Archives for February 2021

Investing in Midwest Mobile Home Parks with Jonathan Tuttle – CRE PN #289

Jonathan Tuttle 0:00

Allow the big Wallstreet of the biggest private equity groups and sovereign wealth funds are coming into our space because it’s been so resilient and especially this year too. It’s about a 93% collection rate reported by institutional owners but go back to a question mom and pop mostly so that’s another way to add value a lot of these people they’re not super tech you know they’ve had these parts for you know, 40-50 years they’re worth every parks worth a few million if not more, obviously a lot more they’ve you know, the cash flowing few hundred thousand year they don’t really they’re not really super focused on having you know, QuickBooks and, you know, Facebook ads to like bring in new residents. They’re still you know, this is what got me here I’m sticking to it. So when you take over you could bring in some management efficiencies technology efficiencies.

Announcer 0:44

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

J Darrin Gross 1:03

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

Today, my guest is Jonathan Tuttle. Jonathan is the principal at Midwest Park capital, a mobile home park fund. And in just a minute, we’re going to speak with Jonathan about trends and opportunities going forward in 2021 and beyond, in commercial real estate. But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us and we’d love if you would you would do the following. You can subscribe, like and share. And please consider leaving a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Jonathan, welcome to CRE PN Radio.

Jonathan Tuttle 2:24

Thank you so much for having me. I’m excited to be here.

J Darrin Gross 2:27

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

Jonathan Tuttle 2:36

Sure, sure. Yeah, it’s a pretty extensive real estate background. I grew up in a real estate family. My dad was a general contractor. So he built around 8283 Custom Homes, single family. And so I was a kid growing up, he had the real estate brokerage offices, yeah, three of those. They developed custom homes. And then also he did flips with investors. So basically, as a little kid, I’d be playing with the staplers in the office or being on the job sites. And even as a, you know, as I got grew up, I’d work on the job sites like clean the dumpsters and fill the dumpsters, you know, like all the trash and being all around real estate from the ground up. You. You pick up some things over time. On Yep.

J Darrin Gross 3:21

So you started off on the job site, kind of osmosis, kind of watching your dad and and just taking it in. That’s That’s great. So now I’ve got you down is the principal of Midwest mobile. What was it? Say mid? I’m sorry, Midwest, Park capital. mobile home park fund. What are you doing there?

Jonathan Tuttle 3:49

Yeah, great questions. Basically, we’re acquiring a portfolio of secondary tertiary market mobile homes parks with a focus obviously with as the title says, Midwest we’re also we also like Texas and Tennessee because they have strong growth, growth drivers and great economies. Basically, the goal is to help keep affordable housing for the everyday Americans while also providing a credit investors a nice stable return. So

J Darrin Gross 4:17

Got it. So do me a favor and compare the mobile home parks to some of the other asset classes. That you know, I know, a lot of times it seems like we talked with people about, quote, multifamily, the traditional sticks. You know, one one building kind of thing. Can you kind of break it down for us kind of compare and contrast? How the two are different from an investor standpoint?

Jonathan Tuttle 4:48

Sure. Yeah, that’s great question, because we our closest similarity is definitely multifamily. What’s gonna be like C class apartments most likely. The challenges it’s the same premise, the whole Ideally, when you’re buying a mobile home park, there is a little complications, one of the things that differentiates us is we have a lot of like older laws like grandfather laws, because it’s called legally not legal but non conforming, for zoning. So a lot of these were built in the 50s 60s and 70s. And the laws have changed, they’ve kind of become, you know, some of them have somw stigma. And so suddenly, cities don’t, or towns don’t want parks in their, you know, in their communities. So that’s the one biggest differentiator because harbor buildings, you could pretty much as long as they have the zoning, it’s pretty easy to get approval, comparatively, there’s only about 10, or about maybe 10, new depart developments in the last 20 years. And then there’s some been a few more, they’re kind of under the table, but they’re usually RV conversion, so has an RV component or has a self storage, it has some other but a strictly mobile home park, it’s almost impossible to get the zoning and it’s also not really economically viable. Unlike you know, what the family where you’d actually develop it, you bring in the market, and you fill out the units. And you know, it fills up right away mobile home parks is kind of like building a subdivision if you had to do it from the ground up, because you have to bring in all these, you know, manufactured housing, and it’s not cheap, and that the new the average price of a new mobile home is about $80,000. So you can just imagine if you have two or 300, lots, you know, it’s multifamily. If you’re doing ground up development, it’s a lot better play. But our true value is just buying a park that’s already, which is almost all of them is buying a park that’s already cash flowing. And that’s where you could you know, you’d already know the cash flow. And actually right now, to kind of give you some context, is the first time ever that Fannie Freddie, so Fannie, Freddie, obviously, there’s financing the government backs in the cmbs and traditional banks, but for the first time ever, Fannie and Freddie, they have to allocate about 30 or 35%. Towards affordable housing. So who’s available? 10 years, it was almost impossible to get. Now

J Darrin Gross 7:06

you can you back up just one second, you were the audio broke down a little bit, I just wanna make sure we get this. You were talking about Fannie and Freddie, and you mentioned 30%, but I didn’t catch the balance of that

Jonathan Tuttle 7:18

about 30% is allocated towards affordable housing. So which is a new thing that passed with a, I think was the cares act or when they act in 2017. I don’t remember the exact name. But it’s the first time in history that Fannie and Freddie’s financing terms are better with mobile home parks than they are with multifamily. So we’re seeing high twos, low threes, nonrecourse. And it’s about, you know, I think we’re just a little bit slightly better than multifamily right now. So again, that type of financing so we have those nice spreads. And that’s where you get the cash and cash. You know, if you have a six and half – seven cap, which is kind of what you’re seeing for parks nowadays, depends obviously your market and the quality of the asset, you get that nice teen cash and cash if not a little bit higher. So we’re IRR eventually, too, as well. So that’s another aspect of you know, the zoning, it’s almost impossible to evolve that. And just as you know, a lot of different laws with the city, the city kind of is your biggest challenge, usually because they have, you know, their own preferences of what they want for, you know, type of commercial properties. They want their neighborhood because, you know, mobile home parks don’t necessarily have like the Greatest Name. You know, people kind of have the stigma behind it. But if you’ve driven through some of them. There’s a lot of really nice ones. I mean, most of them if it’s maintained, right, it’s a nice asset.

J Darrin Gross 8:44

Got it. So your strategy is to to go into these markets. You mentioned secondary and tertiary markets. Midwest. Is it a value add play? I mean, I typically I think of, you know, from a value add standpoint, it seems like there’s something you’re updating certain aspects, you know, and, you know, making it a more desirable place to where tenants are willing to pay more thereby increasing the the cash or the income. Can you describe what a value or what is the the strategy is basically just take it over and then refinance or can you break it down a little bit? Sure, sure.

Jonathan Tuttle 9:27

The biggest probably, there’s a couple of key components to really bringing the value of the park and bringing the noi up. The first major is if the water and sewer are of the tenant, if it’s built back to the part. You want to bill it back to if it’s allowed. You bill it back to the residents. So right there, that’s your biggest expense. One of the first ways you could bring it in, obviously doing little a cap x, like the signage, you know, amenities You know the you know the roads, trees depending on where you’re at cutting down the tree is to make sure there’s not a trees falling down on the houses because a good thing would be also like make the park look like you know beautified three obviously raising the rents ethically raising the rents taxes always go up most likely unless there’s some some because they haven’t mostly the assessors Haven’t you know, they don’t have any idea what this thing’s really worth. So yeah, being able to you know, raise the rents you know, ethically and then just a bit better management of the asset so faster like if there’s any vacancies, making sure you get them on you know, market them correctly online and having your manager on top making sure you bring in the right tenants. The average tenant says 14 years this is another competitive you know, on average because typically what happens mobile home mobile home owners in the country they typically own their actual unit so yeah, that tenant like two or three especially like apartment buildings are hopping to the next apartment building or the newer apartment building. So because it’s there’s nothing cheaper than mobile homes. So and then the last

up for the value add obviously at the last moment info loner and Val can

J Darrin Gross 11:30

Hold on, can you hear me? The the audio is breaking down. You said, “the last thing”, what was the last thing?

Jonathan Tuttle 11:36

The infil..

J Darrin Gross 11:38

The infill.

Jonathan Tuttle 11:38

Yeah. So bringing in, sorry about my internet Comcast, give em a little word of mouth.

J Darrin Gross 11:45

No, I just wanna make sure it sounded like is important. I want to make sure we got

Jonathan Tuttle 11:48

Yeah, yeah. So the infill? Yeah, that’s infill. Easiest way to bring it wasn’t easy, but bringing it in empty lots or lots bringing in new units. Because every unit you bring in depends on the valuation the park and obviously the area. It’s 30, or 30 to 50,000 equity to the asset plus the cash flow. So right now there’s a short like everyone’s trying to buy the older units depending on you know, the age of the park and what the homes are, but because you get the homes for so much cheaper. So if you’re buying a new home, it’s $80,000. But if you get for $20,000 houses, obviously that’s a really value add. So,

J Darrin Gross 12:27

Got it in these markets. Do you find that most of the parks are managed professionally or they managed by mom and pops?

Jonathan Tuttle 12:37

Mostly? Yeah, that’s a great question. The industry is about 92 to 93 mom owned, mom and pop and Blackstone, which is the biggest private equity. Paolo, a lot of the big Wall Street are the biggest private equity groups and sovereign wealth funds are coming into our space because it’s been so resilient. And especially this year, too. It’s about a 93% collection rate reported by institutional owners. But going back to a question mom and pop mostly so that’s another way to add value a lot of these people they’re not super tech, you know, they’ve had these parks for, you know, 40-50 years they’re worth every parks worth a few million if not more, obviously a lot more. They’ve you know, the cash flowing few hundred thousand year, they don’t really they’re not really super focused on having you know, QuickBooks and, you know, Facebook ads to like, bring in new residents are still, you know, this is what got me here, I’m sticking to it. So when you take over, you could bring in some management efficiencies, technology efficiencies, like rent rent managers, like an online billing system, which is really efficient and keeping track because obviously, if you’re not keeping track, some payments could slip through. And even though things are getting paid mom and pops, you know, they’re they’ve got their money they don’t really care about you come in as a good more seasoned investor, that’s one of the things you definitely improve upon is the technology aspect.

J Darrin Gross 13:54

guys got it. So when you purchase the park I’m assuming most of the the actual units are owned by the resident’s. Correct?

Jonathan Tuttle 14:08

The ones we go for? Yeah, it’s called like a land lease community. But there’s about 12 million mobile homes in the mix. But the parks we acquire are definitely we want we want to have that offer hands especially to if you’re doing for institutional going back to Fannie and Freddie financing. They will only allow up to like 20 to 25 units to be owned by the park. And that’s an actually that’s another way to acquire Park. Getting those off your books is another great way to add you know the value add. So those are some techniques you could use.

J Darrin Gross 14:40

Got it. And you mentioned that the the communities, the local cities, and they’re not really gung ho on these things. I can see that being an issue and like a primary or a larger city is you find it all the way down and tertiary markets as well?

Jonathan Tuttle 14:58

Yeah, those actually And that’s part of the due diligence, we’re taking over property talking to when we looking at property, we boots on the ground walk in, like we’re our Grandma, our mom’s moving in. So we get a voice for the residents, what houses community like, not just what the owner says, but actually what the residents say, cuz I’ll actually give you a paint a better picture, go to the local police, local government see what their, their viewpoint is. But something if you’re in the tertiary markets we’re looking at, we’re also looking at bigger parks like 75 to 250 units. But if you have like a 30 unit Park and a small town is something small towns think they own, you know, it’s it’s like that saying, we’re here like, like, if you’re in a major city, and you’re driving 10 miles and over their name, you’ll look at you. But if you drive in a small town that has like, 5000 people, and you’re going five miles over, it’s like, that’s their big highlight of the day, you know, the big crime of the day, it’s kind of the same premise with the park industry, the small, really small town a 30 unit park, and it’s somebody on their high horse, and they kind of feel powerful. So that’s kind of that’s kind of what we know, in our industry here. So get rid of that son, it’s crazy.

J Darrin Gross 16:07

So on the the acquisition and kind of the due diligence, you mentioned, you kind of you you know, you do some boots on the ground, you talk with the residents talk with the community. Describe what what are some of the things you look for in a in the physical due diligence, since you’re not really buying the structures, right, what what else? Kind of give us a rundown of what what are what are some critical things you could look for?

Jonathan Tuttle 16:39

Yeah, yeah, I’d still recommend going into the units and trying to see especially if there’s any park on homes, because it might look good on the outside, but you come in the inside and it looks like somebody ransacked it. I mean, it doesn’t cost too much to replace, like an actual, the fixed inside of units like four to 5000. Like top to bottom like that’s, that’s like top notch. But that could be you know, four or 5000 times 20 units, obviously, it’s an extra hundred K. But yeah, definitely like the roads, the potholes and also going back to some some towns or townships, while a lot actually. Like for example, in the Midwest, if you’re by like a you know, if it’s snowing, for example, some communities will actually plow the streets for free and maintain the roads for you for free, or the lighting. It’s pretty cool. Let’s actually, to give you an example our operating expenses are about typically for sure. You mentioned before with multi family, typical operating expenses around 50-55, sometimes 60, the average mobile home park operating expenses, because like you said alluded to, it’s there’s not a lot of structural components mostly land. So you’re about 35-40. I think 42 is for institutional owners. So you have that much lower operating expenses, but the things you want to look for the trees, we can sure if these big old trees I have a huge branch falls down that’s gonna take out a home, obviously, the blacktop, obviously cement is way better, but 95% of time is to be blacktop. So doing just to make sure that the blacktop, you know, how many potholes. The community center. If you get in the old homes that’s Park owned, definitely check those out. Talk to the residents talk to local police talk to the city kind of get a vibe what’s how the park and community is run. So making sure you’re not buying like a like, you know, a meth lab park or whatever. But those are those kind of things you would notice if you drive through and you’re actually boots on the ground. But that’s a lot of stigma. Like the ones a majority, the parks are just everyday Americans looking for affordable housing. And when you live in, for example, in like Illinois, if you lived across the streets, I’m a glare if you lived across the street, and because we have really high real estate taxes and the say it’s $150,000 house in the same town, and you live in a $300 lot rent mobile home park, you’re only paying 10 bucks a month for real estate taxes and across the street, you’re paying $4,000 so at the end of the day, get the same schools which taxes pay for fire, police schooling, everything’s the same, but they’re saving three, three to $500 per year. And it’s kind of like equity, you know, like how people like oh, I’m gonna buy my house and over time and build up equity as I paint my note for 30 years. It’s kind of the same thing with home parks, but they’re doing it through real estate taxes. And that’s another reason why the cities don’t like it because they don’t get they lose money and the tax bases. The park owner pays the majority of it obviously, but the tenant they it’s 10-20 bucks in a lot of these states. You know, obviously it’s, you know, California Oregon, West Coast would be different than Midwest but every it’s going to be significantly cheaper than the surrounding houses. So

J Darrin Gross 19:43

So in property taxes paid by the the park owner

Jonathan Tuttle 19:49

Park taxes, an individual unit has to pay their real estate taxes.

J Darrin Gross 19:53

I was going to ask it based on that. I always thought the mobile home itself given it that it has As a VIN number like, I thought they were like registered with the DMV almost as opposed to do they? Do they also, is there a property tax? Like a residence as well?

Jonathan Tuttle 20:11

Yeah. And it’s like, yeah, 10 15 20 bucks a month, and they have to have insurance. But yeah, you’re correct. It’s just like a, yeah, when you want your titles and your VIN’s, it’s just like, when you’re when you’re fixing them up, it’s kinda like flipping cars.

J Darrin Gross 20:24

Right? Right.

Jonathan Tuttle 20:26

Which makes a it’s like, there’s not a lot of the beauty about it, too, you’re going to have a lot of complication. So even if you’re going to flip a unit or remodel a unit, you’re not tearing down walls and putting in custom kitchens. Right? I mean, can but it’s like, it’s very minimalistic stuff you could do. So it’s not very complicated. There’s not going to be any challenges in that regard, which is a really nice thing about mobile homes. So

J Darrin Gross 20:49

got it. So how many parks do you have in your fund?

Jonathan Tuttle 20:54

Well, we have to individually with a family we had, we had a third one, we just launched the fund about two months ago, okay, we’re going to be acquiring we’re doing a 10 million raise this fund run. And then next year when do 20 25 million raise but we’re looking to add about 2000 units aproximately, because the pricing is actually getting another byproduct of this whole COVID situation is like alluded to before the 93% occupancy rate currently being reported. Everyone’s trying to get into our asset class, because for the last 50 years, we’ve been the most stable real estate based on being data. And then Wall Street Journal had an article this year, that they’ll since the last downturn, there hasn’t been any other real estate as the class has been performing as well as ours. I think Self Storage is very close second, but we’ve been kind of running away with the, just the stability during downturns. There’s 60 million Americans in affordable housing. So we’re going to try to add about 2000 I think that’s kind of a number but the pricing is basically getting the cap rates are going down because it used to be you can see articles like all mobile home parks have such great cap rates. They do but it’s not the five years ago pricing because everyone’s trying to get into space where competition prices, you know, prices go up the sellers like well, I get this for it, I’m gonna just sell it for way more the cap rate 10 cap was big, like 10 years ago, then eight cap was like five years ago now we’re seeing six six and a half for like Midwest. But like if you’re in the coastal stuff like fours, just like multifamily. So the but the other play about it is too it’s it’s its to stability, so you don’t have to worry about you at least rather have a four cap that pays you then a four cap that’s not getting paid, you know, especially if you think in retail, you know, restaurants can open so many states, they can’t pay you hospitality hotels can open so although byproduct of that least we get the four cap and still get paid. And another benefit to I forgot to mention is the taxation. multifamily has a 27.5 year tax, depreciation schedule, which is really, really good. Traditional commercial estates 39. mobile home parks are 15. So the taxes are better for your K ones, because you depreciate the about 75% 70 to 75% of the the purchase. So land improvements, basically, the land improvements can be deducted 15 years.

J Darrin Gross 23:16

So was it basically your blacktop and and signs and you’re community center?

Jonathan Tuttle 23:21

Yeah, exactly. And then you have like you do cost segregation, but they and everything could have some things like 20 years or something and then you personal property is like five and you have your you got your accountant CPA come in, basically. And it’s it’s pretty, it’s pretty fascinating that we have that ability hopefully doesn’t change with whatever happens with the election. So we’ll see. Right? hearing from some investor owners and investors.

J Darrin Gross 23:47

Right. I’m just kind of curious to do. I mean, the things you can see are also like the underground, is that your stuff to them?

Jonathan Tuttle 23:55

Yeah, that’s a key. Yeah, that’s implemented diligence. Yep. I forgot to mention that for that’s when you’re really you’re doing your due diligence for 30 days. That’s the key is the underwater, the water sewer, the lines making sure that’s good. Because sometimes then also making sure I mean, due diligence as a whole, it’s a whole stack list of things that could go on, really in depth zoning, obviously setbacks, because if what’s grandfathered in, because if sometimes these part would go on like this small towns, you acquire a park and all of a sudden they say on the setbacks now is different than it was when you it was really developed. So now, you know, you can’t add any more units because, you know, we need 15 feet, and you only have 10 feet, because it’s like the grandfather rules. So they don’t like to bring in new units or because the older units, let’s say from like the 60s. Now we have double wides and we have a lot of bigger units that’s not going to fit so you have to have a smaller unit in there, which obviously less rent so yeah, but also the main Yeah, underwater, the water, all that electrical all the underground is definitely key to making sure there’s nothing no No hidden surprises, because if you have to replace, you know, all that that can be hundreds of thousand dollars or you know, if it’s water treatment plant things of that nature, usually, I mean, the old school way everyone wants city sewer city wire, because obviously, they maintain it and has the highest standards, but there’s still avenues for some of the other, you know, the lagoons water treatments, depending on a case by case and depending on what it costs, you know, the local city. So it’s not all you know, they will book the books would say, hey, you have to be city water to see store. Obviously, that’s usually best, but there’s also some opportunities, sometimes other water sources on a case by case scenario.

J Darrin Gross 25:40

Got it. So give me an idea on on what space rent runs kind of the What are you seeing what’s what’s, uh, I mean, I’m sure it varies from Market to Market, but just kind of curious if not, if you can even compare to like what, uh, you know, multifamily, you know, space rent, or not a space but a unit rent, or, and I just kind of curious how you assess.

Jonathan Tuttle 26:08

No, that’s no you’re a hundred percent on the money with that question. That’s one of the best ways to evaluate because do you, typically a mobile home is about one third of a single family home or half the same an apartment building. So I would say the house is 1500. And the apartment is $1,000, then you want to be like $500, they need to go up to that it still makes sense. Market a market, Midwest and they did a survey for economics professors as I bought two years ago from Duke. And it said if mobile home parks, a lot of these, like I said, alluded to in the beginning is a lot of these parks that are 60s and 70s developed. And some of these people are second third generation, they’ve got millions of dollars of equity. And you know, they’re making 300 – 400,000 revenue a year just from cash flow. So they sometimes they don’t raise their rents, because they already have as much money that they need. And especially if you live in like a small town in America, and you have like $400,000 coming in a year, you’re doing pretty good. So a lot of times they’re saying that for the going back to the Duke professor, he was saying their lot rents than say the early 60s are 50 50 bucks approximate across America, that would equate to about $500 today, and today’s you know, with inflation, but we’re seeing if you don’t include you’re in Seattle, correct, like washing problem for that same same thing. Seattle, California, the whole coast up there is that it’s crazy compared to what we see in the Midwest. So Midwest, we’re seeing a lot rents depends on market three to 400. If it’s closer to a bigger city, five to 600. Same with like Texas and Tennessee, but California, Oregon, and some of those states are seeing high like seven 800. In California, obviously you have the park in Malibu when Matthew McConaughey lived and Pamela Anderson, that thing was like $2,000 a month. But you’re right on the beach in Malibu, and the houses across the street are like $30 million. So yeah, see, it’s all across the board. But on average across the country about 350 to 425. It’s kind of like the number you proximately. See. So it’s still below what it should be if you’re doing it based on inflation, according to that Duke study.

J Darrin Gross 28:20

But even even with those numbers, you’re able to I mean, they’re trading it like said, anywhere from a six I mean a six cap, is that kind of acheivable based on? Yeah. So I mean, it’s easy to get caught up in the big numbers opposed to the rate of return, which is really at the end of the day. That’s, you know, what, you’re what you’re looking at there. You mentioned financing. You know, typically you think of like, you know, I guess a you know, a larger Freddie or Fannie property you can get by more often I think we’d like 20% down. How is that? In your experience with with a mobile home parks? What’s kind of the Down Down Payment requirement?

Jonathan Tuttle 29:05

Yeah, it’s actually for us. It’s about we’re seeing about 30 35% right now. And then reserves have gone up from about six to 12 months, and sometimes up to 18 months depends on the asset. They hold it for about a year. So obviously, what the the basis, the 10 year Treasury were like historic lows, it’s just it’s, it’s it’s a no brainer to get these things financing right now, because we’re about 100 basis points less than last year, this time last year, and they were kind of expected to hold for this next two years, kind of to provide stability for investors and they’re kind of you know, mentioned that, but about 30 35% down cmbs it’s pretty similar. And then like I said, two and a half or 2.753 and a quarter rates non recourse great. 10 year 10 to 12 year terms, mostly 10. So your most common. Local banks is your biggest curveball because if They’ve had a relationship with the other Park owner, like they were collecting the rents and they saw the revenue, they might take it over, because they just know they’re familiar with the asset class. You could run into issues like in a small town or even like a secondary market, like oh, yeah, we love mobile home parks. Yeah, we’ve heard so much good things about them. And then they go on the, you know, they go once you’re about to close, they’re like, Oh, we went through our board. We’re not comfortable with this.

J Darrin Gross 30:27

Oh, really? Have you had that happen?

Jonathan Tuttle 30:33

sloshed Rania their backs down and like, it kills deals? Not us. But I knew a lot. I’m not alone. Yeah, no, not for us. We haven’t had that happen for us. But I know people have had that issue with the banks. Definitely just backing out at the last moment. So and the rates are higher, they’re about five, five and a quarter, five year terms. So they’re not, they’re not as attractive. And usually, if it comes to that, and if you have relationship with the seller, see if they do a seller carry for a few years, then go back, improve the park and make it appealing to Fannie Freddie. As long as it has the visual appeal and you hit their you know, their checkmarks thing go back to Fannie Freddie like here. I know you guys have a 35% whatever quota for affordable housing, I got this great asset personally managed by me. Can you do? You know? Can you do a loan on this?

J Darrin Gross 31:20

Got it. You were talking about the expense ratios? 35 to 42% kind of a range? That includes third party management are you guys manage it yourself? Or how do you take care of that?

Jonathan Tuttle 31:35

Yeah, that’s including that’s why it could be in number 42 is like using what third party management? Yeah, but we have the biggest property manager or the ones we own personally and we do it ourselves. They’re they’re smaller parks, so it doesn’t need as much but and we’ve we found still is when you’re buying parks, the bigger is easier. It’s more operational efficiencies and 75 and above, that’s why we’re focusing on that 75 or 250. For our fund. We have a third party manager which is the biggest third party management in the country, they have 32,000 lads they manage including Apollo groups and they’ve 35 years experience so we have that plus we train the management that in place in 80% will stay but we’ll have them we have certain criteria what they have to do and we’re going to bring in technology efficiencies over each other management call rail, everything to make sure we’re monitoring them like trust but verify Ronald Reagan, but still provide best practices but we’re on top of everything.

J Darrin Gross 32:31

Got it. okay. So describe for us what a an ideal just you know, I’m a fat pitch looks like for you guys something that would be just something you would love to have

Jonathan Tuttle 32:45

pretty much everything right now for Parks. It’s a four or five year run, in our opinion to acquire. It’s, it’s because you can’t remember, you can’t develop new ones, it’s almost impossible or it’s not economically feasible for four or five years before you can start breaking even. So right now and that’s why you’re seeing all these, you know, other institutional players coming in they’re building portfolios, and people are just trying to build portfolios to funds or, you know, high net worth families and these mom pops are getting these huge paydays. But if you build a portfolio, we want to build a big portfolio and then sell it later. Right for in terms of acquisition, like Tennessee, Texas, Midwest, six and a half cap and above, depending on like, I mean, there’s not just cap rating, obviously, there’s other factors like what’s the property manager, like the shape of the property and the underlying issues, but just to clean Park, senior parks love SR products, they do extremely well. Obviously, they don’t, you know, they stay forever, then they’re great tenants, they’re cleaning their yards and maintaining it and like we have one of our parks is senior Park, you have a former military guys kind of like the police. You know, the sergeant of the parks have any suspicious vehicle drives by he’s out looking at it. So drives away any issues like senior parks are phenomenal. Just like pride of ownership because they come in they it’s their their pride of ownership live in this park. So those are great, fantastic. And then anything we’re the expenses are a little bit in the high 30s low. Anything below 40 is great. So because it’s comparatively if you compare it to multifamily or other asset classes in the 30s. I mean, your your expense ratios is so much cheaper. So

J Darrin Gross 34:26

No that’s awesome. I appreciate sharing them. Hey, Jonathan by day, I’m an insurance broker. And if we could, I’d like to shift gears here for a second. One of the things we do with our clients is to do some risk management, we kind of try and assess the risk and come up with a strategy. And there’s a couple different strategies we typically look to the first as we look and see can we avoid the risk. If we can’t avoid it, then we look to see other ways we can minimize the risk and when Those aren’t necessarily options. And we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And I like to ask my guests, if they can look at their own situation, it could be your, your way you invest your clients, the market, interest rates, the economy, however you want to identify or, you know, focus on what you consider to be the biggest risk. But I, you know, I’m just trying to get a range of 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, Jonathan Tuttle, what is the biggest risk?

Jonathan Tuttle 35:46

Sure, sure. One thing we try to do as mitigate risk, and that’s one of the reasons we call ourself as the safest risk adjusted return in real estate. I mean, we’ve, it’s historically been really low. But the biggest challenges are like, could be the city if it’s a small city and not allowing you when you’re purchasing making sure that they don’t allow to not allow you to basically transfer ownership of it, or you can’t bring in new units, which I mentioned with the setbacks. We’re not we’re not doing coastal. So we have to worry about hurricanes, and flooding and things of that nature and making sure you’re not in a flood zone. Because even though you’re you know, 30 to 36 inches off the ground, you still want to be in a like next the Mississippi River and it goes over the house. In California, obviously, we’re trying to be away from California with the fire. So we we’d like to Midwest we don’t have as many challenges. It’s usually more snow related stuff. And that’s, you know, it could be accidents, you know, cars driving through. But, and our industry specifically has a lot of insurances really tight. Like you can’t even have certain dog breeds, because or pools or trampolines they’re really stringent and like what could be allowed in a park before they’ll even do insurance on the park asset because like a dog bite or, you know, kid falling off a trampoline or break his neck, it’s, you know, the park owner has multimillion dollar asset, they’ll get money off of that, obviously. The other challenge, I guess would be to, it could be rent control. We’re fortunate enough to be in states that really don’t have rent control, and we identify that but long term and even like multifamily or any real estate, investing, rent control, is going to be a big issue because people have to look at two ways then when the investor comes in. Taxes always go up, maintaining things, just think of anything you buy anything after you have it 10 20 30 years, your car, your house, your each fact goes out your roofing goes like breaks down your car, engine, whatever your breaks, there’s always routine maintenance. And if you can rent raise your rent in accordance to a) inflation, b) to also maintain the capital expenses that need to be put back into the asset over time it’s going to the perks are in real estate, it’s going to quality is going to go down the park owner or the real estate owners be like, I can’t even make a profit on this. If I can maintain rents to pave a) to keep up the inflation and b) to maintain this asset. There’s going to become slumlord. So that’s kind of like an issue. It’s kind of how I find that happy medium. The rent control could be a big issue where I know because you guys did something but it was like eight or 10%. Right? It was like percentage, and then it was a percentage above inflation. They factored it in I forgot exactly what it was or eight or 9% I think Oregon, but which is which is fair for both sides. But because that’s still the average mobile home park. rent increases like 4%. So it’s basically a little bit above inflation. So it’s not like the big issue is some people here the private equity comes in, and they buy some mom pop, they’ve had it for 30 years. And like I said they haven’t you know, care, because they have millions of dollars of bank, they have three hundred lot rent, and private equity, Wall Street comes in like, well, let’s charge 600 because we can. So then that goes around and then the local governments like all you raise the rent double This is not fair, which Yeah, I mean, we try to do you know, 25 50, whatever is reasonable, and also put in improvements. They come in and like double it, it gives a bad name. And then then of course they have these huge returns their investors. That’s why you if you Google, some of the articles like manufacturing, mobile home parks have had crazy returns because people have had the assets for 30 years. It’s supply and demand, you can’t develop them. And then you have you control the price of like what you want to charge for rent because there’s nothing cheaper. So that’s fine, that happy balance. And I think that goes back to the whole risk is like as long as governments don’t come down on rent, because rent is the biggest driver of the noi. So that’s the biggest risk for shurearing his future regulation.

J Darrin Gross 39:52

No, I appreciate you sharing that the that whole rent control thing here in Oregon. I know it was if you look at historically It was basically one year, where the rent actually increased beyond, you know, on a percentage basis, whatever this I forget what the percent was. But historically, it’s always been like three to 4%, ya know, what people have gotten. And basically it was it was a function of you had a lot of people losing their homes, and the demand for rent rental properties far exceeded the and so what ended up happening was, you know, you just had this influx, kind of a market thing, which was, so it’s kind of funny how they, they blame the landlord on that, but but you’re right, though, I mean, with with the the fear of, you know, some of these big wall street funds coming in and in buying it and not being sensitive to how you can do that. You could throttle it up so fast that it draws attention, and kind of sours the whole thing. I think that’s, that’s a, that’s a real risk. So I appreciate her now. Hey, Jonathan, where can listeners go? If they would like to learn more connect with you?

Jonathan Tuttle 41:05

Sure. Sure. Yeah. So the fun is called MidwestParkcapital.com, or if you’re looking to see the ppm, which is like the private placement, which actually breaks down the company in depth, go to Midwest Park, capital, fund.com, everything how sounds are 833MHPfund.com somehow got that. So that’s kind of for somebody wants to find more about mobile home parks. The good thing about the fund aspect is you get a taste of the industry get the tax benefits. We do all the heavy lifting for you, you get quarterly payments distributions. And you get a nice stable, you know, sleep a night return without all the risk. And it’s a way for people to get in without putting down to even buy your own small park and have to put in five times seven times just the down payment. And you have to do diligence and you have to run it, we do all the work for you. So MidwestParkcapital.com, or my Facebook is a Jonathan Tuttle official. So those are the two best ways.

J Darrin Gross 42:05

Got it. Well, those will be in the show notes. And, Jonathan, I want to say thanks for taking the time to talk today. I’ve enjoyed it and learned a lot, and I look forward to doing it again soon.

Jonathan Tuttle 42:18

Sounds great. Appreciate it. Thank you.

J Darrin Gross 42:20

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. CRE PN Radio.

Announcer 42:39

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Senior Living Multifamily with Vinney Chopra – CRE PN #288

Vinney Chopra 0:00

My investors in multifamily for the last 13 years have been wanting to get cash flow from day one, I close on the deal, and I start paying them cash flow every quarter from the day of the closing. Right? So I should come up with a better plan to tell them first year it’s dirt. So I’ve been using the word Dirt, dirt, dirt. And they understand that and say no, don’t worry about it, because we give you a monthly review of what’s happening with your money with the ground being broken and bulldozers and drone footage of you know foundation and everything. So we got it all planned, where people can go log into their our Appfolio website, they could see everything happening with their money. Then second year, they get not 7% return, giving them 10% or 11% return cash flow because we build it in 12 months!

Announcer 1:03

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

J Darrin Gross 1:23

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

Today, my guest is returning guest Vinney Chopra. Vinney is a real estate investor. He’s a syndicator. He’s an author. He’s gone full cycle on multiple syndications. And in just a few minutes, we’re going to talk to him about the new venture he’s invested in, which is the senior multifamily living and why Senior Living multifamily is so essential. But first, if you like our show, there’s a couple things you can do to help. One you can like, share and subscribe to our podcast. And if you’re inclined, please consider leaving a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that on welcome back my guest, Vinney, welcome back to CRE PN Radio.

Vinney Chopra 2:48

Thank you. Thank you so much. Darrin, it’s such a pleasure. I’m so tickled. We are on the show again. And thank you for inviting me. I know you have done quite a few really great shows last year also we did it and even a year before. I’m back with you. I’m so glad. Yes.

J Darrin Gross 3:05

And we have actually if the listeners or viewers are interested if they go to YouTube, there’s actually I’ve got a playlist that’s got all the Vinney interviews we’ve done and we’ve covered a number of topics over the years. We’ve we’ve gotten into multiple topics on multifamily. We’ve done how the numbers work syndication, buy sell agreements. Operation I think the list is extensive. And it’s it’s definitely an educational platform. I encourage anybody to go check out. But today you know, you’ve been very, very busy. I mean, we were just talking before I push the record button. Here we are. We’re recording this today. It’s It’s October 14 2020. We all know that 2020 has been a humdinger of a year as far as all the challenges with COVID in that. But you while sitting in your your home area. It’s your I mean, you virtually not traveled at all,

Vinney Chopra 4:09

Not at all, zero.

J Darrin Gross 4:10

But right before COVID You are like a globetrotter you were like I mean, I remember seeing pictures all over the globe. You were weren’t you? Weren’t you traveling all over?

Vinney Chopra 4:20

We were in Ecuador. You’re right Darrin, and also Amazon and Galapagos. And thank goodness, my wife and I, we love to travel, we had six trips planned this year yet, you know, after our Amazon travels, because it’s our 40th wedding anniversary. So we started planning this year to be the best year in travel. every two months we were going to be gone away, right? But we did get one trip in and as soon as we came back, we had to cancel them because of COVID-19. But you know, my life. I always believe whatever is happening, it’s going to happen. So never fret about it. Never think it’s second you know that What if? You know, so even our children were going to go with us this year Neal and Monica in several other trips, and we are paid a lot of monies and everything, but you know what, we’ll do it next year or the year after watching who cares, right? So right, that attitude that, you know, hey, we are here, let’s make the best of it. That’s what it really got. Well, and I, you know, started two new companies. I also did the branding company, and then we got the hospitality and then the senior living, which we’re going to talk about it today.

J Darrin Gross 5:33

Yeah, I was gonna say, just but you know, while maybe the world has been in a little bit of a pause, you’ve had the accelerator to the floor. I mean, you’ve literally been tearing it up. And let’s talk a little bit about what you’ve done here. You mentioned you you’ve done how many syndications Have you done. This year,

Vinney Chopra 5:52

I’ve done 33 so far. So I did 28 as of last December, many of you might know, then I did one more just recently bought a $35 million deal in Austin, which was very good 308 units with my partner, actually, the son and his team, I love to work with them were in part 50 million last year, and then 35 million in December, but then our new partner Shahe them wrong, who is a very good partner and in senior living, that we have been talking and now we are drilling, you know together. So I did four syndication for that. So that’s why it is 29 plus four is 33 syndications.

J Darrin Gross 6:38

Wow. So let’s talk about your senior living. What you’re doing in senior living?

Vinney Chopra 6:44

Surely, I didn’t actually, I’ve been thinking about senior living for the last three years, three years, because when I read lots of articles, I read a lot. By the way, I listened a lot, read a lot. Look at where the trends are the big ship book game, and I started reading it, how everything is merging down south into, you know, Florida’s and Arizona’s how the population there is silver tsunami going through USA, and the world, which really caught my attention is 10,000. Baby Boomers like me, are turning 65 every midnight, every midnight 10,000 of them. And that’s like almost 60 some million, you know, a baby boomer at 65 Plus, right now, in 30 years, they’ll be hundred million. Hold on. So everybody’s aging in USA now. 85. and above. That’s another statistic, almost five or 6 million are right now. They got to grow to 20 million.

J Darrin Gross 7:52

So if you’re saying there’ll be 20,000,that are 85

Vinney Chopra 7:55

85 plus 85 Plus!

J Darrin Gross 7:59

Wow!

Vinney Chopra 7:59

20 million in the next 30-40 years. I mean, it’s tremendous that it’s so much demand is going to be there in real estate. See, we are in real estate. So we need to really look into the forward looking forward looking. Where is the demand coming? Where are the demographic shifts happening? Why you know we should be in this market is because they be so much shortage of housing in the senior with the 85 plus and 75 plus and 65 plus. So that’s why we decided I’ve been sending messages out in the universe. Let’s just say that, I believe in law of attraction, the secret and everything manifestation. And then I find John Lewis and my good buddy, and he’s brother of Joshua Roosen, and he joined my VP of the Academy. And I said, John, I really want to get into senior living. He says, Vinney, you’re going to talk to my buddy, I went to school with, Shahid Kahn. He’s been building senior living in luxury kind for the last 10 years. I said what? Here I never knew Shahid at all, he comes in my lap, and we do few zooms. And his passion is to build the best of the best of the best for such a reasonable price. And look at that. rest is history. So we have started already within few months 100 million dollar worth of senior living ground up hundred million

J Darrin Gross 9:37

Ground up. So this is this is a little different than just buying something that is existing product and and adding value to it. You’re starting from raw this piece of dirt and you’re going through the whole process

You saw. So right there. So essentially what I’m learning right now and I’m a student of anything, I mean, I believe believe that, you know, when I study when I don’t learn, I die. I that’s my thinking is I’m you know, so essentially you’re right. It’s like buying a land trust a lot of studies, find out where the needs will be where seniors are going, what’s the population of 85 plus 80-85? Then find out what’s out there in that marketplace, right, like market comparison, very similar multifamily. Like I buy those, right. But the biggest thing I love in this market is I don’t have to go out to jobs, jobs jobs, which I’ve been chasing for 14 years. If right whose job I have to give concessions or delinquencies, I mean, we have turnover a lot of things that are happening right. But in the assisted living when we build it ground up, it’s Class A plus. It has zero deferred maintenance, it got everything brand new appliances, everything new air conditioning, youJunaid right. And no turnover, no delinquency and no concessions. And the rents are four times Hold on. So expenses there because we have a commercial kitchen in all our facilities. We have two chefs, we have Restaurant Style dining restaurant style, five star restaurant, in the place in the place. We have movie theaters, we have spas, we have a salons, we have meeting rooms, we have billiard rooms, we have got pianos, I mean, there is a night life right in that multifamily for seniors there one story, there are four to six courtyards hold on courtyards, where people can go out and really enjoy the fresh breath there. No elevators, seven acres of land for only 88 units, seven acre. So we are just building this Taj Mahal, in all these different communities where people have very old, stinking, you know, very old style 2 3 4 story buildings, and our residents are not getting the same kind of service and the food and everything like we do. And we have our own transportation, buses, everything, um, you name it.

So you are also not, you’re This is not just a quote landlord, you are the operator, which you mentioned the the kitchen facility, but is there any care that’s built into that as well?

Vinney Chopra 12:35

Yes, it’s total care. This is assisted Senior Living luxury, and memory care. And memory care.

J Darrin Gross 12:42

Vinney Chopra 12:43

So about out of maybe 88 or 92 units about you know, 68 or so are or 73 is 68 are regular assisted living. Then we had a memory care also right in the same building. So that because when people are that old 80, 85 you know, they will probably be our average stays 2.4 we manage all our communities also. Just like we’ve been vertically integrated in my life for multifamily. You know, we have the same procedure here. Care givers, we have 55 caregivers for 88 residents Hold on,

J Darrin Gross 13:23

Oh wow.

Vinney Chopra 12:36

55. It’s a three shift. See, it’s a around the clock. And it’s caregiving. And it’s like the bathing and medicine and you know, all those, but it’s not acute nursing home. It’s not rehab center. There are no doctors, right. So we have had zero COVID effect and zero deaths in our facilities, which Emraan has built and we manage seven of them right now. Seven of them. He has built 21 of them, you know, so he’s really done this over and over again. He’s got the general contractor’s He’s got the whole recipe, right? So it’s just my good fortune that I found him through John. And now we are in partnership together like anything. I’m the money raiser, we can raise hundreds of millions of dollars. Next year. My goal is $100 million to raise. And we’re going to be building six to 10 of these facilities every year for the next 10 years.

J Darrin Gross 12:36

Wow.

Vinney Chopra 12:36

Yes, yes.

J Darrin Gross 14:28

That’s awesome. And we’re all are you doing this where you mentioned the Sunbelt kind of thing where?

Vinney Chopra 14:33

You’re right see because as the age groups you know, that 80 85 or 90, gravitation is that the seniors have a better lifestyle in the warmer climate, warmer climate. So that’s why we are going in Virginia, in Florida all over the place, Texas. We’re going big time in Texas. It’s hot there, and Arizona, even coming up here in the Bay Area. We’re in my backyard. And then coming to Washington where you are Portland in Washington, because a lot of seniors are retiring, you know, and my partner based in Michigan, because he’s from Michigan. So if anybody wants to check us out Hampton Manor, just google it Hampton Manor is our brand. And Michigan just say Michigan, you will find there are like 17 different towns in Michigan, where there is a Hampton Manor in every town.

J Darrin Gross 15:31

That’s fascinating. So now is this are your plans to build and hold build offering the holder? Is this a like a sale? Is there an exit date? Like in a traditional syndication?

Good point. Good point. Darrin, I’m an engineer, right? I always think and I see, okay, how I’m going to sell it to my present investors, right? I have the grace of God, I saved hundred 68. Now I have 207. I think I just saw a list going like crazy through click funnel and branding and everything. So we do three point contact and meet with them. And then in the future, when the deal comes we offer right, just like syndication is done. The good part is that we I knew that it’s a ground up construction, my investors in multifamily for the last 13 years have been wanting to get cash flow from day one, I close on the deal. And I start paying them cashflow every quarter from the day of the closing. Right. So I come up with a better plan to tell them first year it’s dirt. So I’ve been using the word Dirt, dirt, dirt, and they understand that and say no, don’t worry about it. Because we give you monthly review of what’s happening with your money with the ground being broken and bulldozers and drone footage of you know foundation and everything. So we got it all planned, where people can go log into their our app for your website, they could see everything happening with their money, then second year, they get not 7% return, giving them 10% or 11% return cash flow. Because we build it in 12 months, we build it and then we start managing it. Actually we are 50% occupied the day we open, because we have a marketing arm that goes in advertises locally, and everything and we get executive directors hired and everything marketing starts. And then by the time we do ribbon cutting for opening, we have 50% already leased pre leased, which is unheard of By the way, within nine months, we are 100% full hundred percent full.

Wow, that’s awesome. So the the target market you mentioned 85 to 90 is that’s kind of the the age of the occupants is that the

Vinney Chopra 18:06

It is. See what happens during this to your audience to assisted senior living as the Word says it’s not independent living, it’s not living in your own home, right. You know, if you don’t need assistance, you could live in your own home, right, as long as whatever age, but if a spouse passes away, we find that the degradation of the life starts to happen. You know, people need that somebody significant, you know, somebody they could talk to, and live with, and you know, get to know and have a social life, there’s the word right social life. And then if they cannot cook, or that’s another trouble, you know, and then if they cannot take medicine and properly and all that, or if they had a slip and fall. Wow. So then families get together and they say you know what mom and dad, you’ve got to get into assisted living. So they start looking for within the 20 30 mile radius where they’ve been living to see where is a good place to go. Right. So that’s the what we do. In our case, we don’t take any medical, any Medicare, no nothing because our facilities for regular people. We don’t charge $7,000 $10,000 a month at all. It’s luxury at a budget, we call it because we charge only 3,800 to 44 or 4,500 depending on the level of service, which includes three meals, snacks, and the use of in of course all the utilities paid their linen, their laundry, everything is taken care except the cell phone. That’s the only thing. Entertainment, ADL says activities of daily living all that done. Care giving is all included in their transportation is all included in there in that price. So that’s what we provide to the our seniors. And they have to do the due diligence, we have to check their health, full health, because we had zero COVID effect, because we are so particular and be locked out. Even the families could not meet their parents, we made ait sure, because we didn’t want anybody to die, you know. So they have been doing this birthday’s through the window, hold on, through the window through videos and all that. So we’ve been very, very particular now we have done quarantine, one segment of our building, we somehow planted where it’s an independent unit with kitchenette and everything. So we are able to put plexi glass and the families have to show 14 days of negative to see their family to their mom and dad. And we would even notice by governor of Florida hold on cutting edge. So on our side, we were the first one, Cape Coral, if you google us, Cape Coral of Hampton Manor of Cape Coral, we were in the news. And then we did the same thing in Michigan. So we got recognized because we are on the cutting edge in making sure that we are able to follow the CDC guidelines, lockdown, zero deaths, zero COVID effect. So we are just very, very particular. Because this age is like that. And our residents live in our communities for 2.4 years average. So it’s not the working class who come in and out turnover is so strong, right? In our case, they come in, then they are there for life. And when we want them to live for five, six years, even their families tell us that Oh, my mom and dad have gained 10 pounds. Yeah, good thing, which is because we are very particular about the five star dining, five star dining. It’s not the same food, which is made for everybody. And everybody gets it. No, no, it’s made to order made to order.

J Darrin Gross 22:13

That’s great.

Vinney Chopra 22:13

The head chef and the junior chefs and all and served in a beautiful dining. They know I just sent to that movie of the place. So you will see that right the whole movie put together we’re putting it on YouTube soon so that he could share with the world. Yeah.

J Darrin Gross 22:30

Well, it’s it’s fascinating from from being more of a an apartment operator with the the general population where you’re like said, You’re constantly chasing jobs, where are the jobs where the jobs are the job? Now your view is totally different where the seniors, right I mean, we’re where’s the

Vinney Chopra 22:47

I don’t need any jobs, I mean, I’m in communities and the lakes and very good lifestyle, and we’re the seniors would like to move, and you know, there is need to be there, you know, so we do captivate, want to share that capture rate is because our product takes six to nine months, sometimes 12 months to pass the ordinances to get the permits to get architectural drawings. So and then we take about a year to build it. So we are coming, looking into the future two years from today, to bring a product out. So we have to be very careful with our millions, that we spend our own millions to do all these things, you know, so, I mean, you know, it sounds easy, but it’s not that easy. I just want to mention everybody, but the good part is the rewards out there.

J Darrin Gross 23:39

No, that’s that’s fascinating. And and I think the thing that I’m most impressed by is just the all the success you’ve had with multifamily syndication. And now you found this new kind of a vein of opportunity with the senior living and it sounds like it’s even, you know, that much more based on way, you know what you have available or what you are working with.

Vinney Chopra 24:02

while you’re working. So true there and then it’s good for next 40 years, I wouldn’t be alive. I’m 68. Right? So I’ll be hundred eight. Maybe I’ll be one in

J Darrin Gross 24:13

See you in the dining room.

Vinney Chopra 24:14

You know our goal, play bridge and cards and billiards and so we’re putting pianos we’re putting all these great things, movie theater, right inside this place, salons and beauty, you know, and the small dining places and just you know, sitting down in the cafe and the Bistro, and going to the swimming pool and putting green, every single one has putting green also, and waterfall functions and everything so that they could really enjoy the life. Our motto is to spoil the generation that has spoiled us. So

J Darrin Gross 24:53

That’s great. That’s great. Well, just the the numbers I mean, you mentioned You know, two and a half years average stay the I’m just thinking about the the type of tenant I don’t imagine they’re too tough or rough on the property, the ability to, you know, the need for touch up or whatever, when we do have somebody move out. I mean, I can’t imagine being here.

Vinney Chopra 25:18

minimum.

J Darrin Gross 25:18

Yeah, yeah,

Vinney Chopra 25:20

you’re right there. And, you know, these are specially designed communities that we build with, you know, high ceilings, right. And also, the doors are wider, everything. And within the apartment, you don’t need too many doors, because they are so frail, in the age group is at 8485 to 90 to 100. So they just should be able to go in and out, as you can see in the movie. So we have just perfecting what it should be, you know, and they love it. Yeah.

J Darrin Gross 25:55

That’s, that’s great. I’m, I’m so happy for you. And congratulations on all your success, sir. That’s, that’s awesome.

Vinney Chopra 26:02

Thank you. And we’re coming up with the book too, by the way, you know, your audience know, this book did really well. And if you have not seen it, please do go and buy Spanish, you know, partners and readers, please go ahead and look at Spanish version of the same book. And then my other book came out, which is the Positivity Brings Profitability. Again, please look at my third book is coming on Investing In Senior Living Made Easy. So we’re really teaching everybody what senior living is about why we feel so compelled that we want to be in this market, along with others. So I have about four businesses right now. Five, six. Anyway, it is buying apartments, which I’ll keep on buying B class B plus, in good growth areas, just like I’ve been chasing that. The other thing is my hospitality, because we’ll be buying we just bought Hilton Garden Inn may be buying Marriott’s and Comfort Inns, we’re looking into now with COVID, we’ll have even better deals come on our table. So we’ve been buying them, you know, when my partners, then my other business is Senior Living ground up, ground up. So that is the one we just share. And it’s a three year hold and everything. We are not selling any securities. But if you’re interested, just reach out to Darrin or myself, you know, and so on. Third one, is we becoming a REIT. What is that? Because Emraan our partner was selling after all this hard work and running the operation and everything. Guess who was buying them? REITS. Or some big fund or something? Then he sat down with them two months back, I think they said, Ron, we want to make you a partner with us. That’s what he said. He said, Really? Okay, how does it work? He realized quickly, he was going to get peanuts, just like 10% in the whole REIT. Here he could that whole hundred or 50% with me if 50/50 right. So he said Mr. Chopra, we’re gonna sell nobody nothing, we could achieve them ourselves. So that’s what we are doing now. So we’ll be buying everything we have building will cashing out our investors. After three years, so two and a half years, get new investors in for the next five to seven years. And then flip it again, get another LLC, the exciting part is there, you’re ready. You do cost segregation every single time when you sell a new in new entity, right? New entities brand new and you do cost segregation, then flip again, sell it yourself for another entity do cost segregation again. And this way I can give my investors so much money back. And then they could even do 1031 so never have to pay any taxes at all ever. They just keep on going from one to next to next next.

J Darrin Gross 29:09

That’s That’s awesome. You keep figuring out the ways to make the money rain. That’s awesome. That’s great. Hey, Vinnie, before we wrap up here, I always like to ask people about risk. You know, the I think you’re one of the first guys I asked it, but it’s been a while. So I’m going to see if you if you don’t mind, I would like to let people know that by day. I’m an insurance broker. And we assess risk. That’s what we do with our clients. And we look to see if we can, what we can do to manage the risk. And there’s a couple of different strategies we look at we first looked to see if we can avoid the risk. Yeah. If we can’t do that, we look to see if we can minimize the risk. And then if neither of those are an option, we’ll 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 look at their situation, whether it be their clients, their investors, their tenants, the market, however they want to frame the answer. But if you can identify what you consider to be the biggest risk, and, you know, just for clarity, I’m not necessarily looking for an insurance related answer. But if you are inclined, Vinnie, I would love to hear from you. What do you Vinney Chopra considered to be the biggest risk?

Vinney Chopra 30:30

You know, I’m so glad I mean, you know, I’ve raised $140 million I was just counting in my wife. My wife is my Investor Relations. As many of you know, our daughter, Monica is now VP of operation, and we just grown so much. But the key thing is, as the investor gives you money, you know, Darrin, they want to know, Vinnie, what if you die tomorrow, right? So we have to really as business owners, and I highly recommend everybody listening to us to really sit down with Darrin or anybody who can really change you and tell you, what are the risks involved in your business? You know, it could be your death, it could be your transferring of the wealth, right? It could be like, we’re into ground up construction, what are the different risks involved, when the GC runs out, or runs away, or doesn’t have or slip and fall and, you know, anything, fire is there or wrong, mechanical, you know, systems are put in. So those things are very, very important. Of course, buying the multifamily, the renter’s insurance is so, so huge. Not only that, also the property has to be properly insured. And the lawsuits and the directors insurance, I mean, I got, I had three or four lawsuits in the last 12 years, and I cleaned up, I totally didn’t have to pay with $3 million lawsuit was going on with me, mediation came and the insurance setting for 500,000 I think I have to pay zero money. Zero money. If I had really said, Hey, I’m totally bankrupt, you know, I wouldn’t be bankrupt. But the thing was, I just didn’t let it bother me. I just kept on going kept on going in my thing. I knew my insurance company’s gonna take care of me, right, you know, so it’s very important that we get the best of the best. And, you know, like the GL general liability, right? umbrella policies on every property, I’ve had 6 million to $10 million, even the smallest of the smallest properties, because I believe paying that small premium is well worth the nighttime sleep, which I like to have really good sleep. And then it takes the risk of a you know, I can racial discrimination lawsuit. I got mechanical lien on property. So things like those happen right there. Yeah.

J Darrin Gross 32:58

Yeah. No, they do. They do.

Unknown Speaker 33:00

Yeah.

J Darrin Gross 33:01

I appreciate you highlighting the the the insurance aspect of that that’s always there. And, you know,

Vinney Chopra 33:08

thank you so much. It’s a pleasure to spend time with you. And I hope if anybody would love to find out more about senior living, investing, and so forth through Darrin, please call Darrin and we touch base together.

J Darrin Gross 33:23

And Vinney for the listeners where where can they go to find more learn more about you? You know,

I have actually on over the internet, I don’t do nothing. I just get up in the morning. I’m all over with the posts, because by branding company, you know, I pay them some money in to name India, then you’re using them. And they do all the things for me, but just Google me Vinney Chopra. I have three websites now. One is Vinneychopra.com. Vi nn, e y ch o pra chapra.com. Monealinvest that kid’s name Monica and Neal invest.com. Then my third website, which is getting this for many great great investors is Senior Living investing.co Senior Living investing dot CO or senior living investing Made Easy, the new book that we are coming out with, we have taken the website domain on that one also.

Awesome. I will list all those in the show notes. And I appreciate you doing this thing. I always enjoy the opportunity to talk to you and learn. You always come with great lessons. And I look forward to doing it again soon.

Vinney Chopra 34:45

God bless you, your family and stay healthy, stay safe. You know this COVID is going to pass but let’s just use this time to grow our businesses and to learn more and be more passionate about life because I can spend more time Time What a great thing with lunch and dinner and, you know, breakfast with my wife and kids and do the kind of things we always wanted to do. And that can be right now. So God has given us an opportunity. It’s the silver lining in the dark cloud, we should always look for.

J Darrin Gross 35:18

Oh, amen to that. 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. cr e pn radio.

Announcer 35:39

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On Demand Affordable Legal Counsel with Johnny Merritt – CRE PN # 287

Johnny Merritt 0:00

Started with them just charging them a monthly fee. And and for that they we have an engagement letter that sets out what typically an in house General Counsel would do. And so the business can budget for that. And then then frankly, we encourage calls in the front. Like, I think about the old cell phone example where you have free minutes, you know, they’re not actually free. But But what we found through the years is that this this relationship actually encourages the clients to call the attorney and frankly, if the attorney wants to promote the business, and so I think in a very simple sense, it just puts the attorney in the business more in a partnership arrangement where they’re working together to accomplish the same thing.

Announcer 0:51

J Darrin Gross 1:10

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is 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 Johnny Merritt. Johnny is an equity partner of Hajjar Peters LLP. He’s an attorney with over three decades of experience in complex corporate and real estate matters. And in just a minute, we’re gonna speak with Johnny about how a on demand fractional General Counsel relationship can work for you. But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do. You can like, share and subscribe. And as always, we invite 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 at Commercial Real Estate Pro Network on YouTube. And while you’re there, please subscribe. With that I want to welcome my guest Johnny Welcome to CRE PN Radio.

Johnny Merritt 4:05

Thank you so much for having me. It’s it’s exciting for me to be here. excited for me to talk to somebody from Austin to Oregon. What, what great, great opportunities we have to share information.

J Darrin Gross 4:18

It’s gonna be good. Looking forward to it. Before we get going, Johnny, if you could take just a minute and share with the listeners a little bit about your background.

Johnny Merritt 4:29

I’ve been an attorney since since the late 80s. As you can probably tell from my gray hair and I graduated from law school late 80s wanted to be a transactional lawyer was focused on being a transactional lawyer and I graduated and accepted the job of the transactional law firm and the savings and loan crisis hit the light 1980s. And shockingly the federal government hired the law firm I was going to work for the handle directors and officers liability cases all over the nation. And so for the first 10 years of my practice, I went to a transactional law firm and did litigation for 10 years. And but I’m not a litigator and transactional attorney. So after 10 years, this was between 20 and 25 years ago, I decided to stop doing litigation and focus entirely on the transactional work. Since that time, I’ve done corporate work, done a lot of real estate work, and and has served as a outside General Counsel for $1.5 billion company, which, which frankly, showed me the value of relationships between attorneys and their clients. So the last 25 years, I’ve done real estate corporate work, and kind of been the go to guy for businesses who need help with their transactional work.

J Darrin Gross 5:59

Gotcha. That’s an interesting introduction into the legal profession there the the crash, and go in and litigating the directors officers type claims. You know it’s funny,the, it’s just trying to think of as you were saying, you know, your background wanting to be transactional, but yet ended up litigating, is it not? Kind of a thought that if you don’t have your your transactional paperwork set up properly? That are you I mean, one of the reasons to have the transactional paperwork, and all the contracts set up is to avoid the litigation? Is that not?

Johnny Merritt 6:45

I think, I think that’s absolutely correct. I mean, one and we’ll talk about whenever you’re ready to fractional General Counsel of one, one reason I want to do that is because I want to encourage communication between myself and my clients. And and certainly to the extent that we can help clients in setting up their transactions and or reviewing contracts we do, we can help avoid litigation. But I will say this, I was speaking to a group of Baylor Law students a couple of weeks ago and about and asked them the question the class, what do you want to do? And then I explained to them, what you probably will do is whatever comes in the door, and and then explain my experience with with becoming a transaction that litigator in spite of the fact that I wanted to do transactional work, but you’re absolutely right. We, the goal, frankly, after being in litigation for 10 years, I don’t like litigation. And so my goal is to help clients avoid that, and frankly, at all cost, if we can.

J Darrin Gross 7:51

I would think also, having had that experience, like you said, wanting to help people avoid that it would give you some insight as to, you know, ways it can be avoided is that did you find that to be the case?

Johnny Merritt 8:06

I do. And and through the through the 25 or so years, as a transactional attorney, there have been lots of instances when I wish a client would have called me beforehand, so that we could have avoided problems and and and but but it does, the other thing that it does is as I’m reading a contract, or as I’m setting up a company, or as I’m thinking about the structure for a specific deal, it’s my first 10 years of practice is always on my mind. And I’m always trying to avoid those. What litigation is a lot of times it’s transfer of wealth, I think from from the the disputing parties, frankly, to the attorneys. And so to the extent that we can avoid that we tried to do that.

J Darrin Gross 8:57

No, I have a few clients that would concur with that. I have I’ve, I’ve seen it. And I think that, you know, like any industry, there are those that deserves a reputation and others that that basically are, you know, fall to the reputation of others kind of thing, but just that notion of that, you know, the attorneys are in it to, to, to get paid, you know, and to, to keep it going as opposed to seek a solution kind of thing. So, but like I said, there’s no there’s reputations in in all all different fields of work. There are some some, you know, good ones and some bad ones.

Johnny Merritt 9:43

Well, there’s, there’s no question a lot, a lot of the reputation that attorneys have are well deserved. And, and but, and frankly, at my age, I’m 59. So it made you reflect back on your career and I’ve had the opportunity to look back on the history The law profession and and and have studied where the law profession came from. And it’s unfortunate the way that that that the law profession has has, has become perceived. But But listen, I’d be your listeners would turn me off if and turn the program off if I didn’t acknowledge that the reputations in lots of instances well deserved,

J Darrin Gross 10:28

R ight? Well, and again, I don’t mean to count cast a broad brush and insurance we have the same kind of a challenge sometimes. But let’s talk about, you know, legal representation and and you know how a traditional relationship might work as opposed to kind of your fractional on demand model?

Johnny Merritt 10:57

Well, what I’ve noticed is that attorneys are really compensated in two ways in a very traditional sense. One is the, what you typically hear of is a contingent fee case where, you know, the McDonald’s coffee is spilled, and the attorney sues on behalf of the person who was injured, and they get between 30 and 40, sometimes 50%. Well, and that doesn’t work very well for a business model. But the way that that that transactional attorneys typically bill is by the hour. And what I’ve found through the years is that that creates a natural conflict, if you will, or perhaps conflict is too strong a term but perhaps not. The hourly fee, I think discourages calls the attorney, the businessman who are looking at their bottom line, they want to save money, they want to budget for things and and as they look at this contract, they think to themselves, I can call my attorney, but they’re they’re there, they’re going to start their clock and their clock going start taking and for what seems like a minute or two call, I may get $150 bill and, and and frankly, attorneys, particularly in the real estate arena, we don’t provide sexy drawings with the things that architects provide or, or plans where they they set out things that are the real estate person loves to see, what we’re doing there typically is just an expense. So I’ve started I started thinking many, many years ago, how can we change the paradigm? How can we make put the attorney on the same side if you will, with the client. And and as I said at the beginning, I’ve been essentially an outside General Counsel for $1.5 billion company for over 20 years. And and so I started with them, just charging them a monthly fee. And and for that they we have an engagement letter that sets out what typically an in house General Counsel would do. And so the business can budget for that. And then then frankly, we encourage calls. And in the front, I think about the old cell phone example where you have free minutes, you know, they’re not actually free. But But what we found through the years is that this, this relationship actually encourages the client to call the attorney. And frankly, if the attorney wants to promote the business, and so I think in a very simple sense, it just puts the attorney in the business more in a partnership arrangement where they’re working together to accomplish the same things. So that’s that’s kind of a general introduction of what what we we are doing.

J Darrin Gross 13:55

That makes a lot of sense. I know. You know, there are those things that that I’m resistant to do. And I know others you know, just like you’re saying the budgetary concerns are just the unknown. And in a lot of times in legal things, if you sit on it or wait on it, it’s not going to get better. And I’m assuming that that your model is allowed you not only to build that relationship but also to kind of nip things in the bud before they kind of fester and and become something that’s a little bit more challenging is that Do you find that to be the case,

Johnny Merritt 14:37

you’re you’re you’re directly on point at the end and you use the word that that is is is just critical and that is relationships. In this type of concept we deliver we we develop long term relationships with our clients, we get to know their businesses. We get to know what they like and and free Legal issues are just a small part of the formula for success of a business. And so although we partner with them, we also have to understand how to stay in our lane. And we also understand that ultimately, we may give them our clients advice on what the consequences of certain actions or decisions may be. But ultimately, it’s up to the client decide what what’s in the best interest of our of our operation going forward from a legal standpoint. So yes, we were able to nip things in the bud were able to assist in in structuring things and putting puzzles together. So it’s the business operates properly. And the other thing I might say is to the extent we do something, and we operate for a while, and we determined You know what, this has created a little too many headaches for the CFO of the business, we can then go in and alter things and make things work better for the business.

J Darrin Gross 16:06

So that’s always a good thing. So let me ask you so that the the historical model has been a call the attorney and then get the bill based on the time spent, and like you said, it always felt like you had a two minute call, but you’re not totally aware of all the time they spent, after you hung up kind of thing. And what shows up on the bill, your model, I’m assuming just kind of, can you explain how you come up on the pricing? Because I’m assuming if you got a a smaller firm, versus a larger firm, is there a kind of arithmetic, or some sort of a formula there for how you determine whatever that raterate would be?

Johnny Merritt 16:49

We do. We do. We still keep every week, we record our hours, just as if we were billing per hour. Let me digress for a minute and say one thing that I love about the this system is the hours aren’t always the best measure of good lawyering, for instance, I was working on a corporation the other day that involved a professional entertainer. And and so I wanted to put that make some changes to that that corporate agreement that would be more appropriate for that professional that your listeners would know if I were to tell them but but the fractional allows me flexibility to spend more time to do things. But to answer your question specifically, we still keep our hours. And every month, we send a statement that that includes time entries of everything that we’ve done. And and and then there’s a flat fee at the bottom. And what we have found is that the the clients, I like it better when the clients are getting a better deal, when they’re when they’re actually getting a discount. But what we have seen through the years as in this is it’s it’s I guess it’s to some extent, it’s selfish, but it just works this way. As, as the the clients understand the value of the service we provide, they use us more. And so what we do is every six months, we audit the each of our clients accounts, we tell the report to them where they would have been had they paid us an hourly fee and what they have paid. And historically they they got a very good deal. But we we asked for adjustments not to equal the hourly fee, but just just because they’re using this more so so very transparent. So that the clients know exactly how it compares to what they would be paying if they were paying the hourly fee.

J Darrin Gross 19:00

So kind of like thinking on I think it’s maybe our gas bill or something like that we have that kind of a level pay kind of a thing where you get the right, you know, the year end, remember the first year we bought a house and the winter months came and the heat went on and the bill would, you know, through the ceiling kind of thing and we called and got on quote level pay was like some, you know, something was spread out a little bit more and it adjusts annually. I know kind of thing. Right? So but I think the important thing that I I recognized and sounds like you’re you know you’ve you’ve touched on Is it just the ability to budget for that and not have that. That reluctance to call the professional that can help you navigate something before it becomes something that shouldn’t have.

Johnny Merritt 19:52

That’s that’s exactly that’s exactly right. I mean we we lot of our clients have been big transaction. It takes a lot Time that month, they’re going to get a really good deal. And, and, and frankly, I like that in, I don’t care what business you’re in, you want those people who are interacting with you to feel that they’ve got a good deal, they’ve got value. And I love that. And so the fact that we’re, we may be substantially less and less on what our monthly routine what our hourly fee would be. Frankly, that doesn’t bother me, it thrills me, because that just shows we’re providing good services to our clients for good value.

J Darrin Gross 20:34

Right. So let me ask you with the way you’re set up, in talking about relationships in that in, I guess it would be kind of like even a value kind of a question. The law changes, it seems like it’s constantly changing. Are you able then to communicate this on a more regular basis to your, your clients to, you know, advise what the changes are? How they will affect them? Or what, you know, is that part of this as well?

Johnny Merritt 21:15

Yes, once once we if we see a development in, in in the law, for instance, only give me an example, the PPP loans, when the when COVID hit, and the PPP loans became available, I read that that’s that legislation very, very carefully. And because I wanted to see whether that was something that I should recommend to my clients, and, and frankly, we sent an email to all of our existing clients relating to the advantages and disadvantages of that, that loan, and that loan program. And frankly, we wanted to do it very quickly, because as as your listeners will recall, the first amount that was authorized, was used up very quickly. And and so those people that moved quickly, that that needed, or felt they needed that loan was was were able to I don’t know what any of my clients that were unable to get it if they wanted it. And so that’s a good example of the services we try to provide to the to our existing fractional counsel clients. Yes. Good question. Thank you.

J Darrin Gross 22:31

Well, and even with that, he is a recall there was a question about taxable non taxable, or I don’t remember, there was some, I remember there was the the the Hurry up, like you mentioned there, but it seemed like there was something that changed in the way it was presented versus the the backside of that, I don’t know if that was like on a condition of the way you use it or something. But I, but I would think certainly the COVID has given you guys an opportunity to keep your clients informed on the changes and potential consequences of actions based on all the just crazy things that COVID brought.

Johnny Merritt 23:14

I think COVID has has really given us an opportunity, because iOt covered scary. I mean, you know, we can all put a brave face on and we should and we’ll get past COVID there’s no doubt in my mind, but but there has been an impact in the real estate market, particularly of COVID. And having the opportunity to have an existing relationship with an attorney for an amount that’s budgeted is I think, is has been very helpful. I guess the proof would be in the pudding that the real issue is what am I What are my clients saying? But I think that they would say that, that, that, that having that relationship, one of my biggest clients is in the food industry. And and, gosh, we were trying desperately to deliver food to grocery stores. And and I was I wrote an article in there’s, as attorneys, we don’t often get to say very specific things. There’s always issues, but I was able to say write a sentence that for the first time it was absolutely true. And and what that was was on this specific COVID issue is a 30 year plus attorney and I have exactly the same amount of experiences every other attorney in the state of Texas. And so but I think those existing relationships are helpful.

J Darrin Gross 24:42

No, no, that’s that’s, that’s fascinating, just how you like said that the situation changes. And, you know, is the and I think the other thing that I this this applies to is just the realization of how the laws are formed. They’re, they’re conceptual, when they’re passed, but they’re not really tested until they get to the court or whatever. I mean, is that right?

Johnny Merritt 25:11

Well, and again, I got that great, very good question. Another, that’s another time I bring up the PPP loans. You know, the PPP loan, the statute said was very specific on who was eligible for those loans. And then after the statute was written, a lot of the politicians became concerned about some of the uses and some of the some of those businesses that were eligible, frankly, under the statute. And so we were able to provide our counsel our clients, I think, very good counsel, on on, you know, that not only what the law said, but then the politics that followed that. And, of course, everything’s exaggerated in COVID. But, but, again, I think it provides a good example of the type of services that we like to provide to our clients, thank you for asking that.

J Darrin Gross 26:08

So, you are based in Texas. Are you limited to Texas real estate type clients, or do you have clients all around? Can you speak to that?

Johnny Merritt 26:07

Well, we, of course, I’m only licensed in Texas. I do have clients from many, many other states. But for the most part, we limit our legal representation to relating to Texas legal issues and to the extent we need experts there are attorneys in other states we’ll call in other people.

J Darrin Gross 26:50

Gotcha. In the real estate market, in Texas, I mean, I always think of Texas as kind of its own entity as far as economy and, and size and just the ability to kind of be its own market. Any lack of activity going on in Texas right now?

Johnny Merritt 27:12

Oh, gosh, it Have we got six hours of this program. The it’s fascinating, what’s going on? Is is fascinating, it’s disturbing, it’s great. It’s all I would say in a, from a residential standpoint. Talking to an appraiser the other day and he said for the first time ever, he he seen a both a seller and a buyers market, he’s never seen that. And that’s because the prices are high, but interest rates are low. So as a result of that, that is promoting sales. Here in Austin, we’re seeing it’s kind of turned on its head. Before COVID, Everybody wanted to be downtown. Now everybody doesn’t want to be there. Nobody wants to be downtown. So there’s there’s an exodus from the urban areas. On a commercial standpoint, it’s it’s, you know, the, the point where I think we’re gonna see a pretty significant change because people can work from home. And but those, the office leases are typically more long term, and so that we’re having a lag to see how that’s going to impact retail, of course, has been horribly impacted. Unless you own an industrial building, like Amazon, or Walmart. And so, the sexy buildings now or the interest industrial buildings, whereas used to retail strip shopping, and then also finished with this. The anchor tenants in the retail shopping centers, they faltered used to it was the retail stores that carried those centers, that’s the service stores, the the the the nail salons or the the the healthcare facilities, and those are curating those retail shopping centers. So but but right now, the economy is very strong. I think it depends on what’s going to happen within employment. It depends on what’s going to happen with politics. And and it depends on what’s going to happen with more government assistance, I think. But there’s a lot of balls in here on that on real estate in in Texas, and I frankly frankly think that’s nationwide.

J Darrin Gross 29:48

Yeah, definitely some interesting times, Johnny, if we could, I’d like to shift gears here for a second. As I mentioned before we got started recording by day I’m an insurance broker. And as such, we do risk management with our clients. And there’s three strategies we typically consider, we first look to see Is there a way we can avoid the risk. And if so, then we we eliminate the risk. If we’re unable to avoid the risk, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize risks, and we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And I like to ask my guests if they can look at their own situation. This could be their clients, investors, tenants, the market, etc. I let you identify what you consider to be the biggest risk. And for clarity, I’d like to make it clear, I’m not necessarily looking for an insurance related answer. And if you’re willing, I’d like to ask you, Johnny Merritt, what is the biggest risk?

Johnny Merritt 31:10

Very sincerely in this comes from my relationship with this $1.52 billion company that I’ve represented for over two decades. I think the greatest risk of business has is not having a good relationship with an insurance person. There are a couple of, as general counsel, what what you what you’ve learn to do, is you, your’re a generalist. You provide those services that the the business typically would need. You review contracts, you you attend board meetings to you. You look at real estate transactions. But then then you get calls on for instance, intellectual property. But that’s when you call them the expert. They’re all there are a handful of people that I that I rely heavily upon. One is accountants. And you need to be able to call your accountant. Another one again, for my clients, I have a great IP attorney and intellectual property attorney. But I also have a an insurance broker, that, frankly, I am in constant contact with. Weekly is probably an exaggeration, but it’s over four times a month, it is I believe strongly that that you that every business needs to have a relationship with somebody who understands can they can recall and rely upon. And in frankly, this comes from experience, we represented an entity that did not have enough insurance. And in it, we found ourselves with a substantial liability, they had not allocated the kind of using your formula did not evaluate the risk properly. They had not and then they had not allocated or taken care of. So I it sounds like it’s so self serving in your favor. But it’s just the truth is is having just like having a great attorney, and having a great accountant. You need to have a great insurance person who you trust to who you understand is not just out to sell insurance, but is there to help you protect and minimize your risks.

J Darrin Gross 33:52

Johnny I really appreciate you saying that it’s I mean it’s something we try and do our best to communicate with our clients. But it’s always nice to hear it from some someone and I appreciate you saying that. Johnny before we wrap up where can listeners go if they’d like to learn more or connect with you?

Johnny Merritt 34:17

Johnny Merritt, johnnymerritt.com is I have a website they’re also the law firm is hajjaessentially our h h h a r Peters or Johnny Merritt in Austin. We the websites probably the easiest, you can get our phone number there, it’s easy to remember, it’s just my name dot com and we’d be thrilled to visit with any of your listeners to that. Let me also say if some of you listening to our attorneys in Oregon or elsewhere that that this concept sounds like something they would like to consider. I’d be thrilled to talk to them. As well, I really am interested in changing the paradigm altering the view of attorneys, instead of just being an expense and a hardship. We’re actually partners with our clients.

J Darrin Gross 35:13

Awesome. Johnny can’t say thanks enough for talking today. I’ve enjoyed it. I’ve learned a lot. And I hope we can do it again soon.

Johnny Merritt 35:24

And we appreciate this, this opportunity to speak to you and to listeners and, and hope that what I’ve provided is somewhat helpful and we, we’re gonna make it through this COVID and they’re exciting times.

J Darrin Gross 35:43

For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. CRE PN Radio.

Announcer 36:04

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1031 Exchange Sell – Defer Tax – Reinvest with Dave Foster – CRE PN #286

Dave Foster 0:00

The end of the year when my accountant called me and said, here’s the tax bill. And I went holy crud, who knew that I ended up getting a silent partner named Uncle Sam, who’s gonna make more than me on this deal. So real quickly, it became clear that that was going to take quite a bit longer if we had to go that route. Now, this was right about circa 1996. And right at that moment in time, there was a huge court settlement that had just come to be between the IRS and a guy named Starker, who did a new way of using what was called the 1031 exchange. He sold a bunch of investment property and bought a bunch of investment property, and he did not pay the tax on the capital gains in the middle. And he won that case in 1996 ish. And the IRS had come out with their new RECs. And all of a sudden, that opportunity was now available to everybody.

Announcer 0:45

J Darrin Gross 0:59

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

Today, my guest is Dave Foster. Dave is the founder and CEO of The 1031 Investor. Dave is a degreed accountant and serial real estate investor, who is a Qualified Intermediary and consultant for tax saving strategies such as the 1031 exchange, and the section 121. Homestead Exemption.

And in just a minute, we’re going to speak with Dave about when and why to use the 1031 exchange. But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do. You can subscribe, like and share. And as always, we would love to hear from you if you’d leave a comment. Also, if you’d like to see our handsome our guests are, be sure to check out our YouTube channel. And you can find us on Youtube at Commercial Real Estate Pro Network. While you’re there, please subscribe. With that I want to welcome my guest, Dave, welcome to CRE PN Radio.

Dave Foster 2:55

Darrin, it is great to be here. And I understand that you and I are on opposite ends of the day. I’m looking at five o’clock, and you got a long ways to go.

J Darrin Gross 3:05

Yeah, no, we’re just getting started here on the west coast. But no, we and then as we just before we started recording, we’ve got a little bit of a similar path there. We’re both Kansas natives. So that’s kind of a fun, fun orientation there. But Dave, before we get started in our talk, if we could if you could share with the listeners a little bit about your background.

Dave Foster 3:30

Sure, well, I said I’m a Kansas farm boy, that had ocean and his blood. So from my earliest memory, I have always been fascinated by the sea. And so I grew up trying to figure out how I could go to Kansas State University and major in oceanography. And for some reason, it just never seemed to work. But fortunately, through a series of life events, which include going further in and spending 20 years in Denver, where I met my wife, we actually ended up settling on real estate and real estate investing as a profession and actually moving our portfolios around the country, always in search of the perfect sailboat water.

J Darrin Gross 4:18

Well, that’s definitely a quite a story considering the the start in landlocked Kansas, and, you know, ended up on the ocean there. So that’s kudos to you and, and keeping your dream alive and make an app and that’s awesome. So let’s, let’s talk here a little bit. You mentioned your path as an investor. And I’m assuming you did some exchanges along the way to move your portfolio. Is that fair?

Dave Foster 4:50

Yeah, that’s exactly I think you’d you would almost call me the accidental exchanger. It wasn’t something that was really in my vocabulary or anywhere else, anybody else’s vocabulary at the time, we were simply looking for a good avenue to let us break from the corporate world and start to follow our dreams. And we quickly decided, like a lot of people have, that real estate was going to be a great avenue. So like everybody else, what do you do? Let’s go buy a house and fix it up and sell it. And so I did that. And it was awesome. And the until the end of the year when my accountant called me and said, here’s the tax bill, and went holy crud, who knew that I ended up getting a silent partner named Uncle Sam, who’s going to make more than me on this deal. So real quickly, it became clear that that was going to take quite a bit longer if we had to go that route. Now, this was right about circa 1996. And right at that moment in time, there was a huge court settlement that had just come to be between the IRS and a guy named Starker, who did a new way of using what was called the 1031. Exchange. He sold a bunch of investment property and bought a bunch of investment property. And he did not pay the tax on the capital gains in the middle.

And he won that case in 1996. ish. And the IRS had come out with their new Rec’s. And all of a sudden, that opportunity was now available to everybody. So I mean, really thinking about that, instead of having to pay tax on that real estate deal. If I could have kept it and use that to go buy more real estate, how powerful that would have been. I had some really good friends at that time. And Darrin, you know how you can tell your best friends are until they’re the ones that didn’t feel free to mock you at any moment. Yeah. They called me. Oh, look what you had to pay. Dave, we’re starting a business to help people do this do you want in? I said, Absolutely. So at that moment, not only and I set on a course of wanting to do the 1031 exchange for myself, but we started doing them for others. And over the course of the next 25 years, it’s been a really crazy, fun ride, to not only see what we’ve been able to do personally, by not having to pay real estate gains tax, but also watching the impact that that’s had on my clients and investors know how we got to start.

J Darrin Gross 7:47

That’s awesome. That’s awesome. It’s funny that Starker, I think he was an Oregonian, I think it was a Timberland things. I’ve talked with other local investors, and they’ve called it the star Starker exchange. I was like, wow. And I think I’ve not read up on this, but maybe you would know better, but something about some forest land he bought and sold. And, and I don’t know the details.

Dave Foster 8:12

That’s exactly right. It was actually he and his son. And they were amazing guys, because they separated their court cases. So that if one lost in one district, the other one after case going, and they just jump back and forth until finally they won. Ultimately, crazy story. It was a lot of money that they spent, I can tell you that.

J Darrin Gross 8:37

Oh, sure.

Dave Foster 8:38

Oh, but we’re benefiting from their legal expenditures for sure.

J Darrin Gross 8:43

No, that’s awesome. So So tell me so you had the the you were flipping right. And that’s when you realize the the tax situation that that came up? Because I just had to distinguish a think there’s a lot of people that tend to put all of real estate investing in one bucket. But my understanding is that real estate, if it’s if it is kind of flipping, it’s considered more of inventory type thing that if you’re doing it within 12 months, that you’re purchasing, doing the fixing, and selling, are you able to exchange that on a regular basis?

Dave Foster 9:20

Yeah, it’s not that there is a statutory holding period of the year, two years, you know, you’ll There are all sorts of numbers being bandied about what it is, though, is that your intent way, if you want to do a 1031 exchange, must have been to hold that property for productive use. And if your intent was to hold that property, then you can sell it and use the proceeds in a process to go buy other investment real estate that you also intend to hold. So you’re at the end, I have to pay the tax. You’re absolutely right. fixer flippers would not be able to do 1031 exchanges, because their intent is not to hold that property. They’re simply wanting to buy it, fix it up and get rid of it. So their intent is resell.

But the 1031 investor simply as a different intent. And one of the ways that you can demonstrate that, of course, is how long you hold the property. So that’s one factor. It could be how you use the property, it could be your correspondence with your professionals. There’s all sorts of things that go into establishing your intent.

My favorite story of all time comes from this year, I had a client call me up. And he had owned a property for 30 days. And he wanted to sell it into a 1031 exchange. I said, Well, you know, it’s really only for people whose intention was told he goes, by the end the purchase and sales agreement, I do agree to honor the lease with my tenant. Because I meant to hold it. I said, Well, okay. But then why are you selling it? And he said, Well, it was because the tenant moved out. I said, why would the tenant move out? If you had already agreed to honor their long term lease? He said, it was when the bear took up residency at the trashcan. She didn’t want to live with the bear. So she moved. And I don’t want to deal with a bear. So what was his intent? To hold the property? And a bear gave me excuse, so he could do the 1031 exchange?

J Darrin Gross 11:37

Hmm.

Dave Foster 11:37

So you never know, what kind of accidents are gonna happen?

J Darrin Gross 11:41

Right?

Dave Foster 11:41

They can. But they keep the whole thing though. Darrin, is. You’re absolutely right. He oriented has to have a longer time horizon. But what most people don’t realize is that the tax burden between simply fixing and flipping is massive compared to simply holding property for your big capital gains, let alone if you hold the properties, and then sell it do the 231 exchange. So what I tell a lot of potential investors and clients is tweak your model. Instead of buying properties and fixing flipper, buy a property as an investor. And the instead of buying it, fixing it and selling it, buy it, fix it, and rent it. And then evaluate it periodically, to see if it’s time to sell. You do slow yourself down a little bit. But you just changed your tax burden for maybe 30 to 40% to zero on a profit. That’s a huge model shift. That just takes a little bit of patience. And one of the things that people can do in the meantime, if you’re, I confess, I’m a little bit of an adrenaline junkie, I do love the deal. So I do like to buy and sell sometimes. But if you can do a refinance of that property while you’re holding it, then that lets me get my excited little fingers on cash. And I can go and do whatever I want to with that, while keeping the integrity of the tax deferred. So my model looks like buy, fix, rent, refinance, you use that cash to go do something else, and then evaluate that property when I need to sell it and do a 1031 exchange.

J Darrin Gross 11:44

No, I love it. So that the I think there’s a line and I’ve been trying to figure this out. And maybe maybe you can help identify this because I think that the 1031 exchange, I think from from where I sit, it seems like it’s most apropos or appropriate for for somebody who’s got kind of a longer vision of investing in real estate. I think there’s a lot of people that whether they invest passively or just or are looking just for a quick return, they view investment across all options as the same and that like just get the return get the return to the return. Not Not as much like what I view a lot about or one of the benefits about real estate is actually building equity. And I mean there’s there’s there’s cash flow, which we all want, but the equity is really what’s kind of the muscle behind all of that. The the ability to create wealth, and I wonder if you can talk a little bit about that or if you can help clear that or make it more distinct as to you know, where that fits or how 1031 can help or be a benefit to somebody that that’s an investor.

Dave Foster 14:58

Yeah, you’re absolutely right. It is Really, in one sense, it’s it’s a factor of patience, and the power of what patients can do for you to remember the old example of the, the guy that offers his son $1 a day. And you’ll give him $1 a day for 30 days, or I’ll give you a penny. And I’ll double it every day for 30 days.

J Darrin Gross 15:27

Right?

Dave Foster 15:27

Right. It’s billions of dollars of difference by being patient, now. And so I tend to look at people falling into one of three buckets really, there are those people you’re talking about that are really interested in building the equity. So it’s future benefits, future cash flows, future income, built off of the infrastructure that I built. And then there are those people that are all about cash flow, which is a spin off of that, where I am buying real estate, to generate cash to live off of the income coming in. And so that’s a step down, those people that are all about equity, are willing to forego money now, to get much more money tomorrow. Those people that are into cash flow, are looking for money to live now. But they also want to build equity. So they’re doing both. And then there is what I call the deal flow, cash flow people. And those people, we hear a lot of those are the true fixer flippers, because they are trying to finance a lifestyle that is based totally on the real estate activity. So they can’t just live off of rents from a property, they can’t leave those rents in the game, to generate future equity, because they need to live on the now. So that’s their business model. They are in essence, in the business, of buying and selling real estate. And that’s okay, there’s nothing wrong with it. But there’s a cost of doing that.

And the cost is you pay much higher taxes, you can’t do the 1031 exchange, and 20 years from now, you’re still going to only have your effort to bring in the money. Whereas if you do like what you’re talking about thinking of the longer time horizon, you are building up assets over time, so that in 20 years, you have cash flow that’s coming totally apart from your work. And if you’re the 1031, investor type, a large chunk of that cash flow that is now coming your way through no effort of your own is coming from the income off of the deferred tax. In other words, the government is letting you have the benefit of all the tax, you would probably have paid over the years. And that’s a huge, huge number.

J Darrin Gross 18:12

And I think, you know, the the if we could, could we talk just actual numbers? Can you give kind of an example there just kind of walk through? Pick a number and just the tax consequence? Because I think it’s one thing to talk like the it’s a big number. But I think when you get into actual numbers, it’s really, it really magnifies the power of the 1031.

Dave Foster 18:39

Yeah, absolutely. You know what, let’s see if we can do something here. This will be a great experiment, because I’m the least technologically savvy person you’ll ever meet. But let’s see if I can share a screen I’ve actually got actually, can you can you enable screen sharing? Let me see if I can do that. Yeah, this is hilarious. This

J Darrin Gross 18:58

is the blind lead, the blind participant can share at a time yours, okay, multiple participants. That’ll do the right button here. Let’s see, oh, here, uh, no. Advanced, maybe I took in the advanced options. Here are

Unknown Speaker 19:16

what I can do, I just pulled up a series of slides on my screen that I could use, just so that I could give you examples. I’ll give you the right numbers. But I like to use an example of two investors that start with the exact same property. And then we make this example it’s really just an Excel spreadsheet. But we make the example where they’re making the exact same appreciation. They’re selling for the exact same about the only difference is that one of them does a 1031 exchange, so they defer the tax. Now remember, the tax doesn’t go away, it’s just deferred. The other investor pays the tax and so they’re not going to leave taxed at the end of each transaction. And we do this if they sell a property for $100,000 in gain.

J Darrin Gross 20:08

Hey, Dave.

Dave Foster 20:09

Yeah,

J Darrin Gross 20:09

Check real quick. See if I tried to make you the host here, see if you are able to share your screen now.

Dave Foster 20:15

Let’s see if we can do it all the time. Look at that. Come on up share.

Do You guys have it.

J Darrin Gross 20:27

I got it perfect.

Dave Foster 20:28

Holy that that’s awesome.

J Darrin Gross 20:29

Hey, we figured it out. All right, yeah, let’s, let’s let’s back up here. And let’s

Dave Foster 20:34

Yeah, let’s dive into. So these two investors A and B, investor A is the only difference is going to be investor a does a 1031 exchange. So at the end of their first transaction, you see that far right column, they owe $20,000. In tax, investor B, does not do a 1031 Exchange, they pay the tax. So at the end of the transaction, they don’t owe any tax. But look what happens with their available money to put as a down payment. Investor a could use all hundred thousand dollars, whereas investor B only has $80,000. So they can put 20%, down on a 500 and a $400,000. Property respectfully. Now, here’s what happens after five years, those that property appreciates. Investor A is going to sell, they naw have a gain of 138, they’re again going to defer that tax. So look at how that deferred tax column is adding up. Because they’re doing the 1031 exchange. Investor B again, just pays the taxes they go. But now, investor A is able to purchase a little more than a million dollars in real estate, whereas investor B is only able to purchase, you know, 800,000 or so. Because investor A is using deferred tax dollars, for their own purposes, 10 years, now you start to see it really diverged, don’t you, investor a is controlling almost twice as much property as investor B, simply because they’ve used that $130,000 of tax to buy more real estate using the 1031 exchange.

And then if you take this example, all the way out to 20 years, which is a pretty healthy investing career for anybody. You can see that simply by using the 1031 exchange. And having a patient, long time horizon. investor A is controlling, almost $12 million in real estate. And they still owe almost $500,000 in tax. Now that’s a huge chunk, you would think, but how much are they making monthly on a $12 million real estate portfolio? If they’re making 10% of their money, they could pay that tax it just four or five months of income, couldn’t they.

J Darrin Gross 23:19

yeah.

Dave Foster 23:21

Investor B doesn’t owe a penny in tax. They’re called in. But they only control four and a half million in real estate. So the difference in what you can accomplish is really vast. And it all really just boils down to what Albert Einstein called the eighth wonder of the world. It’s compound interest. Making money on the government’s money, and then making more money on top of that, that just takes patience and runway.

J Darrin Gross 23:51

It is a fascinating thing when you especially when you apply the timeline to it, I think it gets a little simplified when when people think it was just a transaction a one time event. But as you do the math and you you know, extrapolate it out, you know, multiple years like you’ve done, and what was that three transactions or four transactions?

Dave Foster 24:14

Yeah, that was just for four

J Darrin Gross 24:16

transactions. Yeah. So I mean, if you average once every five years, your, your, you know, buying or selling, and, you know, changing up there, then that’s, that’s how you you know, can really multiply that.

Dave Foster 24:31

Yeah. And it’s really interesting that you mentioned five years. Was there a reason for that?

J Darrin Gross 24:37

No, just on what I saw you said 20 years for okay. So yeah, so,

Dave Foster 24:42

because here’s what the National Association of Realtors tells us that are the average the American lives in the house that they buy. So they live in their primary residence for between five to seven years, on an average. So there’s another application There’s a rule that falls into the five year period. And that is the 121 primary residence exemption that lets you also take money out tax free.

J Darrin Gross 25:12

You know, if you don’t mind, let’s talk about that a little bit. I don’t know. I mean, typically we focus on investing, or in, you know, an investment property, which would be the 1031. But I haven’t had anybody yet speak about the the home exemption or the we call it the 121.

Dave Foster 25:30

Yeah, refers to Section 121 of the IRS code. And it’s basically the opposite of 1031. To 1031 deals with investment property, what do we what is your primary residence, and what it says is that if you live in a property for two out of the five years, prior to selling it, that you can sell it and take the first 250,000, or if you’re married 500,000, in gain tax free. And you could do that once every two years. So basically, if you’re staying in a property for five or six years, over the course of your lifetime, you’re gonna have seven or eight or nine opportunities to sell a house that you live in, and take up to $500,000 in profit, tax free.

J Darrin Gross 26:25

And that’s a gain from purchase to sale, because your is a residential not depreciating that, right?

Dave Foster 26:30

That’s correct, you’re not depreciated so that that’s not a factor in it. But here’s what’s really interesting during and what we discovered, and used for ourselves. And that is that using the 1031 exchange, remember, you’re selling investment property, and you’re buying investment property, and you intend to use that property for investment uses. But after a year or two, it is perfectly allowable to convert property from investment into primary residence, or vice versa.

So what we did was we started in Denver, and we would we positioned our investment properties, using the 1031 exchange, where we were going to move next. And so we got rental properties in Stamford, Connecticut. And then a couple years when we were ready to move, we simply moved into one of our former investment properties. So the gain in those was tax deferred. And then we moved into it, which did not create a taxable event they did a couple years, we then sold those properties. And we would get we got a sizable chunk of that tax free. And we simply did a daisy chain of those from Colorado to Connecticut, to Florida. And at each time, the buy the boat bank account was populated with the tax free dollars for the primary residence sales. So at the end of 10 years, we were able to buy our sailboat to go live on it for 10 years and raise our four boys using combination of the 1031 exchange and the 121 primary residence exemption.

J Darrin Gross 28:25

And are there any said it’s once every two years that you can do that are

Dave Foster 28:30

correct.

J Darrin Gross 28:32

So you buy a rental property, you sell your residence. And you you win on the as long as you’ve been there to the last five years. If you’re married, you can take up to 500,000 gain, and you move into your rental. And you have to stay in there assume two years.

Dave Foster 28:54

Yeah, if you did a 1031 exchange to get it, you have to live in it for two years, you have to have a home did a total of five years. So that that’s how you demonstrate your intent is you would use it for rental for a couple years. And they live in it for two or three. Or vice versa, whatever works out. And once you’ve owned it for five years, lived in it for two, you sell it and you get to prorate the game tax free versus paying tax based on how long you actually lived in it. So if you live in it for three out of five, you would get 60% of the gain tax free.

J Darrin Gross 29:32

Oh, gotcha. So if you live in a for at least five then you get to the full gain or is that

Dave Foster 29:39

you would still use it for investment for a year or two. Oh, so let’s say you moved into it for for lived in it for four and used it for investment for one, you would get four fifths. Okay, gotcha.

J Darrin Gross 29:50

Gotcha, gotcha, gotcha, gotcha, gotcha. Okay. So it’s still appropriate thing. So, if you’ve been if you have had long term rentals, it’s still a 1030 one’s probably a You know, as opposed to moving into something, if you’ve held something for 20 years, and you move into it for two, you’re not exactly going to win big on that.

Dave Foster 30:10

Because you’ve got depreciation issues and that sort of thing that

J Darrin Gross 30:12

Yeah, yeah, yeah.

Dave Foster 30:14

But think about those people that are wanting to change locations. Yeah. So let’s say someone, well, you and I were talking about how beautiful Sarasota is. So what if someone wanted to sell an investment property in Los Angeles, and go buy a Siesta Key vacation rental, you receive the 1031 exchange, and they were nearing retirement, after a couple years, they could say, you know what, I think I’m gonna move in to that property. And as long as you never sell that property, you’ll never have to pay the tax. So I have people that will use this as a retirement plan. Sure, for 10 15, 20 years, till they absolutely have to move.

J Darrin Gross 30:58

Sure. And at that point, when you when you’re no longer around, and your heirs would have to step up in basis and, and wipe that clean.

Dave Foster 31:07

That’s exactly right. That’s exactly right. So that’s just another way that you can strategically package to 1031 exchange, so that you could use it in both your personal and your professional life to get out of it.

J Darrin Gross 31:24

So let me ask you this, this is something I think that I think people, people are familiar with the word 1031 exchange. They don’t always understand the mechanics of it, they understand the benefit, they don’t understand the the, you know, how do we get from I own an investment property to I’ve exchanged into another property? Can you walk us through that?

Dave Foster 31:49

Sure. Well, and actually, the most beautiful thing about that is, you as the investor won’t do anything different. It is a process of selling and buying, and you use all of your normal professionals. So if you were going to sell an investment property, you would list it with a realtor, you’d have a title company you work with, you’d have your own normal vendors, who are going to fix up the property or whatever. The difference is the add on of an unrelated third party, called the Qualified Intermediary who sole role is to document the 1031 exchange, and hold the proceeds in between the sale and the purchase.

So you sell the property just like you normally would the Qualified Intermediary documents along with the title company, and the proceeds, go in your exchange account because you can’t touch them? That was one of the things that they really did not like about Starker is they wanted to see that the money wasn’t in his control. And then you will go shopping, to go buy your new investment property, same thing. And again, the Qualified Intermediary will document that sale. They send the money into the closing, and voila, you’ve got a 1031 exchange. It’s really that easy.

Now, the real bugaboo is in the timing, and a lot of people get caught up, because the timing is pretty constrained, from the day that you close the sale of your property, you only have 45 days to identify your potential replacements. So you’ve got to be really focused, because after day, 45, you can’t add properties to your list, and only the ones on that list will count. You have a total of 180 days to close on your new property. But that’s usually not so much of an issue. It’s that first 45 that will get you every time. So that’s bugaboo number one is the timing. So you’re going to do your normal process, just like you would here to use a Qualified Intermediary, you’ve got the 45 to 180 day window, whoever it is who’s selling the property is going to have to buy the new property title needs to be the same. And if you want to defer all tax, you simply have to purchase at least as much as your net sale and use all of the proceeds. So if you sell a property for 320,000, and there was 20,000, in closing costs, your net sale is 300. So you have to purchase at least 300,000. If there was $100,000 mortgage on that, then you have 200,000 in cash that goes into your exchange account. So your goal to defer all tax would be to buy at least 300,000 in real estate, using all 200,000 in cash.

But the cool thing is you can allocate That cash in any way that you want. So let’s say you found a property for $150,000, that you wanted to buy for cash, you could do that and use the $50,000 as a down payment on a $300,000 property. So you just got yourself two for one, you just sold one property, you purchased two, one of them is debt free. So you did have a had a think there, I call it defensive investing, you just took a part of your equity, and you protected it from debt risk. But meanwhile, on the other transaction, you’re still getting the benefit of the arbitrage of leverage. And that’s one of the greatest applications of the 1031 is the ability to sell one and buy multiples, or to go the opposite direction, sell two or three and combine them to buy one bigger investment. You could go either direction.

J Darrin Gross 36:06

And I like the the the flexibility of it, I think the the going from one to many is probably a little bit easier than going for many to one based on the timing there. But nice to have the flexibility there.

Dave, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk, and determine what to do with the risk. And there are three different strategies we typically consider. We look to see if we can first avoid the risk. If that’s not an option, we look to see if there’s a way to minimize the risk. And when we can’t either avoid it or or minimize it, then we look to see if we could transfer the risk. That’s what an insurance policy is as a risk transfer vehicle. And I like to ask my guests if they can look at their own situation, whether it be themselves their clients, investors, tenants market, however you want to look at the question. But if you if you can assess and identify what you consider to be the biggest risk. And, again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. But if you’re willing Dave Foster, I’d like to ask you, what is the biggest risk?

Dave Foster 37:39

What a great question. You know, I like to think of risk as having been a coin that has two sides. And on one side, I think the greatest risk in both my life. And in my investors, life has been the risk of inaction. We want we had a goal of moving on to a sailboat and living and living out here raising our boys. And oh my gosh, that was the greatest period of our lives. But boy did we have to overcome a lot of naysayers, and a lot of fear, to take that risk. But the risk of inaction had far greater consequences than the risk of actually doing it. And that’s something that Mark Twain actually said it 20 years from now, the things that you regret are not going to be the things that you did, they’re going to be the things that you didn’t do. So I see that risk of inaction has been huge. But the other side of that coin, is that with the 1031 exchange, and with what to build wealth, the greatest risk you’ve got is not exercising patience, and let your money work for you. Everybody talks about passive income, but passive income doesn’t happen overnight. It happens in stages over time. That’s my coin of risk.

J Darrin Gross 39:11

No, that’s true. You know, it’s funny, you mentioned 20 years, and it did just flies by Yeah, I still can think back. You know, further than 20 years. I’m always shocked when people go well, that’s old. I’m like, What are you talking about? I can remember that like yesterday.

Dave Foster 39:29

To true.

J Darrin Gross 39:30

Definitely. Dave, Where can the listeners go if they would like to learn more connect with you?

Dave Foster 39:37

Yeah, best place to catch us for all your 1031 needs is going to be www.the1031 investor.com. And we have a whole set of like I said, I think it’s 34 and counting videos on how to Stroud to strategically use the 1031 exchange. There’s a primer and review paper that you can use That goes into more detail of all you and I talked about, and just a lot of resources for you. And you can catch us through there.

J Darrin Gross 40:08

Awesome. All that’ll be in the show notes for anyone that’s not able to write that down. But, Dave, I want to say thanks for taking the time today. I really enjoyed our talk. Learned a lot, and I look forward to doing it again soon.

Dave Foster 40:25

That sounds awesome, and you of all, people will understand EMAW. Every Man A Wildcat! Right?

J Darrin Gross 40:31

There you go, especially right now. Go Cats Go! So, all right. Well, for our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

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