you managing that on a, you know artisan contractor by contractor you can you speak a little bit about that? Yeah, so we have our set of contractors and also subs. It depends upon what what job it is for the most part, we’re not doing anything too too heavy. Mostly, you know, carpet paint, you know, new countertops, maybe new sink, maybe paint the cabinets. So we work with you know, we have a few different contractors in our Rolodex you know, a few different GC we usually do work with GCS and then we manage the construction of that so you know, oversee them. So essentially we do construction management to but our projects aren’t, you know, anything too crazy so far. So we’re able to manage that process.

J Darrin Gross 9:11

So more kind of cosmetic value add.

Anthony Scandariato 9:17

Yep, goes a long way there was a long way.

J Darrin Gross 9:20

No, that’s usually the kind of stuff you can charge more rent for. Right? As opposed to, how are you? Big system stuff that’s hidden behind the walls that the, the, it’s supposed to be there as opposed to, you know, nice new countertops or painter or floor coverings when you guys are searching for a property or when you you know, you find one and you’re going through your due diligence. Do you feel like being a invested as you are in property management that’s given you a kind of a leg up or is it give you giving you a better understanding, going in as to what’s the Gonna be needed as far as trying to estimate or do you still get your contractors involved with getting bids and all that or how do you how does that help you out? Was it worth?

Anthony Scandariato 10:10

Yeah No we feel for underwriting Yeah, it helps a lot for sure. Because you know how much here’s, here’s the type of laminate I want to use, you know, what’s my labor going across? What’s the square footage of the apartments? One of the material is going to quality it’s definitely has its advantages to underwrite better, but we still go in and we do we do bid out, you know, each of our unit turns or project projects. You know, for example, we had like an exterior landscaping project where we were ripping out sidewalks and put in, you know, new sidewalks and also what’s it called, stonework. So, you know, we would we do bid them out. But as you start bidding out projects, you kind of understand, in general how much this is going to qualify. And that’s gonna cost so you kind of get more familiar with it. And every, every location is different. So, you know, cost of Labor’s different in New Jersey as you know, it would be in Ohio or wherever. So it’s, you know, I can actually have a chart that breaks down labor and by part, so we I kind of use that for my guidelines, but we’re getting used to understanding what in general things cost. So,

J Darrin Gross 11:27

gotcha. You mentioned 10 unit properties, or the majority of your properties, like close to a 10 unit, or how do they vary in size?

Anthony Scandariato 11:41

No, so that’s just how we started I mean, personally, I started with two families. But my partner and I started with the 10 unit, and then we bought you know, for other 10 to 20 units together. And then, you know, we ended up you know, we mentioned syndication, syndication is just pooling partners and resources together investors together to go after a larger property. So we did our first indication in December of 19, actually and under contract for a second one, which should close next month, and that’s, that’s April. So yeah, I mean, that’s, that’s essentially what we do and, and, you know, as you start to produce and you develop a track record, which we have, we’ve had to find refinance events, where we pulled out 140% of our equity on one deal, about to pull out 110% of our equity, we only owned it for a year. And then I saw something like 40% IRR. So once you develop more of a track record, you can, you know, present yourself better and, you know, more doors open for you to do larger deals. So, we just started out by the twos and the 10s and the 20s then The syndication really closes at 50. The next one we closed, we’re closing on as 64. So it’s gradually getting bigger.

J Darrin Gross 13:08

Got it? Have you found investors are more receptive to your or to working with you or investing with you given your, your, you know, steady increase in, in, in growth?

Anthony Scandariato 13:26

Yeah, absolutely. That helps. But like I said, the most important thing to add is just track record. Yeah, I have, okay, you bought this property? What did you do to it to add value and what were the returns. So that’s what it comes down to at the end of the day. So we just want to continue to provide solid returns and make everybody happy and you can’t complain about pulling all your money out plus an additional 40% in a year and still own the building and collect, you know, cash flow. You just can’t complain. So, you know, we want to do more deals like That was kind of an anomaly. But now he second deals similar, you know, and the syndication that I closed on, it looks like if we continue the way we are, we’ve already turned over 40% of the rent roll to new rents, and I’ve only only for three months. So if we continue the way that we are, we’re probably looking at a refi. I mean, by the end of the year, and I projected to do a refi you know, in two years, so just under promise and over deliver is what we always say.

J Darrin Gross 14:35

No, that’s, I’m sure most investors would be happy with that. Are you finding that most of the investors are willing to reinvest the equity when you’re returning their their capital?

Anthony Scandariato 14:47

Yep. Everybody has their own different reasons and, you know, timing for certain things, but we don’t require that. But yes, most of the times they do. Yep.

J Darrin Gross 14:59

Got it. Can you speak to kind of the the target kind of what you’re, you know, what you’re looking for in a property condition asset class management, etc.

Anthony Scandariato 15:13

Yeah, so we’re looking for, you know, Class B and C, you know, workforce housing product, which is, you know, not, not the low low low end of the totem pole, but kind of in the middle between, you know, really high end stuff and decent stuff. So, we focus on that and, you know, we, we like, right now we’re in New Jersey, and you know, I’m not saying he has a great story in general because it doesn’t to be honest. But there are certain pockets in the state that you can still buy at a low price for door and a nice cap rate going in that a lot of people don’t know about you know, and that’s that’s where you know, we’ve targeting right Now, actually, I just got awarded a deal over the border in Pennsylvania. So we’ll be moving out moving out there. I do own a small deal in New York State, as well. So we’re kind of in the tri state area, so to speak. But we look for properties, you know, that have that asset class and for rents that are below market due to whether it’s poor management, or they just haven’t really kept up with the building in terms of improvements. You know,

I’ve seen very many different situations. But it’s mostly mostly mismanaged properties. Off market for the most part, some of them we bought, were marketed with a real estate broker. We we picked up but we’re not we’re not buying things at the auction. You know, we’re not doing any of those short sale sort of things. It’s a lot harder to do that commercial anyway, for these types of deals, but in terms of deal size, Anything from like five to 20 million? we would we would close on.

J Darrin Gross 17:06

Gotcha. You mentioned off market are you are you going through brokers? Are you are you marketing direct to sellers?

Anthony Scandariato 17:19

Yeah, so now we’re going through brokers 99% of the time, there’s always that situation where you come across a real off market deal, but it’s just developing relationships in your network. And once you start closing on deals people know about you. And you know, it creates a sense of trust when you’re trying to buy another property from the seller who’s never worked with you before. You know, that definitely helps with one deals just because of that. But 99% of the time, it’s from brokers, especially in you know, this price range. And obviously, once you get to the higher price ranges, it’s even more broker dependent. So

J Darrin Gross 17:59

Gotcha. And as far as your expense, you know, stack as far as you guys are self managing, do you charge? I mean, in your operations? Do you charge a management fee similar to if you were managing, or having a third party manage the properties?

Anthony Scandariato 18:21

Yeah, so we actually charge at least for, you know, if it’s a deal with other investors, and it will charge under when a third party would charge to manage. So we’re always cognizant of that.

J Darrin Gross 18:36

No, I think there’s you know, having to charge for it totally makes sense. I just kind of curious you know, how you guys use that and I would think it would also help just spread the or help support the operations, you know, if you’ve got people that are actually engaged and, and doing things and how many units do you have now.

Anthony Scandariato 18:59

So we have 100 In 140, and then we’re closing on 64 for next month. So we’ll have a little over 200

J Darrin Gross 19:08

That’s great. That’s great. And the timeline since you When was it, you guys got started.

Anthony Scandariato 19:18

So I started about a little over a year ago. I was also working part time. As I mentioned, I was working full time, as I mentioned, but uh, we, you know, I started buying slowly on the side with my partner and, and then one thing led to another and we found a really good off market larger deal. And we put a group together and closed on it. And then that was the catalyst for,you know, for making this a real business. Yeah,

J Darrin Gross 19:50

That’s awesome. See, the I mean, just, that’s a pretty quick timeline as far as, you know, growing that fast and making it happen, so Like you guys are known in the areas as operators and have attracted assuming that the brokers are coming to you now with the fact that you have worked on multiple deals.

Anthony Scandariato 20:14

Yeah, yeah, absolutely.

J Darrin Gross 20:18

Is it a little different than when you first started?

Anthony Scandariato 20:23

Oh, yeah, much different a, for the most part, especially in a close knit community in New Jersey, it’s it’s tough to get a phone call return you know, there’s a lot of people who like to kick the tires so yeah, you take you get taken a lot more seriously for sure. And even you know, age doesn’t mean anything but you know, younger younger guy like me just walking in there and say, hey, I want to buy a property is $10 million. You know, Who who are you? So it’s a lot easier once you you can say, Hey, I own this now that I closed with this person, I know this person. It’s a lot easier. So

J Darrin Gross 20:59

Right Right now I’ve talked with a couple of different people here recently and conversation is kind of alluded to the need to stay with it and stay in it and consistency in order to kind of get some results. But once you, you know, begin to have those results, people start to recognize you as as, you know, capable and and credible and somebody that can close and is not just say kicking the tire. So that’s kudos to you and sticking it through there and in building up that reputation. And what’s the the MSA as far as the size of the area that you’re in?

Anthony Scandariato 21:45

Yeah, um, I mean, Northern New Jersey as a whole. Yeah, I think is actually look it up. But I know it’s at least a million people in New Jersey, but Miss in terms of the sub market, particularly That we’re invested in to some markets 50 to 100,000 people within a three mile radius.

J Darrin Gross 22:09

Right. And are jobs, you know, do you weigh is are upside, are people moving into the area? Or is it more of just kind of a a mature demographic is pretty steady or

Anthony Scandariato 22:28

It depends on the area and in particular, but the areas we invest in are yet people who already lived there or people relocating there for work. And you have to remember, we’re only an hour from Manhattan. So, you know, it’s, there’s so much demand all the time and vacancies are very big, the rates are very low, especially for this types of these types of products. Even, you know, during the last recession, the vacancy rates were extremely Low, everybody needs a place to live. So, yeah, I mean, it’s a combination of both. And in the markets, you know, market we’re heavily invested in is bringing actually like 6000 jobs over the next couple of years. So we do look at you know, employment is already a steady employment base within local economy we do. We do like that, because, you know, if, if stuff hits the fan, then we want to make sure that people still have the ability to work and they have jobs and are able to pay the rent. So

J Darrin Gross 23:33

Yeah, no rent rents important. Your mixed use properties. Can you speak a little bit to you know, how that’s different from a straight multifamily property?

Anthony Scandariato 23:50

Yep. So next uses apartments above and stores in the bottom in my instance, it could mean something else to somebody else. But generally if we’re looking at a mixed use deal, the spread between the going in cap rate going and yield so is generally like 200 to 300 basis points, which is pretty significant when you’re comparing it to traditional multifamily. At least in my experience, it’s definitely went down since we started buying. So there was definitely a spread but there’s a little bit more risk with the retail. We’re buying a building with retail, we’re very cautious and we’re very selective, that retail can’t be more than like 20% of the gross total revenue in the building. And you know, the has to have at least a three year lease depending upon who the tenant is. But most of the tenants we have are like mom and pop. And it’s that a service based so nail salon hair salon, ice cream store can really be disrupted by Amazon. So or you know, any other ecommerce so you No, this is all service based for the most part. And that’s generally what we look for.

J Darrin Gross 25:07

I would think that would be kind of a nice stabilizing factor, I would think or do the do the commercial tend to tend to be longer term.

Anthony Scandariato 25:20

Yeah, yeah. Like I said, usually they sign at least three releases, sometimes five, sometimes 10. Sometimes 15. depends on you know, if you have a credit turn in or if it is like a, you know, a mom and pop or a startup. But for the most part, we’re looking at, you know, service based retail.

J Darrin Gross 25:39

Gotcha, gotcha. Hey, Anthony, if we could I’d like to shift gears for a second. As I mentioned you before we started by day, I’m an insurance broker. And with that I assess risk and try and manage risk for our clients. And there’s a couple of strategies. We will use When we’re trying to manage risk, the first is we look and see Is there a way we can avoid the risk? If that’s not a possibility, we look to see if there’s a way we can minimize a risk. And when when neither of those are options, we look to see if there’s a way we can transfer the risk. And that’s where insurance policy comes in. And I like to ask my guests, if they can take a look at their situation and what they’re doing. And you can identify what they consider to be the biggest risk. And just to be clear, I’m not really looking for an insurance related answer. But more of Ill let you kind of frame that. So if you’re willing, I’d like to ask you, Anthony Scandariato what is the BIGGEST RISK?

Anthony Scandariato 26:52

Yeah, I mean, the BIGGEST RISK is to me it’s always on the buy. So you have to always buy right you have to always run your numbers. You To run a sensitivity analysis, you have to understand, you know, if downside base case and upside, and if the downside scenario still makes sense, then it’s a good deal. So the BIGGEST RISK is people not buying right? You know, we always not running these analysis because markets change, and right now they’re changing every day. So, you know, you have to incorporate those into your numbers, and we always do, you know, what happens if, you know, I can’t get the rents I wanted? Or what happens if I can’t refinance or sell for this cap rate? And, you know, what happens if interest rates go up? And, you know, I have to therefore increase my exit cap by 3300 300 basis points. Am I still gonna make a decent return on my money as opposed to putting it in the stock market? And the answer is yes, then that checks my box. But we have a whole criteria of that but the base versus people overpaying for deals just today. Deal doesn’t necessarily mean it’s a big deal.

J Darrin Gross 28:04

No, there’s definitely a fear of missing out kind of a thing where people are, you know, willing to do some silly things sometimes. So that’s good advice there. Anthony work and then people go, Where can the listeners go if they’d like to learn more or connect with you?

Anthony Scandariato 28:25

Sure, so they can go to our website, that’s RedKnightProperties.com and that’s Red Knight with the K. We also have a LinkedIn page Red Knight Properties and we have a Facebook page Red Knight Properties and on our website, we have a scroll to the bottom of the homepage, we have like a Contact Us form. So you can send us an inquiry there or you have my email on there and also my partner’s email, so feel free to email us phone number is also on there as well for office so happy to hear from you.

J Darrin Gross 28:57

Got it. Well, Anthony. Thanks for taking the time to talk today. I’ve enjoyed it. learned a lot. Yeah. Yeah. And hope we can do it again soon.

Anthony Scandariato 29:09

Absolutely.

J Darrin Gross 29:11

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. CREPN Radio.

Intro 29:29

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

Machine Learning AI and Commercial Real Estate with Alex Fleiss – CREPN #257

Alex Fleiss 0:00

Learning from its failures is a very big part, by the way. And in fact, the past performance is a very useful data set, for a machine learning system on top of data, you feed it itself. Its own performance, that’s great helps, and helps it learn. But if you don’t moderate the system, it will try and learn quicker than it should. And then it’s failures will rise more than it should. So we try to keep our machine learning you know, kind of moderate, you know, so that it doesn’t, you know, moderately positive Of course. You know, think of it as you know, singles National League style baseball, I suppose the home runs, will never want it to trade on its highest prediction because its highest prediction will have so much inherent risk in it, that the risk reward is too high to be buying for clients. As a business really.

Intro 0:53

Welcome to CREPN 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 1:13

Welcome to Commercial Real Estate Pro Networks CREPN Radio, Episode Number 257. 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. Let’s get into the show. Today. My guest is Alex Fleiss. Alex is the CEO of RebellionResearch.com. They’re an artificial intelligence company. He’s also an instructor at Cornell Engineering. And in just a minute we’re going to speak with him about AI and the potential to disrupt real estate. And before we do though, I’d like to remind all of you that if you like what we’re doing here with CREPN Radio, there are a couple things you can do to help us out, you can like you can share, you can subscribe. And as always, we’d love to hear from you if you want to leave a comment. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find this at Commercial Real Estate Pro Network. With that, I want to welcome my guest, Alex, welcome to CREPN Radio.

Alex Fleiss 2:40

Thank you for having me on. I really appreciate it.

J Darrin Gross 2:43

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

Alex Fleiss 2:53

Great. I started programming video games in the mid 90s and then in the late 90s. I got very preoccupied with machine learning, which is the branch of artificial intelligence that deals with the teaching itself. So AI can be any intelligent system, dishwasher essentially one of the most common forms of AI, this planet. But machine learning can adapt its code to a changing environment. And so that really caught my eye in the late 90s. I’ve been dealing with that ever since and RebellionResearch.com has clients in 40 plus countries. We use a base who’s a well known mathematician we use his brand of machine learning and we cover the global economy. So you know, we really at the end of the day are just economic forecasters. You know, machine learning is my passion. and applying quantitative metrics to problem solving is also my passion. But you know, we also do a lot of research Rebellion Research often see it’s in our name, but no, we publish up to 20 pieces. As we know, our contributors will include the head of data science from Accenture, or a well known machine learning author like Peter Cook. Now or he’ll sit down General David Petraeus, or astronaut Scott Kelly is a perspective on technology. So, you know, our primary focus is, you know, really just staying on the cutting edge, whether it’s through our technology research, or through our development of AI, and real estate’s something that you know, really fascinates me. You know, I, I was lucky enough to marry into the Silverstein family who control built the World Trade Center. And so, you know, I’ve been slowly learning about the industry over the last five years. And it’s really a very fascinating industry that is highly quantitative as well.

J Darrin Gross 5:00

Yeah, no. The, you know, you mentioned the machine learning then in the dishwasher had thought of dishwasher with AI and that. Can you expand on that? Just say I mean that example where you how you apply or how you quantify machine learning there.

Alex Fleiss 5:21

Yeah. So as a career, yeah. So basic AI is just any machine that can follow an intelligent set of instructions. And so with a dishwasher, release cold water. Release soap. Release hot water spin, you know, release hot water, again, dry whatnot. It’s an intelligence cycle. And you can open the machine so that you can mix up the cycle depending on the ingredients. And so that’s, that’s all you need for AI. Ray Kurzweil, has spent a whole career making these big grandiose speeches and, you know, I feel like half the time of the speeches. He’s already just explaining to people how simple AI really is. Machine learning is where things get exciting. And machine learning is where, you know, the potential really becomes limitless. Machine learning is very simply the idea of, you know, a, you know, for in layman’s terms, think of it as a robotic brain, one where the system makes its own decision on how to proceed. And you know, it can be if you’ve seen the Dustin Hoffman, movie Rain Man, that gives you a good idea kind of in terms of a vantage point of how this intelligence operates. In that it’s very stupid in most ways, but it has certain applications like counting toothpicks or counting cards where it’s fantastic. Of course, if you move a few degrees, the applications abilities are zero. And so, think of it like an outboard motor for a boat, you know, that might work well in a small lake in Maine, but take that thing to a rough Bay or an ocean and it’s really worth worthless. And the application beyond that is, that’s probably not the best example because, you know, a, a small outboard motor will have some effectiveness in you know, in a bay, but in a combination but most machine learning, it really can’t function outside of its specific application. So you build a machine learning for facial recognition. It will take a lot of work to alter that so that it can work on something else. Be it smart document search, natural language processing whatnot. So you need you need to really work with the technology and treat it like a like a Dustin Hoffman’s characters type and that it’s very fragile. And you really have to spoon feed it as best as possible otherwise your results will fail very quickly very soon.

J Darrin Gross 7:53

Got it. So question for you the the the system In the data that these systems are utilizing, is that is that constantly changing? Are there are there? I mean, is there a, is the machine able to learn, based on the data that it’s receiving isn’t able to decide it needs additional data points? Or is that more of where the programming comes in?

Alex Fleiss 8:26

Well, it’s funny you mentioned that actually, because when we first started in, 2007, I think like a year later, we were giving it not nearly as much data as we’d give it today. We weren’t giving it data on currencies, but our machine learning was able to find data on currencies and use it. And then

J Darrin Gross 8:47

Oh really it was it was it was seeking it out and found it and used it all by itself.

Alex Fleiss 8:51

Yes, yeah. And so we so we started giving it you know, we saw that was using the Euro. And so we started giving it more and more currencies. So that was very interesting. And so, you know, we’re trying to give more data, but the data has to be concrete and consistent. And so like Twitter data, you know, we really can incorporate that. We like an industrial output is something that’s more consistent retail sales. You know, our our technology views the global universe, as you know, very, very, very interconnected when it comes to the economic universe that is rather. And so, you know, when it looks like Chile, for instance, it looks at all of the assets that make up Chile. And, you know, as those assets have greater and less effect over time, you’ll see that like, what’s Australia, from 1990 to 2010, Australia went from like 5% correlation to China to like 50%. So really over 20 years, Australia went from very little sales to China to basically becoming China’s leading trading You know, it’s so that that makes Australia’s you know, data inputs for what is going to predict the economy’s movement very different because you have a different economy 20 years later. The way Apple Computer 1994 is a very different entity, than Apple Computer 2014 sells different goods, different masses at different margins, remember different people. So the idea that it’s a constant asset is almost it’s not it’s extremely changing asset. And it might still be in technology, but a lot of the correlations ends there.

J Darrin Gross 10:41

So the machine is actually able to learn. I’m curious, is that based on the preset programming that was originally the real code that was written or is this machine currently writing its own code?

Alex Fleiss 10:54

No we can also no we that’s how it’s designed to work but you know, we can Also moderate the rate of learning so that it doesn’t learn too fast, because the systems are naturally aggressive. And so they will try to learn as fast as possible, and then become aggressive with what they think will happen. And so, you know, we have to moderate every part of it, we, you know, have to, you know, really kind of treated very, very carefully with, you know, kit gloves as well. And so, you know, it, you know, it’s a fantastic beast, but it really, it must be very monitored and very massaged. And so it’ll overexpose itself to industries, it’ll get to, it’ll decide that it can’t pick natural gas, it should never buy natural gas again, or, you know, it’ll look at its failures and try to learn, you know, learning from failures is a very big part, by the way. And in fact, the past performance is a very useful data set, or a machine learning system on top of data, you feed it itself. Its own performance, that’s great helps, and helps it learn. But if you don’t moderate the system, it will try and learn quicker than it should, and then its failures will rise more than it should. So we try to keep our machine learning, you know, kind of moderate, you know, so that it doesn’t, you know, moderately positive, of course, you know, think of it as you know, singles, National League style baseball as opposed to homeruns. And we’ll never want it to trade on its highest prediction, because high vision will have so much inherent risk in it, that the risk reward is too high to be buying for clients. As a business, really, it’s just, you know, whereas if you scale down the risk, and you scale up confidence ratio, confidence ratio is very important. So there might be a 60% chance of this asset. will go up. But how high is your confidence ratio that that will actually occur. And so the confidence ratio is very low. And we take that very much into account. So that’s a case where, you know, maybe the system likes global foods, but it’ll end up buying Nestle because all the other global food companies are too expensive or have other issues that make it too risky and the competence ratio is too low in terms of moderating the risk. Risk is very, very important.

J Darrin Gross 13:30

Yeah, no, on the different ratio. You mentioned, the confidence versus the I apologize I can’t remember the other ratio. You’re coming down there that are you constantly developing new I guess measures for the words the machine able to pick up and identify other measures that then correlate help to correlate or

Alex Fleiss 13:58

Yes. At the End of the day, we’re pattern seekers, you know, like, from the movie, The Imitation Game with some touring mathematician who helped solve the Nazi Enigma code, you know, so we’re really just trying all the time to find those patterns, those patterns that predict positive or negative performance. And, you know, so you know, the problem with this black swan event of COVID-19 is that we get a strong economy. And there was no reason to go defensive on the US economy except for panic that quarantining would kill everything. And so things change very quickly and it was a it was definitely a it was as Black Swan event, as will come. So it’s very difficult. If you look at all of the a lot of the best computerized firms, some of the results haven’t been pretty there. You know that that’s about the markets not always purely rational. This was this reminds me of 2011. In 2011 the market crashed maybe 35% people thought it was all over for like a month or two, and then the market just ran back up. 25 30% was nine years ago now. But, you know, and of course COVID-19 is, I think, a good more significant issue than the debt downgrade. But once COVID-19 is finished, you know, washing the economy not be what it was, I mean, of course, we’ll lose restaurants and whatnot. But no, it’s, it will see it for us, it’s hard to make predictions like this.

J Darrin Gross 15:33

Right, right. So when you’re designing a system or training, how many data points what’s what’s a minimum kind of a number of data points that you look for, in order to establish some rules?

Alex Fleiss 15:52

Well, for for trade to occur, we need to have you know, 50 to 150, positive factors and each factor relates to a cheap PE Ratio, strong balance sheet strong industry, maybe coppers, you know, flying and this is a copper company, maybe France’s economy is doing great. This is a French company. And so, you know, whether it’s the geography, or the industry or the specific country, you know, we’re looking for, you know, these positive patterns and we want as many positive correlations as possible. So this company correlates to a strong industry, a strong country, strong financials, you know, its pricing has been working, that’s something else, this system tends to sell stocks that don’t work, you know, and so if the markets humming along and one stock goes down for no reason and stays down for months, the system will try and figure out why it’s wrong. It will just move on, which makes for a very tax efficient index. So at the end of the day, you know, we had this AI index on 120 stocks. It’s been running for now 14 years in SP performance, but if you Generally creates a tax loss because it sells the losers within three to five months and holds on to the winners for multiple years. So we you know, I, I always say I challenge anyone to find a more tax efficient index than our index because of how not just how we design but the the nature of the system and that it sells its losers quickly and holds on to its winners for a long time. So that’s a nice benefit of it. .

J Darrin Gross 17:25

Got it thinking of real estate and potential applications? I’m wondering would, would it would it be more useful in commercial real estate or what do you think it would apply well, in residential real estate given the emotional you know, the intangible with a kind of the it’s going to be your home as opposed to a commercial real estate where it’s more about the the numbers.

Alex Fleiss 17:54

I think both are very tricky, to be honest. I don’t think actually AI works perfectly for real estate. I’ve been examining this now for quite a few years. So I actually I think, you know, there’s some trouble, I think it could work more in smaller localized situations, because AI performs best in a vacuum, if you will, when you when you can lessen the factors, it’s best. So maybe like in Manhattan, you could have a machine learning system that’s looking at all the different blocks, looking at the values looking at the sales, and it can spot like an apartment in one complex that’s trading 30% below its comparables, something like that, that’s where it could, you know, help or maybe for you know, like a localized basis. So you know, maybe a area of Phoenix. So you know, there are those potentials. And I think it will be applied. Like I said, just because it’s trippy doesn’t mean it won’t be done. It doesn’t mean someone won’t do a fantastic fantastically well. But I think both commercial and residential real estate, have significant avenues for people to develop them using machine learning for investing in real estate and maybe in time even finding the best broker, what broker will sell this type of partner the most. You know, when people pick brokers, it’s almost like you’re flying blind into the wind. I like this guy. My buddy likes this guy. My college roommates, wife plays poker with her sister, you know? And so okay, but how about what broker sells, you know, three 4000 square foot houses in this zip code for the highest price on average over the last two years? I’d be curious to know who that is. And that would be the broker I would want to hire. Even if it’s only by chance, well, maybe that broker by chance and got lots of rich people overpay for houses. And so there are these kind of these niche areas of real estate, where there’s quite a bit of a market, I think you can make money, whether it’s a broker search, and that’s something that compass is doing and actually, we put on our board. The lead machine learning engineer from Compass. You know Compass is a big dislocator in the real estate world, and we’re excited to have him join. You know, machine learning is still still very at the early stages when it comes to real estate. And so it’s very fascinating watching how it’s applied. And that is,

J Darrin Gross 20:19

What about beyond the the actual kind of the trading aspect where you’re determining value or, you know, one’s better than the other kind of thing, but, but actually in the operations, is there an opportunity for machine learning or AI? With respect? Whether it be reservations or

Alex Fleiss 20:41

Yes, yes, yes, you know, throughout the entire system. Machine learning is a really fantastic way to automate with slight intelligence, a lot of menial tasks. So from reservations, to insurance, And in the actual operations of real estate themselves in real estate measure companies, you know, they are going to be able to automate. I mean, you look at something like energy, and that’s one of the kind of most old school industries out there. Original Cowboys, you know, I’m sure we all saw There Will Be Blood. And you know, we get, you know, you got some, some heavy personalities and energy industry, definitely not a techie place, but energy because of the oil crash. The last six years has really embraced AI because there are a lot of simple parts to the business where you can apply AI save a lot of money. And so I think that you know, if energy and drilling can embrace AI, without a doubt, you know, real estate, the same, whether it’s drones for inspecting houses, you know, or investing in houses or for managing your properties, instead of, you know, having, let’s say a New York management company wants to buy a property in Philadelphia, but their main property guy that you know, he doesn’t want to be driving back and forth for hours. You know, in time, maybe they can have the outside of the property inspected by a drone, as an invention in the inside will be inspected by another drone. And so the idea to virtually inspect your property without having to be there, that could really change the game in terms of cost you don’t know. It’s all about creating intelligent ways to automate a lot of these menial tasks and replace, you know, people and then with that cost savings, you can expand or grow more and overall, more people will be hired. So I always I always caution people don’t think this is like a zero sum game where you lose a job here and you don’t get to there because that’s not the way that automation and innovation I’ve worked the last few thousand years. Over mankind’s history, innovation has consistently made jobs higher, paying safer, and more comfortable. And so jobs that were riskier, 100 200 years ago are less risky. Of course, there’s still risky jobs out there. But the amount of risk has decreased significantly and will continue to decrease significantly. That’s that’s one thing about, you know, technology, but not only does it make these apps actually retreats, more jobs and more jobs. When you look at something like a zoom video, which we’re using today, created by a Chinese immigrant who didn’t speak English, flunk thousands of people created billions of dollars of value. You know, I zoom has enough of a reason to be a capitalist, the whole socialist movement really sick and to me, frankly, because, you know, 40 50 years ago, we serve a country where whether you’re liberal or conservative, realize socialism was a losing cause. John F. Kennedy was a very, very, very, you know, hawkishly anti socialist communist person. So yeah, that, you know, that definitely very much upset me. But yes, as we’ve seen with technology and innovation over time, there are more jobs, more jobs that pay more, that are safer and more comfortable. So it’s really consistently been a win win win for the worker as technology unfolds.

J Darrin Gross 24:17

So speaking to that kind of the history and how it’s moved. How, at what speed Do you feel like AI and machine learning is upon us we’ll be moving as we go forward. I mean, there there is it, I forget, there was some sort of like Moore’s law about technology about how it you know, the the pace

Alex Fleiss 24:41

Yeah, I don’t I don’t. Yeah, I wouldn’t, quote any specific law with the progression of AI. I will say that we are very much at the dawn of the dawn. If this were the New World. I’d say it’s more like Cortez has burned his sails and he’s marching towards Tenochtitlan, but you know, we’re not at Jamestown yet Plymouth Rock. We’re still very, very, very early on singularity, we’re still years from significant cognitive, you know, intuition years from these are still very stupid machines. You know, they they need to be applied in very, very, very direct manners and you need to spoon feed them the data as much as possible, otherwise they will fail. So, yeah, we’re still very early on.

J Darrin Gross 25:28

One of the things it’s, it’s always been kind of the, I think the challenge for for myself anyway with technology is that I get all in with a particular brand or model or style and then thinking that that that’ll it’ll be built upon that or future versions will be built upon that only to be you know, only find out later that that one’s totally scrapped or in a you know, a new one and you’ve got to constantly be learning. Is there is there any kind of like a base level for This, this, I mean is or platform or I mean, I don’t know if I mean giving you the right question or if I’m speaking in a way that makes any sense. But is it does it continue to build upon itself? Or is it something can they can be totally dis unattached, that becomes the new focal point of of how this works that make any sense?

Alex Fleiss 26:23

No, no, it makes sense. Yeah, no, very much academic research is building upon itself. And, you know, as we move forward, moving forward faster, faster. And our progression is, is definitely increasing. And and unlike the previous AI bubbles of the 50s and 70s, this bubble has created a lot of profit. And so there’s a ton of AI companies that make a lot of money. And you have biggest tech companies completely embracing machine learning. The largest companies on the planet, Microsoft, Facebook, Amazon, Google, all They are the ones who are the leaders of machine learning. Machine learning has gone from bubbles to now leading the economy, they are buying the best engineers. And they are getting most of the data.

Data is the, data is the blood that makes the body move. And without blood flow. You have absolutely no sick no human being you have no animal. And so the more the better the bulk blood flow, the stronger you are, you know, I remember Steve Prefontaine, the famous middle distance runner from University of Oregon. Yeah, he was known for having one of the most efficient blood flows in the history of the planet, I think was the you know, the co founder of Nike who was his coach, I had partnered with Phil Knight said that, you know, he never ever wants

J Darrin Gross 27:32

Bowerman

Alex Fleiss 27:36

to If it’s Yeah, exactly, Yes, exactly. Nobody’s, you know, blood was as efficiently pumped as Prefontaine, which allowed him to be not just so good, but also he was a chunky guy, he was a large guy, you don’t typically have guys of that size, able to run that fast. And so with Google, Apple, Microsoft and Facebook, because they have so much more data, their machine learnings, you know, will will be the best on average because they will have the most data to work with. And the more data the system has more intelligent isn’t has to work with working make intelligent decisions. So it’s a race now it’s totally an AI race and AI engineers around very expensive.

J Darrin Gross 28:48

So you mentioned data in the collection of it. Is is the data that’s being collected Is it is it recognized up front is is a data point they want for a specific person purpose? Or do you find that a lot of times the data is being collected, so that it’s available for future analysis.

Alex Fleiss 29:10

I mean, Netflix is trying to collect as much data as they can on their customers and their customers actions, and they’re working on it and every different way they possibly can to better their systems. You know, they have teams, ie these companies and teams and machine learning engineers that are playing with their data, trying to make their companies more efficient. And so, you know, in terms of data, they want as much data as they can, wherever they can get it, your data is it is the new oil and you know, every every little bit of data has become valuable now and so because the you know, the Fang the Facebook, Apple, Netflix, Google have the most data. That’s why they’re gonna naturally be leaders in this industry.

J Darrin Gross 29:52

Yeah, no, it’s interesting as an insurance broker. If you like for years, we’ve been plugging data into the machine. But it’s only like recently that it’s really started to be used. And if that makes sense that you know it, I don’t know if it, I don’t know if that was understood going in or if that’s just kind of reality of the fact that you have now data scientists that are able to, you know, analyze the data and all all different views and come up with different correlations, and then the machine learning etc. That’s been able to utilize it and, and draw some correlations that can then be translated into economic success.

Anyway, hey, Alex, if we could like to shift gears here for a second. As I mentioned you before we started by day, I’m an insurance broker. And I work with clients to assess risk and try and manage it. And there’s a couple different strategies we consider when managing risk. The first is called can we avoid the risk for not able to avoid the risk we look to see if there’s a way to minimize the risks and then minimize or avoid it we look to transfer the risk and insurance is a transfer risk Transfer Tool. And as of late have been asking my guests and and if they can take a look at the world as they see it and their world and identify what they consider to be the BIGGEST RISK. And just for clarification, not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Alex Fleiss what is the BIGGEST RISK?

Alex Fleiss 31:49

Well, you won’t forget my last name because my cousin is Heidi Fleiss, of 1990s fame and Dennis Hof’s widow, but I’d say the BIGGEST RISK is the unforeseen risks without a doubt, which obviously is manifest in the COVID-19 Black Swan event or the S&P debt downgrade of the US government in 2011. The unforeseen risks is always always the worst risk, but it’s very, it’s very hard to worry about risk, you know, because there’s, it’s almost a it’s really endless. I think about my, you know, my, my, my Papi and 911 some people told him Don’t take any insurance out for terrorist events, and then other people telling him to take more. And so but Terrorist are gonna blow up the building. That sounds ridiculous, but then of course, what six weeks later happened. And so, you know, we’re living in, you know, in times where the unexpected is expectedly happening now. Whether it’s America’s Cup, the best comeback of all time, the idea of winning seven Sailing races in a row. So unlikely I’m a sailor. And so I got to play the odds that are just almost impossible. But, you know, we’re getting to these kind of new. We have such a globally connected world, which obviously has nothing to do wiht sailing. But, you know, it presents more and more and more potential risks against the globally connected world. If a risk arises in India or China, it will travel faster than ever did before because we didn’t have that connection in the world that we have now.

J Darrin Gross 33:30

No, absolutely. We’re a little beyond bird flu. As far as a means for transmitting that kind of stuff, and like so just information in general, just the way we’re so well connected and stuff. It is kind of, it’s a fascinating and almost a scary reality of just how, you know vast is how, how easy, it all moves.

Alex Fleiss 33:53

So I like to think about Carl Sagan, the famous astronomer astrologist, who says, Don’t forget, you know, we’re just A bunch of little creatures on a forgotten rock in a nothing solar system and a ho hum galaxy. There’s nothing, there’s nothing special about it. Now ours our star alignments aren’t special planets aren’t special, nothing about anything about us is special. The fact that our one planet allows our, you know, specimen to live here and other specimens. Look here doesn’t make anything about us. So, and when you start realizing that there’s, you know, another hundred or 200 billion galaxies out there, you know, it’s very small, and the potential for risk gets at most.

J Darrin Gross 34:39

Right, right. No, that’s good. Good to remember. Alex, where can the listeners go if they’d like to learn more connect with you.

Alex Fleiss 34:49

Thank you. So if you want to learn more about rebellion research, go to our website Rebellionresearch.com you can open a brokerage account. Or you can go to our research and read about AI machine learning flying cars, covered hundreds of topics and hope you’ll become a reader and a subscriber.

J Darrin Gross 35:32

Alex, this has been great. I appreciate you taking the time to talk. And I’ve learned a lot and I hope we can do it again soon.

Alex Fleiss 35:42

If it’s not a pleasure is all mine. You have a great day.

J Darrin Gross 35:44

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

Intro 36:02

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

People Relationship Key to Deals with Omar Khan – CREPN Radio #256

Omar Khan 0:00

Don’t be like most used car salesman and just come up big deal. Deal. Deal. Deal deal. Take a step back, give the guy a call just like that. Hey, man, what’s up? Yeah, and let’s assume you’re doing a deal. Right? And you know, this guy’s got money, but you know, you’re at the start of your relationship, right? And you. So just be like, Hey, I just wanted to call you what’s going on just a regular jet. And if the person brings up the bill, I know you’re working on this. You’d be like, yeah, it’s going fine. We’re doing good. Don’t worry about it. You didn’t do the hard pitch. People hate a hard pitch. Okay? let that person ask you, but why would that person ask you number one, you’re consistent and in the market number two, you are doing deals. Number three, you are professional. So when you are talking to that person, not about the deal, you want to raise money for it, but just generally, you’re presenting yourself the right way and you’re professional. You know what you’re talking about that person in and of themselves because they are a human being.

Intro 0:53

J Darrin Gross 1:12

Welcome to Commercial Real Estate Pro Networks CREPN Radio, Episode Number 256. 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. Let’s get into the show. today. My guest is Omar Khan. Omar is a Chartered Financial Analyst. He’s advised on over 3.7 billion of capital financing and merger and acquisition transactions. He’s the principal at boardwalk wealth you The syndicated multiple large deals across the US. And in just a minute, we’re going to speak with him about raising capital, working with institutional investors. And before we do that, though, and remind you, if you like the show where we’re doing here, commercial real estate, pro networks, CREPN Radio, there are a couple things you can do to help. You can like you can share, and subscribe. And as always, please consider leaving a comment. We’d love to hear from our listeners. And also wanna remind you if you’d like to see how handsome our guests are, be sure to check out our YouTube channel, and that is Commercial Real Estate Pro Network. With that, I want to welcome my guest, Omar, welcome to CREPN Radio.

Omar Khan 2:52

Hey, thank you, Darrin. It’s a pleasure being here.

J Darrin Gross 2:55

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

Omar Khan 3:06

So look my background, it’s, you know, somewhat common to a lot of folks who went to like, you know, they stopped in business schools graduate from finance. And you do the whole thing, you know, if you’re in bigger cities, which I was, I graduated from University of Toronto, not the best time 2008 which is not the best time but you know, I never drowned got a go job, the Royal Bank of Canada portfolio management, and its that whole route. Either you go to portfolio management, or you go to Southside advisory, which is investment banking, equity research, or hedge funds. You know, you do that grind for a little while you either stay at one company, we kind of bounced around, depending on what your network is and what you want to do, you know, and I always wanted to do multiple things. And I was on the buy side, which is basically Hey, we’re actually going to be the people acquiring these deals and structuring these deals and also on the sell side, which is the ones people who are advising on these days, like investment bankers are and a lot of these other guys are so which I didn’t know At that time was somewhat unique. I mean, earlier on in the career A lot of people don’t make those switches. I did part of that was because I just wanted a broad based network of understanding what goes on as always very curious. And then I moved to the US A few years ago, age old reason for girl. My wife’s a physician she was right about done with her residency and everything and for her to move up to Canada, she would have to do the entire thing again. And for me in the kind of professions that I’ve been in my skill set is very cross transferable. So I it was easy for me to move just south of the border, and that’s how we started.

J Darrin Gross 4:33

Got it. And and currently you’re located is Dallas, whatever you’re located?

Omar Khan 4:37

Well, right now I commute between Dallas and again, again for girl same girl. My wife accepted a position and a small town in Oklahoma, Home of Blake Shelton, by the way, Ada, Oklahoma, if you listen to country music. I don’t but apparently he’s big deal. And that’s a nice thing so I can move back and forth and bless with my business. Either on the phone or on the internet, you know, you’ve got to take care of stuff and on a plane. So frankly, if you’ve got a phone, Internet, and access to an airport, doesn’t really matter where you are,

J Darrin Gross 5:11

Yeah, you’re in business, right? It is crazy to think just how small the world has gotten. And, you know, just the ability to literally kind of Jetsons, you know, have these video conversations that were just years ago, kind of, uh, you know, somebody thought about it, but I don’t remember

Omar Khan 5:30

Oh, you’d already suffer. You’d be very surprised. I was talking to a friend of mine a few weeks ago. My dad is an engineer, and he was doing a lot of telecommunication stuff back back in the day like late 80s, early 80s, all the way the 90s and Siemens had come out with a broadband link back in the day, so you could video chat. This was like they were prototyping this out and testing this out. And I still remember because I grew up in Pakistan, and they were prototyping it out here. So I think it was 91 or 90 where you were in one city. You know, a bunch of these engineers got together they produced video chat and with their delay, a guy in the next city will reply back with a video. And people’s minds were blown. Oh my god the future. This was like what late 80s, early 90s. Right? And now look, here we are we this is a consumer technology.

J Darrin Gross 6:15

And I it’s funny because I think for me for the the transfer from the industrial or the commercial to the like said the consumer use is really what’s really kind of blows my mind where it is. Now it is ubiquitous. I mean, it’s whether you can do it on your phone, you don’t even need, you know, any special equipment, just push the button and there’s grandma or whoever you want to talk to. So

Omar Khan 6:35

yeah, and what’s funny is if you read a lot of sci fi, like asthma and stuff, we are now becoming like androids. I mean, like the phone is an extension of her body. Right? Right. And without a phone you feel kind of naked a lot of times

J Darrin Gross 6:47

Sad but true. But yeah, it’s you know, and and actually, is we kind of going through the the COVID-19 thing right now it’s almost even more of a tool to keep from being isolated. You know, I mean, there’s Yeah, at least stay connected there. So

Omar Khan 7:03

I don’t even know. I mean, I think a lot of people were getting divorced if they didn’t have a phone, right?

J Darrin Gross 7:09

That’s probably true. Well, hey, enough about the technology stuff there. What I’d really like to talk with you about today is given your experience and your professional experience and your your work as a syndicator is about raising capital. You know, I think there’s, there’s, well, beginning like 2010 12 there’s a lot of people that started syndicating and is that the their experience and success was reported and people recognize it more and more people got in and, and pretty soon everybody’s syndicating and everybody’s trying to raise money. And what I want to recognize now is that we have kind of the markets matured, currently we’re in this COVID-19 see what shakes out. But I want to talk with you about how to distinguish yourself and, you know, raising money from like institutions and professional investors, and how to set yourself apart and what you can you know, speak to that based on having had the experience of being the one that was approached and now I presume you’re here in the the opposite side of the table looking for capital.

Omar Khan 8:33

Yeah, look part. The two most easiest ways of doing this out. Either you’re extremely tight and have a track record operationally or you are just a fantastic marketer, really, but if you’re a marketer, a lot of times institutional capital doesn’t really chase you as much. I mean, you have to do a different type of marketing, right? These people don’t necessarily care about podcasts or I don’t know if he went to some conference on the weekend or something like that. They just want to fend for themselves. Because the reason is they’re already sophisticated, they can already look like for instance, I can look at a p&l. And if it’s in one of my markets within one of my sub markets, I can easily poke holes in it within five seconds and know Okay, all right, here are the big questions. Now, I’m not saying it’s a hole in the sense that it’s wrong. It’s a hole in the center. Why is this not answer? Right? So you need to be really sophisticated, understand your financials inside out, and your operations inside out. So a lot of folks who were talking about saying, you know, in the last few years, they’ve started syndicating a lot of these are part timers. And what happens is, you know, bears make money. bulls make money, pigs make money, but hogs get slaughtered.

J Darrin Gross 9:40

Right?

Omar Khan 9:41

So a lot of these guys that were high on the hog who were below maybe working in IP or accounting or finance or whatever, Doctor what would you name a profession, right engineer, whatever it is, and they were doing this part time, they can’t raise institutional capital, because those people nobody’s gonna give you a stroke. You were $10 million check five times a year, and kind of half expect you kinda have passively do it in the weekends, right? So number one, you need to have a track record of either professionalism, or deep subject matter expertise, right? Because these are already sophisticated pools of capital who already have experience. And by the way, you’ve got to realize, you, you might be the owner, like, for instance, for you, this might be a big deal, right? You’re, you’re talking to this guy, ten million dollar check. And you might do it once or twice here. This guy has ten of these meetings before lunch every day, right? So for you, it’s a one off occurrence for him. It’s an everyday thing, right? So you’re just a number. So what you really need to do is stand out for the right reason and what you’ve got. You just need to basically for the lack of a better word, understand operations just doesn’t mean well, you can kind of haphazardly talk about it to me to show your benchmark, Hey, who are the people on your team? What is the backup behind it organizationally? What is your structure? Then you’ve got to show them okay, this is how our reporting is. A lot of folks can have everything, but they struggle on the reporting side of things because these people have very onerous reporting requirements. Right?

J Darrin Gross 11:00

Right.

Omar Khan 11:00

And you’re never going to make headway, right? So you really need to be holistically combined, you need to have a holistic set of experiences. And if you don’t have that, the best bet is for you go get that first, get a track record, start the ball moving, and then start looking at bigger pools of capital.

J Darrin Gross 11:18

So you mentioned I mean, obviously, all the reporting in that. And just the sheer size, I mean,

Omar Khan 11:25

Just to let you know, by the way, the reporting and all you would think you understand that’s not a real estate related thing, right? It’s not like you could be a fantastic operator and still have really bad accounting. Right, right. Right, right. So if you understand these are organizational things, like how strong and robust is your organization? These are qualitative things that they’re assessing, as opposed to just Hey, do you have a good deal or not? Because you know, all this, this trope about Hey, find a good deal and the money will follow right? Yeah, that shit doesn’t , isn’t really true, man. I mean, I like these one of the ones some guru ads at some conference to saying this as like, Okay, you got $80 million, buddy. I can find you 100 million dollars in profit. To show up at $80 million cash tomorrow, because if you can’t, I mean, then you got to start, you know, let’s talk more walkie Right,

J Darrin Gross 12:08

Right, right. Yeah. No, and given that I think just the sheer size of the deal or not the deal, but the pool of capital that the professionals are looking to put to, to work, whereas the the smaller operator is, you know, looking for, you know, 50 hundred or, you know, a couple hundred thousand dollars type thing. And just the sheer volume, I mean, and how many, how many opportunities they look at on a daily basis. How you said 10 before lunch, how many do you think they look at in a in a year and how many

Omar Khan 12:44

Thousands of them. Thousands and thousands but they have to because you have to realize they the entire job of them and by the way, they are capital providers, but I raise my own money and I’ve run my own projects. I say no to 99% of the opportunity to come across my paper. And I know I’m not the only one who does that, because there are countless other operators that I respect and I, you know, I get their opinion lots of times on things, they do the exact same thing you have in any profession. If you are wanting to succeed or you’re in a position to succeed or you put yourself in a position to succeed, you have to have the ability to continuously scale. You know?

J Darrin Gross 13:20

Right.

Omar Khan 13:20

That’s just the way it is.

J Darrin Gross 13:22

Definitely. So on on the obviously the the team members you talked about and the reporting. Can you go into any kind of like the the depth of reporting, I mean, obviously, you mentioned like the holes and financials I’m assuming that somebody like you that’s, you know, worked on both sides and the experience what are some glaring tells that you would you commonly see when you when a deal is presented to you,

Unknown Speaker 13:51

Oh, number one, everybody says, you know, rents are $200 below market, and this is below sales, like they’re the price at which they’re requiring is below sales comps. You’re like, Yeah, but you pick the comps, right? The comps, hell dude, I’ll pick comps and everything I do is gonna look like the greatest deal in the world. So number one, you know, but again, this comes down to product knowledge, market knowledge, right? So you have to be a product, product expert and a market expert. So for instance, if I’m in Atlanta as an example, and I’m looking at a place like say fear it will Peachtree City in the south or say Marietta Alpharetta coming on the north. I’m not gonna compare that to College Park, which has just different demographics completely right. Because Yeah, I compare that I buy a deal in College Park and on paper, I was like, Look, there’s $800 of rent difference in sales costs are so different. And you’ve got to realize, look, people a lot of newbies say, Oh, well, I’m just taking in from the broker. Well, legation to you, I mean, you’re not the one thing the broker, the broker. Again, by the way, you cannot bring blame the broker because the broker is a salesperson, right? They have What is in their best interest because they do all fiduciary duty, right? Or fiduciary duty to yourself, to your family and to your investors. That’s why, you know, you got to start walking the talk, you can’t just take easy ways out, you got to, you know, you got to put in the hard yards, it’s like any other, it’s like any professional, you’ve got to put in the hard yards, you’ve got to do your research. And if you don’t do that, you’re going to be taken for a ride.

J Darrin Gross 15:25

Right? Now when you’re looking into a new market. Do you physically go there and walk in? I mean, I the brokers and

Omar Khan 15:34

You have to look let me tell you this, a lot of guys for some weird reason still have it in their head that I’m just going to go direct to seller, I just want to bypass the broker. Yeah, let me explain that to you that that that works. If you’re buying a $50,000 house in the middle of nowhere and Podunk Mississippi. That doesn’t really work if you’re trying to buy a $30 million asset in Jacksonville, Atlanta. People don’t have time for this kind of stuff. You know, people tell me Oh, I’m gonna do skip tracing them. Yeah. reboot is like the gambling thing. Just think about it logically, do you think a guy or girl that owns a $30 million piece of real estate? They are that dumb or that unsophisticated and they own multiples of these properties, but it’s not just one of them, right? They own a few of these, right? They’re that dumb. They’re just gonna randomly call and you’re gonna give you a rags to riches story, and they’re gonna tell you Oh, my God, you know, just to help you get yourself up from the bootstraps you go, man,

J Darrin Gross 16:28

Right. No. I’ve been waiting for your call. Oh, my God, you know,

Omar Khan 16:31

All my life. I’ve been waiting. Yeah, you know, your $30 million. I really wanted to burn it into the ground. The only reason why work for it was because I wanted to burn it. Right? That stuff doesn’t really work. You have specialists called brokers. Okay. There’s a reason why these guys get paid so much money and it’s not just because they’ll wear fancy suits are nice guys, because they do our work in nice offices. Look, I can’t it’s like any high pressured, professional. It’s like being a physician, insurance salesperson. Anything all these people who put in the hard years they’ve made relationships over 5, 10, 20, 30 years. So when somebody is even thinking about selling, they haven’t decided how they’re thinking about selling. They pick up the guy called, hey, John, what do you think about this? I’m telling you, even right now, I am a seller A lot of times, and we’ll say the top because every big market only has stopped three or four big brokers. It’s like, it’s like any other business in the world, right? You know, insurance sales, kind of same thing. A lot of times I pick up the phone and be like, you know, I’m thinking about this. This mark, I don’t if I don’t have abandoned the property on the market, right? And thinking about the sub market, what’s your take on the sub market, right? And they’ll be like, Look, you know, rents are going up, but there’s lots of delinquencies, and then immediately the last or what property did you have in mind, right? So you got to be a little coy depending on the situation, but you have to realize they are providing they are in the business of developing relationships so they are providing you information. But you also got to step up to the plate and do your part, right. You can’t be a tire kicker.

J Darrin Gross 18:00

Right, right. Hey, Got it. Got to be ready to respond.

Unknown Speaker 18:05

Yeah, but they want to do this? By the way, just let’s be very clear. They want to do this because a lot of this is this relationship away from them look, think about it. Even if somebody takes three years for sales to happen. This is not like buying $100 pair of Nikes. This is like a $30 million sale. Right? And one guy who does a $30 million sale, I bet you he’s gonna do two or three more sales. Is this just not gonna be a one and done right. So the sales process is very long. But you make like 500 grand a sale. Right?

J Darrin Gross 18:35

That’s worth a couple year courtship there to finish liner. So,no, that’s good.

Omar Khan 18:43

But it’s the same with this institutional people you said you know, a lot of times the first ones they’ll pass again, unless you know, you’ve really good relationship. But again, what people are assessing to see is Hey, are you around? Do you do a volume of deals? If you don’t do a volume of deals, you better have a pretty damn good reason why you’re not doing right. Right. And are you consistent player in the market? Are you one and done? Are you flash in the pan? Or are you out there? because trust me, these exact same people also talk to the same people that you want to talk to they talk to the brokers, they talk to the lenders, in fact, a lot of times, if I have to go raise pref equity, right from some of these guys, they’ll talk to the lender be like, hey, you’ve given this guy three loans. What do you think about him as an operator, right? And a lot of those guys off the books will be like, yeah, I really like this guy. He’s been paying on time, but otherwise, too, when we talk to him, you know, he’s, he’s got it going on. We’re saying, yeah, that guy got a good deal. I don’t really think.

J Darrin Gross 19:37

Right, right.

Omar Khan 19:39

And it’s a small world, by the way, just to be very honest with you. It’s a very small world these days.

J Darrin Gross 19:43

I mean, absolutely. The word spreads. If you’re, you know, if you’re well capitalized, and you’re a good operator, and you do what you say you’re going to do and, and are closer. I mean, we’ve talked to many people about that once you know the The first deal ever I came everything Michael Blanc might talk about that. But just the, you know, once you have a deal than other others tend to present themselves. But again, in these bigger properties and larger capital deals, I mean that the level of your sophistication will speak volumes to the opportunity and whether or not others are willing to back your work today. Yeah. Yeah.

Omar Khan 20:26

And by the way, even if you don’t have any, let’s assume you’re new to the market, but you do have a level of sophistication you understand these things. It’s like industry lingo, right? You’re speaking the same language at the same pace at the same intensity and, you know, like, the top three ways somebody is gonna screw you in a day like this. Right? And you already be like, and somebody’s going to be like, Look, man, come on. Just look and be like, what, come on, man, these demographics are just shit. Right? Right, right. The guy trust me, people don’t no matter what you might think professionals don’t get offended because there is realize it’s a game. And part of playing the game means that you have to keep assessing your Counterparty right it’s like kids you know, you got you’ve got to Yeah, I’ve said I’ve got a kid and another one on the way every single day. My kid is two years old. And he keeps pushing the boundaries. He keeps pushing the boundaries. He wants to keep knowing where is the boundary where my dad will start screaming

J Darrin Gross 21:21

Yep,and it doesn’t stop.

Omar Khan 21:25

Oh it doesn’t stop. Okay, well, that doesn’t help.

J Darrin Gross 21:28

Well, I think what’s funny though, is in in the kid example is that while the boundaries they become known, then there’s a new presentation that you hadn’t anticipated and I just

Omar Khan 21:40

Yeah, I’m learning that the hard way.

J Darrin Gross 21:42

In just that situation I I’ve mastered yesterday. That’s that’s where my point of reference is. And my wife’s always thinking like, you know, weeks, months, years down the road kind of thing. And I just I’m always one of those kind of caught off guard. But but i just i perfected that you know, but even in this in this Real Estate thing, though, you’re talking about you know, and I think what I what I’m hearing from you is more about just the consistency about staying in, you know, whether it be the the brokers staying in touch with them. And, you know, like that creating that relationship, whether it takes three years to do a deal.I’m assuming that the same with a capital.

Omar Khan 21:59

It’s the exact same thing. It’s a continuous Look, a lot of people think it’s really funny. Like, sometimes I joke, I was like, I’m not in the real estate business. I’m in the marketing business, right? Where I just have to keep staying in touch with people. And you know what’s really funny? A lot of times the best results I’ve had are with people. For the first five calls, I felt like, Oh my god, I’m Jesus, right? Yeah, right, right. And suddenly, maybe the timing is right, maybe the guy’s having a better day. Maybe I’m having a better day and I misread the situation earlier, bam, it works the system, but you have to get to the sixth call, right? If you drop out of a third call, or the second or fourth call man doesn’t really work.

J Darrin Gross 23:00

That’s funny, I know in insurance, I think the you know, it’s a free 100% of the salespeople will make the first call, and 50% will make the second call and it drops off dramatically, but the buying starts, you know, way out, you know, 12 plus calls kind of thing. So it’s, I

Omar Khan 23:18

Look a lot of times, it’s disheartening. I’m not gonna be honest. I mean, nobody likes to get like, you know, might not make any progress, but but that’s just the way it is. I mean, what are you gonna do about it, you can complain about it, or you can just go do your job and consider your job. What are you gonna do?

J Darrin Gross 23:32

Right, right. So, let me ask you with the, we’ve talked about kind of the consistency and the presentation. What about just the the security of the opportunity? at a professional level, I think a lot of times, you know, newer investors are they’re attracted to the the high returns or or some sort of You know, high cap rates or or can you speak at all to, to just the the opportunity, not just the numbers, but just just the security, the nature of what they’re looking for? In a return?

Omar Khan 24:16

Look, I mean, the way I look at it is thank God, we live in a free enough country, where we’re all allowed to do really dumb stuff. That’s the way I look at it, thank God, because who would want to live in a country where I can’t even go do dumb things? Right? So all I’m trying to say is if somebody wants to go do dumb things with their money, it’s their hard earned money. And it’s their God given right. Right? Right. The way I look at it as like, if you’re, if you’re smart enough to work, you know, in any profession, you know, if you save $100,000 It’s not easy to save $100,000 right for most professions, right? Which obviously means you you’ve at least understood the concept of delayed gratification to certain degree. Now, if you’re going to take that whatever, 2, 3, 6 months, one years, two years worth of savings, and you’re going to go to some scammy Real Estate conference. And you’re going to have a guy with Gorky, when the shiny suit, value investment deal in five seconds of him being on stage and you’re that desperate lose your money. While this is going to be a really good life lesson for you, right? So I tell people look, if you’re going to be that gullible This is just God’s way of telling you are a dumb ass. Right? And you don’t let this be a life lesson because we all know you you already know the pain it takes to save money over a period of time, the sacrifices you have to make. So take a step back the deal of the century comes back every two every two weeks. And look we’re all gonna make mistakes we’re all trying to do is reduce the level of intentional or avoidable mistakes we can make. We’re all gonna make mistakes, right? So don’t be gullible. Anytime you feel like you want to take you know, you want to take a decision sleep on it, you know that old saying sleep on a thing and you get up in like one or two days, whatever. And, you know, then you decide whether you’re a pet, don’t let people talk to you about deal, but hey, if you’re that gullible, then I got a bridge to sell you Right.

J Darrin Gross 26:04

You know, oceanfront property in Arizona.

Omar Khan 26:06

Yeah, oceanfront property in Arizona. I love that.

J Darrin Gross 26:12

You know, and what’s funny is and funny, sad, but I think that, you know,

Omar Khan 26:17

No it is sad. Look, don’t worry, I’m not I’m not trying to make fun of somebody here. I’m trying to say, look, take a step back.

J Darrin Gross 26:23

Oh, but but I think that across all markets, whether it be the stock market or real estate, or, you know, what have you. The, the big wins are what really gets people’s attention. And, and the, the, the work that was put in before is rarely ever recognized or understood or even considered,

Omar Khan 26:48

It’s the ten failures before nobody looks right. It’s the one when everybody just goes in like this. It looks at

J Darrin Gross 26:53

Right and in just that, it just it captures the imagination and You know, people are not happy with their current circumstances and just thinking man, if I just said that one lottery ticket, you know if I could just get that one thing and Oh, he’s offered a

Omar Khan 27:09

Hey Darrin, I think about it all the time doesn’t mean I mean, look, I mean, I’m gonna be honest with you, I’d love to have a private jet.

J Darrin Gross 27:15

Right.

Omar Khan 27:15

Doesn’t mean I go to, you know, I spend all of my income on lottery tickets, right? My point is, is because this is such a concept lately, which to be honest with you, man, I just don’t understand these days. I was like, Look, what what difference does it make that you want something like, I don’t even understand what difference it makes you want something? I mean, I want I want to be like Michael Jordan. Well, I’m not jumping seven feet into the air. I mean, nobody’s signing me up for a professional basketball contract. So just because you want something doesn’t mean you should get it right. Right or, or the other way around. My point is, wants and needs are different. And it’s very shocking to me these days that people tend to confuse the two.

J Darrin Gross 27:52

Right? Right. So when you’re considering like from From a an institutional or more of a professional capital provider, is there. Is there a margin? I mean, is there a safety that they’re looking at? Or is there an asset class? I mean, I’m assuming that you know, a D property or you know, something like that’s not what they’re going to mean or B’s and I mean, I’m assuming A’s obviously, but are bees are you able to raise money from from institutions?

Omar Khan 28:31

It totally depends on the person or people or institution raising money from maybe there isn’t there there are institutions I can assure you, that just wanted to be properties, but they will by volume. Right? So my point is this is we’re doing your research, developing the relationships upfront and over a longer period of time plays in because then you can truly understand what the person is looking for because as an example, if somebody is looking to invest in safe industrial assets are office assets, and you keep pestering them and multifamily assets right

J Darrin Gross 28:33

You’re not listening.

Omar Khan 28:35

I mean, that’s, that’s a short way of, you know, get going to spam directly. Right, right. But cultivating the relationships, taking, taking a step back and actually understanding, right? Because think about it yourself. You probably, I mean, I don’t, but you probably don’t like getting sold, things that you don’t even want to buy, right? I mean, like, dude, just don’t do that. Right? Yeah. So it’s the same with these people. Because you’ve got to realize just because somebody works in an office wears a fancy suit and drives a Porsche doesn’t mean the person is not a human being. We’re all human beings at the end of the day, a lot. A lot of these I can assure I can tell you from personal experience, the first step is not the money, you got to talk more money right in the end, man. Okay, if you start with the money, pretty much none of your relationships are gonna go anywhere. Okay? You got to understand what people are looking for. You’ve got to present yourself in the best possible light, you’ve got to be approachable and nimble and, you know, easy to talk to, but professional. Take that time, develop that relationship. In fact, don’t be like most used car salesmen and just come up with Deal, deal, deal deal deal, take a step back, give the guy a call just like that. Hey, man, what’s up? Yeah, and let’s assume you’re doing a deal. Right? And you know, this guy’s got money, but you know, you’re at the start of your relationship, right? And you. So just be like, Hey, I just wanted to call you what’s going on just a regular chit chat. And if the person brings up the bill, I know you’re working on this. You’d be like, yeah, it’s going fine. We’re doing good. Don’t worry about it. You didn’t do the hard pitch. People hate a hard pitch. Okay, let that person asked you, but why would that person ask you number one, you’re consistent and in the market. Number two, you are doing deals. Number three, you’re professional. So when you are talking to that person, not about the deal, you want to raise money for it, but just generally, you’re presenting yourself the right way and you’re professional. You know what you’re talking about that person in and of themselves, because they are a human being will ask you over a period of time. Hey, Darrin, tell me about that deal. Or why don’t why don’t you ask us about the deal. Be like oh, well, you know, we were so busy with our other deals. Raising money that I just you know, I didn’t want to bother you. I know you guys are swamped all the time. Don’t worry about it. But you know, next time around you want me to tell you yes or no answer. But yeah, I want you to be okay. I’ll keep that in mind. But what’s going on? What are you doing for the weekend? Right?

J Darrin Gross 28:41

Right. Right.

Omar Khan 31:16

It’s this cannot be the focal point. But look, trust me, when you get to that stage where money is going to change hands when they are going to ask you a question. Trust me, they will ask you the questions. You have to answer those questions. But

J Darrin Gross 31:31

Right, but if you don’t have the relationship, you’re not gonna get to that question in the first place. So that’s

Omar Khan 31:35

Yeah, but you understand you or you still get that question, but you don’t have to present like, five paragraphs worth of answers. Right? Right, right. You can say two words and bam, you’re on to the next topic. But the reason for that is because you’ve established a level of credibility over multiple months and years, which has led to them then when you say those two words, whatever those two words are, right, right. But you know, like we talked about 10 failures and then one success. That is the one success but the failures, failures are the conversations you’ve had leading up to.

J Darrin Gross 32:07

Right now I and I get it. It’s, it’s, I think too many people when they start off and I’ve certainly been guilty of it in, in my career over the beginning is when you’re hungry and you’re desperate, you’re desperate and it shows and it doesn’t. It doesn’t translate well to like, gee, let me let me let me invest with you.

Omar Khan 32:26

Yeah, because look, the more desperate you are, even though you’ve gotten better, you might have a better deal. It’s not attractive. It’s repelling. Right? So you gotta look it’s a game man. I’d be I’ll be honest, it’s a game. You’ve got to play the game. There are the rules of the game. Now you don’t have to like the game. But that’s the game. Yeah, yeah. You know, you don’t have to like I mean, I don’t have like everything I do.

J Darrin Gross 32:48

And that’s, that’s true. I gotta remind myself of that. Sometimes. It’s it’s a game. So

Omar Khan 32:54

Hey man, every day I need to remind myself Yeah, sometimes I get off a call and I want to break a frickin pencil or something right? Right, right,

J Darrin Gross 33:00

right, right, right. Hey, Omar, if we could, I’d like to shift gears here for a second. Yeah. Before we started, I mentioned you by day, I’m an insurance broker. And as such, we do risk management with our clients. And there’s a couple of different strategies we consider. The first is we we asked, can we avoid the risk? When that’s not an option, we look and see if there’s a way to minimize the risk. And if that’s not an option, then we look to see if there’s a way we can transfer the risk. And that’s, that’s what an insurance policy is. And as such, I’ve been asking my guests, if they could take a look at, you know, what they’re doing with real estate, and if they can identify what they consider to be the BIGGEST RISK? And, again, just for clarification, I’m not necessarily looking for an insurance related answer. You know, risk is everywhere. So with that, I’d like to ask you Omar Khan, what is the BIGGEST RISK?

Omar Khan 34:04

Not having enough liquidity. You could have the greatest asset in the world, if you don’t have enough liquidity, none of it, you can survive. A lot of times when you’re in trouble. All you need to do is run down the clock and survive. And liquidity offers you that, that comfort, or another word, a lot of times, you know, we are humans, when we’re put under undue stress, we tend to do things that we would not do when we weren’t under stress. So the liquidity is the cushion that allows you to not mentally put yourself under stress or be backed into a corner for no reason. So even during trying times, you can, for lack of a better word, continue to do business as usual while you’re scrambling to do everything else, right. And you’re not foreclosed upon, nobody hates you, you’re not dying.

J Darrin Gross 34:53

No, I think there’s definitely a liquidity test here. And the making with you know the current situation,

Omar Khan 35:01

Oh geez, I really hope it is I’m sick and tired of being safe and conservative. And oh my god, I mean it better paid off now.

J Darrin Gross 35:08

Yeah, I think your your prayers or whatever, but I think that they’re they’re gonna be a lot

Omar Khan 35:14

My prayers were not for the COVID. My prayers were not for the pandemic to happen.

J Darrin Gross 35:20

Well, we appreciate that. But no it’s it is interesting and you know I think that having you know gotten myself into some deals and stuff and recognize just that you know having capital and and being well capitalized is the difference between surviving and and you know winning surviving winning versus losing big and losing all of your your investment not just your your initial investment but any of the opportunity on the upside there too so

Omar Khan 35:55

And the way I think about it is look a lot of things in life for as long as you live to fight another day That’s a win.

J Darrin Gross 36:02

That’s good. Hey Omar, where can listeners go if they’d like to learn more, or connect?

Omar Khan 36:10

So you can go to our website boardwalk wealth Bo and be as involved boardwalk wealth dot com. Right on the front page. If you scroll like the thing, the second, just like smidgen down, you’ll see a box on the on the right side where you can enter your name, your email address and how you find out about us. And then you’ll get an email you click on the Verify button and bam, you’re in into our distribution list. And you can hear my profound thoughts and get the inside scoop on our deals.

J Darrin Gross 36:38

All right. Well, Omar, this has been great. I can’t say thanks enough for taking the time to talk. I’ve enjoyed it learned a lot and hope we can do it again soon.

Omar Khan 36:49

That was my pleasure. Thank you for having me.

J Darrin Gross 36:50

Intro 37:08

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

People, Property & Capital; Raising Money for Multifamily Real Estate with Tenny Tolofari – CREPN #255

Tenny Tolofari 0:00

This guy that says they have big amount of equity to bring to the deal so because of that with the one the boys chasing everybody else that had maybe $50,000 on $100,000 which is a big mistake because if one of those guys said says, you know, at this point is a good time you’re completely screwed, right? So, um, we went ahead and you know started depending on one or two big decoder, big dogs and they disappointed us and at that point you and I said, Okay, let’s go ahead and start chasing the guys that have 1000 or $50,000 to invest in since the concept and every information that would show was new to them. A lot of them do find it find find it very appealing to put them on Institute. Welcome to

Announcer 0:47

CREPN 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.

Darrin Gross 1:06

Welcome to Commercial Real Estate Pro Networks, c r e pn radio, Episode Number 255. 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. Let’s get into the show. today.

My guest is Tenny Tolofari. Tenny is a co founder of Exide Capital Investment LLC, a multifamily real estate investment focused company based in Washington DC. And in just a minute we’re going to speak with Tenny about the myth of finding, find the deal and the money will come and before We get into that. Want to remind you, if you like the show CREPN Radio, there are a couple things you can do. And they’d be greatly appreciated.

One you can like, share and subscribe. And the other thing is you can always leave a comment. We 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 that is commercial real estate pro network. And also please consider subscribing to that too. That’s funny how those numbers work. The more more you have, the more attention you get. So appreciate your help with them. With that, I want to welcome my guest Kenny, welcome to CREPN Radio.

Tenny Tolofari 2:43

Thank you very much Darrin. Thank you for having me. Ah, what a wonderful time to be on the show right now. Appreciate it..

Darrin Gross 2:51

I’m glad. Glad to have you and looking forward to our talk today. Absolutely. Before we get started, if you could take just a minute and share listeners a little little bit about your background.

Tenny Tolofari 3:03

Sounds good, I just think.

But um, yeah, I came to the United States in 2010 10. Um, my goal coming to the United States was to get my master’s degree. I had a bachelor’s degree in Electrical electronics engineering back in Nigeria. I was born and raised in Nigeria, to the family of seven kids. I’m a twin actually, with a sister back there. So I came in 2010. To get my master’s degree amongst all countries, I decided to come to the state because this is the land of opportunity. So I went to school I graduated from Boise State in 2012. And I, I go there with my my sense of cybersecurity instead of doing cybersecurity for companies like Boeing and presently have a global consult on to Deloitte and in 2016, I thought, you know, I was actually my American dream, I brought my mom here to visit, but my baby stay here as well to come and get my sister as well. But in 2016, at one point, I said, You know what, I don’t think I want to continue to do this rat race.

And that was because I had an injury. I just said, You know what, I think I need to do something differently. And I got approached by a financial services company. And I started learning about finance. And that’s how I got into financial services. So while I do my cyber security consulting, I have a financial services business background as well. So since 2016, I’ve been doing that. And then in 2019, while I was doing a presentation at at one of my clients office, I met my partner’s wife, which is Leslie. So my wife will give me audience session come to their home and Discuss to them about financial services. And I met this great guy, we had a wonderful conversation. I thought we had a conversation for a while about what I came to do. From there moved on to start talking about personal development, books, your reading, and then we just found a connection. And then from there, we said indoor, let’s meet up and start talking about the future.

So we started meeting up to have a conversation about money instead of playing the Robert Kiyosaki board game. And we started learning about money and one point to say no one, I think it makes sense to just venture into business together and that business I wanted to venture into his real estate. Business already had a lot of background in real estate before. Before I met him. Me I always had this philosophy by Robert Kiyosaki that says, you know, you create a business and you invest, you invested money in real estate. I’ve always had that philosophy and when I met Leslie, I was like, I know what this is the time to implement. So, Allison in 2019 opened up a company called excite capital, which is a real estate investment company focused on multifamily. Like you had mentioned in the introduction. So since then, you know, it’s been an amazing experience. I’ve met a lot of people. And now you know, I’m here talking to DarrIn. So that’s a little background about me. I don’t have to go to details more, but that’s it.

Darrin Gross 6:26

I appreciate you sharing that. So you and Leslie are partners and Exite Capital, correct?

Tenny Tolofari 6:32

Correct.

Darrin Gross 6:33

All right. And so tell me more. What is Exite Capital? What are you guys it is a basically an investment vehicle for multifamily. Are you guys principals, are you limited partners, how are you participating?

Tenny Tolofari 6:49

So the intention, why we formed the company at first was you know what we want to hold on to, to for real estate properties, right?

When we started thinking about investing, we said, you know what people should you buy single family homes and, you know, buy them and rent it. Because we feel like that’s one of the most stable asset class in investing in general. The most wealthy people in the world where they made their money wasn’t real estate. And we were like, you know, this is a good time for us to get in and just start buying properties. So in the process of doing that research, and doing a bunch of research about what asset class to invest in, we came across multifamily. It was understanding more about how multifamily works, how you know, you can come together as a team, or a group of people to buy a property. And we’re like, you know, this makes sense. Instead of we try to do it by own on ourselves on our own dime. We can come together with a group of people, where we all pull funds together to buy bigger property, because the more we’re able to scale, the more we’re able to win for everybody. So what excess capital was fund to bring a pool of investors together to go in there and buy apartment buildings and we manage the property. So we’re basically a principal in in acquiring these assets in great markets across the country.

Darrin Gross 8:16

Gotcha. So are you investing in any particular market center? Where were you investing?

Tenny Tolofari 8:23

Absolutely. So last year, we invested in 192 units apartments, we another group in Marietta, Georgia. Um, this is great class B property. That was what property we invested in. Right now. My partner, we’re looking at all the markets. The market we’re focused on right now like we’re locked in is in Charlotte, North Carolina. We’re also looking at the dorm Chapel Hill area in Charlotte, North Carolina. So the North Carolina, North Carolina market is one market out blue team and will heavily focus on the market right now.

Darrin Gross 9:01

Got it? And, and I just want to make sure I’m on the property 192 units that you’re in. Are you, the general partner? Are you guys limited partners on that? or How are you in that deal?

Tenny Tolofari 9:14

So we are limited partners. But we had an amazing opportunity to come in as general partners. And again, if the conversation going that line or some of the lessons I’ve learned in our journey, I’m able to share you give an example of how we had a huge opportunity to be a general partner in that property. But we thought fell short so but we’re limited partners that deal right now.

Darrin Gross 9:37

No, can you share with us I think it’s interesting, because I think, you know, a lot of people understand the terms. And it sounds like you had an opportunity to be a general partner, but now you’re you’re a limited partner. If you can share a little bit about that. I think it’d be a

Tenny Tolofari 9:54

Absolutely I love to share this story.

So Once I decided to go into multifamily investing, we did a lot of research, we did a lot of investing in ourselves. We invested in mentorship programs, we invested in beautiful relationships with people that are already in the industry that are doing good. In in that process, that’s one of the events that that one of the group we’re part of in terms of our mentorship program. I raised my hands one of these days and say, Hey, listen, you know, I’m in the DC area, and I’m looking for a key principle or a key sponsor in this area, and I’d like to have a conversation and before you know, somebody say, Hey, I know this guy. This group is a wonderful group and he will have a call with them. I can remember they give me about nine names of, of key players in the Maryland Virginia DC area.

And out of those nine to two of those guys picked up my call one of the company is Viking capital. And then the other guy said, You know what? I’m just gonna invest you guys up but I’m not going to be any key principle so I had a meeting with my Leslie had a medium with Viking capital on the individual matches. Vikram writer, grid wonderful guy was top sat on the table with him and had a wonderful conversation and he saw the passion that I literally have when it comes to this and he said hey, listen, if you guys are really interested we have a deal right now that we have on our contract we’re going to be flying to Atlanta to Marietta, Georgia to check out the property and your due diligence. If you guys want to be a part of it. Why don’t you come with us? See, we’re we’re in. We booked our flight ticket unless he couldn’t make it. I flew down, went with them for two days due diligence process on that property. And he said, Hey, listen, this is a great opportunity. If you guys can come in as general partners and raise equity.

That would be amazing. Sure. We got this. And I prior to having that conversation, we’ve met a bunch of people that say they’re interested in buying apartments. Remember our goal is how do we bring people together for us to go? buy property is apartment buildings. And we’ve met a bunch of people that say they have more than $1 million to invest and a whole bunch of stories, right? And I’m sure you’ve heard that where they say, you know, you find the money to deal find a deal, the money call, we had that notion, and we were busy, you know, looking for the deal looking for the deal. And now we have an amazing deal deal Class B property willman property cash flowing, the upside of that property was about $300 that they have throughout the lifecycle of the business plan in the company. So we’re like man, this is an amazing opportunity let’s take it out of there talk to the people that are interested in it now we have some opportunity to come in and GP raise equity and come in at GP now when that these guys that say they have all this money how conversations with them they said you know what, I have money. I’m gonna be ready. So he is you go is a form that you know, the accredited That’s the questionnaire go ahead and fill it out and send it back to us. And cricket.

Cricket

We started getting frustrated at that point, she started getting frustrated and started going to the people, probably our friends we know and started telling him about it. And they’re like, dude, I’ve never heard about this before for you. I know you as a financial adviser, a cybersecurity expert. What are you talking about real estate right now, it doesn’t make any sense to me. And at this point, if I think back, I really don’t blame them, right? Because if I’ve not come before and share with them what I’m working on an offer. All of a sudden, I come up with a $25 million property and I say, Hey, listen, I need to give me money. I’m like, dude, I don’t understand what you’re talking about.

So. So we learned a great deal from that experience. That you know, you want to make sure you do the relationship with people let people know what you’re doing. And then gradually those equity will come and then you continue to find those deals. And was you are you at the right position where you have equity deals, things are just magically Work, Work Work out together. So that’s one of the big setback we had. So we couldn’t raise the capital. And we ended up going in and just put in our own money since everybody else says, You know what, I’m not getting your money, money. So don’t worry, we have our own money, we’re gonna put it put it in as a limited partner. So that’s what we do as a company with that deal.

Darrin Gross 14:23

Got it. So you actually lived the myth of, you know, you find the deal, the money will come kind of thing.

Tenny Tolofari 14:32

Absolutley.

Darrin Gross 14:33

Yeah. So. So how many when you were presented the opportunity to be a general partner, in your mind, how many people did you think you had in your queue that that were available and willing investors?

Tenny Tolofari 14:50

Not a whole lot? Not a whole lot. Um, I think the big mistake that we made was we were looking for the big people that say they have big money so we have this lady, she she said, Hey guys, I see the passion we actually met her in Boston we went for a conference on there to say hey listen, I see the passion here. Let’s these eyes see you guys have integrity. I think I want to work with you. I have a couple of investors like to bring up to $2 million into a deal. So if you find a deal, bring it to our attention. And then we had another folk a lot of folks out there that said, you know, he has a bunch of investors he can bring it up to a million dollars so we have this this guy’s that that says they have big amount of equity to bring to the deal. So because of that when you want to buy that’s chasing everybody else that had maybe $50,000 on $100,000 which is a big mistake. Because if one of those guys said says you know at this point is a good time, you’re completely screwed, right?

So we went ahead and you know, started depending on what No too big, decoding big dogs. And they disappointed us. And at that point you and I said, Okay, let’s go ahead and start chasing the guys that have 100,000 or $50,000 invest in since the concept and every information that was shown was new to them, a lot of them to find, find, find it very appealing to put their money into the deal. So we didn’t have a whole bunch. So right now we’re doing something completely different. And we’re learning from experience and building out our systems and our processes in place to make sure we need to get that problem.

Darrin Gross 16:32

Gotcha. So what I also asked you a little bit about kind of the shock of your friends and family, the response of like, you’re doing what? Can you talk a little bit about that? I mean, you kind of mentioned about, you know, they had no idea that you were doing this kind of thing, correct Talk, talk a little bit about that and what you learn

Tenny Tolofari 17:00

So, um, in the last three years have shadowed my family and friends, you know how they can use advocate plan their finances, you know how they can put in different strategies to help them maybe minimize taxes particular ones and a whole bunch of different things that has to finance I’ve already shared with them real estate, so they must see me as somebody that’s really passionate about real estate. And when I went, you know, my partner, Leslie went to them and I said, Hey, listen, you know, we’re starting to open up this company, and now we’re looking to invest in 192 unit is about $25 million, blah, blah, blah, like, you must be smoking something.

When did you start talking about, you know, apartments, um, and at that point, I was kind of like, Dude is me man, you know, I’ve been talking about money for a long time now. You guys need to listen to me, you know? And all they said was, you know, I understand what you’re saying. standard way where you’re coming from but if you don’t do research you should this is a good asset class. Why do you think this is an asset class? We know you know how to deceive. As you’re doing this business you need to bring your partners you know, I share with them my partners, partners have about 2400 apartment buildings and environment I bought and sold the medical doctors blah, blah, blah, property management companies there’s that then I buy none of that. Like I know you and you’ve not been doing real estate for all this Why? And if you if you’re just giving this giving me these heads up right now you want me to give you my money right now. That’s not gonna fly.

So and you know, I was hurt. But I went back and I thought about it. I’m like, I don’t believe them. You know, if it was me, too, I’ll think about it as they did. They just you know, don’t understand where you are right now. So what me and my partner we’re doing right now is to make sure we continue to educate them on this Understand that, you know, our goal is to come together as a community, my community where I’m from, we have a limited mindset. Very, very limited mindset. People believe in doing their own thing. Like I want to be the best cybersecurity expert and or in the whole us, or in my whole community. And when everybody sees me, they want to see me as though but that’s not my philosophy. If we want to be wealthy, we can all come together and invest in the asset class is very stable, and that’s recession proof. You can buy it and you can maintain it and you don’t have to worry about it except that I got that you get the returns that you’re looking for the equity that you’re looking for. That’s ma’am a partner will find this vague was when they can use to help a lot of people have families and help the world the future. So So yeah, I hope I hope I see a question.

Darrin Gross 19:56

Yeah, so So tell me what are you doing now to To build the, I guess, the identity to where people do recognize you as an investor, how are you, you know, letting them know that you are doing this, and kind of educating them so that, you know, the next time or possibly the next time or maybe even the next time, you have an opportunity that they’re, they’re thinking in the mindset. Yeah, he’s been talking about that for a long time. He, he, I think he knows what he’s doing. How are you working on it?

Tenny Tolofari 20:33

Correct. Thank you very, that’s a good question. Um, so what we went back and did so man less than sat back, you know, after, you know, couldn’t make the GP part of that deal. Went back. I said, as I review what we did wrong. Admission, you know, people don’t don’t feel like we’ve been doing this long enough, even though we have all this team members that were brought to the deal. So right now we’re focused on beauty in our brand, cellular communication. Developed developing materials and sending it to these guys and just continuing to give them in conversations that we have continued to let them know what we’re doing.

Like, for instance, we recently went to Houston, Texas for a conference went to Keystone resort for that conference. Right? We’re going to be traveling sometime in April. Hopefully these home prices go down to market. While I do all of these, I have conversations with my friends and family and let them understand I’m still in the game. I’m still looking at this market. I’m seeing you in deals, I’m still talking to key partners to graduate education is one key component of it. We’re using social media. We have a meetup. We have a Facebook group. So we have all these different avenues that we’re using to send the message out gradually. And with time, that information is going to be viewed on people’s subconscious and they will do understand that I’m in it, not just to make a quick buck, but to build a business

To help a whole bunch of investors out there that like right now, you know, I was talking to one of my friends yesterday he said he doesn’t want to stop right now. And and that was a good avenue for me to share with him. You understand, hey listen, there are a vehicle out there that you can use to give great return rather than just defending the stock because he’s really hurting a lot of people like right now in America and new world.

Darrin Gross 22:27

Nope, that’s that’s a that’s a good idea. Do you have any kind of a census to the number of I mean, the for lack of a better word touches or kind of a timeline and do you have any kind of expectations? You know how long it will take to create this identity where people now think of you and are willing to respond positively to to your request, provided they have money.

Tenny Tolofari 22:58

Absolutely don’t have time. I think it’s, it gets to a point when somebody looks at what you’re doing. And they fall in love with it. And they like the idea. They want to be a part of what you’re doing. At this point, we’re not worried about people that we know anymore. I say, Hey, listen, you must join us. Because one of my mentors, you shouldn’t say, the people you know, don’t don’t hundred percent are supposed to support you when you get started. They’re supposed to self support you because they love you, they might think that you’re crazy.

They might think that the ideas you have a crazy, all you need to do is to prove to them that what you’re doing, you believe in it, and you’re doing it for the long term. And you have the interest of the people you’re working with to the interests at heart, right. So I don’t have a timeline, but I’m sure when you see that I’m in it. I’m not quitting. You know, I went back and so that whole bunch of boys that started this whole went to courses together, went to seminars together. Oh, But I don’t see them anymore. And a lot of the when the seals were still going on Leslie was going that, oh, man, you guys on fire. You know, I love what you guys are doing. I’m seeing your article online, I’m seeing the polls, man when you’re doing something that Senator Mitchell that we’re aware of. So I just think with time, you might be one year, it might be one month, maybe two years, maybe five years, maybe 10 years. Right now, me and my partner, I really don’t care. We care about making sure that we get the right set of information, and just put it out there. And whenever people are comfortable with being a part of our journey and being a part of what we’re trying to do, they will come on board.

Darrin Gross 24:37

You know, it’s interesting, you as you’re speaking, I’m thinking about it and just other conversations I’ve had with others about this. And, and, you know, I think that what I’m hearing from you is that now that you you two have committed you and Leslie have committed this is what you are doing.

Tenny Tolofari 24:55

Correct.

Darrin Gross 24:56

I think as you progress through that and people See that? And there’s not this sense of desperation when you’re, you know, you’re approaching people but they know that this is what you do. And if not this one then you know, keep us in mind next time or however that is that really transfers to you know the recipient of the message into kind of a trust and belief that you are committed to it and it’s not as risky. If I don’t know you and and all sudden you’re asking for money and you know, you haven’t got a track record or any kind of experience in in in doing what you’re claiming to do.

Tenny Tolofari 25:42

Correct.

Darrin Gross 25:43

No, that’s great. All right. Well, so you guys, you’re in your You’re the one deal with your own money as limited partners for it and long. How long have you been in that deal?

Tenny Tolofari 25:57

I think we’ve listed in September of the deal. Closing September of last year of 2018.

Darrin Gross 26:03

Okay. And was at a value add? Or they do an update or what was the what’s the plan with that property?

Tenny Tolofari 26:13

Yeah. So it was a value add on is a property that I’m the owner of the property has gone to, you know, his lifecycle and he’s trying to, you know, move it on to the next investor that we had about 46. Or that of the, for the six units that are required and upgrade. So basically what the company was, what exact capital was thinking about doing with Viking capital as partners was to go in, change rules, do some landscaping, do some painting upgrade for the six units that have not been upgraded yet, and then gradually increase the rate. As of right now, if you know if I can copy it and send it out, sending out statements we actually received our first quarterly payments from them recently in the Properties performance, you know, they’re beginning to increase the reins and and they’ve done the roofs of the of the the apartment building because the roof would not have never been changed or collect very well and a whole bunch of different amenities they wanted to add in the apartment complex syndicate better. So yeah, it’s definitely a value add.

Darrin Gross 27:29

And you’ve had kind of a front seat for the all the inner workings of the deal is that if you had that experience,

Tenny Tolofari 27:38

Yeah, during the the time that I played a key role was doing the due diligence. That’s why I’d pick you roll when I went there. And I met with most of the contractors that coming in, how do we put it in quotes and the property management company now we have a great relationship with them actually the other company that’s going to be managing our properties. Yeah, the Manage properties down in the south southeast region of the United States. So had a good relationship with one of the regional manager there and talked about how they can, how they are coming in to implement the business plan. What are some of the things they can do to make sure that the tenants and people that in the community are confident with what we say we’re going to do with apartments and stuff like that? So, you know, he’s a, this was an amazing experience being down there. And that visit alone opened up other opportunities as well. You know, which if we have time.

Darrin Gross 28:39

Now, what was that the loan? Oh, what what was that you said if you have time?

Tenny Tolofari 28:46

Well, I said that that distance, opened up opportunities as well.

Darrin Gross 28:51

Oh, gotcha, gotcha, gotcha. Gotcha. Yeah. No, I think plugging in the community and getting to know people that would be a strong opportunity for you. Well, this is this is great to me. I feel like, you know what you’ve done. And, and I think, you know, it’s there’s two thoughts coming.

One is the experience, the positive experiences you’ve had, even though it kind of came short of what you originally thought it would be. There’s you’ve been able to plug into and now you’re getting this firsthand experience, which I think will likely transfer to the people that you’re engaging with now sharing your experience and that will that will create credibility for you.

I think the other thing is just that, you know, how you were, you’re able to kind of attack and realize, you know, I think there’s, there’s a lot of people out there look at like real estate, it’s just as easy thing. It’s like, yeah, you just, you know, you just put the money in and you get other people’s money and they just make money. Yeah, that was great. You know, and, and, and, you know, but the reality is that There is a lot of work on this, you know, this is, especially if you’re going to be a general partner, and you’re going to be the steward of other people’s money, there’s a tremendous responsibility and you’ve got to have your you know, first you have to be connected with them.

Second, you have to have a clear through point as to how you’re going to take care of their money, make them money, and then you have to be able to operate and pull it off, you know, and you know, so it’s, it’s it is a process and I think that anybody that can what’s what’s the sad thing about most of life whether it be the stock market or real estate or whatever, is that people hear the highlight reel all the time for the people that bought after the 2008 crash and, and got all these just super cheap deals and they wrote them up and they made all this money. That that’s the story that resonates with People they all think I need to get into that. The reality is, those times are gone. Although as we speak today, there’s the pandemic. I mean, nobody knows exactly how the fallout is, but the economy is essentially running fast with the exception of this pandemic. And, you know, so there’s the, we’re in different times, and I think you just have to be that much more aware of the times and, you know, if you’re in it for the long haul, I believe that you will have success and people will see that and, and want to work with you.

Tenny Tolofari 31:35

Absolutely. That’s how I bought you know, to to make sure that I would time people would understand they were in it for the long haul and we have a big vision and as we go along, we share that vision with them.

Darrin Gross 31:49

Tenny if we could, I’d like to shift gears here for a minute. As I mentioned you before we get started by day. I’m an insurance broker. Okay, and As an insurance broker, we do risk management with our clients. Right? And there’s

Tenny Tolofari 32:08

Excuse me, all right.

Unknown Speaker 32:11

All right. There’s a couple different strategies we we consider when we’re trying to manage risk. And the first is we asked, can we can we avoid the risk? And if we, we recognize that that’s not an option, we look to see if there’s a way we can minimize the risk for And if that’s not an option, then we look to transfer the risk. And that’s what an insurance policy is. It’s a means of transferring the risk to an insurance company for exchange of premium and you get a contract kind of thing. Yeah, but so with that, I’ve been asking all my guests and like to ask, I’d like to ask you to, if you, you know, share with us what you consider to be the biggest risk and just to be clear, I’m not necessarily looking for an insurance related answer. Mm hmm. Because I believe risk is risk is everywhere. So, if you’re willing, I’d like to ask you Tenny Tolofari, what is the biggest risk?

Tenny Tolofari 33:20

Well, one of the biggest risks for individual investor houses is one is not getting in the game is seen on the on the on the sidelines, right? Because if at the end of the day you you’re thinking about getting ahead, and you are dependent on just one asset class to get ahead. You’re going to be disappointed from what we’re seeing right now. Right. The risk is depending on one particular asset class, like the stock market, to be huge wealth or for retirement purposes or for generational wealth, or for your family in general, because your family is dependent on You or you and your spouse are dependent on each other for the future. Right. So I think that’s one big risk. Another risk is speculation, right? Where people think that the market is going to perform at a particular rate. And people don’t not educating themselves about how if x Class A class work, you know, so I think that is one big risk I would think not gets in the game is one big risk outcome people are not taking.

Darrin Gross 34:34

No, like if you don’t, you don’t play you can’t win, right? Absolutely. You gotta get another game. Tenny, before we wrap this up, I’d like to ask you where can listeners go if they’d like to learn more or connect with you?

Tenny Tolofari 34:51

So one way to get in touch with us is you can visit those on our website. Our website is XSITECapital.com excited. capital.com excites people As X as in xylophone. S as in Samwell I as un indigo T as in Tango. E has an Edward capital.com. And we have a Facebook group, which is the Exciting World of Multifamily Investing. And we have a meetup group with the Xsite, Xsite capital Meetup group. So these are different avenues. If you’re in Maryland, Virginia, DC area, you can stop by our meetup is hosted every first Monday of the month. Fortunately for April, we’re going to be postponing that one for now, till this whole crisis settled down. But it’s a good community where a bunch of people that are interested in what I finally I relisted in general come together to have conversations. So those are some of the ways you can you can get in touch with us again, that’s except capital. They’ll come in on the exact to one of my family, Facebook, and exact excites Meetup group on meetup.

Unknown Speaker 36:12

Got it. And I’ll have all that listed in the show notes for the listeners. Tenny, I want to say thanks for taking the time to talk today. I learned a lot. And I hope we can do it again soon.

Tenny Tolofari 36:24

Absolutely there. And I really appreciate this opportunity. And thank you for this platform for you know, at least for us to share our story. Because we want to encourage people that are looking to get into game to get started. And if there’s any way we can be a resource who would love to, to be in a resource for them to at least get started and start learning about what we’re doing.

Darrin Gross 36:46

All right. For our listeners, if you like 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. commercial real estate pro networks, CREPN Radio.

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