Jeff McKee 0:00
But then quickly after all of that, we moved on to commercial real estate to basically scale up to scale up the number of doors, and then also to have them in close proximity and have the equipment, the infrastructure be all part of the same versus having 10 or 20 or 50 Single Family rentals that have all different components and your repair and maintenance people are going all around town trying to keep up with your rentals. And so we just felt that this commercial real estate business was mostly in one location mostly with a similar components a lot easier repair and maintenance, and that was just more scalable that we found for us.
Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.
J Darrin Gross 0:57
Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
Today, my guest is Jeff McKee. Jeff is a real estate syndicator. He’s a limited partner in 1500 doors. He’s also a general partner on 10 properties with over 2500 doors, and 200 million assets under management. And in just a minute, we’re gonna speak with Jeff about multifamily apartment investing.
But first a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. With that I want to welcome my guest, Jeff, welcome to CRE PN Radio.
Jeff McKee 2:15
Thank you, Darrin Great to be here.
J Darrin Gross 2:17
I’m looking forward to our conversation. But before we get started if you could take just a minute and share with the listeners a little bit about your background.
Jeff McKee 2:26
Sure. So a longtime w two employee read Rich Dad Poor Dad Cashflow Quadrant, tax free wealth, you know, five years ago got into real estate to drive multiple lines of horizontal passive income. And so we invested as a limited partner and in several deals, apartment deals. And then we decided to go bigger faster. So then we joined another mastermind group and started investing as co sponsors, general partners, and then those are the 10 deals that we’ve closed the 2500 doors from Texas to Florida, basically. And yeah, so I’ve been ramping up in this multifamily world over the last year, four plus years.
J Darrin Gross 3:09
Got it. And you mentioned you you read all the prerequisite books. I love the Kiyosaki books, they’re the Cashflow Quadrant, and it’s one of my favorites. Was that basically the impetus that made you rethink or go from W to to to investing in real estate?
Jeff McKee 3:28
You know, I’d say right before that, Darrin, I was I was turning 50 years old and my father had passed away from heart attack at the age of 55. And I started thinking to myself, Well, geez, you know, like the W twos man, good. My wife and I, you know, socking away the 401k. But then, you know, we’re basically relying each on one vertical income, we hadn’t really driven much horizontal income from other investments, and it’s all about the retirement. And then it’s like, well, you know, life is short. And what could we do to accelerate you know, our wealth and repeatable passive income? And that’s when I started doing this research. And then I and then like the Cashflow Quadrant, like you were saying, it’s like I find myself as the employee, you know, the the high w two the high federal taxes paid. And I want to become that investor, you know, where it’s like the 0% federal taxes paid, and lots of passive lines of income and reaching that financial freedom. So you know, I read vivid vision as well and the 10 year vision, the five year and then my wife and I started working on that we hired you know, tax planning and strategy. We hired a company called provision which is actually a Tom wheelwright wealth ability company and started going down the path of, well, hey, strategically, what are the things that we need to be doing differently? And part of that was passively investing in real estate is great. In order to get some of the W two, you know, write offs against that income, you have to be more creative, sophisticated, and that’s when we went down the real estate professional Pat, where my wife ended up quitting her W two job and focused on real estate, commercial real estate, as well as short term rentals. So so that was some some things that we’ve learned along the way. You know, we join masterminds, we’ve hired great professionals, you know, like pro vision, we’ve got a CPA that focuses specifically on real estate investors, because it gets kind of complicated when you’re dealing with 15, or 20k ones. And some, some of them, you’re limited partners, some of them you’re a general partner, and you’ve got all this carried interest and different entities that we’ve structured, including, you know, a Wyoming holding company, and things that were recommended to us. So again, we surround ourselves with some very good professionals in this space. And and then teams of people to go work, work these investments for our investors
J Darrin Gross 5:49
on it. Now, you mentioned kind of your education there. And just how you’ve gotten kind of going here, what what are some of the benefits of real estate that you saw that really attracted you to real estate?
Jeff McKee 6:06
You know, initially, you know, five years ago, we joined a single family mastermind group. So we did one fix and flip with a partner, when we realize that all of that income that we made on the profit, and that seven month flips was all current income, it wasn’t any depreciation. And so we thought we’re getting into real estate. And it turns out that we’re just adding to our top lines. So then I started rethinking that we also did a buy and hold of a duplex. And we just did one of those because we started looking at the numbers and saying, I don’t know that we can scale if you’re getting, you know, 100 $200 per door. And I mean, to get to the passive income number of let’s say, 20,000 a month, that’s going to take a lot of single family homes. And we did one of those. So we did one fix and flip one of those that then we did this homestead strategy where we were here, and we live in Austin, Texas. And in just south of downtown, we bought a teardown house, so three and a half years ago, and we went down that path. So we built two houses on that. And that’s part of the Homestead strategy. Again, more single family, we live in the front house, that is our homestead in the back houses and Airbnb that my wife self manages. And so that’s been a good strategy for us. But then quickly, after all of that, we moved on to commercial real estate to basically scale up to scale up the number of doors, and then also to have them in close proximity and have the equipment, the infrastructure be all part of the same versus having 10 or 20 or 50, single family rentals that have all different components and your repair and maintenance. People are going all around town trying to keep up with your rentals. And so we just felt that this commercial real estate business was mostly in one location mostly with a similar components a lot easier repair and maintenance. And that was just more scalable, that we found for us.
J Darrin Gross 7:55
That’s that’s definitely some words of wisdom there. If you don’t mind me asking who was the the mentor group that you are working with?
Jeff McKee 8:04
So the single family group that we joined, you know, almost five years ago, they refer to themselves as the big dog group, but it’s still in Shinola Grove, based here in Austin, but they also have chapters in Dallas and Houston. Then we joined, you know, Brad some rocks group and turns a limited partner investor went through all the training invested in a bunch of deals through those groups. And then eventually, we decided to become more active. And we joined mark, Kenny’s, I think multifamily group, which is basically just general partners and looking for large commercial apartment buildings. Yeah. Mostly from Texas to Florida.
J Darrin Gross 8:40
Yeah, no, all those. I am not familiar with the big dogs. But definitely Brad and Mark, Kenny’s group, there that definitely are are noteworthy groups and do a lot of good, good work there. So when you when you made the decision to go from being more of an LP to participate in, in the GP, what were some of the things that appealed to you, or were, you know, the considerations that you had to overcome or, you know, think through to do that,
Jeff McKee 9:13
yet, part of it was the tax implications of having you know, your your spouse become a real estate professional means you need to be actively involved in real estate, not passively involved. And that meant that we need to move more to the general partner side on future investments, as well as let’s say, self managing properties, like the duplex that we that we still own, the long term hold is really managed by third party property management. And so you can’t really count those hours towards you actively managing that. But the Airbnb, for example, is self managed by my wife. So all of those hours count all the hours towards real estate investing as a general partner doing the due diligence, you know, meeting with investors and all that those hours count. And so it was really around into working with pro vision on what would it take to one of us to qualify as a real estate professional, so my wife ended up leaving her job to do that full time. And that was a large part of shifting over to the general partner side was to have those hours count towards active investing was a large part of our consideration.
J Darrin Gross 10:22
Got it. And so the the, you made the switch, and then you kind of overcame some of the the hurdles, what you know, having I mean, made the switch, and now you’re acting more on the on the general side of things. If you were to kind of convey to some of the listeners, you know, some of the things that you’ve learned, that would expedite their learning curve, what’s like a number one thing that stands out in your mind,
Jeff McKee 10:56
you know, joining paid mastermind groups has certainly accelerated, you know, our, our involvement in this space gets you more confident, it surrounds you with other like minded people that are going down the same path. And, and, you know, the whole thing about a mentor or mentoring group is just the speed up your time. And, you know, we go, we’ve had enough resources that we could pay for those things, other people may join, you know, bigger pockets, and, you know, do some of the three, a mastermind mentoring groups, we just felt, you know, joining some of these paid organizations would accelerate our time to get to where we want to be faster. And so that would be my number one recommendation is to, to join relevant, you know, mastermind groups that you’re interested in what they’re doing. And people, I mean, that’s part of being a mentor versus a teacher, like a mentor is actually doing that they’re, they’re out there buying, they’re investing and then they’re they’re coaching you on how to do it, versus someone that has learned something theoretically, and is trying to teach you what, what they’ve learned from a book. So we basically follow people that are doing this day in and day out.
J Darrin Gross 12:09
And now that you’re on the GP side, what what are some things you’ve learned on the GP side, as opposed to being passive on the the LP side? Yeah,
Jeff McKee 12:21
so you know, you’re definitely closer to the brokers and what goes on in the front end of the transaction. We’re very close on the underwriting. And so basically, going through the detailed underwriting tool, again, each group typically has their own tool that they use, and they update. Basically, it’s a, it’s an Excel spreadsheet, usually with a series of 15 or 20 tabs, and it gets pretty detailed. So there are actually classes just on underwriting like we’re about to go to a follow up on a deal analysis workshop, that’s a basically a three day class on just the underwriting piece. And so that’s always changing, like during COVID, it changed, you know, what the reserves and you know, the lending, you know, changes. And then you know, so we have a loan broker, we have an insurance broker, we have other people, you know, sec lawyer, other people that are that are members of the team, so you get closer as a general partner to all of those activities than a limited partner. The other thing that, you know, we’ve learned along the way is, you know, I’ve been able to be a key principle like a guarantor on some of this debt, this is typically non recourse debt. So being a general partner can also enable you to be a key principle on some or all of the debt, depending on how much there is, but then also, we’re able to provide earnest money down at risk capital as a general partner on the front end of the deal. So you’ve got to meet certain deposit requirements from the lender, you’ve got to pay for the loan at fee, you have to pay for the due diligence up front, you’ve got to pay for, you know, some of this inspection and some of the environmental studies and all that stuff’s out of pocket from the general partner team. And they need, you know, liquid bonds. And so some of us have those funds, and we can put those up at risk at the front end of the project. And then there’s also the capital raising part. And so that’s what I’ve been spending a fair amount of my time on is, is learning that side and and then bringing along friends and family, because I’ve been in the high tech, you know, WT world for 30 plus years. And so I have a lot of high tech friends that don’t understand maybe this type of commercial real estate investing. And so that’s what I’ve been doing is been writing blogs and newsletters and videos and trying to educate people on this type of investing. And so those are some things we’ve learned along the way as general partners, that as a limited partner early on, we didn’t really know existed and how all that worked. We were just basically listening to the finished product of the investor webinar. Hey, here’s the PPM you can read through and then here’s the subscription docs and then you know, wire in your money and then you know, get the monthly updates from the GPT So, so this being a co sponsor are, um, has really opened us up to understanding what goes on on the front end. And, and also a lot of the deals that never make it to getting funded, right, a lot of the deals that loi falls through the purchase and sale agreement falls through. And so you get access and visibility to a lot of a lot of those things that happen.
J Darrin Gross 15:21
And it definitely takes it from a very passive thing as an LP to a very active thing. You know, while you’re on the on GP side looking for the deals to present to the, to your investors. And I wanted to ask you, you know, you mentioned, kind of educating some of your friends and family and, you know, the work you’re doing kind of in the education realm there with blogs and videos and all that kind of stuff. What do you find that some of the the the points that potential investors don’t know, and also some of the benefits? Well, what is it that really appeals to them?
Jeff McKee 15:57
Yeah, I mean, I think sometimes, you know, the jargon in commercial real estate, for example, a cap rate, you know, capitalization rate, can, you know, it confused people initially on like, what does that mean? It means, you know, basically, if you were to pay cash, what would your return the, and we typically put 70% debt on these. So we’re, you know, reasonably leveraged with a typically government that, I mean, I didn’t know what that was going in, I didn’t realize that Fannie Mae and Freddie Mac are subsidized by the government, and you can get, you know, below market rates, because the government wants to incent investors like us to provide housing for Americans. So the government doesn’t have to build all these houses. And so it’s not only you know, Freddie and Fannie being subsidized to get low cost long term debt in the United States, it’s just amazing compared to what other countries have to do to get debt. But also the tax benefits that we get, I didn’t really realize, you know, if you’re helping to provide housing for others, the government has all kinds of incentives for you and your money on on how you’re able to either use, like, nowadays, we have bonus depreciation. So if you do a cost segregation study, and the five and 15 year components in an apartment complex in this example, can get accelerated to year one, and you get, you know, basically, a phantom loss, you get a k one with a big negative number, based upon how much you invested and how much bonus depreciation was allocated to your investment. And that could go offset, you know, your long term capital gains and other asset classes. And then if you take it another step further, if you happen to qualify as a real estate professional, then those losses could then offset your W two federal taxes paid, which is what we’re able to do now not not everybody is able to do that. And initially, when I went through some of this training early on, it’s like, oh, wait a minute. So as a limited partner, I could invest, let’s just say 100k. And I’ll get a negative 60k k one, and I can take that negative 60 and offset it against my w two, it’s like no, so are you can’t do that as a limited partner. But you’re on the right track, you could offset you know, any long term capital gains you had that year with that, but but you’d have to become a real estate professional in terms of the IRS designation, to get the full benefit of offsetting your active income. And so So then, you know, I’ve learned a lot along the way, as it relates to, you know, the benefits. And like Tom wheelwright talks about, you know, the US tax code is what I don’t know, 1000 pages, and only like 10 pages are all the tables of what you owe, and how much you owe. The other, you know, like 900 Plus pages, it’s a series of incentives for the government to incent you to do certain things, you know, whether that’s to buy an electric car to help fund, you know, solar or wind energy, or in this case, provide housing for other Americans, there’s like the 1031 exchange still exists, you know, which is a tax deferred kick, the the capital gains tax down the road. And so there’s all those kinds of things that are there in the real estate world, I didn’t fully understand I understood about the, the, you know, from a single family perspective, the homestead exemption, if you live in a house to have five years, if you’re single, you get up to 250,000 of exclusion of capital gains tax, and if you’re married, it’s up to 500,000. You know, for that, I knew that part. But I didn’t know all this commercial real estate, I didn’t know about bonus depreciation, which you know, this year still 100% Next year, it drops down to 80%. But all those kinds of things I learned along the way. And so that part’s been fascinating.
J Darrin Gross 19:35
I have to say that the learning and and I’m kind of curious as you start to attract investors and appeal to you or anybody you’re raising capital from. Do you find that the depreciation is something they they’re completely? I mean, it’s a word they know, but the how it applies to their situation. Is that is that a familiar thing? Or is that I like, oh my gosh, kind of, you know, what’s their reaction when they, when they come to understand that
Jeff McKee 20:07
it’s mostly in oh my gosh moment, it’s like, okay, wait a minute walk through some example, you know, for me like just to help me run through and just you know, knowing that most of the people I talked to are W two employees, I explain what benefit they can get. And then if they ever become a real estate professional, what benefit you would get from that, you know, like if your spouse as an example, became a real estate professional, or vice versa, you know, and so I walk through that those scenarios too. But yeah, mostly, it’s eye opening. The other one that I didn’t realize five years ago, and that I talked to a lot of w two employees about is that you can use a former IRA, you know, towards real estate investing, but you have to change the vehicle that you’re in, you know, like, I’ve been trained to max out, you know, the 401 K, it’s all about stocks, bonds, mutual funds. And, and there’s this whole world of alternative real estate investing, which, you know, they consider commercial real estate and alternative investing, like, I didn’t know that you could do this kind of stuff as an individual. And then, of course, you know, fidelity and all the big brokerages don’t really want you to know that because they want you to invest in the real estate investment trusts that they offer, they don’t want you to do private placement investments that you can do as an individual, like, you know, in the SEC, these are governed by the SEC as well. But these are separate from, let’s say, Wall Street, these are Main Street investments. And so I actually I had worked at Compaq Computer Corporation in Houston for 12 years, I had an old IRA. And then through my education, I originally moved that to a self directed IRA with a company here in Texas called Quest. And then I had heard about this ubit tax, this unrelated business income tax, that if you invest in a asset that uses debt, even though it’s in your self directed IRA, the government can tax you on the gain of that. And it’s not a pretty situation, or if you move in investment, and if you open up a solo 401 K, also, there’s another EQ RP thing. But if you have a solo 401 k, that is not subject to this ubit tax. So that’s what I ended up doing is moving my limited partner real estate investments into a solo 401 K. And as those deals go full cycle and they sell, now I’m not subject to the special ubit tax, I’m able to keep up all of that in their tax deferred and keep investing in more and more deals. And so that’s another area that a lot of w two people don’t know about that you can take an old IRA and move that over to a solo 401 K and invest in real estate, and you’re the custodian of your account, etc. And so that’s, that’s open, and that frees up a lot of capital for people. Now, of course, when I contacted fidelity to roll that money over, they go, you can’t invest in real estate assets with that money. It’s like, oh, yeah, you can. So I just had them cash out, you know, the stocks, bonds, mutual funds, you settle it to cash, you do a straight transfer to the other account, you make sure it never comes into your name personally, it gets transferred, in my case to a solo 401 K in my name, and then you manage it, you know, you’re the Managing Member type of a thing, you’re the custodian of that account, and then you invest, you know, as long as it’s not a deal that you’re personally involved in. So when it’s a retirement account like that, that I’m in control of, there’s certain prohibited transactions, one of them is I can’t invest in my own deal. And I’m a general partner, so I invest in other people’s deals with those monies, there’s certain rules that you have to follow.
J Darrin Gross 23:41
And I gotta tell you, the, as many times I’ve talked to people about these things, you know, and I love the fact that there’s a continuum of knowledge and the opportunity to continue to learn the fact that you just mentioned that the solo 401 K allows me to invest in other deals that have debt, because I had somehow in my head limited, that to more like, lending was kind of the ideal thing if you made private, private, you know, private loans, maybe for a flipper or whatever. But you know, again, if it was outside of you or your your, whatever, forget it, your Ascendance and descendants, you can’t can’t do it to your kids or to your parents, but you can do it to like a nephew or anybody that’s that’s not directly related to you up or down. That you could then you know, interest was like one of the best or the cleanest, I guess, ways to go in and out but I hadn’t I hadn’t realized that the solo and gave you that the ubit free investment thing there. So yeah, yeah, show us your number
Jeff McKee 24:51
1k Is, is not subject to any unrelated business income tax that the self directed IRA is subject to for any product that uses debt now if someone is is doing fix and flip, and they’re a private lender, being in a self directed IRA is totally fine. The key though, is that you need to fund 100% of it, you know, you don’t want to mix it with debt or anything. And so like I did that, like I had the solo 401k, there was a gentleman in Dallas that I knew from this big dog network, he wanted help buying and doing the rehab. So my, my self directed IRA funded all of it, there was no other debt involved. And I was the single lender, and that was fine. You know, you make two points. And then it’s a 10%, interest rate and all that kind of good stuff. And but it’s a reasonable amount of work to go do all the documentation and to do well. But that is perfectly fine. When there’s no debt involved, you’re the lender using your funds. And you’re not related to that person, you know, you don’t have an interest in that property, all that stuff that that that scenario is perfectly fine. It’s when you want to invest as a limited partner, as an example in like, say, a apartment investment and syndication, you can use a solo 401 K and not be subject to you. But the other thing I did is I invested in a hard money fund here in Austin, that funds other people, and they provide good returns to me as an investor, but they also use that so I had to move that investment from a self directed IRA to my solo 401 K. So whenever I would go full cycle and sell any of that, that wouldn’t be subject to ubit. But I had to ask that company, do you guys use debt? And they go, Yeah, we do. And so part of it, they use equity from us, and then they use debt from other people. And so that part that is leveraged would be subject to tax on the gain if I had left it in my self directed IRA.
J Darrin Gross 26:47
Right, right, right now, just a subtle difference. I mean, somebody here is, you know, Ira solo, but the solo 401. K, is the one that gives you that option, if I understood what you just said,
Jeff McKee 27:00
That’s right. That’s right. And then there’s some providers on a solo 401 K, that people can research and they’ll want you to set up an LLC, which is fine, you can do that there’s just an expense. And then there’s other providers that don’t have you go through that they have different things they follow. And, and so but there’s multiple providers out there for a solo 401 K. And so I would encourage people to do their own due diligence, obviously, consult with your, you know, your your your CPA, your tax provider on your situation, and maybe you know, your financial advisor. But But yeah, definitely get some professionals around you. And not just don’t listen to me.
J Darrin Gross 27:37
No, but I appreciate you making that clear, because like I said, it’s a I hear people and sometimes there’s there’s such a blur of terms and stuff and you think you understand and what I think also is, is somewhat confusing is the difference between an IRA Ira versus a 401k. And, you know, you go solo, I get the everybody gets the concept of taking it out of your employer sponsored plan, but the options beyond there. That’s, that’s good. So, how has the capital raising done Have you have you coming? Sounds like you’re in a lot of doors. what’s your what’s been the response? From Yeah, yeah, no,
Jeff McKee 28:21
it’s been good. You know, another book that I read, you know, in the last year was who, not how and so that and I also read, you know, Tim Ferriss Four Hour Workweek, so I basically hired a virtual assistant in the Philippines to help me with social media and, you know, strategize and execute on some of the capital raising stuff. So I’ve tried to expand, I’ve hired a part time writer, so I’ve actually put out some blogs and things around, you know, this, the this tax situation and trying to educate my investors on these kinds of topics. And so part of that, and then, yeah, basically giving, you know, mentoring and advice on on capital raising, as well as you know, following some of our SEC lawyers and their advice in this area, because right now, the 10 deals we’ve done have been, you know, the reg D 506. B as in boy and and that allows us to do up to 35 non accredited investors that are sophisticated, that are familiar with this, and an unlimited number of accredited investors. But when you do the 506 B, you cannot advertise. So you have to have a substantial relationship with these investors. So I basically have one on one calls to understand people’s situation, and to end to talk through these types of investing. And so that’s part of the 506 B there’s the other exception you could do a 506 C as in Charlie and that’s for accredited only and you can advertise you can post your deals you can look for brand new investors that you haven’t met before. We don’t do that kind of capital raising that regulation at this point. We could in the future but but but yeah, so Paul, Part of my situation is I have one on one calls with all potential investors and, you know, obviously follow up calls with them too, when they have questions on deals.
J Darrin Gross 30:10
So, how many you had 1010 deals? You’ve done your last four years, is that right? Right. And you’ve raised money for each one of those, correct? Yes. Sounds great. That’s, I would think that, you know, the first one, I just, I’ve never raised capital myself, we’ve done all of our investments, just, you know, my wife and I, but, but, you know, what I recognize is really the the limitations based on the lack of capital, it’s, it’s really a matter of, you know, raising capital in order to really get into some bigger deals and have some more, you know, measure of safety, and some of those larger deals based on, you know, what the, the larger properties can afford, based on, you know, in house management and staff and, and all that kind of thing. Are you actually involved in the operation management, then? Or is it, do you get involved in the asset management,
Jeff McKee 31:05
typically, we will hire as part of our team, a full time asset manager that manages the full time third party property manager. So, I personally will join some of the asset management calls once we own the asset, but we have someone on the team day in and day out, they’re managing the property, with the third party property manager, these properties are so large, and they all use basically agency debt, and the agencies require us to use third party property management, they don’t really want investors self managing their property, which is totally fine. And we don’t really want to self manage these either. And so then we have people on our team that are either former property management people or former construction people there are designated asset manager as part of our general partner team. And then they manage the third party property management, and then the other co GPS, like me, will join the asset management calls just to make sure we’re staying on track.
J Darrin Gross 31:57
And would you have any deals on your plate right now that you’re working on to close or
Jeff McKee 32:05
I do, but I can’t talk about them? Right, right. Right, right. Yeah, yeah. But I do. Yeah. So we have two deals that are under contract that are in the works, people that are part of my investor database, or are seeing those in the webinars and the decks and all that kind of good stuff. But But yeah, so we so that’s the thing, like getting back to the capital raising one of the things I noticed about our group is we have great deal flow, we’re able to get on market off market deals under contract, the critical success factor is having more capital involving others, other outside investments, on the large deals, like when we’re purchasing apartments that are 4050 $60 million, you know, we’re raising 1012 $20 million. And sometimes we’re using private equity for a part of that investment. And most of the time, we’re using, you know, the private equity that we’re raising from friends and family, and we’re just trying to expand the friends and family. So we’re not relying on any private equity groups to cut a big check. And so that’s just one of my personal goals, is to help bring more people along, to show them this path to financial freedom, to give them the opportunities to invest in these deals, like I mean, who would think that, you know, you would get internal rates of return that average between like 15 and 18%, like on real assets, you know, an annual percent like that, I was just used to, you know, five to 8%, stocks, bonds and mutual funds. And, you know, after all the asset fees, you know, from, you know, the companies and your advisors and all that stuff, there’s a little bit left for the investor. But when you get to this, this private world of investing in real estate like this, the returns are just amazing. And then, you know, we’re in a little bit of an abnormal cycle right now, where our deals are starting to sell faster than we had planned, we had planned for five to six year holds. And now, some of these deals are selling in 18 to 36 months from when we own it, which is great, you know, for the investors, and we typically will just sell and then, you know, give people the opportunity to invest in the next deal, they can do a 1031 exchange, which means they can roll those funds into that next apartment investment, they could do a 1031. And, you know, get out of the deal once we sell it, and they can roll them into something else that they want. But that’s again, another tax advantage and strategy that the government allows us to use is just to keep deferring this long term capital gains tax, and when it’s more than 12 months.
J Darrin Gross 34:30
Yeah, no, I was gonna ask her the whole time. That’s, that’s sweet to try but to get, you know, up to where you were intending in just a couple of years that makes her so happy investors. Do you find most your investors reduced sign up for the next deal?
Jeff McKee 34:45
Yeah, yeah, yeah, I take most of them sign up for the next year because they they go well, geez, I had planned this money to be out five to six years now. You’re telling me you’ve doubled my money in 18 months. That’s good news. Now I just need to find a place to put it and out, what we’re starting to do is to say, well, here’s the next deal, if you’re interested, here are the numbers, we can roll you straight into that deal with all of your gains rolled in, or, you know, we can do a 1031 and give you the money. And then you have to identify and work with an intermediary and make sure you follow all the rules. Or you can just take the money out, and you can pay your 20% capital gains, or you can choose it, maybe you need that money for something other than a real estate investment at this point in your life. And maybe you’ll just do something else with that. So we just give people the option. But you know, it’s this whole thing about velocity of money. And that’s what you’re looking for is, hey, I want that velocity of money. And then I want to be in control as an investor, do I want to reinvest in another multifamily deal with this group that did really well? Do I want to go take that money and invest maybe in a short term rental, or maybe I want to do mobile home parks or self storage, or maybe I want to take it out, and I’m gonna go, you know, pay for a wedding or a big trip or a college education, and I want to take that profit, and I’m willing to pay that the 20% tax, capital gains, and then it’s, it’s free for me to do with it what I want. And so we just want to give investors options. But we do want to try and provide, you know, that high velocity of money at the same time, we want to be conservative when we do the underwriting and say, hey, it looks like it’s an 18% internal rate of return with a six year hold. So just plan on your money being out six years, if we have an opportunity to sell sooner we will, you know,
J Darrin Gross 36:25
yeah. No, I was just saying the burden hands with two in the bush. And if you can get it faster, I’m sure that most investors appreciate that. And again, even though it creates new challenges on what to do with, do with it, just to recognize it and move on. It’s contrary to what I’ve always thought, I mean, I been in this doing this long enough that I just I always thought, you know, kind of invest, buy and hold. That was kind of my my mindset, I just didn’t realize, like you said the velocity of money is really where you can create the substantial gains. Yeah,
Jeff McKee 36:57
yeah. Well, here’s another difference, too, that I’ve learned over the years. Dear, like when you think of residential, you think of comparables, how is the property valued? It’s valued based upon the comparables in the area that are similar to that that sold and that’s just the price per square foot. So everybody understands that? Okay, that’s fine. And appraisal? Well, when you get into commercial world, there’s this whole thing called the net operating income. It’s like, okay, what’s the net operating income, okay, it’s your revenue minus expenses. Well, in the commercial world, let’s just say it’s 100 unit apartment complex in San Antonio, Texas, when an appraiser comes in, they don’t look for other 100 unit apartment complexes and look at the the property tax roll and say, Oh, it’s worth, you know, $10 million, they look and say, well, give me the numbers like, show me your books, show me your profit and loss, show me your, your, your trailing 12 of your financials. And I’m going to tell you how much we’re going to value this property at that, then some lender will will, will give you a loan, let’s say up to 70% of the value of that. And they look at that. And so then as an owner operator as a syndicator, we’re able to force appreciation by improving the outside but also the inside of the units and increasing rents over time, while holding expenses, let’s say relative at a lower growth, then your rent increases. And that spread that gap adds to your monthly profit, which is the net operating income, which is before your debt service. That’s what we’re able to do is there’s also you know, a concept called loss to lease. So in this kind of COVID world, let’s say maybe almost post COVID world, we’re coming out of a time where there have been a lot of concessions on rents where people were able to stay in these properties without paying rent, but also to keep the occupancy at a reasonably high level to get people to renew, we might have have offered, you know, get the 13th month free or we’re we’re going to you know, reduce your rent by 100 a month. Well, now the rents are going the other direction, they’re starting to go up. But oftentimes, the rent of this particular apartment community that we’re looking at my they haven’t increased rents to market rent, the difference between their in place rents, and what the market will bear for that area. That’s the gap. That’s the loss to lease that we plan on matching over time. As those leases expire. We go let’s just say it’s a one bedroom going from 600 a month to 800 a month, the new rents in that market, let’s say are 800 a month when that lease is coming. Do we let the tenant know, hey, instead of renewing at 600, it’s now going to be 800 a month, you have the option to renew or you know you can go somewhere else. And then there’s other people in line that are willing to pay the 800 a month in this example. And that’s where you’re able to what you would call force appreciation now, there’s also the classic units and the modern units, the rehab units if you will Well, we put money sometimes 2000 to $10,000 per unit, you know, per door to improve the inside. And that’s what really justifies a lot of the market rent increases, we’re able to charge if someone walks into, Oh, these are new countertops, refinished cabinets, new flooring, All new appliances, you know, LED lighting, low flow toilets, you know, that save money, all these things that we’re doing on these, these units, then command higher rents than the classic units that maybe they were in. And so that’s what we are able to learn. And just a small increase in that net operating income makes a huge difference to the value, when you’re dividing it by the capitalization rate of a five cap 5%, or a six cap that increase is it’s amazing what it can do to the value of your apartment community when you’re able to manage and increase the NOI.
J Darrin Gross 41:05
Right? Well, and then as a measure of the percentage at your end of the property. It’s, it’s the exponential returner, it’s Yeah, exactly. So now, I appreciate you going through that. Hey, Jeff, if we could, like shift gears here for a second. My day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s a couple of strategies we typically consider, we first look to see if there’s a way we can avoid the risk, if that’s not an option, and we look to see if there’s a way we can minimize the risk. And when avoid nor minimize our options, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And I like to ask my guests, if they can look at their own situation, and frame the question, what is the biggest risk? And provide an answer and you can look at it from any one of a number of different things could be interest rates could be the political environment could be taxes, it could be weather, it could be the market, however you choose to frame the question. If you’re willing, I’d like to ask you, Jeff McKee. What is the biggest risk?
Jeff McKee 42:29
Yeah, I mean, I would say, you know, from like a property casualty, some of the areas that we invest in are on the Gulf Coast, you know, whether we’re invested in Corpus Christi, Jacksonville, Florida, you know, all these places. And so, you know, we do you review and have great insurance on our properties. And so it’s in case there’s, you know, fire flood, you know, that kind of of a damage, which, you know, it happens occasionally, in these communities. And then you also need the business continuity insurance in terms of, if we displace guests, maybe to a hotel or another community while their unit is getting repaired, maybe there was a flood or there was fire, we also need the business continuity, to make sure any rents that we would have lost that were covered on that. So yeah, we’re basically, you know, well insured. And so that’s something that, you know, we’re very cognizant of, of in terms of, you know, where are we with, you know, FEMA flood map, you know, where are we, with this, and in terms of any hazards that we got on the property. So that’s probably the first one. And then lately, you know, in a rising interest rate, the second area of risk, and we’re trying to mitigate is trying to put a rate lock, so trying to lock in the rate before it keeps creeping up on us. And so then that would, would be another one, basically, we’re fortunate in the US to have a lot of fixed rate long term debt. So we’re just very careful of the adjustable rate mortgages, the arm products out there, because, you know, they could, you know, creep up over time. And so when we’re putting a lot of debt on these properties, you know, 3040 $50 million loan, or trying to look at the rate law, and be able to manage that. And sometimes, you know, we pay a bit extra to get that type of insurance, the rate lock cap, so we try and put a cap on any interest rate, that we’re locking in long term debt. And so those would be two areas, you know, kind of the property casualty and business continuity. And then the second area in rising interest rates, having a rate cap and paying for a lock and, and underwriting that expense. To give you some assurances of your debt payment won’t escalate much over time.
J Darrin Gross 44:38
Yeah, definitely. Some some areas of risk and anything you can do to mitigate that is going to help your investment perform them much better. Jeff, where can listeners go if they’d like to learn more or connect with you?
Jeff McKee 44:54
Yeah, you bet during they can go to the McKee capital group.com. So just McKeecapitalgroup.com. And then My email is Jeff@McKeeCapitalGroup.com. And on the website, you know, you’ll see the 10 close deals plus some of my LP investments. In the portfolio section, you’ll see a resources section with a bunch of blogs. Again, some of the topics we just talked about, and also have a download of a best selling book I was in last year it’s bringing value solving problems and leaving a legacy. And that was part of another mastermind. I’m part of this Kyle Wilson mastermind but in that I wrote a chapter about scaling from single family investing to multifamily investing and what I learned along the way, and then that PDF is a free download and I’ve got a short video about multifamily real estate investing for a lot of people that are just, you know, getting familiar with it. So it’s an intro video on on exactly what we’ve been talking about.
J Darrin Gross 45:47
Awesome. Jeff, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.
Jeff McKee 45:58
Well, thank you so much for hosting Darrin, I appreciate your time.
J Darrin Gross 46:01
You bet. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time. Thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.
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