Archives for November 2020

Real Estate Syndication to Financial Freedom with Linying Zou – CREPN #276

Linying Zou 0:00

It’s easy, right? It’s easy to get kind of stuck in the comfort because you just do the job. And then you know, our academic system trains us to find a job get better pay and you know, climb the corporate ladder, in a sense. And so it’s really easy to get stuck in a kafir we will do work every day, you know, go home to the gym, go to your family, and then look forward to the weekend and then dread the Mondays. Right? It’s so easy to to get comfortable. So, you know, I was at a point where I was really dreading that Monday morning for about two years, until I managed to leave the company. So that was a really valuable experience to be able to exit and see there’s so many other opportunities out there that can provide me the life that I want to live.

Announcer 0:51

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 1:11

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

Today, my guest is Linying Zou, and two years ago, excuse me two years after graduating from Boston College, Business School Linying bought her first multifamily investment. She had a new job. But very soon after she started, she realized that the job was not going to provide her the financial freedom she wanted. So she set out on her own to achieve her goal. And she started Akras Capital. And in just a minute, we’re going to speak with Linying about how an immigrant used real estate syndication to achieve the new American dream, reach your financial freedom number, and travel the world.

But first, a quick reminder, if you like our show, CREPN Radio, there are a couple things you can do. You can like, share and subscribe. And as always, we hope you’ll leave a comment we’d love to hear from our listeners. Also, if you’d like to see how attractive our guests are, be sure to check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And I also want to encourage you to subscribe there as well. more subscribers more reach tall good. With that I want to welcome my guest Linying Welcome to CREPN Radio.

Linying Zou 2:58

Thanks for having me.

J Darrin Gross 3:00

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

Linying Zou 3:12

Sure. Um, so like you said, I started investing in multifamily two years out of school, but I was actually a trader in fixed income for about 10 years. So you know, I, I worked for as asset manager for my work for insurance company. And, and so I kind of went from kind of the Wall Street path into kinda mainstreet path. And so that’s a really helping what we’re doing right now, because there is a really good segue, you know, from finance into real estate. So, you know, I at Akras, you know, my main, my primary role is acquisitions. So I do a lot of do analysis and in underwriting so you know, using my background finance and that, that that’s really helped. So, yeah, so you know, about three years ago, you know, we started Akras Capital, and and we focus on both buying small multi families for a direct acquisition strategy as well as syndication. So build a portfolio, that allows us to essentially travel the world and you’ll live our lives on our own terms.

J Darrin Gross 4:22

No, sounds pretty good. In that, I think you said it, but I didn’t quite catch it. How long were you at the Wall Street firm doing the E asset management or you said asset fixed assets is what you’re working on there. Right?

Linying Zou 4:35

Fixed income, so corporate bonds. Okay. Yeah. So corporate bonds and government bonds. I was trading those I was there about I was at various firms put together a career total about 10 years.

J Darrin Gross 4:48

Gotcha. Gotcha. And when you bought your first multifamily What was your first multifamily property,

Unknown Speaker 4:58

It was what it is still Actually, I still own it to this day. So it wasn’t a triplex. It was a house hacking strategy. I’m sure your listeners are aware of that strategy by, you know, essentially live in one unit, and then another two to cover the mortgage. So that was back in 2010. So the market was really supportive with that strategy at the time.

J Darrin Gross 5:19

No, it’s a beautiful thing when it works. Yeah. Somebody else pay your pay your way. So you were you were in the the Wall Street world? I mean, it’s, it seems pretty glamorous from the outside. What was it that you recognized? Being in it, that it wasn’t going to get you where you wanted to go?

Linying Zou 5:45

It’s a couple of things. You know, for one, yeah, it’s very glamorous, right? You see it on TV all the time. It’s a very high paced career, and you can make a lot of money doing it. But I think the problem is that it wasn’t just for me, there was just no greater purpose in that career. You essentially tried to make money with money, and there is not enough flexibility, or control on what I want to do. That, that really didn’t jive with me very well. So because of that, you know, I just, I mean, don’t get me wrong, I love the job itself. You know, it was challenging, you know, every day was different. I have so many gathering pitch, so many trade ideas, and you have all these ideas come to the door, and you had vet them. So that was always my favorite part of job was just really the culture, you know, and I realized that just because I didn’t like my job at this company doesn’t mean that I like my job, the next company is going to face the same issues, where, you know, I don’t get to live my life on my own terms. And, you know, I have to basically provide go in and have face time. And, essentially, you know, listen, have the culture be something that I have no control over.

J Darrin Gross 7:05

No, that’s pretty big insight. I think for a lot of people. I think there’s kind of an exception, or not an acceptance, that’s what I’m trying to say. Just that’s the way it is. And this is what you do. And you you go and you try and do more and earn more and keep, keep earning more, but not necessarily recognizing the quality of life. You know, unless you have a really rich life outside of that. And that’s your primary vehicle. But you think about it, how many hours a day you spend at work. And I’m assuming that Wall Street, you weren’t necessarily working just a 40 hour week.

Linying Zou 7:47

Yeah, me, me, I worked on the buy side. So that was a lot. The work life balance is there, but I still spend about 10 hours a day at work. And it’s easy, right? It’s easy to get kind of stuck in the comfort because you just do the job. And then you know, our academic system trains us to know find good job, get better pay and you know, climb the corporate ladder, in a sense. And so it’s really easy to get stuck in a kafir we will do work every day, you know, go home, will the gym, go to your family and then look forward to the weekend and then dread the Mondays? Right? It’s so easy to to get comfortable. So, you know, I was at a point where I was really dreading that Monday morning for about two years, until you know, until I managed to leave the company. So that was a really valuable experience to be able to exit and see there are so many other opportunities out there that can provide me the life that I want to live versus while I was living before.

J Darrin Gross 8:52

No, that’s good. So you you bought your first property, you’re still working your your wall street job was real estate kind of the the I guess I’m trying to figure out how did it fit in? Because it sounds like was that always a goal? Or was that just something that that happened based on the fact that you were having success house hacking?

Linying Zou 9:21

I think real estate really is the American dream, right? Like only property in the States. I’m a first generation immigrant. So it was really a buy the first property It was really a family decision. You know, my parents came here and they never owned real estate and they never owned the house. And you know, I was in a financial position to be able to do that. So that was like the American dream. The family dream of me only a real estate property. And then I after I bought that property, you know, I managed it myself. And it was until four years later I bought my second property And that was in the process by my third property when I left my job. So, so that you know that for a wrench in things when you don’t have a W2 income when you’re looking to buy residential properties, you know, that’s like four units and below. So um, so, you know, I put a pause on that I went travel the world came back. And then when I started to, you know, start Akras, my business partners, that’s when we started investing in real estate full time and start buying other commercial properties.

J Darrin Gross 10:28

Gotcha. And you mentioned, you bought your second and third property, what were those,

Linying Zou 10:34

I bought my second property, which is actually my primary residence right now. Um, so and then my third one we were, we’re in the process of buying a while I was in the process of buying off market property at the time. But they kind of fell through in the last minute, and then, you know, I left my job, so that just went didn’t go anywhere.

J Darrin Gross 10:51

Gotcha. Gotcha. So you traveled? How, how long did you give yourself to travel and we’re all good to go.

Linying Zou 10:59

I travel for six months, I’m on the road and, and my back patient backpacked across Europe, and Asia. So I was in, I basically went, you know, to Estonian, and UK and Iceland, and then kind of flew back into Russia. So I spent about a month in Russia, two weeks in Mongolia, eight weeks in China, and then South Korea, I was actually in South Korea when the Olympics was happening. And then, and I went to Japan, so

J Darrin Gross 11:35

Wow. Well, there’s no no substitute for travel, I love kind of the experience, and just kind of the education of meeting people in different places and all that. So that’s awesome.

Linying Zou 11:47

Yeah, traveling, I mean, traveling really changed my mindset and how I view you know, what, basically, happiness is, because as you travel through these, you know, more kind of developing countries, you get to meet people who are living very happily have very little. So it kind of creates, you know, it kind of quite brings into question like, why is money so important, right? Why is it making more money, you know, having a bigger house or having a really nice car important when having these can be so it can be, you know, just something completely different to someone else. So I think that kind of changed my mindset and how I want to pursue my next career. Because when I first started, my my idea was always that I’m going to go traveling and come back and find a job. And other than, you know, another finance investment firm, it is continued a career path. And then having that kind of experience just seeing, you know, meeting people on the road, encountering different cultures, that’s when you know, my business partners, and I kind of sat down and said, Hey, like, do we really want to go back to the corporate world? Is that really important to us is that end goal is that the end all be all. And we decided that it wasn’t that we want to create freedom for ourselves, and you know, help create that kind of freedom for other people, so they can pursue that passion on their own.

J Darrin Gross 13:10

Now, it sounds like you You’re what am I trying to say, you know, coming from that wall street culture and just kind of go, go Go fast, fast, fast, more, more, more. World travel, and all sudden, now you’ve got a different view of, you know, maybe what’s important. Sounds like? Once you had that change, I would think it’d be kind of hard to go back to Wall Street, or just in that kind of thing. I don’t know if there’s a lot of room for that. kind of more of a Zen kind of a mindset, or do you find or are there people in Wall Street you ever saw that had that kind of a view of things?

Linying Zou 13:53

I think very rarely, I think, you know, people do want, I think most people do know what’s important to them, but it takes I think it takes a lot of courage to kind of step outside your comfort zone. And you know, and I think when you when you’ve been doing the same job for 10, 20, 30 years, it’s hard to change into something else because it’s scary, right? It’s there’s so much uncertainty, you know, your skill set applies. So, you know, it’s easy to kind of stay with the comfort and stay with what you know. So I don’t want to say that people offering people finance, they’ll know you know, they’ll understand like, what’s important to them or you know, that you know what, how they value money, but it just see, you know, it just that you can get stuck so easily and it’s hard to get out. Yeah, and actually, personally, I know so many people like recently that have gotten out and gotten pursuing other careers where you know, they maybe start a restaurant or maybe they started start up. You know, so it’s so you do have definitely people that don’t leave the industry to do to pursue something else.

J Darrin Gross 14:54

Right, well, having that experience where you are able to untether from that pace, and that lifestyle in that culture for an extended amount of time, even six months, I think is, is a good you know, amount of time to actually kind of reset, or have the opportunity to adjust. And, and while you’re traveling and seeing different things, it’s kind of exciting, but at a different pace. That’s, that’s got to be great. So you, you came back? And was it right away that your partners, and you mentioned your partners? How many partners do you have?

Linying Zou 15:35

I have two other partners?

J Darrin Gross 15:36

Okay. And were they also in the same situation? Or what was their?

Linying Zou 15:42

Yeah, so, my, one of my business partners, Christina, where she worked together my last company, and we so now we’ve been working together for like, eight years. So she and her husband, Charlie, who’s our other business partner, were also traveling, and they traveled for 14 months. And we work together for about six weeks during our travels, you know, through Russia and Mongolia. And you know, we really have a chance to kind of sit down and we know how well we work with each other. And so it the timing just worked that when I came back, they also came back. And then, you know, we had an opportunity to kind of sit down have the just strategic meeting, I think in all in July of 2018. And then, you know, decided to kind of go adventure into real estate.

J Darrin Gross 16:33

And were they real estate investors as well?

Linying Zou 16:36

Yeah. So they were when they were trying on the road, they had a property in Boston, which they were renting out as well and the rental income from that were enough to pay for the mortgage and provide funding for them when do on the road as well. So

J Darrin Gross 16:52

know that that is definitely the foot loof, footloose and fancy free kind of, you know, when the worries are taken care of that’s the mortgage is paid and you’ve got money to live on. That’s pretty good.

Linying Zou 17:05

Exactly. It’s a lot cheaper to live overseas to sell. I mean, depends on the country, but most of the countries it’s a lot cheaper to live there than in the US.

J Darrin Gross 17:13

Right, right. So they were basically renting out their home. Did you rent out your home while you were gone as well?

Linying Zou 17:22

I did. So I have my triplex which is you know, always trying to and then I and then I did Airbnb my property for a couple four months to Boston is very seasonal on Airbnb. So, you know, in the winter, no one wants to visit the cold blizardly you know, City of Boston. So you don’t really get a lot Airbnb business, you know, during the winter, and I’ve been traveling during the winter, so but I did Yeah, I did start using Airbnb as an option to provide more cash flow during that time.

J Darrin Gross 17:54

Gotcha. All right. See you. You and your partners. Realize that you’re like mind, you work well together. And the decision is made, let’s go in. Let’s go do real estate. What were your What was your focus? And how did you go about? You know, achieving or acquiring additional properties?

Linying Zou 18:23

Yeah, so there were definitely many asset classes within real estate. And, you know, we were we knew from very early on that we want to do multifamily, because it is, you know, it is the the least cyclical of the asset classes. You know, everyone always needs shelter, right. So it doesn’t matter where the economy goes, so we decide, oh, so we wanted to go into the multifamily. And then we kind of decide to pick which market we want to bid. And, you know, we figure Boston I live in Boston, my business partner is living in Boulder, Colorado. So both the market is extremely expensive. And you know, there’s some cash flow. So we picked a market that’s familiar to my business partner, Charlie, because he grew up there, which is Spokane, Washington to kind of dip bar. Yeah, the bar feed in incense. And we start at acquiring multifamily there. And we started really small, you know, we did our first property was a five unit, and then we bought seven unit and nobody loving unit. So, you know, and, uh, and we mostly use the wholesalers to buy these properties. So all of them were off market listings. And so a lot of that with a lot of the initial efforts went to relationship building and building a team on the ground because it would be like this is the best thing. And then and then eventually, we got to syndication where, you know, we would partner with other operators to syndicate deals and you know, we did a 300 unit and like 111 unit in for the Dallas Because that’s where our partners have experience in.

J Darrin Gross 20:04

Gotcha. So the 5, 7, 11, were those buy and hold? Or were you repositioning selling those? or What were you doing?

Linying Zou 20:12

So we’re using the BRRR strategy. That was our goal. So the 5 ,7 ,11 actually, we’re currently in a process this positioning them and we actually sold the five unit already. And we’re on the contract on the seven unit. And lthe 11 unit is currently on market. So we actually tried to sell those properties and roll them into a larger asset. In different city. We don’t like Spokane anymore. So we were actually going to move into Phoenix, Arizona.

J Darrin Gross 20:42

Gotcha. And now, so you did the the BRRR strategy with the first three properties. You get some experience, how long did you how long between the acquisition, repositioning refinance operation, operating before you jumped into syndication?

Linying Zou 21:03

About ayear, so we spent about here acquiring our own assets? And then we jumped into syndication?

J Darrin Gross 21:12

Alright. And the 300 units? I mean, that seems like a pretty big jump from, you know, 20, what do we got 23 units, three properties to a 300 unit deal? Can you tell us a little bit about the 300 unit property?

Linying Zou 21:32

Yeah, so it is a syndication deal. So we are small GP and then deal and it is our first syndication deal. So we, you know, we actually were, we met some partners at a conference that we attend them, we establish a relationship there and where they brought us in the interview. Um, so that was a really a class B+ property it down in Orlando, Florida is actually really nice type is myself, and we visit all of our properties when we went through our diligence. But um, but you know, it’s essentially a cash more cash flow play. And, you know, we still, we still have equity stake in the right to this day. So it was definitely a learning experience for the first one, and we’re glad to have the experienced operators there with us that we can kind of learn from. And so it’s been, it’s been a very great experience. Yeah.

J Darrin Gross 22:27

No, I appreciate you sharing it. Because I think that a lot of times people recognize the smaller properties or something they can take on by themselves. They recognize the syndication as a model for taking down a larger property, but don’t always recognize how they can fit into the syndication model, you know, thinking that you have to be the general partner, or you can go in passively. Can you speak a little bit of how you came in, you mentioned that you met him at a at a conference, but just coming in as a general partner, what were your responsibilities.

Linying Zou 23:02

So the responsibilities will vary depending on deal itself. So for example, you know, there, you can come in and be an investor relations and capital raise, or you can come in and help with asset management. So for some of our, for some of the syndication properties, we do help out on the asset management side, the leasing side, and on the marketing side, and, you know, there’s interior interior renovations and things like that. So they’re diverse communities and get involved in. So as a GP, that’s really your role, right? Like the main GP brings deal and then other GPS come in to bring both the capital and experience and resources to get the deal done. And there could be someone there, too, that signs off on the loan, right, because for an agency loan, you do need to have that amount of net worth, that’s enough to guarantee guarantee is non recourse loan, but still had to provide your sign off on it. So that’s really the role of the GP. I mean, it’s it is a lot of work. I mean, it is a business, for syndication deal, you’re essentially running a business. So as you know, it’s very important to partner with other people who have kind of business mindset. And as an LP, I mean, it’s, you know, I think for a lot of new investors that want to get into real estate syndication, LP is a great route to go. Because, you know, you get to understand how the deal works. And then but you’re completely passive. So you can take you don’t really take any responsibility, but you can learn as much as you want to learn because all these GP’s are essentially very open and transparent. And then you know, you can take that experience and maybe if you want to be on GP side on the next deal, and you have a way to get in as an LP you can get cash flow, which is the best part right? The GP is typically though really good cash flow during the 10 deal. They get paid on acquisition fee and then at disposition. So as an LP your passive and you just get your monthly according distributions,

J Darrin Gross 24:57

Right, and where are you in the cycle? Have the 300 unit property,

Linying Zou 25:02

We’re in year two? So you know, it’s sure a five year hold. So we’re less than halfway through. But a lot of times, you know, it really depends on because we’re always continuous continuously, kind of reevaluating where word property is today, and you know what the value can be. So it’s not unusual to exit the property or as good deal earlier, and as long as we hit that IRR threshold for the for the investors.

J Darrin Gross 25:32

Right, right. What about the 111 unit property? Where’s it at? Tell us a little bit about that.

Linying Zou 25:41

It’s in Dallas. So that’s a more workforce housing. So compared to the first deal is is different. And this deal has, you know, it’s 111 units, it’s more class C asset in a sense. And we’re, you know, in the middle of it there, there were some issues in the beginning due to tornadoes, you know, there were a lot of tornadoes, the touched down in Dallas the month after we closed the deal. And so there was a whole insurance insurance claims process that happened, you know, we’re we’re in the path of the tornado, but obviously, there was some damages. So that kind of pushed off the the kind of renovation plan a little bit. And then you have the and then you have covid happen. So, so know what the eviction moratorium things to that. So it took a little bit more time for this property to get up to where we want to be. So it’s still in process of getting there. But it’s making good headway now.

J Darrin Gross 26:40

In the 111 property, are you on the general side? Or the limited? Or where are you?

Linying Zou 26:44

Well, the GP side, and we’re on various, you know, committees to help with the asset management as well.

J Darrin Gross 26:52

You know, on each of these, how many people are there on the GP side?

Linying Zou 26:58

It depends, I think for, you know, for larger property, because the capital raise is much greater they can be, you know, more groups involved before to smaller deals, you know, it could, it could just be like 4 to 5 GP groups. So it really depends on you know, what resources are needed to come in to help the deal close successfully?

J Darrin Gross 27:22

And what are you? Are you guys looking to possibly be the general or to be a sponsor yourself going forward?

Linying Zou 27:30

Oh, yeah. I mean, that’s really what we’ve been doing this whole whole year is that we’ve been looking to lead our own syndication deal. So we’re actually in the best and final round on the deal today. So I have to feel submit a best and final offer on a on a on a property in Arizona by tomorrow. So that’s what I’m going to do after this call.

J Darrin Gross 27:52

Oh, that’s exciting. Yeah. How large of a property is that?

Linying Zou 27:56

It’s a 63. Unit. And in Arizona, so well, $8 million deal.

J Darrin Gross 28:03

Oh, that’s great. That’s great news for the sponsor on that you found the deal.

Linying Zou 28:07

Yeah, well, we’ll be the lead sponsor on it if we get word deal. So I still early here, you know, five other groups and investment final rounds, very competitive. You know, I’m sure you know, but it’s just very competitive nowadays, you know, inventories very slim and they’re still all buyers out there despite COVID so hopefully, fingers crossed.

J Darrin Gross 28:31

Yeah, I wish you well, with that. I know, you know, the whole COVID realist estate, rubix cube has been kind of a, you know, an ongoing question people have been I think a lot of the conversations that I’ve listened to or been a part of have tried to match up the past market cycle to this market. And I think for a lot of reasons there is no way to compare the two based on just the different factors that fed into this situation you know that in the prior crash the most clearly there was a lot of loose financial dealings as far as your lending was pretty loose and that. And now you’ve got the economy is running pretty good up until the virus hit. You have much more conservative lending and kind of what I’m hearing from people that are in working on deals is that you know the the requirements to close are a little bit more stringent with the the banks wanting you to have higher reserves, etc. But market seems to be holding up I mean, rents are still being for the most part you know, paid collected. So, you know, especially with multifamily, it seems like it’s a still a pretty strong market and and, you know, I think people keep looking for that sign that thing’s going to take a dip. But I don’t know, I’m not not seeing it. I’m not. You know, I think there have been, like, certain markets or certain things like right after to happen, but as long as the the stimulus checks, the economy keeps improving, I think things look pretty good. So,

Linying Zou 30:25

Yeah, I think I think depends, right? I mean, when COVID first happened, everyone was expecting there to be higher delinquencies and low collections. And then, you know, you have the massive stimulus package that came in from the government that really helped. And that, you know, just the expanded employment benefit just ended, you know, and, and then July, so, it’s kind of too early to tell what’s really going to happen, especially if there’s no stimulus that comes again. So that is like one of our greatest concerns, right, is that there’s a extended kind of extended recession and extended high employment. And that’s really going to affect elections and a lot of cities, the eviction moratorium is still in place. So you can’t really evict your tenant if they’re not paying. So I think, you know, if this does go on, for a while, you might see that they were looking for, because you know, some property, some deals are going to be under stress, you know, due to the low collections, if they can meet the debt service ratio, then they’re in trouble. But that’s not going to be in the immediate current, right, there’s always some kind of cushion or reserve in place. But I think we just had to be really cautious about, you know, how we underwriting future deals, and we’re now using conservative assumptions. Because at the end of the day, if this, no one knows where this COVID is gonna go, and you can only make us conservatively can do to, you know, to kind of understand and say, offset the concerns, right,

J Darrin Gross 32:03

Right. No, yeah, I’m kind of curious. You mentioned two things there. One is you have to be conservative with your underwriting based on all the unknowns, but then you mentioned it’s very competitive. Are you finding that the, the competition is equally conservative? Or are there some that are willing to throw caution in the wind? And I guess you’re gonna find out later today or further on? But do you have any kind of sense and talking to the brokers? What your?

Linying Zou 32:33

I think, yeah, I think they’re, we are trying, it’s a delicate balance that you have to walk down the line, right? If you’re too conservative, you’re never gonna win any deals. But at the same time, you know, we definitely encountered deals where we’re like, Wait, how does this even make sense? It makes no sense to us, like, why how this was underwritten to justify this price. So there are definitely groups out there to still doing deals and using, you know, grass assumptions, I think it just, you know, the investors just to be cautious that they trust the GP and they trust the underwriting, because it’s so easy to kind of just go in and say, you know, hey, this, the numbers look really good. I want to invest in this field without understanding all the assumptions that went into it. because everything’s the pro formas is, you know, whatever GP comes up with, right, you can assume a 20% rent growth if you want, and, you know, this can make any deal work. But it just has to make sure that your GP is the way to doing and how the underwriting and they’ve had that kind of, you know, financial background to, to understand, you know, what’s going on and how to offset some of these risks.

J Darrin Gross 33:42

Let me ask you with syndication, I mean, one of the primary goals or the challenges you face is raising capital? How have you gone about building your investor network or creating a pool of investors?

Linying Zou 34:02

So we have various strategies. So I’m on acquisition side, my business partner, Charlie, he’s actually he’s focused on the capital raising. So we actually have various strategies targeting different peers, investors. So you know, obviously, their investors were, you know, basically our friends and family and our close networks. And then there’s tier two. And tier three are basically investors that we see from, you know, podcasts or from, you know, just what content so we have, so, you know, through different different channels, you know, we build a investor base, and then we provide a lot of educational content, through our, you know, monthly newsletter, through our white papers through our website, we have a lot of articles on website as educational. And, you know, we were essentially using both pull and push marketing in a sense, to to generate that kind of a kind of investor interest. I think it’s really important to continue to have to people to and just educate them that syndication is an option because I personally didn’t know syndication existed 10 years ago, and I probably would have gone into it a lot earlier, if I know that this opportunity even was working a second job, or I could have been cheap, I could just be an LP right on the deal. So I think, you know, the fact that not a lot people knew that this opportunity exists is something that we work really hard to bring to others is just this awareness that, you know, just education, if you want, you don’t want to be a landlord, a one to cash flow and somewhere to kind of put your money that’s away from stocks and bonds.

J Darrin Gross 35:37

Right. Now, I think there is a lack of recognition, almost by design, I think the little bit of the history that I’ve come to understand about the stock market and the 401 K’s and, and, you know, the structure that was was more about stocks and bonds, kind of thing, and I think people get trained in that. And that’s kind of you go to work 401k and you just kind of pick pick your fund. And the the, the ability to have it be liquid, you know, is something there’s I know, I’ve talked to some people, they’re like, Well, yeah, but you can’t get your money out as well. But it’s, you know, it is it is a longer term investment. But the returns I mean, the risk, there is risk, but the potential returns are fairly Can I guess it all depends on the operator. But a little bit more of a you can see the path to the the exit you know, and I say it is you got to be careful what you say because it’s always case by case and late the end where you really know but but it’s good. So you’ve got your property you’re in Arizona that you’re in last and final her best and final? And what do you guys feel like? Is the Arizona market you want to really plant a flag and and build? Or is it still just find the find the best asset wherever the best opportunity of?

Linying Zou 37:12

Yeah, I mean, we do have a focus in Arizona right now. I mean, our key strategies has always been inland pro cities, right. And I secondary cities, that’s getting the population income and growth from the coastal cities through the cost of living, better quality of life, etc, etc. So we do you know, so we actually went through a market criteria exercise and, you know, Phoenix, Arizona does fit most of the criterias that we come up with. And so yeah, so we do want to have a focus in Arizona at this time. We really not looking unless like our partners bring us in as like a coach up on a deal in another market? We will we won’t look at any other markets at this time.

J Darrin Gross 38:01

Okay, got it. And are you still in regular contact with the people you met at these conferences? Is that are you? Do you look to them? When you’re trying to raise capital for your? Your own sponsor deals?

Linying Zou 38:17

Yeah, absolutely. I mean, it’s important. I mean, in real estate, or any anything really, it’s important to have partnerships, right, because they compliment you. And, you know, for partners that we found at these conferences or meetups or, you know, people that we know, we actually, you know, have a regular scheduled calls with them to build that relationship, because we think it would look partnerships a long term thing, like we never just go to, like know, someone get to know someone at a conference. And then six months later, we have to say, hey, you want to come in on this deal with us? No, we want to know you. We want to know, if you’re ethically aligned, if you treat your investors like we do. How is your underwriting? Like? How do you, you know, how do you look at these business plans. So I want to make sure that all of our emails align first, and then you know, we start to say, hey, you want you do want to partner on a deeper level. So all of our relationship is, you know, is maintained through, you know, through years, and that’s what we want to do going forward to is just have these long term partnerships that we can, you know, tap into for resources, it’ll help them they need help, and that way we can kind of grow together.

J Darrin Gross 39:29

Oh, that makes a lot of sense, makes a lot of sense. Linying if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with clients to assess risk and determine what to do with the risk. And there are three different strategies we typically consider. The first is we look to see if we can avoid the risk. If that’s not an option, we look to see if we can minimize the risk and when neither the avoid normal Minimize strategies will work, we look to see if we can transfer the risk. And that’s what an insurance policy is. And I like to ask my my guests, if they can take a look at their situation and or their investors or clients situation and identify what they consider to be the biggest risk. And for clarity, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Linying Zou I’m sorry, Linying Zou, is that right? .

Linying Zou 40:39

Zou,

J Darrin Gross 40:40

Zou.

Linying Zou, what is the biggest risk?

Linying Zou 40:48

Well, as owner operator of real estate right now, the biggest risk is a prolonged recession and sustain high unemployment. And if there are no more government stimulus, because that will really affect our collection and, and its collection numbers. So that is really the Biggest Risk.

J Darrin Gross 41:14

Yeah, I think there’s a lot of people that are, like we said, you know, kind of waiting to see what happens here. It does seem Well, I don’t know, election and all that stuff going on right now. It would I would hope that there’s some sort of a an effort to keep things afloat rather than just let it crash. But I guess time will tell. Linying, Where can the listeners go? If they would like to learn more connect with you?

Linying Zou 41:46

So yeah, your listeners can come visit our website at www.akrascapital.com. Akras Capital dot com and where you can just send me an email. at lzou, LZOU@akrascapital.com as well. So we have we have a lot of educational content on our website. And we have a monthly newsletter and well white paper called the new roadmap to financial freedom. If anyone downloaded it, you can find it on our website as well.

J Darrin Gross 42:15

Great Linying, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed our talk and learned a lot. And I hope we can do it again soon.

Linying Zou 42:25

Yeah, thank you.

J Darrin Gross 42:27

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 to Commercial Real Estate Pro Networks CREPN Radio.

Intro 42:46

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

Investors Sponsors and Real Estate Deals with Trevor Crow – CREPN #275

Trevor Crow 0:00

You know, I often get a call, I get calls from people who say, Hey, we want to, we want to do real estate deals. And we want to, and maybe we’ve done a few in the past and been successful. But now we want to do it on a on a bigger scale. And so we want to, what we want to do is raise a fund, we want to raise, we want to get a bunch of capital in and we’re going to go chase deals, real estate deals, and a lot of times they say, you know, I say all right, do you have you know, properties lined up or in the pipeline or locked up in that with a purchase and sale agreement, or at least an option or a term sheet? And they say, No, you know, we just want to raise the money and then go look for him. And inevitably that that fails, unless you’re, you know, a big institutional real estate company that that has a long track record. It’s really hard to raise money unless you have a specific project because investors just say, hey, show me that what projects you want to invest you want to what project what the project is, and I’ll decide whether I want to invest or not.

Announcer 0:40

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 1:00

Welcome to Commercial Real Estate Pro Networks CREPN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Today my guest is Trevor Crow, founder of Crow Legal LLC, Trevor founded Crow Legal LLC to deliver sophisticated and practical legal solutions for companies looking for an alternative to a large law firm. His focus in business transactions include complex joint ventures, and syndicated real estate deals. And in just a minute, we’re going to speak with Trevor about real estate joint ventures. And But first, a quick reminder, if you like our show, CREPN Radio, there are a couple of things you can do. You can like, share and subscribe. And as always, we would encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on You Tube at Commercial Real Estate Pro Network. And I’d like to encourage you to to subscribe there as well. With that, I want to welcome my guest, Trevor, welcome to CREPN Radio.

Trevor Crow 2:54

Hey, Darren, thanks for having me.

J Darrin Gross 2:56

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

Trevor Crow 3:07

Sure. So I grew up in the Denver area I’m still in Denver now it’s where I Crow Legal is based. And we I went to law school at DU Denver University and graduated in 2009, which was not a good year to graduate law school. There was a right in the downturn in the economy and and law firms weren’t hiring. And so, you know, I had to had to deal with that initially. And I think really think that’s a big part of my background. Actually, that’s why I mentioned it and came out then. And, you know, had to the firm I was supposed to go to kind of had to retract the offer that I had because the work was just so slow, especially in the transactional area.

But anyway, they ended up bringing me back there and long story short, I bounced around to three different law firms and Denver, mid sized law firms, you know, from 20 to 50 lawyers and made partner at one of them in 2017, and was a partner there for a year. And then I decided to, and that was mainly a real estate firm. And so that’s kind of where I got a lot of my real estate experience. And then ended up in February of 2018 jumping out on my own starting Crow Legal and did did that. And since then, you know, we’ve kind of took off and I’m kind of a boutique transactional firm in Denver. doing deals we I mean, we do deals all over the US but focusing on real estate joint ventures, syndicated real estate deals. We represent both investors and promoters and developers. And yeah, so I currently have two other attorneys that have I’ve hired since I started the firm and in our three attorney shop and just trying to make our way.

J Darrin Gross 4:57

Well, congrats on surviving the start in the market you’re in and and, you know, pulling the ripcord and going out on your own. I know that’s always a thought a lot of people have and to actually do it is a whole nother thing. So congrats on that.

Trevor Crow 5:14

Thank you.

J Darrin Gross 5:17

So, real estate. You mentioned your, your, your background, and what you learn there, the firm where you were made partner. Can you describe kind of the breadth of types of transactions and what you’re doing with real estate?

Trevor Crow 5:37

Yeah, so, you know, typically, again, we were representing either the investors or the developer or promoters in a real estate deals. And so, you know, really our, my our focus is not so much on the purchase and sale agreement and locking up the property. A lot of times what we’re drafting is all the entity documents and so we’re doing the operating agreements. And when I say syndicated real estate deals, I’m talking about ones where, you know, there’s a developer who’s gonna have to raise part of the equity. You know, usually a real estate transaction involves a bank loan, which covers part of it, then there’s going to be, you know, equity that they developers or investors are putting in. And so a lot of times, developers don’t want to put in all their money into the one project or either because they don’t have all the money or even if they did, they don’t want to sink it all into just one project. They want to do several projects. And so they go out and they find investors and so with that, they have to raise the money and comply with securities laws. And so we’ll draft all the securities documents will draft all the entity documents and we’ll help navigate all those. And you know, that the joint venture agreement or what I call it joint venture agreement, typically in the form of a operating agreement for an LLC, that is the buyer of the real estate, is is very complex document, depending on the parties involved, and that sort of thing. And so we’ve really carved out a niche and being able to draft those operating agreements and represent either that either the seller or I’m sorry, either the investors or the promoters on those deals.

J Darrin Gross 7:12

Gotcha. And you mentioned joint venture versus syndication kind of thing. Can you distinguish between the two structures or what the differences?

Trevor Crow 7:25

Yeah, you know, there’s there it’s kind of one in the same honestly, what what when I say joint venture is because, at least in my world, there’s attorneys who say they can draft operating agreements for, you know, draft an LLC operating agreement, so somebody forms it and an LLC and whatever state what governs that LLC is the LLC act as well as an operating agreement, which is what is put together to kind of govern the management, the how the economics, work distributions, allocations, all that is built into the operating agreement and You know, an operating room for an for a business say it’s an engineering company. And there’s three, three engineers who get together, they want to start an engineering company. And you could add, they could form an LLC. And there could be an operating agreement for that. But that operating agreement is going to be very different from what I’m calling a joint venture operating agreement, one where there’s somebody who’s managing the the deal, the real estate project, so again, probably a developer, or just a value add sort of real estate person. Somebody who’s going to go and lock down the property get it locked in and a purchase and sale agreement and is going to manage the property either develop it from ground up or is going to do some you know, value add renovations to it, and get at least up or whatever they’re going to do. And so there’s that party, but there also may have to go out and get equity from other people so other investors to come in and put money in so they can close on the on the real estate and, and so When I say syndicated deal, it’s any sort of deal where they’re going out and getting investors to invest in it.

J Darrin Gross 9:07

Okay, we’re like passive investors as opposed to active kind of thing.

Trevor Crow 9:12

Right? Exactly. So it’s gonna be, you know, the manager or the general partner who’s controlling all the operations, but there’s going to be limited partners or, you know, just passive members of the LLC that are investing money in the project and, and you know, want to get a return, they get usually some sort of preferred return and return to capital. And then there’s a, some sort of split after that where the developer gets all their money because they sell the project for a big profit, you know, five years from now.

J Darrin Gross 9:42

Right? Do you tend to deal and more of like, development projects or a lot of like, I think the common term is value add guys are buying an existing property, they’re going to go in and renovate some increased rent. To increase the NOI, value and then liquidate. Is there any? I mean, do you do one more than the other? Or is it kind of can you describe? Your your?

Trevor Crow 10:12

Yeah. Yeah, the allocation of practice there. So it really is probably 50/50 honestly, right now, at least. We’re doing several working on several ground up development deals. And so buying raw land and developing it, which adds a you know, a whole new element to it because you have the whole entitlement and permitting process and things like that and, and more agreements involved because you have general contractors that need to be hired, and, and that sort of thing. But we also do a lot of just the, the value add type projects where, you know, it’s could be in multifamily buying an apartment building, or it could be, you know, an industrial warehouse or it could be just, you know, retail, commercial properties and so we that are existing, and they’re just trying to you know, Like I said, either do some renovations and increase rent or get at least up and be better at marketing it or something like that, and then flipping it later.

J Darrin Gross 11:10

Gotcha. And for the, the, the key principle of the party that sponsoring the the deal. Can you walk through some of the, I guess the the risks and the benefits of working on a deal like this, as opposed to, you know, taking an all on themselves or, or maybe not going out and finding investors and I guess I’m trying to differentiate between, you know, the opportunity, the risk reward of the of the model of going into this with a joint venture syndication model.

Does that make sense?

Trevor Crow 11:49

Yeah, it’s so I think the risk reward from the developer side is, you know, if they put no one if they’re putting all their money into it, because typically Banks not going to provide 100% financing. So you know, then then they’ve kind of put all their eggs in one basket. And but on the back end, you know what, if you bring in investors, one, you have to deal with them. And so they may have certain rights and decision, major decision rights or things like that, that they’re negotiating. And they may have misaligned interest in that they they want to sell the property at a certain time versus when, you know, the developer wants to sell it, and things like that. So you certainly have some push pull there and potential risk with just having other in other people involved in the project. Now, the other thing from the economic standpoint is, you know, the, how the distribution waterfalls typically work, at least in the deals that we’re been involved in, is, you know, it’s gonna you have the property, let’s just say it’s a multifamily existing property and they’re going to be collecting rents, you know, at it. As soon as they buy it, they’re going to start collecting rents. And so they have money coming in and that that cash flow usually goes out first to pay the investors. And so, you know, maybe the, the sponsor of the project takes a management fee as part of it. And so that’s kind of how they stay afloat. But really, their their big payday comes at the end of the day when they sell it, because hopefully they’ve added value, they’ve leased up the property, and now they can sell it for a much higher price than they paid for it. And at that point, the money flows out first to the investors give them all their capital back 11% on on their money for the time period that they’ve owned it, and then the money usually split in some sort of 80/20 fashion or 70/30 fashion where, you know, 80% goes to all the investors or anybody who committed capital to the or made capital contributions to the entity and then the rest is coming out as a as a promote to the, to the developer of the sponsor, and so, you know that 20% or 30% they get on the back end is really their payday. And so they’ve kind of taken a risk that, you know, their big payday for all their work doesn’t come out until till the end of the day.

J Darrin Gross 14:19

Yeah, no I the, you know, the cycle of the deal. I appreciate you kind of going through that because I think a lot of people get kind of wound up in the, you know, the, the passive investor side of things, not really talking about the sponsor side of what, you know, what they stand to gain, but also that their their interests are aligned with their investors. I mean, if your investors aren’t, if you don’t, you know, satisfy your investors. I’m assuming you’re not going to make your money, right. I mean, the investors are in line ahead of you, as far as getting their return and you get your management fee along the way. Like I said, it’s kind of something to sustain you, but not necessarily that The big win that that everybody is looking for. And in your experience what’s been like a typical hold period for for some of these properties?

Trevor Crow 15:16

So the hold period has varied but usually I see where everybody is trying to have some sort of either five to 10 year period of when we’re going to try to turn the property round now different different sponsors have different thesis is on on the property and theories on when they’re going to do it. And so some think that it may happen earlier and try to push for that try to you know, do a quicker sale and in two to three years, but usually, I would say most investments are in the the five to 10 year timeframe.

J Darrin Gross 15:53

And as far as the size of deal, what can you give us a range of the purchase In the capital raise kind of range of, of size of deals that you you’ve worked with?

Trevor Crow 16:08

Yeah, so we we’ve kind of gone across the board on that. So we’ve, you know, done $90 million real estate fund and worked on that, which was obviously doing multiple properties. And we’ve also done we do have a lot of clients that are just kind of the the side side hustle mom and pop it real estate investors that are going out and but they have friends and family who contribute and invest money in these projects. And so they’re just buying, you know, an office building for, you know, a million dollars or something like that. But usually it’s in that range, I would say, I mean, just real estate prices have gone up. So real estate in general is expensive. But most of our deals are kind of in that, I would say a million to $10 million range.

J Darrin Gross 17:00

Got it.

Trevor Crow 17:02

and that’s total purchase price. So sometimes the raise the, the, you know, the investors that they’re getting, you know, are well, on the fund part, they were actually raising $90 million. And so that that was a big one for us, but the, you know, in a smaller one off project, it’s, you know, they could be raising anywhere from 250,000 to, you know, a million dollars.

J Darrin Gross 17:26

Gotcha. Gotcha. You know, talking about kind of the financial risk reward there that we were talking about. Have you had any issues or any stories where you’ve had kind of a mutiny or or where the investors have been so dissatisfied that they’ve, you know, sued the sponsor in any kind of tales like that, that are some cautionary tales that you can tell things you’ve seen? I mean, I’m sure that your documents are set to where, you know, if this happens, this is where this where you go to, but I know that that’s, that’s always the plan, but in reality can deviate from that and anything that you can share with us.

Trevor Crow 18:14

Yeah, certainly. So yeah, and it’s come up and in a lot of times, it’s the timeframe question where investors want to, to sell and, and get their money out and, and the promoters don’t want to sell at this time either because they think the market is going to turn and for the better or if they had a little bit more time, they could get a better rate. And, you know, the thing to consider there is, you know, from the investor standpoint, if if the project sells would sell for enough for them to get their capital returned and the preferred return, you know, some some percentage on their money that they’ve put in, they may be okay with the sale, but the promoter hasn’t, you know, they only get paid if it’s just enough. Return capital and the preferred return. And they don’t get that big payday at the end. And so their, their incentive is to keep it and hold it and hope to get a higher price because that’s where they make all their money. Whereas the investors may say, Well, you know, we don’t need to even get to that split yet. And we Let’s sell now and cash out. And so that’s come up. And, you know, often in these joint venture agreements, there’s a major decision rights and major decision rights usually require a these are the big items, you know, taking out more debt, selling the property entering into you know, affiliated in a contract, something like that. And so that can be that can be a point of contention down the road and so we always like to make clear, make it clear on who can make that decision and when in these joint venture agreements. The other the other thing I would point out is you know, you typically there’s ability to remove the promoter so if the promoter and take away their promote if they do Something bad. It could be usually included in that it’s, you know, fraud, gross negligence, things like that. And so obviously, if they commit that, and the investors can remove that person, as manager, take away their promote, and you know, theoretically at least hire somebody else to come in there and manage the project. And, you know, the issue with that sometimes is that we had a deal before where there was the principles of the developer or the promoter company, were really good people. Unfortunately, they hired somebody who was who was doing maintaining the books, who was skimming off the top, and so technically, the company had committed fraud. And so luckily, we had investors in there who were friendly enough not to remove you know, the us as manager or my clients as manager and take away their promote they we did have to reimburse the company for the amount that was stolen and obviously went after the the bookkeeper who was skimming off the top but there’s You know, technically that was a, that was fraud and they could have been removed. And so something to be aware of that, you know, if you’re running a larger operation and you have employees, you know, that can can lead you into a really bad situation. Luckily, you know, in all other respects, they’ve been managing the property very well. And and doing all the right things. And so, you know, the mistake, the hiring mistake didn’t lead to them actually losing it, but something something to be aware of there, too, which I’ve seen.

J Darrin Gross 21:30

Yeah, it’s, it’s always scary to some of the schemes that people cook up. I know, my dad was a banker, career banker, and occasionally when I didn’t have any funds to do something over spring break, he’d say you want to get a job in the bank because I go, okay. And, you know, it’d be a few months later and he’d go you remember so and so? Gosh darnit, I caught them stealing, you know, and, and, you know, be a dinner or something like that, you know, and it was always some elaborate little scheme. You know, how they met came out with it, but it’s, you know, it happens quite a bit.

So, you know, you mentioned the, the investors want to sell the sponsors not ready to sell. Is that kind of the the more of the focal point of issues you’ve seen? I mean, I know you mentioned the you know, if the operators not the operator commits fraud or whatever they can be taken out but, but as far as I’m just looking for, or I guess I’m asking about just anything friction that comes from the investor side. I know once you you know, if it’s, if it’s you and me, we can probably agree on a lot of things. We’re bringing somebody else and all sudden now we got a third person and and then you just continue to multiply that Rubik’s cube to where it’s not always easy to get everybody on the same page or you think they are because they signed all the documents that you know, to enroll in the deal. I’m just kind of curious, any other points of friction that you run into? Or if you’ve seen?

Trevor Crow 23:08

Yeah, you know, another big one I would say is additional capital contributions. So if the idea of that project is we’re going to go in there, we’re going to renovate and do some things, and it’s going to help us increase rents or whatever it is to add value to the property. You know, typically, there’s a budget that’s put out right and says, here’s what it’s gonna cost to do all this and this is why we’re raising this money. And it’s hard to put together budgets, because they’re not always correct. And so the, you know, investors usually want to put in their money, and they don’t want to put any anymore. They said, you know, this, you you you’ve told me, this is the budget, this is the project, I’m investing this amount of money and I don’t want to put in any more. But that can put the, the promoter or sponsor in a bad position because if they don’t hit those budget targets, and they Need more capital than then what are they going to do, they either need to put in the money themselves, or they need to get more bank financing, which is a lot is hard to do. And or they need to go back to the investors. And so, you know, this gets negotiated in most of these agreements. And it’s kind of a point of contention on, on whether they can or can’t force the investors to make additional capital contributions. And, you know, it kind of is a negotiation that goes back and forth. But even in the case where there is required additional capital contributions to, you know, either cover an operating deficit or a development cost, deficit or overrun, then, you know, a lot of times there’s a that can lead to friction between the investors and the sponsor. And in that investors are saying, you know, what happened? You, you had this, you had this budget, how come we’re off? Why are you asking me for more money? And, you know, no matter what the document says, there’s still that friction. That’s created in potential disputes between the parties there that’s, you know, uncomfortable to navigate. So, you know, we always try to make sure that when we’re representing sponsors, especially first time, people who are really doing this, to make sure they have enough, either additional capital themselves or additional line of credit with a bank, or they have, you know, built in enough buffer in that budget to say, you know, there could be cost overruns here on some of these things.

J Darrin Gross 25:32

No, I know a number of my projects. They’ve all i don’t know that anything’s ever come in under budget or time. bills are settled saying good, cheaper, fast. Pick two, you know, yeah. And so I think the, the, you know, especially with I tend to believe that’d be a bigger issue with a lesser experienced operator. Because I’m guessing that your more experienced operator has learned that lesson. Also, I would I would guess would make it difficult to go raise capital. If that’s your if that’s the rumor on the street is the project you did. I mean that the people that you had in the first deal probably aren’t going to sign up to do a second deal. If that’s that’s your experience base. So that’s, that’s good to know.

So from a passive investor standpoint, what are some things you can you can point to that passive investors should look at or be aware of when engaging in a joint venture or syndication as far as you know, the the agreements or the the operator, are there any kind of things you can point to?

Trevor Crow 26:52

Certainly, yeah, so the A lot of times these get these agreements get drafted and and investors don’t really pay much much attention to it depending on, you know, obviously, if it’s a big institutional investor or just a big, you know, investor who’s putting in a lot of money, they’re gonna do their due diligence more than if you have a around, you know, you’re raising money and you’re getting it from small amounts from 20 different people that are all friends and family, they may just be buying into the person as opposed to the projects, you know, so they’re not paying attention to the documents as much. But the big hammer that I think if you’re a passive investor that you want to kind of have on your side is one that there’s budgets that need to be approved. And so the budgets come in in the beginning, and, and an annual budget is comes every year, and it’s improved, approved by the investors or certain percentage of the investors. And so that that’s one big thing. And then that kind of ticks, ties to a lot of other decisions, you know, so that the manager or the promoter can’t really make a lot of decisions outside of the budget, if it’s in the budget, and it’s been approved. They make those decisions. If it’s if we start getting outside the budget, then that’s go back to the class A members for approval. Also sale of the project approval of that by the, by the Class A members or, or I’m sorry, I say Class A because a lot of times the investors come in as a separate class, but really just the investor members have the ability to, to approve a sale or have to be it has to be brought to a vote of the members to approve a sale. And a certain percentage of those investors have to vote for it for it to happen. You know, those major decision rights are really the big ones that a passive investor should look for. So there’s not just a unfettered, unfettered ability for the manager to do or promoted to do whatever they they want. And, and I keep going back on these terms, you know, I sometimes people call managers sometimes they call it a promoter, sometimes they call it a sponsor. I’m using those terms synonymously as the same thing, it’s really the the person who’s kind of bringing the deal to the table and going to be managing the project.

J Darrin Gross 29:06

Understood, I appreciate you clarifying that because I know I, I think I’m pretty clear on that. But I know that it’s easy to get, you know, kind of mixed up on who’s on first what’s on second and, and you realize they’re all the same or whatever. So, in the spectrum of, you know, doing a deal, there’s a, an investor out there that wants to you know, do a project, raise capital, you know, get their ducks in a row and and, and go out and do a project and you know, be be a developer do be a deal sponsor. Are there some checklist items that you can point to that, that you recommended. They, you know, whether it be time experience resume, you know, any of all or all of the above? Is there a Is there a list when you when somebody calls you up and says, Hey, Trevor, this is what I want to do. Is, is there a kind of a list of things you can recommend the they’d be ready for?

Trevor Crow 30:21

Yeah, I would say, one. So what happens? Now I’ll kind of approach this question in a little different way. But you know, I often get a call, get calls from people who say, Hey, we want to we want to do real estate deals, and we want to and maybe we’ve done a few in the past and been successful. But now we want to do it on a on a bigger scale. And so we want to, what we want to do is raise a fund, we want to raise we want to get a bunch of capital in and we’re going to go chase deals, real estate deals,. And a lot of times they say, you know, I say all right, do you have you know, properties lined up or in the pipeline or locked up in that with a purchase and sale agreement or lease to an option or a term sheet. And they say no, you know, we just want to raise the money and then go look for him. And, and inevitably that that fails unless you’re, you know, a big institutional real estate company that that has a long track record. It’s really hard to raise money unless you have a specific project because investors just say, hey, show me that what projects you want to invest? You want to what project what the project is, and I’ll decide whether I want to invest or not, not many people want to make a capital commitment or an investment. Before they they see that. So this this blind pool fund idea is is very hard to pull off. And so, you know, I think a lot of people get that idea in their head. And it’s a lot tougher than you think just because investors aren’t aren’t going to put up money. So that that leads to the answer to your question, I think is one, you know, have have an idea of the properties that you’re looking at at least have a pipeline of properties.

But at the same time, you know, it’s kind of a chicken in the egg thing where you have to also have investors lined up or at least, you know, soft circled somewhere that that have said, Yeah, we’re interested if you find a good deal. And, and so you want to have those relationships in place, because if you already, if you find the project first and then try to start making those conversations, it’s the timing gets tough. So you’re kind of doing both of those at the same time you’re looking for deals. At the same time you’re talking to investors, telling them kind of what you’re looking at what you’re what you’re thinking about, and getting people excited or interested in so that you at least have a few few people that you have on board that you you know, as soon as you have that project in the door that you can send it to them and say, Hey, what do you think of this? And, and so that that’s important. Having, you know, an idea of the budget is important and something to think about from the beginning. Having your your your team lined up, you know, I think you want to have You got to move quickly on these things. So you need a real estate lawyer to draft the purchase and sale agreement you need, you know, a corporate lawyer or somebody who does entity documents, like me to help with the finding, or putting together that the operating agreements and investor documents that go out. Having, you know, your a good description of viewer track record, you know, any sort of bio on your history, you know, that’s important to investors. Although those things I think are important to think about and kind of have I know, that’s, those are more general rule then kind of a strict checklist, but those are the big things. I think that somebody who’s trying to put together and take take in investments and do real estate deals needs to consider before they’re doing it.

J Darrin Gross 33:55

I appreciate you, you know, taking us through that the I think there’s always This notion if you have the deal, the money will follow. And, and I’ve heard that if you’re, if you’re at a standing start or if you’re at a stop, and you’re waiting to start until you have the deal, you may have waited too long. I mean, kind of like you’re, you’re, you know, kind of putting the feelers like you mentioned is kinda like a juggling act you’re you’re you’re trying to stay in communication with potential investors and let them know kind of what you’re looking at and, and but before you get the formal offer, I mean have a property in mind and in kind of a direction because it seems like the the clock starts right I mean, as soon as you signed the documents, the you know, the bullets are live kind of thing. It’s, it’s, you know, no, no longer nerf kind of thing. It’s that’s the real thing you’ve got, you’ve got timelines and money. And if you don’t meet those timelines, there’s real money on the line kind of thing. So I appreciate that.

If we could, Trevor, I’d like to shift gears here for a second. I mentioned to you before we started that, by day, I’m an insurance broker. And I work with my clients to manage risk. And, you know, assess the risk and determine what to do with it. And there’s a couple of different strategy strategies we typically consider. The first is can we avoid the risk if we can’t avoid it, and we look to see if there’s a way to minimize the risk. And then lastly, if we’re not able to do the minimize or avoid, we look to transfer the risk. And I like to ask my guests if they can identify what they consider to be the BIGGEST RISK? And you know, basically take a look at your operation your customers you, you can frame it however you want to. And again, for clarity sake, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Trevor Crow, what is the BIGGEST RISK??

Trevor Crow 36:09

So in my mind, that is assuming that there is no risk in certain actions and or in the status quo. So, you know, for me, I started this firm, which seemed like a big risk at the time. And I started in 2018. But at the, you know, because I was coming from a firm, a well established firm that, you know, paid me and I was, you know, never worried about the paycheck and it just came, and I knew there was business there and as business was going to keep coming in, and so it seemed like a big risk for me to, to go out on my own. Now. Now I look back at it and I think I was at a much bigger risk staying at that firm than I am now. And it kind of goes back to my roots of graduating law school in 2009. And seeing that the the people who had got terminated the attorneys that got let go or laid off. Were not the attorneys with big books of business. Those attorneys always have a place. And so if you have clients, if you have relationships you have, you know, people who know like and trust you and come to you do work for them, you always have a place to anywhere you want. Or you could write your own ticket by starting your own firm. And, you know, the firm I was at was a great firm, great attorneys loved it there. The problem was that I was the corporate guy doing all the corporate work for other people’s clients. And so at the end of the day, you know, my risk was, as I look back at it now, it was more of a risk for me to be there than it is now because now I have my own clients. I have those relationships, direct relationships, and when they have issues that come to me, and and so I can write my own ticket a lot more than I could At the prior firm, and so I think, you know, often people think that certain, whatever society says, or whatever seems normal and safe might not always be normal and safe because, you know, big, big fortune 500 companies will lay you off. And, and that happens all the time. And so just having that job doesn’t necessarily mean you’re safe. And so, you know, I think bottom line is sometimes take what seems like a risk might actually be safer in the long run.

J Darrin Gross 38:31

No, well said I think there’s a lot of people out there that believe if you have, are there security with a job, you know, I think it’s kind of a lot of the way we’ve been. Our society is kind of reflected you know, you go back a couple generations and, and you know, you look for the union label or whatever you want to was and just kind of the, the, you know, the comfort I think is probably to a part of that is a lot of times of jobs, they give you just enough to to satisfy you, but keep you hungry, you know, not so much you’re not hungry kind of thing. And you don’t realize that what’s what’s on the other side of the fence and then then the flip side of that is a lot of times the the opportunity always looks, or the grass always looks greener on the other side of the fence, but it’s just as tough to mow kind of thing. You know, there’s so but that’s, that’s, that’s great. I mean, again, I commend you on on jumping out on your own and congrats on your success. So

Trevor Crow 39:26

Thank you. Appreciate it.

J Darrin Gross 39:28

Hey, Trevor, before we wrap up, where can listeners go if they would like to learn more connect with you?

Trevor Crow 39:35

So my website is www.crow.legal and so it’s not a.com it’s dot legal and so crow.legal and so all my information is on there. But you know, you can feel free to email me at Trevor@crow.legal, happy to talk to anybody who’s who’s looking to do a deal or whatever, even if you just want to want to chat about it and bounce ideas. Happy to do that. You No, we don’t charge for anything like that or initial consultations, you know, we want to make sure we’re the best fit before you ever receive a bill for us from us. And, you know, my direct line is 720-230-7123. You could call me there as well. And yeah, so feel free to reach out anytime.

J Darrin Gross 40:18

All right. Well, Trevor, can’t say thanks enough for taking the time. I’ve enjoyed our talk, learned a lot and hope we can do it again soon.

Trevor Crow 40:27

Sounds good. Darrin, thank you.

J Darrin Gross 40:29

Announcer 40:48

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Earnings with Lior Gantz – CREPN #274

Lior Gantz 0:00

When you do when you buy a company if it’s a private company if it’s a laundromat or a restaurant in your area, whenever you look at earnings. What am I buying compared to what am I paying? Today, investors are paying some of the highest prices for stocks compared to the earnings that they make. But if you look at the alternatives to generating a return about 75% of the worlds bonds yield less than 1%.

Announcer 0:35

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 0:53

Today, my guest is Lior Gantz. Lior is the founder and editor of the free number one rated financial newsletter, Wealth Research Group. He’s an investor. And in just a minute, we’re going to talk with Lior about the real economy versus the stock market. But first, a quick reminder, if you like the show, CREPN Radio, there’s couple things you can do. You can like, share and subscribe. And as always, we would love for you to leave a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find this on YouTube at Commercial Real Estate Pro Network. With that on welcome back, Lior to CREPN Radio. Lior welcome back.

Lior Gantz 2:09

Thanks for having me back.

J Darrin Gross 2:11

I’m looking forward to our talk today. I think the last time we were together, things were a little different. There was no pandemic. And you know, just definitely some some different circumstances. So but before we get started, if you could just take a minute and share with the listeners a little bit about your background.

Lior Gantz 2:34

Okay. I’m 36. And when I was 13, I think I had a pivotal moment in my life where my father’s business went under, and I had to start earning money for myself if I want to allowance and stuff. So I started babysitting in my neighborhood. And then I told all the parents that I was babysitting at least the male children. That I can tutor them in basketball. So I upsold the parents. For the first time in my life, I upsold something. And then babysat, tutored basketball, and started saving money. I’m 16. I have $20,000 in the bank saved up from like three years of this stuff. And the banker says, Well, you have all this money, why don’t you invest in a way to make your money work? And what does that mean? This? Well, you you invest in the stock market, sign up, get your parents sign waiver, your 16 it’s your parents sign a waiver and we can start doing this. And this was June of 2000. It’s like three months after the.com bubble burst. So in hindsight, a very good time to start investing, and he was like, you should you should see China. And so he was literally telling me great stuff. And then I asked him, What should I learn? Because I was in high school. So you know, my mind is like, what book should I read? Amazon was just starting to ship books. So I bought A bunch of books in English and started tearing through them. And that’s how I got into investing.

My father’s my father had a second business and third business both going under as well. So my mind was obsessed about risk. And what’s he missing? Because I’m, you know, father figure is very important in your life you always assume as a hero, and here’s this guy failing and failing and failing. So, by the time I’m 23, I’m so engaged in entrepreneurship and business and how to do it, right. And that’s the path I took life entrepreneurship and investing. And about four years ago, I really, it’s something to me that most people do not read, you know, one book a week for, for their entire 20s and most people do not have financial education. So I said, let me congest everything that I’m doing because I’m reading four hours a day Talk to CEOs and I, I do the business in our own business and let me congeste it to bite size article three times a week, a week about the economy what’s going on, if I see specific opportunities, then to cover them as well. And that’s how we found that Wealth Research Group in 2016. It’s a free letter, it was one of the first letters to cover Bitcoin $400 per coin. And in early 2017, it was the first newsletter that I know of that covered ethereum, which was a cryptocurrency that traded for $12 when I covered it in $1,000, six months later. And last year, when I was on the show, we talked about gold, gold is actually as we’re doing this interview is an all time high. So, you know, that’s sort of the the way that the newsletter works. We really talk a lot about the economy, and we try to see exactly what’s really important for To give educated on right now and to cover it.

J Darrin Gross 6:04

So let me ask you the the I’ll say the average consumer myself included you turn on the news there’s a blip usually about the the market rallied or the market gave back. But it’s usually focused around the indexes. You’ve got your your DOW or your a in

Lior Gantz 6:29

The Dow and

J Darrin Gross 6:31

S&P yeah NASDAQ and the S&P 500. And those are kind of like just these reference points that are kind of like a collection of multiple stocks and an index and I think if I recall the DOW is the, the collective price of multiple stocks

Lior Gantz 6:51

30 industrials, the 30 Industrial stocks Yeah.

J Darrin Gross 6:54

Okay. So they’re their price combined, equals this. This index

Lior Gantz 7:00

So no, it’s it’s, it’s, it’s weighted on the market cap. So it’s not something like each company is 3% of the index of the index. It’s it’s weighted according to your industry, ya know, to your size to your market.

J Darrin Gross 7:17

Okay. Gotcha. Gotcha.

All right. So, so if the average person is watching the news, and they see it’s up, it’s down, it’s up, it’s down. It’s up, it’s down. And you have some sort of a reference point. I mean, like, right now, I know when when this whole COVID thing started. I think we were, we’re closing in on 29 or we are at 29,000 for the Dow. And since then, I think yesterday I was watching it’s been hovering 26. Close to 27.

Lior Gantz 7:51

Right now.

J Darrin Gross 7:52

Okay. And it. So I mean, the, you know, you look at that and you say it’s down, you know, what is that 10% Okay.

Lior Gantz 8:02

Yeah, from the highs.

J Darrin Gross 8:04

Okay. And all things considered that seems like a not not a horrible place to be considering what’s what’s taking place. My my concern and I think that one of the challenges for really understanding what does that mean when you have all of this governmental interaction with the supporting of the markets and the kind of propping up the markets? How do you take a look at that and sort through that? Is there a, is there any kind of a sense of a false market there? That’s, that’s, you know, if the government doesn’t continue supporting it, that it that it collapses or is it or is there a weight given or help me understand how you, somebody that studies us day in and day out, looks at that and views it.

Lior Gantz 9:00

So that is literally the question of questions that is on everybody’s minds, you know, from the retail investor to the hedge fund manager, Warren Buffett, everyone is literally trying to understand if this market is what we call artificial, if it’s if it’s fake. And if it’s fake, what’s the real price? And if it’s not fake, how am I getting it wrong? Why do I think it’s fake? And it’s not. So the first thing you want to look at is earnings.

Today’s when you buy an index, or the when you buy shares of the Dow Jones, or shares the s&p 500 points, the s&p five etc. What you’re buing is a collection of companies and now you own a piece of them. And the first thing you do when you buy a company, if it’s a private company, if it’s laundromat or a restaurant in your area. Whenever you look at earnings, what am I buying compared to what am I paying? Today, investors are paying some of the highest prices for stocks compared to the earnings that they make. But if you look at the alternatives to generating a return about 75%, the world’s bonds yield less than 1%. As an insurance broker, you obviously know that what insurance companies do are property and casualty insurance specifically or Warren Buffett even more specific because he came up with this is they they take all the premiums in advance, and then they have a float. Basically, this is money. That is that they need to keep on reserve in case their claims on it. But in the meantime, they get invested. That’s a float Where insurance companies investors flow. This is billions and billions dollars of your money, basically, that you paid. They may well retain it. But they for the meantime, after keeping in reserve, they get invested tax free. That’s how insurance companies become giants.

And usually, they don’t want to do the stock market, they do bonds. Now they can’t do bonds. Because you can’t generate a return, you’re getting less than 1%. Inflation is higher pension funds, same thing throughout history throughout the 1980s. The 10 year bonds so you lend Washington money for 10 years, you get 8, 9, 10 percent. In the 90s. It’s about 6 to 7%. In the 2000s. It’s about 4 to 5%. Still great returns overall for very low risk. Today. Zero. And so when you have this challenge, then stocks are just worth more companies are worth more you can pay more for companies if there is no other an alternative, because if the dividend yield of the s&p 500 is 300 or 400%, larger than the yield on the 10 year bond. You know, there’s a point where pension funds and sovereign wealth funds and hedge funds etc. They just stopped with that 6040 mentality because they were not earning anything on their bonds. So, this is one thing that is driving stock prices are much higher. Secondly, think about all of the real estate investors who cannot invest in hotels, casinos, construction of retail, all these you know, very troubled industries and they have to go towards stocks.

Now suddenly stocks you look at what they did in time before And they had a lot of their expenses offset and their expenses basically with the government. Government is paying their their salaries for the employees can lend and they can borrow money from the government to pay a lot of their expenses. So a lot of companies have adapted really quick talking about the multinational companies. And as you as well, pointing out, the s&p 500 is only 500 companies. The Nasdaq 100 is 100 companies in the Dow 30s 30 companies. So this is a collection of 630 companies. And most of Americans have nothing to do with these companies. They don’t work for these companies. They don’t own shares in these companies. 84% of the stock market of the s&p 500 etc, is owned by the top 1% of Americans. We say that again. 84% of the equities are owned by 1% of the people in America. So most Americans have, you know, they they don’t if the Dow is 30,000. That’s a that’s the annual salary. That’s the annual median median salary. For most Americans. It’s the median salary, basically, step. So if it takes you one year, to buy the doubt, that is an all time high right away in 1980. It took about 10% of that. So you could have bought 10 times more be part of the american enterprise system. today. It takes you a year. That’s, that’s insane. So that’s why you have this wealth gap. Why did this wolf gap happen? Why is there is there such an income gap?

One thing is education. When education is so expensive, there is a there’s a certain segment of the population that can never enter college and never go into college, high tech, etc. They’re stuck 30-40 years behind and industries that are getting either outsourced or optimized, or whatever else. And just they’re frozen, their salaries are going to be frozen, etc. So that’s one thing, education and the cost of education. Secondly, what you have in America is the financial system is predominantly handled by the Central Bank, in the central bank, this does not really touch Darrin. It can’t reach Darrin. It can lower interest rates, which indirectly in signal to Darrin and hey, maybe Darrin should, instead of rent, take a mortgage, and then that will fuel the real estate market. But they never touched the real thing. Whereas the government, it can come to Darrin and say, Hey, Darrin, want to buy a house? We’ll give you two years of tax breaks. That’s that’s touching you directly. And I’m not a not an American, and I’m not a political animal. So this is not a political action or something. But during the Obama years, the government was pretty much laid back on, on doing fiscal policy. They left everything up to the central bank. And the central bank wanted the baton, and to the government, but the government just didn’t take it. And so, after 2008, you lower interest rates. If you get over the hump, you get a lot of deficits because of this, but then government needs to start, you know, maneuvering the economy and it didn’t. Trump, on the other hand, is very proactive, maybe does a lot of mistakes. We’ll have to judge that, you know, a few years down the road, but he’s very active tax tax cuts, opportunity zones. You know, working on a trade deal with China. These are all things that touch the people and obviously people PPE, all the things that are happening right now, that’s the government and not just not just the central bank. That’s what you’re going to see going forward. It’s a marriage of doing both of these together. Because interest rates are already at zero. So like a big answer to your question is, there’s the real economy, or 54% of Americans are employed. That’s your small businesses, you know, mom and pops. And then there’s the rest. The rest are doing pretty well, because the central bank has created a situation where they have a lot of liquidity. This is very unusual for a crisis usually. And of course, it’s all the credit contracts, like you saw in 2008. Here, there’s the opposite. There’s all the credit in the world. So you know, companies can can even if they have lots, much lower earnings, they can borrow money at very low costs and get through the hurdle. This is the multinational company, the big company, the small companies, they have much more issues, they don’t have access to the debt market. And the credit markets, they have nothing to do with central banks. That’s why the government had to help them. Otherwise, you would have seen a collapse of small businesses, and just big business is buying them, and there’ll be even more gear than there is right now. And so that’s basically the the dual economy that we have, and have, on one hand, assets prices are totally elevated, because governments are telling you, hey, if you lend me money in 10 years, I’ll bring you back your principal but no interest. So that forces people to go into the stock market.

And then you have the real economy, which depends more on government stimulus, and it’s it’s not as open to all these advantages of cheap credit. It’s struggling. And that back and forth is what’s called causing riots and populism and everything else. Because people are saying, Hey, this is this is not fair. It’s not capitalism. I’m not enjoying the fruits of capitalism only, I’m only enjoying the two, you know, two rules and deciding what to eat for dinner. And I’m the sheep. So it’s fine. The two wolves have raised their hands and we’re in a, you know, democratic system and in a capitalistic free market, but I’m always losing. And so I don’t like it. So that’s where America is right now. And there are clear winners or losers to the system.

J Darrin Gross 19:41

Yeah, I think, you know, everything you talked about, I mean, I get it. It’s, I think it’s it’s frustrating for most of us that you know, support a free market. But yet you see the it’s kind of a bastardized market when you have the the government You know, pouring cash into it, he doesn’t allow the winners and losers like you would normally expect to tries to keep falsely falsely in some cases, you know, and maybe reward some with with additional liquidity to where they can have those opportunities down the road to take advantage of those opportunities when they come, but that that would, I guess, if you, if you, if everything was equal, the the people that have more capital probably had more capital to begin with, you know, in reserve, they were probably operated differently as opposed to the people that were, you know, sink or swim kind of a model there. So, when you when you assess a company, you mentioned talking about looking at earnings and stuff. How How are you in this market? Given this infusion of cash from from the government’s How do you reason through that because Without that, I think you could you could assess, you know, Company A versus Company B or make some sort of a determination. But, you know, there’s a lot of people talk about, it’s kinda like driving in fog lights on, you can’t see where you’re gone and everybody’s kind of in the same. You know, we’re how do you take a look at that and, and when you’re when you’re making a decision to invest? How are you sorting through this? The fog?

Lior Gantz 21:29

Sure. Okay, so there are industries that have really been affected by COVID-19. Those are real items, right? Hotel chains, casinos, cruise lines, hospitality, hospitality, oil companies, tourism, to the airline industry. Okay. So you put all these in one basket, and then within that basket, you look for very specific things, and I can touch on that. So those are the real casualties. amount of in the food industry, you know companies like that, put them in one batch, and in retail, in malls, etc. Let’s put them in one batch. And they are basically whatever is sporting companies, whatever is really impacted either buying government restrictions, literally the government telling you you can’t operate this business or you have to operate within really crazy restrictions, cinemas, etc. Put them in one basket, let’s touch upon them later, then you have the ones that are thriving. Once this is like the government telling you all eliminate your competition for you. You know, I mean, there will be no retail stores online will go big. For example, Amazon, right. So, these are the two companies and then these are two extremes, those that are being victimized, those that are being being benefited, and then there’s in the Middle, all the companies that are sort of chugging along in terms of they haven’t been too much impacted from the bad side, too much for the for the upside.

What most investors are currently doing is that they’re trying to buy a company at x and a few weeks or a few months later just sell it for a higher price. And that model, it works until it doesn’t work. In other words, there’s there’s a top somewhere for the price. I don’t do that. For the most part, I avoid trying to buy a company for x and gambling, we’re speculating that somebody else will pay more for it in the future. What I’m trying to do is look for a company that I buy an x because I can see the earnings are currently pretty good or that I think it they’ll they’ll come back to normal real soon, and its prices cheap compared to the growth of the company going forward. And therefore what I care about is the cash flow this business will generate in the coming years and decades to come and not, then I buy one at one price and I can sell it a few weeks later and another price. And so that’s my model to begin with, because people have to realize the price appreciation is only 40% of historical returns to the stock market. The additional 40% is dividend distributions. And then the additional 20% is what we call buybacks or share buybacks that companies that are there instead of using their capital to distribute the dividend are basically telling you will buy more shares of our own company will will close the pool of shareholders and you will own more of the company tax free. Okay, so that’s just a bit. That’s some points. This is even better than a dividend.

Okay, so now that we’ve done that, we want to look at companies that are almost a monopoly in their industry companies that have very few competitors, either because they operate in a very tricky industry. In other words, it’s hard to compete. Even if you raise the capital, you won’t be able to come in. So they either are operating with very low, very thin margins. And therefore, if you try to compete with them, you’ll probably get eaten alive. Or they have a special relationship with a government or some sort of a regulator that it’s hard to compete with. Or they have a lot of brand loyalty. And it’s hard to shift the trend towards a new company.

Or that they’re one of the dominators or two or three dominators and no one else can get in. It’s very hard to get in and that would be because of economies of scale, for example, other companies will have higher costs. If you can find those types of companies that have what I call a moat, something around their business that makes it very hard for others to compete with, then you have a chance at finding something that will be index. Because otherwise, it is pretty much a certain that if you just find index fund, and you wait at least a business cycle, so at least seven years or more, you will start seeing how consistent the returns are. In the past 100 years. The s&p 500 has returned 8.3% a year but only on four calendar years out of 100 it actually close to you. Listen that 8.3% average. In other words, most it’s like having one hand in in boiling water The other hand and ice, if you combine it, it will probably have a nice feeling to it, but both of your hands are, or one is having froze whites and ones, you know, I mean you know, it’s, it’s, it’s in hot water. So you have to realize that over the long term, the American Enterprise is doing very good, you’re gonna make a fortune betting on American companies. But if you knew how to find companies that even grow faster than the index, then you have something unique.

93% of investors underperform the index and they should just invest in index, and they should probably double down or pilot more after a huge correction. For example, what happened in March that would be an amazing buying opportunity. And for the rest of the people that have a succinct way of understanding businesses can outperform that now over the long term, if you invest for 30 years, the difference between earning 8% a year and 12% is mean over one or two years, it’s it’s almost a negligence. It’s few thousand dollars depending on how much you your risk, but over a 30 year period when you compound that as an insane difference. So that’s where you have to figure out, am I capable? Do I have the time? Or do I need to offset this to somebody else? How do I do this? And that’s, that’s basically the business. So one, competitive advantages. That’s the main way to find a phenomenal business. And then if it’s a complex of knowing the industry, knowing this knowing that understanding the books, the numbers, it that is what being an investor is it’s a profession. Many people do not see it as a profession and And therefore many people lose a lot of money in the stock market.

J Darrin Gross 29:06

No, I think everything you you touched on there, I was kind of surprised you mentioned that only 40% of the returns is through price appreciation. Is that is that true even over the longer haul? Or is that

Lior Gantz 29:20

That is true only in the longer haul? day to day? No. I don’t. I can’t tell you what will happen from now until right. But over the hundred years that they did the study 40% comes from dividends 40% from the appreciation of the price and 20% from you know, earnings with buy backs.

J Darrin Gross 29:49

Well, that’s that’s interesting.

That’s great. Hey,

Lior Gantz 29:53

you may find that study online.

J Darrin Gross 29:56

No, I appreciate it. I want to ask you quick. I know you’re You’re a fan of gold. Can you speak to gold as to how it’s held up and give a little perspective on gold?

Lior Gantz 30:09

Sure. Today I’m a big fan of only a fan. Gold is trading at an all time high. And more importantly, than gold trading at an all time high, which is amazing. And, you know, if you go to our website, for example, for free shipping, you click on that top menu, you’ll see special reports. Lots of them have to do with gold. So If you don’t know why gold is important. As a part of your portfolio, you can definitely download some of those and also go to wealthissues.com/goldplaybook, which is a special report we created for your listeners. That’s a very comprehensive manual on investing going slower.

Okay, so gold is also it’s almost like a mirror of other things that are happening in the economy and the most important thing for gold That investors like to own it, when the interest rates that they can get either intervene by buying bonds is negative. So, let me say that again. If you currently want to do the safest thing in, in finance the traditionally you go and you purchase a and you lend Washington money for 10 years. The 10 year bond is the barometer for all the other assets in the world. Okay, that is, you know, whoever you ask, any professional investor, he will tell you the bare meter is the 10 year bond. So today the 10 year bond is yielding point five of a percent. In other words, if you lend Washington a million dollars, you’ll get point 5%. So that’s $5,000 of interest, a year, million dollars and then you have to duck inflation, inflation is a point and a half. Therefore, in real terms, you are losing $1,000 every year. On on, on this transaction, you are lending money at real negative rates when that happens, gold soars historically.

So that is exactly what’s happening right now the 10 year bond right now, in real terms. So whatever the nominal yield that you see on when you when you’re quoted online, minus the CPI, the consumer price index is the lowest it’s ever been. It’s point zero, it’s minus 1%. And in that kind of environment, there’s a lot of institutions that say, I am not going to just lose money, not going to lend money to Washington, knowing that I’m losing money. I’ll just find gold. And that’s what’s happening right now. And that’s my goal. There’s over $2,000 an ounce. And it will continue on doing what it’s doing, if there’s no change in that, and to me, it looks like there’s not going to be any change because the chairman of the Federal Reserve central bank is saying we are probably done raising interest rates for a few years. And so if they if interest rates are going to stay the same, I think inflation is even going to go up a little bit and rates are going to go even more negative.

Secondly, you have $1 bear market that has just started two months ago after 10 years of a bull market. Now the dollar what is it what is $1 bull market $1 bear market, a dominant bull market is if the dollars value relative value is rising compared to a basket of other leading currencies, the Euro, the yen, the Canadian, the Australian, the Swiss, the Hong Kong, etc. And it was beautiful. 10 years bull Market from 2010. It just broke down below. That was that support line that 10 year support and it’s in a bear market. dollar bear market is the most important financial event or dollar bull market is the most one financial terms, so many other things, because the dollar is the reserve currency that everyone uses. And all bear markets historically are six to seven years long. And so if we just started one then has insane repercussions, or commodity prices and you’ve seen in the last two months, or three months, that’s Silver’s price has gone up 100% that’s the smaller precious metal, the one that’s much more correlated or inversely correlated with the dollar. So you’ve seen phenomenal returns, or gold, silver, gold stocks, silver stocks, some of the stocks that we’ve profiled in our own portfolio are up over 100% Three, four months in the newsletter. So that’s what happens when you have a bull market, in commodities specifically in the mining sector.

J Darrin Gross 35:12

I appreciate you taking us through that the precious metals are I know they they have that are there times when they’re more sought after and it sounds like the way you described it now is definitely a time to make certain you have some in your portfolio. Lior if we could, I’d like to shift gears here for a second. As I mentioned to you before, I’m by day I’m an insurance broker. And I work with my clients to assess risk and do some risk management. There’s a couple of strategies we typically consider. We first look to see if we can avoid the risk. If that’s not a possibility, can we minimize the risk and when that’s not an option, then we look to see if we can transfer the risk and that’s what an insurance policy is. And I like to ask my guests if they can identify what they consider to be the biggest risk grand. for clarification, I’m not necessarily looking for an insurance related answer. You can apply this however you you feel if you want to look at your your business, your clients business, however you want to frame the question is up to you. But with that, if you’re willing, I’d like to ask you, Lior Gantz, what is the biggest risk?

Lior Gantz 36:39

`So I think COVID-19 is changing a lot of habits that people have some habits changed faster for certain people, some habits have not changed and some habits are slowly starting to change. And it’s very important to see that you’re not kind of touch with what’s happening. In other words that you don’t think that the way that you’re being changed by COVID-19 is the way that your clients are being changed by COVID-19. Therefore, you will take your business one way because that’s what personally is happening to you your own personal experience was your, your clients are, are looking at a different route to go forward and you’re going to lose them to competition. So the biggest risk right now is not understanding how your client has changed if it changed, and I think that’s really important for people to to stay on top of now, if you’re an employee, which most people are, your client is your boss, you need to see if he’s changed. If his business is more vulnerable, you should look at moving to a different business. His business is full of problems, but he also has a way to get through it, then you can bring a lot of value by solving problems and you can move ahead in the company. So just think of that, understand that everyone right now is experiencing either multiple problems or other experiencing a boom, because basically the government has benefited if you want to be part of that, be part of that. In other words, go with companies that and with industries that have a huge tailwind or go to the victims because you’re going to have opportunities to make a huge significant significant impact on them. Because they need so many new ideas and some fresh solutions. So either or, but just know that this is a phenomenal time to show your value that is the key point. Just think of the experiment that no business would have ever taken to close down or to put all the employees home. These are unheard of. And they’ve happened now. So you have to be unconscious that and that is the biggest risk losing the mindset of your clients because he’s changing you’re no longer understand what he wants and what he needs.

J Darrin Gross 39:30

Now that’s well put, and I think it’s a good reminder for people to recognize there is an opportunity here and in every crisis, there is an opportunity and it’s up to you to find that and and be the solution there. So that’s great. Um, Lior, Where can the listeners go if they’d like to learn more or connect with you?

Lior Gantz 39:51

Wealthreserchgroup.com. The homepage, you can sign up for the newsletter that’s literally like the best way to stay in touch with whatever I am doing.

J Darrin Gross 40:02

Got it. Lior, I can’t say thanks enough for taking the time. I’ve enjoyed talking with you again, learned a lot and I hope we can do it again soon.

Lior Gantz 40:13

Thank you, sir.

J Darrin Gross 40:14

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 40:33

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

1031 Exchange Option Delaware Statutory Trust with Jason Salmon – CREPN #273

Jason Salmon 0:00

You sell a property for a million dollars and you pay a mortgage back of $400,000. Your $600,000 goes and sits in escrow with your Qualified Intermediary. That 600,000 still has to buy a million dollars equal or greater, to pull off the 1031. Otherwise, it’s called boot. And specifically in the case I mentioned mortgage boot, and that’s taxable. So you have to buy equal or greater value. With the Delaware Statutory Trust, these DSTs come already, either with or without debt already attached to them. So it’s really important for people doing a 1031 somebody needs a mortgage. The great thing about DST is is it’s already attached to it, you know, any given deal that already has the debt on it. And the great thing further is that it’s not recourse to the investor so they don’t have to sign for it.

Announcer 0:50

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 1:09

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

Today, my guest is Jason Salmon with Kay Properties and Investments. And in just a minute we’re going to speak with Jason about Delaware Statutory Trust and 1031 exchanges. But first a quick reminder, if you like our show, CREPN Radio, there are a couple of things you can do. You can like share and subscribe. And as always, please consider leaving a comment We love to hear from our listeners. Also, if you’d like to see how handsome our guests are, under normal circumstances, you can check out our YouTube channel. And that’s Commercial Real Estate Pro Network on YouTube. And while you’re there, please consider subscribing.

With that, I want to welcome my guest. Jason, welcome to CREPN Radio.

Jason Salmon 2:22

Thank you. I’m glad to be here.

J Darrin Gross 2:25

I’m glad you could join us and looking forward to our talk. Before we get into the topic, if you could just take a minute and share with the listeners a little about your background.

Jason Salmon 2:39

Yeah, in in commercial real estate in some way, shape or form for about 20 years, probably 20 years plus at this point and started out on commercial real estate research side. Eventually that evolved into private equity real estate and then evolved further into specialization with 1031 exchanges, which is a big part of commercial real estate investing for for many. And beyond that the Delaware statutory trust structure, which is a pretty specialized 1031 exchange vehicle, but kind of been around the space for quite a while and many, you know, wearing many different hats.

J Darrin Gross 3:27

Got it? You mentioned research, can you speak a little bit to what your role was and like the level of properties and then what I mean were you working for a fund? Were you working for an investor? I who, what was your your situation?

Jason Salmon 3:47

Worked for commercial real estate research data and analytics firms. So they were the firm itself was collecting data basically on vacancies, sales, absorption, new construction, leasing activity, concessions, all these things across the board in various sectors, asset classes of real estate. People were collecting that information. And then ultimately those got synthesized into quarterly reports. And part of my role is, you know, was one building out a database itself and, and maintaining it.

And then one of the roles that I had, while there for many years was actually to write and edit the narrative quarterly reports for over 200 markets around the United States in commercial real estate asset classes across the board. So writing reports, market conditions, analysis for you know, the users of these reports predominantly were institutional, but there were a lot of private investors, they hire, you know, assets under management. But essentially, these reports will be used by publications as commentary. The reports will be used by lenders when they were underwriting their, their real estate for for lending, and was also used by asset managers to assist with their decisions on acquisitions or kind of timing and even ultimately, to sell. And in fact, it’s interesting even today, you know, I’ll see some of the asset managers that we work with might are still using those, you know, reports, not the old ones, but the current ones for their decision. Sometimes I’ll see the name of an old firm that I had worked with, in there and it’s, you know, it’s a little validating and it’s kind of a small world. But that’s kind of what I was doing at the time, just from a research standpoint. So researching commercial real estate market conditions in various markets for real estate sectors around the country.

J Darrin Gross 6:16

Yeah, I appreciate you dive into that a little bit. I think sometimes the the notion is there, there are firms that do that, but I don’t know that I’ve had the opportunity to speak with anybody that was intimately involved in the underwriting or reporting of the information. So I appreciate you taking and I would assume that that just as a base level of understanding of commercial real estate, that was a nice entry point for you for the rest of your career. Do you find that so?

Jason Salmon 6:48

Yeah, I mean, yeah, I mean, it’s it’s interesting, as you know, when one is at the beginning of their career, it’s always interesting trying to figure out what’s what, at that time, it was the exact right thing for me I’m an analytical person at heart. And it just made a lot of sense. So, you know, the numbers, seeing kind of how trends, you know, were occurring, seeing kind of, maybe, you know, even headwinds on the horizon and seeing what’s what that was very gratifying for me. I enjoyed it. It was great. And certainly, I have no doubt that it’s prepared me, I think, with an in depth knowledge to actually ply my trade, as I do my day to day today. I think it it all helps I would not have I couldn’t imagine it any differently. And now for what it’s worth. I appreciate that experience.

J Darrin Gross 7:41

Well, that’s good. And then you mentioned private equity. Were you raising capital or what was your role in the private equity firm?

Jason Salmon 7:54

Purely raising capital. That was but they were it was for real estate but, but it was capital raising for private equity real estate in different vehicles kind of across the board so somewhere you know, I guess you get as a overarching I don’t really like to make blanket statements but it would they were syndications. They were syndicated real estate deals. And then that kind of evolved in other kind of larger private equity real estate vehicles, as well, but a capital raising Yeah.

J Darrin Gross 8:30

Well, those are two unique I guess roles in commercial real estate and have a fundamental understanding of both, I would think, would be a nice base level of understanding and give you kind of a just an understanding. I think anytime you’re talking to somebody and they don’t understand or they gloss over or think they know some of the inner workings, I would think it would tend to translate as you’re speaking with, whether it be, you know, potential customers or, you know, whatever level that that would that would give you an edge. I would think that if you feel that way or not, but I would think it would.

Jason Salmon 9:13

I hope it always has. I mean, if you like, metaphorically speaking or analogy of, you know, if you, you know, if you’re batting a certain batting average, I mean, you could strike out, you know, six, seven out of 10 times and be a Hall of Famer or whatever that you know, adage is. I mean, for, for what we’re dealing with. It’s really not for everybody. I mean, I think what I do today is a little different from what I had done previously, years ago. But realistically, it’s a very specialized thing. I mean, the 1031 in and of itself, is a major motivation and that, you know, kind of stands on its own to some extent. Taking that out of it and we’re talking about in you know, commercial real estate investing. It’s not for everybody. And fortunately for me, I like having conversations with people. And I’m happy to do it. And, you know, if my batting average is 100 maybe, you know, I don’t know if that’s all star game territory or not, but I, you know, certainly at that rate, if somebody wanted to do it, it has to make sense. It’s a phenomenon known as suitability. It’s very important, of course, when you deal in securities, because that is kind of the universe that that we dwell in. And so whether it be present, or in the past that always factored in. And, you know, for me, it’s really just a matter and it always has been of established, establishing a relationship with an investor, kind of knowing where they’re coming from. And then kind of seeing where it goes that it’s very easy, you know, to know that generally speaking, people would like, you know, when we, you know, just because of certain things we can’t get into specifics of it, but people want higher returns lower risk And they want to make profits. That’s easy to know, as a general sense, all be it every deal. You know, a real estate deal, especially a private placement stands on its own. It comes with its own business plan and its own risk factors and they stand on their own. So that, again, is something that throughout my career on this side of the business is just really important. But yeah, I mean, I like having conversations. I like talking to people about, you know, what they’ve been doing with real estate, what they’re doing now, what they’d like to do in the future, how that fits into the big picture with their, you know, life plan, estate planning, things like that. And that all weighs in on, you know, if I can or can’t help them. And you know, and certainly there are times where I tell people I wish you the best and my you know, there’s nothing we can do. I just wish, I wish you well. Other times if people eventually do become my clients, then you know, we stay pretty close together, you know along the way.

J Darrin Gross 12:03

Got it. Well, let’s get into our topic here. And and, you know, today the the idea is to talk about Delaware Statutory Trust. But I’m wondering if you’d like to take a minute and talk just a little bit about 1031 exchanges, given the fact that they’re intimately related, as far as you know, where ones coming from and how they get to a Delaware Statutory Trust. Do you Is it fair to start from or maybe we start from somebody who has an investment, and they’ve had it for a long time and they’re, they’re facing either paying taxes, capital gains taxes, and recapturing dish depreciation, or they could do a 1031 exchange into a another property and or That that other property could be a Delaware statutory trust type type of structured property. How would you like to address that?

Jason Salmon 13:13

Yeah, I mean, I think you’re right on, I think we should start, kind of at the top level, the 1031 is kind of the linchpin of the whole thing. Delaware Statutory Trust fits within that if applicable, but, you know, they they’re not, you know, bound at the hip together, if you will. But, but you’re right. The 1031 exchange itself is called that because it’s section 1031 of the Internal Revenue Code. By the way, this is the point in the conversation where I have to say, I can’t give tax or legal advice because one should always consult their own CPA and attorney and guess how many times a day I say that, but the 1031, you know, effectively has, you know, some form of like, kind exchange so 1031 Like kind exchange for real estate. Like kind exchange has been around for decades. And really the genesis of this was regarding farmers, their land, their livestock equipment, all sorts of things with that, you know, played into this method of tax deferral. Now, fast forward, the modern era of the 1031 exchange was, I think, right around 79 came to be known as a Starker exchange. And that really laid out the groundwork for the framework for the 1031. As we know, it’s still today for real estate.

Now, mind you with a caveat there. There was some tax reform a few years ago, now 1031. That’s the whole light kind thing. That that like kind means real estate for real estate and I’ll dig in them in a second. But years ago, you could sell artwork and you could buy artwork. You could sell airplanes, and buy airplanes. You just couldn’t sell airplanes and buy real estate and you couldn’t sell real estate and buy artwork and things like that for 1031. So that’s interesting. But with tax reform, that all changed a little bit. The good news for for my industry and my clientele, is that the 1031 exchange for real estate has remained in tact. And that being said, what that means is like for like, so if somebody is an investor, a real estate investor, so again, primary residents, you can throw out the window that doesn’t count, but investment real estate that has been held for kind of that reason. And, you know, again, one should always consult their own CPA on whether or not the 1031 is a valid tool for them to use. But if somebody’s own investment, real estate, whether it be a rental home, a condominium, multi, a four Plex two family 300 units Commercial Property single tenant net leased and office building something was their family business and they sold it. And then they, you know, they sold the business and they maintain the real estate and then their landlord, all those sorts of things. If you’re a landlord in some way, shape or form, chances are, if you sell at some point, you might have the opportunity to do a 1031. And you were right on. So what you’re potentially deferring the taxes, you’re potentially deferring by doing a 1031 exchange are your long term capital gains. Your depreciation recapture tax at a rate of 25% state tax, if applicable, depending on where you live and where your real estate is, and then possibly even the 3.8% Medicare surtax, and there could even be other stuff on that. So it does add up, potentially. So those are the taxes that if you do the 1031 exchange the right way, you could potentially defer those taxes and what that means is when you sell You can’t take possession of the proceeds. You can’t take the money, you must enlist the services of a professional organization called the Qualified Intermediary. We call them to QI for short. And what happens is, they’re part of that transaction. So when you sell, they get the money, and they escrow it and they’re the ones that are enacting the mechanics of the 1031 exchange. So once that happens, let’s say somebody sells today, and their funds go to that QI and sit in escrow. There are two clocks that are ticking concurrently. One is a 45 day clock and one is a 180. And there’s a little there’s a but with that. One of them the 45 days is to identify replacement property, and we’ll get to that in a second. The other one is 180 days to close, or the due date for your taxes for which for the year in which your property was sold, whichever comes sooner.

So there and then there’s rules within for what you can and can identify and you know how many properties or the number and, and that’s kind of how that goes. But the light kind aspect means if you sell a condominium and you want to buy a ranch, you can do that. You sell a ranch and you want to buy an office building, you can do that. You sell the office building and you want to buy raw land, you can do that. You sell the land, and you want to buy an industrial building, you can do that. You sell the industrial building, and you want to buy, you know, a handful of rentals, you can do that you sell any of the above and beyond. You can do you want to buy do a DST or DSRs plural as replacement property, you can do that. And the reason that the Delaware statutory trust structurally is available as replacement property is through what’s called revenue ruling 2004 dash 86 and that put the Delaware Statutory Trust Which has been around the trust like any other just happens to be a Delaware Statutory Trust and they’ve been around for decades. It’s just that the use of it for the purpose of a like kind 1031 exchange came into being through this revenue ruling, which allows private high net worth accredited investors, it means that you have to meet certain network standards, either individually or as an entity can participate in these private equity real estate deals for 1031 exchange, and I have a lot of direct cash investors also, that just would rather be passive. And I guess we could, you know, I can I can stop there, just based on the 1031 and where DST is the Delaware statutory trust fits into it, because there’s a lot more to it, but you know, I’d like to be as efficient as possible. But

J Darrin Gross 19:50

Yeah, let’s just let’s kind of pause there just for a second. So that again, that the the starting point is if if you are in for The premise of our conversation primarily would be somebody that’s a, an investor currently has been for a period of time, I tend to find that this gains the interest of people who have been an investor for a longer period of time as opposed to somebody that bought something a year ago, and all of a sudden has, you know, potential gain with very little depreciation, I tend to find at least the conversations I’ve had with insurance clients. It really resonates with somebody who’s had a property for 20 plus years. You know, if it’s a residential property and they’ve had it for more than 27 and a half years, theoretically, their depreciation could be used up or, or, you know, a very minimal amount still be available based on recapitalisation. And when they when they face that way, What happens when we sell and realize that all of the years that they’ve been receiving the benefit of depreciation, they have to recapture all that, plus whatever the gain is from their basis. So if they’ve depreciated it, or you know, if they bought it for 100, and they sell for 300, or whatever that that number is you’ve got the long term capital gains plus the depreciation recapture. It’s a pretty significant tax amount. And, you know, so that’s, that’s where I think the the interest, you know, really starts the 1031. I appreciate you kind of laying that out, because those are the mechanics and I think that the thing that I’ve heard and I’d be curious to know if you have any additional insight, but I think there’s a lot of people that have heard of a 1031 but don’t always understand, you know, what’s involved. The best advice I’ve heard is that if you think you’re, you might want to do a 1031 that’s exactly the time you shouldn’t get A Qualified Intermediary to come to understand what’s needed in order to, you know, make it happen properly. You can’t wait till the Day of closing and say, I think I want to do a 1031 where you can get through, but it’s not advisable. I think that laying the groundwork for a successful is a better plan than just, you know, a minute or two before you’re signing.

Jason Salmon 22:26

I agree with that. Yeah, I mean, my experience, I’ve even had people come to us years in advance, because, you know, again, based on the fact that a major part of our business is the 1031. You know, we can kind of help map that out a little bit, just broad strokes, you know, kind of with the intent to maybe, you know, gain some focus on what, who’s who, and what’s what, what the, you know, timing should be, etc. But you’re right. I mean, certainly I’ve also had phone calls with people that said, You know, I want to do a 1031 and I sold last Week and my first question is, where’s the money? They’re like, to my bank account. I’m like, you gotta speak to your tax person. But, but you’re right, I mean, usually approaching a sale. One, you know, if they are planning properly, you know, would want to consider what, you know what might be next. I mean, you know, once somebody sells an event, you know, already has a contract to sell a property. I mean, depends how quick the closing is, but let’s just call it 30, 60 days, that should be ample time to consider, you know, what, what might be next. And I think that, you know, if nothing else, it’d be short sighted to say that they’re going to be buying additional investment, real estate, yet post tax with having had the ability to do a 1031 exchange all along. It’s really not that big of a deal because again, enlisting the help of professionals. This is a major major industry. It’s a big part of of real estate investing, with all the respect for people that might be hearing this for the first time, because they never needed a vehicle, like a 1031 exchange or never had to think about these things. It’s something that again, when you start considering what the potential tax liability is, when you tally all those numbers up that you were referencing a few minutes ago, it could be a pretty bitter pill to swallow. So, you know, those those, those are the things to consider. I mean, you know, are they going to stay in real estate? Do they have other things that they want to do? What are they looking to do post tax versus, you know, conducting the 1031 and then keeping those funds working for them, and hopefully throwing off some income, potentially.

And then, of course, you know, what’s, what’s the bigger picture? Are they, you know, are they looking to you know, kind of take the money and then pay their taxes and be done with real estate investing or you know, is this, again, kind of a long term strategy, multi generational, etc, etc, kind of what are they? What are they looking to accomplish in the grand grand scheme of things, but last minute, you know, it certainly is doable but not advisable.

J Darrin Gross 25:20

Right. You mentioned kind of the generational thing I guess, as a real estate investor myself, I’ve always thought of real estate as a long term play. And when I find that there’s a, there’s a large contingency of investors that are more syndication focused, that don’t necessarily recognize the nuance of depreciation. write off as as greatly as somebody that that has been in a single property for a long time. I’m kind of curious, do you have any sense of and I don’t need specifics, but I was just I don’t know if you can speak to this or not if you can’t so be it. As far as the the average person that comes to you, and the length of time that they’ve been in a property, is there any sense of that or a range? Can you speak to that at all?

Jason Salmon 26:17

I mean, yeah, I’ve been I’ve, I’ve seen people that have owned things for me. And you’re right on, by the way, because, again, the depreciation recapture, you know, it doesn’t necessarily kick in, you know, depreciation itself. It’s all about basis. So if one is working off of straight line depreciation for residential, it’s over a span of 27 and a half years in commercial 39 years. So, you know, depending on how long one is owned these properties, then it does have some bearing but somebody could certainly have owned something for only a handful of years, that just for one reason or another is highly appreciated. And as a result of that, you know, they might have a potentially huge tax burden just on the gains themself. That’s their own motivation.

But I think you’re also right. Many of my clients have owned their investment properties for quite some time. In fact, many of my clients also have done 1031’s, and they’re just coming to me on it kind of, never really, I don’t know if this is really terminology or not, but a, an a next generation of 1031. They 1031 before, you know from a property that’s long gone, they were in another property, they 1031 to get into that, and now they’re coming to me, because they want to diversify. They want to be hands off, they don’t want to chase tenants around or deal with asset management and timing the market for sale. And that’s kind of why people that’s motivation, people coming to me, but yeah, I mean, I’d say to Jeff, I’ve seen I’ve seen corporate documents that looked like they were made of dust before because that’s kind of part of our process to find kind of you know, accompanying documentation and this corporation went back to way back when, and indeed it had owned real estate. And then, you know, literally generationally getting passed through. But I’ve seen people that have owned real estate for 40 years, I’ve seen people that have owned real estate, for five and anywhere in between, and in the cases that I mentioned before, somebody could have just, you know, kind of hit it right. And in got an opportunity made a whole bunch of, of profits just off of the, you know, when they recently bought it and how they’re selling it. And, you know, they’re they have a motivation to do a 1031 because they believe it’s in their best interest. And, you know, they do it. So, but you’re right, the longer one owns the real estate, it’s the combination in many cases of the least the motivation is the depreciation recapture tax, which is, which is, you know, could be pretty painful. And then the and then the capital gains, and the other ones that we kind of mentioned a little bit earlier in this conversation, but it all adds up. I mean, it, you know, again, I don’t want to fight a number per se, but, you know, I guess really you just have to consider that if one has to pay their taxes by not doing a 1031 exchange. I mean, let’s just talk, you know, General numbers, if somebody sells something for a million dollars, and they have a potential tax liability of $300,000. You know, that’s, that’s significant, you know, if that’s what that person’s situation is, you know, if somebody is selling something for $5 million, and they have a seven figure potential tax liability. I mean, it’s really just a question of, you know, what the motivation incentive is to, you know, stay within the real estate universe. If one is able to, you know, to enact The 1031 exchange because again, those are significant numbers. I mean, in and of themselves are large numbers, but we’re talking about, you know, to continue to have that number working for you, or to just, you know, pay it in taxes, have it be water under the bridge and then go on to the next adventure. You know, I can’t make that decision for people. But I certainly know from my day to day, what I think, you know, makes sense, but not always people have to make that decision for themselves. They have to consult with their, their advisors on, you know, on how that looks. And then certainly from a professional standpoint, it’s part of my job to help with that process as well.

J Darrin Gross 30:41

Got it. What I asked you quick about the, you know, part of the 1031 exchange requires that the seller of the property, be the buyer of the the replacement property if I’m selling one property and I own it as an individual or an LLC. However, the replacement property, I’ve got to have the same chain of title, the, the, you know, entity a or or individual a has to be the buyer on the second property is individual layer or LLC or entity a. Can you explain how on a property with a Delaware Statutory Trust and maybe we should back up for one second, just explain what is what kind of properties are held in a Delaware Statutory Trusts and then talk about the, the the way you know, how one’s able to maintain that, that seller, buyer status?

Jason Salmon 31:51

Yeah, I’ll make it very easy. I’ll we’ll address that question straightforwardly, and then I’ll build that out. With respect for Delaware Statutory Trust. Fact of the matter is in the paperwork that I have for my clients as investors, there’s a place if you can own real estate any which way you can own real estate within a Delaware Statutory Trust in that same way. If it’s a corporation, I have clients that are corporations, if you’re an LLC, I have clients that are LLC’s, partnership, joint tenants with rights of survivorship, individual husband and wife, if you can own real estate in that way, and that’s how you sold your real estate. And that’s how you need to buy your real estate as replacement property. That’s, that’s a okay. That’s there’s a place for that it works the exact same way. But for the fact that you own what’s considered a beneficial interest in a trust a Delaware Statutory Trust. So you go in buying the replacement property if you buy into a DST or DSTs plural, case by case in that exact same way so that that would be no issue. No problem. You know, I probably right now I have clients of all stripes that are those types of entities and individuals that I just mentioned a few seconds back. As far as the structure itself, the Delaware statutory trust in and of itself is a trust. And that is how the real estate is owned. Now, somebody doesn’t come to me and say I’m investing with Jason I’m investing in in a DST, and then magically, they are in, you know, a bucket, or a portfolio of various real estate. That’s not quite how it is. So with the Delaware Statutory Trust, again, it’s a structure the trust owns, or it’s the trust that owns a real estate, and everybody in it, as fractional owners are members of that trust. So a DST itself could be a single property, it could be a portfolio of two properties, three, eight, I’ve even seen 20 plus properties in one DST. That doesn’t happen every day. Because again, just to frame this, our company we work with probably at this point over 30. asset managers, very large companies, they’re the ones that are buying the real estate with their money in the format of a Delaware Statutory Trust,

That and again, they could be four properties as one Delaware statutory trust, it could be a single property. And they’re pretty large, I mean, 10s of most cases, 10s of millions of dollars. I’ve had properties deals that were hundreds of million. And I have had modest ones that, you know, some very high net worth investors have no problem owning a five or $10 million property. But the beauty of the dollar is that story trust is the ability to diversify, and also to be hands off and passive. So those are the biggies and maybe we’ll get into that a little bit later. But these firms firms that we work with go out they buy the real estate. And the deal is the deal is the deal. If the single property there’s nothing happening underneath it, that is what the investor ultimately is investing in, albeit fractionally, but just because somebody goes out and puts together a DST and buys a 300 unit apartment complex that way, or a single tenant net lease, Walgreens, or a corporate headquarters building, to a fortune 500 company or whatever, because again, they could be various asset classes. It could be, you know, let me let me touch on that also could be multifamily self storage. I eat these days you don’t really see traditional retail like what we call anchored retail kind of Neighborhood Center, which means that you have a grocery and a little bit of inline space in line space being like your barber shop pizzeria, nail place, that kind of thing. Community Center, that’s where you have a few more big boxes, but you all We’ll have that in line space that we referenced again, you know, you name it, maybe a Chinese restaurant, pizzeria nail place, Hallmark store, whatever, whatever it might be. And then you get into the power centers, which is all the big boxes. And then you get into what we call regional centers, and that’s malls. But I can tell you from experience, it’s been a really long time, since I’ve seen anything like that, at least in what I would consider the mainstream DST market years. And again, for obvious reasons, but single tenant net lease real estate, like a pharmacy, or like a medical building, or like a distribution center. These are the types of things that might be considered kind of pseudo retail. But really what you’re investing in when you’re investing with that, if you have a corporate guarantee, is the creditworthiness of the tenant and the lease behind it. Because that’s just kind of a different thing. And you do see that from time to time with Delaware statutory trust many people like like, just buy, you know, net lease real estate or triple net Real Estate’s true, but the great thing about when, when I do my job is I know that I can help my clients to diversify. And instead of having to have any concentration risk and buy the whole thing, they can own a portion of it and also other things. So, you know, multifamily Self Storage, like I mentioned, you do see more industrial and distribution now more than ever, certainly healthcare more now than ever. I think the last statistic that I remember was 10,000 baby boomers retiring every day. So obviously, it’s important health care related, just depends on the sign of, you know, the times. But, you know, again, it’s real estate, there’s always risks, and you just have to consider kind of how these are looking.

You know, as far as the real estate is concerned, one important point about the 1031 is that one has to buy equal or greater value. We talked about the light kind . With 1031 exchange you have to buy equal or greater value. So if you sell a property for a million dollars, let’s just assume without a mortgage on it, you have to buy a million dollars or greater of total real estate value example be, you sell a property for a million dollars and you pay a mortgage back of $400,000. Your $600,000 goes and sits in escrow with your Qualified Intermediary, that 600,000 still has to buy a million dollars equal or greater, to pull off the 1031. Otherwise, it’s called boot. And specifically in the case I mentioned mortgage boot, and that’s taxable. So you have to buy equal or greater value with the Delaware statutory trust. These DSPs come already, either with or without debt already attached to them. So it’s really important for people doing a 1031 somebody needs a mortgage. The great thing about DST is is it’s already attached to it, you know, any given deal that already have the dead on it, and the great Further is that it’s not recourse to the investor so they don’t have to sign for it. So that’s again, another way to kind of maybe potentially alleviate a burden for people and sort of free themselves to kind of live their life moving forward, you know, and on down the line. So it’s really important to note that structurally, with the DST, if there’s debt on it, it’s not recourse. The deals either come with or without debt. And the way our firm is set up is we work with, like I said, a few minutes ago, over 30 firms, they’re going out and buying these very large real estate deals. And then just because they have to deal doesn’t mean that it sees the light of day at least from our firm. So they come to us and we conduct a very stringent and thorough due diligence process. And when that through either the deal will or won’t be offered to our clients. If the deal does not pass our due diligence we do not offer to our clients. If a deal passes the due diligence, then it’s one of you know, Maybe 30, 40, even 50 and beyond deals at any given time that one of my clients has the opportunity to participate in. So, you know, it’s really a very collaborative decision. When I work with my clients, we talk about the deals, we talk about who’s running it, we talk about what their exit strategy is, it’s that’s another important point. You don’t go into these deals, and then you’re in them forever. There’s, you know, there’s an exit strategy, because these are 1031 vehicles. It’s not just like, you go in and then, you know, wake me up in 30 years, it’s not really how it goes. Usually, when these asset managers own the real estate, they might, you know, put an exit strategy in their own that they want to sell in seven to 10 years, or they want to sell in five to seven years. So people would know going in kind of what we’re looking at here, as far as what they have in mind to sell but ultimately, because these are passive investment Is the asset manager running the deal that makes the decision on when and how to sell? So, that was really long answer to a short question, frankly. And I know you asked me about structurally how it works. So entity wise, however, somebody owns their real estate that they sell, that’s if they do DST’s or frankly anything else, that’s probably that’s gonna be how they buy their replacement property. When it comes to the Delaware Statutory Trust itself. You’re in, you own a fractional interest, it’s called a beneficial ownership or beneficial interest. It’s units of the larger real estate deal.

J Darrin Gross 41:41

Got it? Now, I appreciate you running down that because I if you hadn’t I was going to ask you and I think the the thing that I wanted to reiterate there was that Kay Properties is not a deal sponsor but more of a vehicle to to provide access to the different deals, is that correct?

Jason Salmon 42:03

That’s right. Yeah. Yeah. So we work with these firms that are putting out, maybe between one or three, four or five even deals at a time, maybe beyond maybe none. Maybe they’re just waiting. And, and so when, when I’m working with clients, I’m, you know, while I have relationships with these managers, and I know who they are, I know that humans behind, you know, what they’re doing, why the way that our company is set up, is that, you know, we really work with our investors, because that’s kind of what we’re looking at here. It’s, that’s the role that that’s the pure relationship. It’s between us and the investor. Looking at these other deals, I mean, certainly these asset managers would love all of our clients to go into their deals, you know, every every single time but that’s just not how it works. It’s a phenomenon that we call suitability. So it’s really just the spirit of knowing that just because there’s a deal that’s out there doesn’t mean that it’s the best deal for every person, it just would be the right deal at the right time for the right person. And that’s part of our process, over time of getting to know people, and investors, when in the same for what they’re trying to do, to find them, the right deals to go into. And that’s, I think, a great advantage of our company and the platform we have, because we have so many relationships with so many of these asset managers to have the options, you know, to find the one that’s, you know, the one or the few that are just right, I mean, the, you know, somebody could if I had 30 deals at any given time, just because somebody wanted to diversify into those 30 deals, doesn’t mean that that’s the the right idea of the best idea. Because diversification for the sake of doing it is his sound, and a big part of my business and what I like my clients to accomplish. But just to go into deals to go into an extra deal, if that extra deal doesn’t make sense, then it doesn’t make sense. So don’t do it. You know. So that’s, that’s the thing. But for one reason or another, the deals that we have, I probably have clients in, in most, you know, as they come and go, you know, for one reason or another, again, it’s kind of the right thing at the right time for the right investor. So, you know that that’s a big part of it. But the place that we, the role that we play, is, you know, it’s securities. So that’s how I do what I do, but I don’t do stocks, or bonds or mutual funds. I do all private equity real estate all the time, with a bit of a specialization for 1031 exchange. But I do have a good amount of direct cash investors that prefer to own their real estate through, you know, this destructure in this channel

J Darrin Gross 45:04

A couple of questions. You know, and I think this relates based on the fact that you guys continually have sponsors providing you new deals that they’re trying to fund and or that are available for the DST investor to get into in the one of the important things I guess to understand is that as somebody gets into one, and you mentioned the prospectus, and the plan is to get out eventually, the important the importance of the fact that you will have additional opportunities for them when that time comes to replace that so that they won’t be faced with this, you know, what do I do kind of thing, that there’s the ability to continually roll that money and maintain that deferral on the tax from the original investment?

Jason Salmon 45:54

Yes. So, that With that said, You’re exactly right. So it’s Really important to note that for people that participate in Delaware statutory trust for their 1031 exchange, one of the great things about you know, the the way that this has been been put in place to revenue ruling 2004 dash 86 is you can 1031 in, and you can 1031 out and that’s when it ultimately sells. So when and I just had this happen three weeks ago, I think at this point at a handful of clients and a deal. It was actually sold after three years with a profit for profit. And, and leading up to that sale the investors in that deal. were contacted by an investor relations from the asset manager running it saying, hey, look, you know, it’s selling, you know, this is the timeline. If you’d like to do a like kind exchange 1031 exchange, please relay the contact information for your Qualified Intermediary, and that’s where they send the proceeds at closing. But further still, it’s really important to know Note that if one chooses to vote to go that route, it’s not they don’t, they’re not stuck in DST’s. So a few things with that one, if they don’t want to do another 1031, they can take their money and pay their taxes

Two, if they choose to do a 1031, First one doesn’t automatically roll into whatever deal is next. People might say that Yeah, just put me in whatever this asset managers neck deals are or dealers, that is not how it works, you actually have to go out to go back in so your money still does have to go to a Qualified Intermediary. And mechanically, you’ve got to do the 1031 exchange, kind of like we talked about earlier. They don’t put your money to a Qualified Intermediary and say, guess what, we sold it. You’re in a 1031. They don’t say hey, we sold it and now you have to pay your taxes. So they fully reach out, to let people at you know to ask them how they want to go next. And so with that said, if somebody doesn’t want to do dfts anymore, and they’re in a 1031, they can go buy another rental, you know, deal with their tenants, they can go buy a commercial property, you can do another 1031 when a DST sells, but in my experience, you know, this is that the industry has only grown. And, you know, with enough time and planning, it just gives people more and more options. So, I, you know, nobody can I had a crystal ball, you know, be a whole different story and nobody knows what the future will hold. But, you know, based on experience of mine, I have clients that have come out of DST’s that have sold for them. There have been deals, you know, and plenty of them as options. You know, again, the mechanics still go and apply. You know, do you Or don’t you need debt for your 1031? You know, what is the timing? What are the deals that are available, how much equity is left in the deals, you know, based on the timing and, you know, then we talk about the 45 days and the other timeline. So, those are all things that when we work with clients, we figure it out. But one does have the ability when a DST sells to do a 1031. And it is their option, how they want to go next. But I think you would ask about availability, and DSTs and 1031 vehicles for when they come out. In my experience. You know, every single time I’ve had somebody come out of a DST, there’s been, you know, at least a few dozen deals as as options generally speaking,

J Darrin Gross 49:44

Right. The one thing we haven’t really talked about, we you mentioned about the equal or greater then can you speak a little bit to the individual that has they’ve sell one property, it’s, say, $500,000 they’ve got this one deal that they want to do that’s maybe 300,000 they’ve got this balanced this 200 that they need to do something with or pay the tax. Can you speak a little bit to that?

Jason Salmon 50:16

Yeah, I mean, that’s, that’s, that happens from time to time. And it’s, I think that’s a really valuable tool for people. You know, to maybe can, you know, if you will have their cake and eat it too. I mean, you’re exactly right, somebody sells something for 500 they have their heart set on something for 300 placing the the remaining 200 could get, you know, may extend themselves just based on what they want or need. And rather than have to meet, you know, rather than that the boot in unplaced, 1031 funds, the dfts are really valuable for being the right They’re for that. So and I have that happen all the time, where people are buying something on their own people even use bsts as a backup, just in case, as long as they kind of follow the 1031 rules, which is nuanced. And, you know, we could probably speak for an hour and a half about that. But, um, yeah, I mean, your example 500 with, you know, somebody buy something for 300. And they need to place the 200, then, you know, we just kind of, you know, lay everything out, we determine what’s what, you know, figure out how much certainty of closing that they might have on that piece, but they’re buying what the timeline is. And then, you know, with that $200,000, figure out if they want to go into a deal or two.

And, you know, like I said, it happens pretty regularly for people that do that, although I will say once people start getting a sense of the passive nature of it, if they’ve kind of reached that point in their life where they just don’t want to have to do do with it all? Or they don’t want to have to deal with the stress of will or won’t they be able to close? And you know, will the seller perform while the seller tried to retrrade them, you know, at the 11th hour, even after they’ve identified, sometimes people once, you know, once they learn about dfts and get a comfort level with it, you know, do make a decision to kind of go that route, but it’s not the end all be all, anything mean, if somebody needs to buy something for, you know, $3 million, they’ve sold something for 3 million and they find something for 2.9 and they have $100,000 they’re going to be taxed on and if they don’t do it 1031 you know, I’m Johnny on the spot, you know, with situations like that. It’s a Okay, it works out. I see it all the time. And and it’s certainly doable.

J Darrin Gross 52:48

Well, and you mentioned DST as a backup, I think that’s something that’s worth reiterating. Given the the timeline that you referenced earlier and that 45 days to Identify, and the identification, if I understand correctly is you have to identify three properties, or three, three options. And then you have to close from those three, you know, you can’t, you know, bring 10 more and and it’s it’s there is a limitation on the number and the options available. Is that said, your understanding or is it consistent with what you were looking for?

Jason Salmon 53:28

Yeah, that one of the rules is the three property rule that basically says that one can identify up to three properties, as long as they can close on one, two or three, as long as they’ve identified them. And they by equal or greater value, another one of the rules, which by the way, they don’t all need to be followed simultaneously. It’s one or the other, the other. Another rule is called the 200% rule. And that basically says you can identify up to 200% of the value Your relinquished property. So that, you know, that does play into it. Sometimes with people that do DSTs when you think about it, you know, if you’re if you sold something for $2 million, and you identify three properties that are $2 million, that’s 6 million right there, use the 200% rule, you’re at 4 million. So it really just depends on kind of how you’re looking, and kind of really what you’re trying to do. But if you sold something for 2 million, and you’ve identified one property for 1,000,002 properties for 500, then, you know, it just there’s some variants there. There’s also another role called the 95%. Basically, you can identify whatever you want, but you must close on 95% of it. So that’s a tricky one. And the conventional wisdom is that that one is not often used, but but it is sometimes. So it just depends. We have pretty deep familiarity with how these rules are applied. With the timelines. So, if somebody is using a backup, if somebody is using DSTs, these are things that do factor and again, nuances like does the deal have debt or not have debt? Does the investor need or not need that for their 1031? You know, I have somebody right now, who is going into a DST with debt, but he’s buying a property that’s hands on without that. So that, you know, probably because of what I mentioned a little earlier in this conversation about the financing, be not non recourse to the investor. And this particular gentleman needs debt for his 1031 exchange. So, you know, he’s, that’s how he’s going. You know, I’ve, I’ve had, you know, I’ve seen a lot of different scenarios, based on my experience. Our firm helps clients by hundreds and hundreds of millions of dollars of real estate year over year over a year, and we kind of we feel a lot different situations. So, you know, I’ve seen each of those rules applied for 1031 exchange for identification. And, you know, as long as there’s kind of open dialogue about what the investor is trying to accomplish, you know, we can we can pretty much let them know, you know, what fits within the parameters of 1031 exchange, and identification and, and what’s, you know, not possible. So we will help with that we work with people as well.

J Darrin Gross 56:29

Yeah. Jason, if we could I unless there’s something that you feel like we’ve left out, I’d like to shift gears here. Are we do you think we’re at a good point there? I mean, based on the we’ve touched on the 1031. We’ve kind of walked through the different asset classes and the opportunities and DSTs Is there anything that that we that we should have the you you were waiting for me to ask you about?

Jason Salmon 56:58

No, I think we’ve covered a lot I mean, I think we, you know, maybe listeners can tell I, you know, I could probably talk about, you know, this stuff, you know, probably for another 10 hours, which I do, usually day, day by day. So, but you you cover the important points. I mean, it’s, uh, you know, it’s a very specific thing. It’s not that easy a topic, you know, to just automatically conceptualize, you know, commit to memory and understand, and that’s why when we work with our clients, it’s education is big for us. So, you know, that’s a process leading up to everything. And so I, you know, certainly I’ll make myself available to anybody that wants to know more about it. But I think we covered a ton of information. I think we, you know, we laid out kind of how a 1031 exchange is, we laid out how the DSTs fall within it, and how it might apply For real estate investors, and I think we’ve covered a tremendous amount of territory on this call.

J Darrin Gross 58:06

Agreed. Jason, if we could, I would like to shift gears here for a second. As I mentioned to you earlier by day, I’m an insurance broker, and they work with my clients to assess risk and determine what to do with the risk. There’s three different strategies that we typically consider when managing risk. The first is can we avoid the risk? Next, if we realize we can’t avoid it, is there any way to minimize the risk? And then if neither of those are options, we look to see if we can transfer the risk and insurance is typically the vehicle to transfer the risk. And I like to ask my guests if they can take a look at their situation. You can look at both your you know your professional situation and or your clients. And if you can identify and speak to what you consider to be the biggest risk. And for clarity, I just want to make certain you understand I’m not necessarily looking for an insurance related answer. So, if you are willing, I’d like to ask you, Jason salmon. What is the biggest risk?

Jason Salmon 59:25

Well, the biggest risk with any investment is losing your money. I mean, that’s really it. So then the question becomes how to mitigate that from there. So you talk about avoidance. And again, I’m compelled to tell people that anytime they make investments in private placements, there are risks, including what I just mentioned, no guarantee of returns, no guarantee of profits, no guarantee against losses and one can lose their money. So the way to avoid that is by not investing and you know, putting it onto the mattress, I guess, and then you have to figure out you know, what the match protected by, you know, because anytime it gets outside of, you know, under your thumb, you know, that’s, that’s one thing as far as minimizing and and, you know mitigating for me and our clients is diversification. So, you know, when one has all their eggs in one basket, they then are incurring concentration risk. So then again just because one diversifies doesn’t mean that they’re avoiding the risk, but they are spreading that risk around.

So we love the fact that DSTs give most investors the opportunity to diversify. And, you know, that’s, that’s a big motivator, and that’s part of my day to day and I remind people of that all the time. Beyond that, though, one also has to determine what their own appetite is for risk. I mean, I’ve had people tell me that they’re, you know, in a great place in life and they want to bring it on, you know, so we talked about with these deals, any of them, it’s a risk adjusted return. Now, there are deals and I don’t want to get into returns, you know, it’s just not something that we can do through this venue. But, you know, returns could be all over the board. So that’s, you know, your, what your annual returns are, and it’s a risk adjusted return. But for us, you know, it’s about you know, when you talk about diversification, we’re talking about real estate, so diversify in some cases across asset classes, type of real estate, diversify across geography. In some cases, some people love certain geography, you know, it’s okay. It’s things we talked about, and diversify across asset manager, different people running the deal. Sometimes people just like certain deals that certain asset managers are running. So That’s different ways and different permutations than that when we work with clients, we can mix and match to kind of try to mitigate that risk by way of diversification. But just because people diversify doesn’t mean that they’re protected from risk. And as far as transferring. You know, for us, I can’t really claim to be able to do that, because there is inherent risk, you know, with private placements, it is available to accredited investors. So one, you know, has to have be at a certain point in life, and in the spirit of that has to be comfortable with the potential for loss. And that’s why you hear all that, you know, all those disclaimers disclosures with any investing, whether you see it kind of on a screen, or you’re working with your friendly neighborhood, financial person, these are all parts of it. And I’m sure this is part of your day to day, but yeah, I mean, there’s risk, but hopefully, you know, again, through understanding, I think that’s the most important thing, know what you’re getting into, you know, manage the risk by really understanding what’s behind it. For us. It’s real estate. So the great thing is, you know, I oversimplify it sometimes, but really, it’s just a tenant or tenants in a building or buildings and their ability to pay their rent. And or, you know, does the deal have debt on it? Could there be a foreclosure? That could be trouble, if that’s the situation? So these are things that we talked about, what are the chances that happening? Something on, you know, without alone on it, you know, what does that mean? What’s, what’s kind of what are some worst case scenarios from a real estate standpoint, you know, as they weigh into each of these respective investments, but again, with any investment, you know, one does have the risk of losing principal.

J Darrin Gross 1:03:57

Now, that’s well said and, and It’s always a risk. So I appreciate you sharing that. Jason, where can listeners go if they’d like to learn more or connect with you?

Jason Salmon 1:04:08

Yeah, I’m happy to have direct dialogue with anybody, anytime. The most efficient way to get to me and hopefully that will get us to the point to get on the phone but simply emailing me at Jason@KPI1031.com is the best way to find me and to you know, find time to exchange telephone numbers to get on a call, talk about the situation and you know, kind of figure out if we if we can help also our website is KPI1031.com.

J Darrin Gross 1:04:50

Yeah. Jason, I want to say thanks for taking the time today. I’ve enjoyed our time and learned a lot and I hope we can Do it again soon.

Jason Salmon 1:05:02

Well, you’re welcome and thank you for having me. I appreciate it too. And I thought it was a great way to spend, you know, some time talking about my day to day. So thank you.

J Darrin Gross 1:05:14

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