Shannon Robnett 0:00
So you’re seeing a lot of this where people are absorbing the, the fall off here where we, we bought it the right thing at the right time, the wrong way. And so we’ve got a great apartment complex, the business plan executed properly, but the interest rate floated up and now it doesn’t cash well. So there’s gonna be some of that that’s going to be a little bit painful. There’s going to be some of that that’s going to readjust. Unfortunately, with where pricing has gone, I think that most of that is going to be able to be absorbed by the investor, not necessarily affecting the bank. Right, because the product is stable. The product has received facelifts in some cases they’ve received rent gross, they’ve seen them repositioned in the market well, and so there’s really not a problem with the asset. There’s a problem with either the opposite Well, it’s not even really the operator. In most cases it has to do with the financing.
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J Darrin Gross 1:20
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.
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Today my guest is Shannon Robnett. With over 25 years of experience Shannon has been involved from start to finish on over $350 million in construction projects, and is dedicated to sharing his experience and expertise. And in just a minute, we’re going to speak with Shannon about the multifamily marketplace.
But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that I want to welcome my guest Shannon Robinette Welcome back to CRE PN Radio.
Shannon Robnett 3:10
Thanks, Darrin, it’s great to be here again.
J Darrin Gross 3:12
Well, I’m so glad you’re able to join us. And I’m looking forward to our conversation. For those that may not be familiar with you, if you could give us just a little bit about your your background.
Shannon Robnett 3:25
Yeah, so I grew up in a real estate family. You know, I, my parents were always in construction and development. My mom was a third generation realtor, I’m a fourth, my son’s a fifth generation. You know, so I grew up watching development deals happen. And I got involved at an early age. And I soon figured out that working for even in construction, if you even if you own your own company, you can work for somebody else, and you can make money. But the reality was, if you really wanted to get to where the real money was, you became the developer, you began to find the property and and then you built the asset. And, you know, so I’ve done that whole thing for a long time. And we’ve just been, you know, we’ve been fortunate in the fact that, you know, we currently have about $100 million worth of commercial real estate being built. And we’ve got about $200 million on our books to start in the next 18 months. And you know, we’re just looking at how the markets shaping up and what we’re going to do next, but it’s it’s kind of on repeat. Just really, I mean, we’ve seen it all before it’s coming back again. 6% interest rates are normal. You know, we’re seeing some very similar things that we’ve seen a lot in my past.
J Darrin Gross 4:48
Yeah, no, I appreciate you kind of given us the the background there and I look forward to digging into this a little bit. Just as a kind of a reminder or Are you still kind of primarily operating in Idaho as far as your development?
Shannon Robnett 5:07
You know, we’ve got projects going in Florida and Texas as well. And we’ve done some stuff in Washington. It’s just it’s been some value add stuff, but we’re moving out from, from Idaho for sure. We still do quite a bit in Idaho, we’ve got a lot of people still moving in, I think we’re the second or the third most attractive state by percentage of influx, if you look at numbers, we’re not really there. When you’ve got, you know, somewhere like Dallas, Texas, that, you know, Colorado Springs imported 65,000 people last year. You know, we don’t have quite the size that we compete, but on a percentage basis, we definitely do.
J Darrin Gross 5:49
Got it. And as far as the the asset classes that you’re active in multifamily, and or you use an industrial or what’s the word? Yeah, so classes,
Shannon Robnett 6:00
I grew up in industrial space, that’s been a, that’s been kind of a bread and butter. You know, it’s funny, multifamily is kind of everybody’s darling. But, you know, industrial trades that probably, oh, probably 1% higher on the cap rate on a normal basis. Plus, it’s a triple net lease, which means that the tenant pays all property taxes, insurance, snow removal, lawn care, all of those additional expenses. And on top of that, they’re usually three to five year leases, and a lot of them have national tenants and personal guarantees buying them. So it’s really a better class of tenant. But when people think of industrial, they think of you know, those dirty old dingy warehouses down by the dock.
J Darrin Gross 6:44
Right? Yeah, yeah. No, and I think that I’ve talked with numerous investors and people in the know, just about the kind of the Amazon effect and, and, you know, all of the kind of flex space that’s become so in demand and in, you know, in everywhere, you know, so that’s, that’s definitely an appeal there. And you mentioned, the the projects you have in progress, are those primarily multifamily? Or Is any of that industrial?
Shannon Robnett 7:19
We’ve we’ve got, I just put another $10 million industrial project under contract today, we’re moving forward on, we probably have of that 100 million, there’s probably 20 million. That’s industrial right now. 25 million, that’s industrial right now, and the rest is multifamily?
J Darrin Gross 7:41
Well, let’s talk a little bit about kind of the market and the market cycle. And, and I’m trying to think, where the best place to start on this because I think the there’s been kind of a a sense of something was coming for as long as I’ve been doing this podcast, which I started in 2015. And at that point, there was a notion of that we were, you know, if we weren’t in the eighth or ninth inning of the cycle, maybe this was going in extra innings, you know, and, and then from then we went through kind of a minor slowdown, and then we had all of the boost of the additional printed money in the COVID. You know, situation where a lot of a lot of extra capital is out of the market and interest rates were pushed down. And you know, and now we’re at a point where interest rates are kind of the, the story from as much as that if I understand it, and you could certainly speak to it more is just the, the, the market is trying to understand what’s going on the, you know, the Fed keeps pushing the rates up trying to get the brakes to slow down the economy a little bit. There’s a concern of, you know, a looming coming recession. But then there’s all sorts of signs, maybe it won’t be a recession kind of thing. And I’d love to get your kind of a sense on, you know, where we’ve been to where we are now. And then maybe we could pick up from there and compare that to, you know, historical cycles, as you mentioned earlier.
Shannon Robnett 9:31
You know, it’s funny, I’ve I’ve seen government do a lot of really dumb stuff, and I think they continue to not disappoint. But, you know, when you have people when you have the government really trying to control the money supply and do the things that they’re doing with interest rates. The biggest issue that we have right now that is really hurting what they’re trying to do is the fact that we have no inventory. I mean, we are you know, doesn’t matter who you talk to, there’s not enough The Inventory out there, whether it’s, you know, we’re million housing units short, I’ve seen it up to 9 million housing units short, we’re still we still have a product constraint. And we saw that in my primary market in during COVID, where we went down to a three day supply of real estate, right? This is the average, we’re currently we’ve only bumped back up against 2.8 months supply. And that’s now starting to dwindle, because people are starting to see that maybe the Feds ease easing off a little bit, maybe there’s going to be a plateau here. But the reality is people do things based on what’s happening right now, they tend to forget what happened when we had a percent interest rates, you know, they tend to forget what happened when we, you know, when when we had these other things, but but really, we’re supply line constrained. And so there’s, as the market has shifted upward, we’ve definitely had pricing go up. So now a $200,000 house is $400,000. Well, you know, $200,000 house and 8% is a very different thing than a $400,000 house at 8%. But what I’ve always seen in these cycles is the fact that everything happens in an order, first of all, you have pricing goes up, that’s usually stimulated by some sort of funkiness with the interest rate, which we saw. And then you see as the bidding goes up, you know, now we’re seeing the pressure on wages, we’ve seen a lot of pressure that way, we’re seeing job cuts. But I’m wondering if that’s not a consolidation of, hey, we’re cutting Jim’s jobs so that we can pay Sam and Sally and Sarah, what they’re demanding, because we’re, we’ve got to do this. So we’re losing some jobs, but but by and large employees are being paid more. And that’s kind of at the tail end of the cycle, because then what comes next is we now have $400,000 houses that are being bought by investors that are being financed at 8% that now need 2700 instead of 2700 a month or 3700 a month. And that’s what’s coming. And so we always see these things happen in the cycles. And it’s just what point are we at, you know, we and then with that we’ve got a lot of apartment investors, buyers that bought and thought, you know what this is so great, we’ve got 2% money, but let’s leave it flexible, because we can get 1.78% money, and we can save that extra quarter, or eighth or whatever. And we can have this floating rate debt. So now we’ve got people out there that can’t cashflow their properties, it’s nothing wrong with the property that has everything to do with the financing, right. And I probably see a deal a week coming across my desk that are, you know, assumable loans that nobody wants, or they’re, you know, great products that are underwater currently. And really, they would be underwater, unless you brought a massive cash amount to the table to bring that equity cost out. You’re seeing a lot of this where people are absorbing the the fall off here where we we bought it the right thing at the right time, the wrong way. And so we’ve got a great apartment complex, the business plan executed properly, but the interest rate floated up and now it doesn’t cash flow. So there’s going to be some of that that’s going to be a little bit painful, there’s going to be some of that that’s going to readjust. Unfortunately, with where pricing has gone. I think that most of that’s going to be able to be absorbed by the investor, not necessarily affecting the bank. Right, because the product is stable. The product has received facelifts in some cases, they’ve received rent gross, they’ve seen them repositioned in the market well, and so there’s really not a problem with the asset. There’s a problem with either the OP Well, it’s not even really the operator. In most cases, it has to do with the financing. So there’s going to be some pain of that constriction and that absorption. But it’s not, in my opinion, it’s not going to be catastrophic. Because there’s lots of buyers out there that have the equity to come in and say, hey, you know, you’ve got $70 million in bank debt on an asset that you paid $100 million for, that’s now worth 85. So we’re willing to come in and buy that from you at 85. We’ve just got to get some adjustment here because we’re gonna have to bring in our own $30 million to make this deal cashflow. And we’ll be fine. And as the wages continue to come back into the market, over the next three or four years, we’re gonna see that steady three to 5% rent growth like we’ve always seen, and now your $85 million asset five years from now is back up to $100 million.
J Darrin Gross 14:49
Right. So, if I’m hearing you right, it’s just a matter of time for this to kind of reset or the the you know, the You have a long in the front of the runway on your financing, and you can wait. I will resolve itself. But it’s more a matter of need you need to get out now? Or is there somebody calling your note? Or do you have to refinance her or something like that as well?
Shannon Robnett 15:17
Yeah, Darrin, I mean, you know, real estate is a long game. And there’s a lot of people that joined in the last 18 to 24 months. That thought it was, you know, thought it was a short game, because, you know, they came into it, and they said, hey, you know, what, we can buy this, we can flip this, and, and a lot of cases, they had some great success. But they didn’t come into it with the thought process, that maybe we need to have some some prudent reserves. I mean, we went through the whole COVID thing, right, nobody really got in trouble there. Because rates kept going up, you know, property, values kept going up interest rates kind of substantiated that, but really where we’re at, if you’ve got an asset that is, is not performing today, because of the note, you’re probably you know, if you can stabilize and stop that bleeding, you’re probably somewhere in the neighborhood of 18 months from being right sided back in that deal. It’s just can you survive long enough to be there. And in most cases, everybody I know of people there in that got, they bought a $50 million asset. Sorry, $63 million asset, they financed 85% of the asset, and 100% of the of the $5 million rehab. On a floating rate debt, they got a little bit delayed on how things went together, they got a little bit delayed on their lease up, their contractor cost them a little bit more. And they are now trying to lock in fixed debt today that they anticipated being 4% in their performance. They’re toast, right? They’re toast still there, they’re a million dollars over on the remodel 20%. You know, not terrible with everything we saw in COVID. But all things considered, they don’t have enough runway, and they don’t have enough cash on hand to survive the deal. So now they’re 55 $56 million strike price is likely coming in closer to 48 on a sale, 48 million on a sale, that’s financial, which means that they’re going to eat, they’re going to lose most of their equity, if not all of it to stop the bleeding because they don’t have the ability to get further down the road to get this thing truly honestly stabilized. Everybody says buy real estate and wait. But a lot of people that are getting hurt right now forgot that last word. And they just bought real estate thinking, well, this is a short game, and we can flip and we can do this. And they’re they’re kind of they’re kind of they’re struggling. It’s you know, it’s difficult.
J Darrin Gross 17:59
No, I like your your timeline there but 18 month, because everything you point to is I mean, demand is still strong. I mean, there’s a there’s a need housing is, you know that that riddle hasn’t been solved just yet. And, you know, as long as interest rates are creeping up, and investors aren’t, you know, feeling 100% certain about what their costs are. It seems like and then you tell me, I mean, obviously there, we’re just talking about people that have got have been caught? Are Are people getting? Are you? Are you? How are you structuring deals that you’re offering? Your you know, that you’re making offers on now that you’re locking up? Are you have you Is it still the same math that it was before? Or is there a question mark as to what’s the value? Or is it or is it just a matter of lock in what your financing is? Know what your operation cost and your you know, whatever development costs you may have, and then, you know, make the offer based on that?
Shannon Robnett 19:06
Well, you know, I’ve always made mathematically based offers, I’ve never been the guy that runs in non refundable, you know, million dollar earnest money is day one, you know, so and we’ve always made sense of it. If it doesn’t make sense. You can’t you can’t bet on yesterday, or you sorry, you can’t bet on tomorrow with the appreciation we had yesterday. Right? Right. It doesn’t work like that in most cases. And and a lot of us learned that lesson and oh, wait, so we don’t need to repeat that right. But here here here’s what we’ve always looked at if I can make it pencil today. We’ve I don’t know of anything that has historically gotten cheaper and stayed cheaper. So if I can make it work with today’s rents, today’s construction costs today’s rehab costs, today’s interest rates than the likelihood of me having a successful project are very good. it. So based on always doing that, and always making the math at the front, it’s never been about one of those things. And I heard a guy say this, well, you’ll just have to bring more equity to deal because your bank will only loan you 85% of the appraisal. Well, why are you bringing? Why are you spending more on it? And the appraisal says it’s worth just to get the deal? I mean, where is this? Where is this really going? Right? Right. So people found themselves in trouble because they overpaid for it. They had expectations. I’ve seen stuff that even now shows 10 to 12%, rent bumps for the next three years. Right? Well, who models that? You know, if you’re modeling that stuff, you’re gonna get in trouble, because there’s going to be the year that you get a 7% Rent bump or a 5% Rent bump, or what we’ve always penciled in on our site is a 3% Rent bump. And here’s the thing, Darren, if I run my math, the way I’ve always run my math, the last 25 years, I look like a genius, right? Instead of looking like the town idiot, right? So the people that have that have not been doing that they’ve been running it going, hey, I can pistol whip or I can I can pencil whip this thing. And I can make my numbers work. So any deal looks good. We’ve We’ve walked away from a lot of deals, we passed on a lot of deals, and we were having trouble right now, educating sellers on what the deals really worth with this interest rate. Right? I mean, you know, I’m paying, you know, a mortgage on a deal right now, we’re about $900,000 apart, the seller doesn’t think that’s a big deal. It’s about $4,000 a month at current interest rates. Well, $4,000 a month, the current interest rates on a $10 million deal is the profit margin. I’m not gonna go into the deal at cost breaking, even hoping that somewhere between the time I take the deal down, and the next 12 months, I’m going to somehow mysteriously run into appreciation that’s going to give me profit. Right, right. Well, I’m actually having to have the conversation with the seller, that shows him my math. And he’s having to decide if he wants to sell today or not.
J Darrin Gross 22:23
Yeah, I think that’s that’s kind of that’s kind of the feel I get from, you know, just the things I’ve seen, and people I’ve talked with, it’s just, you know, that the math doesn’t work like it did, you know, six or nine months ago. And, you know, I would tend to leave just kind of like we’ve been talking that it’s a matter of time, I mean, you know, is a rinse do continue to creep up in the NOI will improve the cap rate, again, market specific will again, then, you know, determine the value, but it’s not going to be a compressed cap rate that was six or nine months ago based on just, you know, unlimited demand and cheaper free money. Yeah, kind of thing.
Shannon Robnett 23:09
Like, I can give you a quick example, from my area in in September of 21, we had average rents in Boise were $1,640 bucks. They peaked in June of 22, at $2,085. Okay, average rent and Boise. They’ve slid down now to about 1965. I was just looking at a model that that was was reevaluating a model that we’re currently under construction on that I had modeled three years ago. And I was adjusting my rents $575 to meet market today. Now that market has slid a little bit from the peak, but I’m looking like absolutely, even with cap rates expanding again, I’m still looking very good with my model. Because I didn’t think that the $1,640 jump to $2,085 in a 12 month period of time was normal. Right? All I did was applied some logic to it and went this can’t this we got to give up a little bit. And the funny thing is there when people look at Tesla, or look at Microsoft, or look at the price of gold, it’s nothing for that to fluctuate four or 5% in a week and nobody freaks out. But if but if real estate fluctuates 1% In a year, even though your debt is fixed for 30 Everybody loses their ever loving mind.
J Darrin Gross 24:37
Right, right. Yeah, no, it is it is kind of interesting. And I think that you know, there’s kind of the fury of it all I think, because so many people have found real estate as an alternative investment. You know, back in a way when when all you had to do is fog a mirror and you could you know have multiple properties under, you know, her own multiple properties regardless of your income and, and, you know, the there was just kind of a story and there was a buzz and it seemed very attainable, and everybody everybody knew somebody that was in real estate. And, you know, as an alternative, I mean, I think that, you know, the stock market the.com was kind of the similar story, you know, everybody was everybody was in, in the market, and it was, you know, I can remember walking by bookstore with my father in law, and he goes the Dow’s at, you know, 10,000, you know, what, that he was thinking it should be like, you know, 3030 500 Dots, that was his reference point, you know, right. And here’s a big stretch. I mean, that’s, that’s a, you know, 300% error of almost a 300% increase. And so that, I think that’s kind of the news. And then you have this constant barrage of the information and stuff to where it it, it’s really easy to get sucked in and, and, you know, pay attention that but I’m kind of curious in, in love to hear your thoughts on this, you know, with with the the run up of the multifamily specifically, since the 2008. Crash, and the number of of syndicators that have come to be, or have entered the marketplace where, you know, it used to be it was it was kind of more in this probably more pre JOBS Act, as probably be more one of the things that then restricted the capital so much, but, but it used to be kind of more of like an old boys network, or kind of who you knew kind of thing or, or, you know, larger funds or families or whatever, that were there primarily, the operators or the investors in that space. But since since the Jobs Act, and around 2008 have been there’s been a complete proliferation, proliferation of syndicators. And obviously, there’s been plenty of opportunity demand. So my question to you is, do you think through this kind of the cycle, kind of going back to some historic levels? Will that kind of thin the herd? Do you think there will be some that will? Get out, stop, you know, let go and we’ll be more of like a more of a dedicated, you know, syndicators that are that are committed to the long, long term, or do you think this, this is just going to be the new norm and everybody in will continue to play?
Shannon Robnett 27:43
No, you know, I think it’s like everything, you know, it’s, it’s the new I mean, shoot in, if you told people in 2011, you were in real estate, they treated you like you’re a leper, or, you know, mentally deficient. It’s, I think it’s kind of the same thing. We’ve gone fullcycle real estate got sexy again, you know, I mean, I ran into somebody I went to high school with and, you know, they were a chiropractor in town, and they were now a developer, you know, and so where’s that gonna go? There’s gotta be some of that clearing out, like with the.com bubble bursts with, you know, what’s happened in the run up in the market. And hopefully, the professionals will come in and clean up and take care of things. And hopefully, the government doesn’t decide to throw some more regulation on there to protect the poor, unwitting people that got into involved in stuff that maybe shouldn’t have, or should have known more about or whatever. But the reality is, I believe that with the lack of supply in the market, we have a whole different thing that’s going to happen, that’s going to make it easier to clean up. You know, when I was talking with Ken McElroy, about where we’re at in the ballgame being you know, now we’ve gone the other direction, right? You when you were talking about the ballgame earlier, it was the ballgame from here to peak, right? Well, now we’re talking about we’ve already we already know we pass the peak, but where is it from peak to keys back at the bank, because people are given up on their projects? You know, I think we’re I agree with Kenny, we’re probably in that second or third inning because of the lack of supply. Because of the strong retail market that we have everybody’s there’s still a lot of transactions going on, go into a restaurant, they’re packed, retail stores are selling things. There’s a lot that’s happening there. Even though we’re at a record low savings in America right now. We still have a lot of transactions happening. And I think that the rent market is going to stay strong. And it’s taken a lot of people out of the home buying mode and left them stuck as renters. But I think in all of that, you’re still going to see that with with high occupancies rents increasing, it’s going to be pretty easy for people to come in, that have a good solid business plan that have learned to syndicate properly, that have learned to raise capital that can Ron, these projects be able to come in and assimilate that. So you’re not going to have vacant buildings and you know, half finished projects and those kinds of things, you really going to be able to finish this out and walk it across the finish line without too much disruption. But there is going to be a lot of, let’s call it short selling in the meantime, that people that maybe overpaid, maybe didn’t quite execute the business plan properly, maybe have a little bit of an issue getting to the end of the day, that they’ll I think they’ll be quickly absorbed, though.
J Darrin Gross 30:33
No. Yeah. I mean, that makes sense to me. You know, again, I think that the it’s, it’s kind of human nature to, you know, look to the last disaster for the answers for, you know, whatever the next one will be, or the crisis or whatever, you know, and, you know, my my sense of things is that whatever happened in the past, there have been efforts that have been made to correct or to not allow that to happen again. And so, you know, even though you have some similar kind of, you know, market conditions, the cause is not always the same. And, you know, so it’s, how it will play out will, will likely be entirely different. Yeah. And so, I think you’re, and then
Shannon Robnett 31:25
And then you’re right, I mean, then you’re going to have, you know, government come in and try and correct the situation and protect everybody and, and do the things that, well, maybe we shouldn’t have, and, you know, maybe you gotta get a serious 65 to do this kind of thing. And, and maybe that’s not bad. But then you when you have those kinds of things, you’ve got the stifling of an economy for a little bit, you know, an artificial constraint, if you will, on, you know, capital coming into the market, like we had in 10 and 11, where we really choked out homebuilding, because of all of the, you know, regulation that was coming in because of the funky loans that were written in, oh, five, you know, six, those adjustable rate mortgages. So there’s always that precession, that lag, in effect, you know, the effects happen, we had the low interest rates, prices went up, rents are now going up, and here comes the after effect.
J Darrin Gross 32:21
Interest rates, where do you think, they’ll kind of rest? Or, you know, what’s your sense of things as far as where we are today, and where we might be within 12 month?
Shannon Robnett 32:33
You know, I just got my crystal ball yesterday, but I dropped it, it’s kind of cloudy right now, I’m hoping it clears up. But, you know, I, I think we’re still going to see some rate increases, I think we’re, you know, everybody’s signaling that we’re going to see another quarter percent this next time they meet, I think we’re gonna have another quarter percent after that, I think you’re gonna see toward the end of the year, we’ll have eased our way up from six to probably seven, I think we’re still going to see some, some raising of interest rates, but I think you’re gonna see, I think you’re gonna see wages are going to have to push up to match that to put people in a position where they can afford what has to happen. Because if that deals gotta get financed at 7%, the rents got to be here. And, you know, people have got to be able to afford it. So it’s going to come out of there, we’re gonna go back to the hurt cycle of, we’re going to be pushing on employers to pay more, because they’ve got to fund this upcycle. And then, then here, we come with more inflation on pricing of what it costs for me to show up with my employees because of what I got to pay. So I think you’re gonna see 7% And you’re gonna see that cycle just continue to ease its way up through the end of the year.
J Darrin Gross 33:49
Yeah. That’s clearly plausible. And, and, you know, I think historically, if you look at the the markets, like we’re, you know, started the conversation. You know, and that historically, that’s not been a, an outline. Interest rate. I can remember, the first home loan I got I was seven and three eighths, and we were doing cartwheels because I was like, Oh, my God, you know, we’re the
Shannon Robnett 34:18
he used to be that phrase, if it’s under eight, don’t hesitate. Right? I mean, it was so cliche, but it was and yet now we’ve got the combination of the incredible price increase and the interest rate that may get a little bit different story. But at some point, we’ve got to we’ve got to choke down and get through that.
J Darrin Gross 34:37
Right. You mentioned trying to re educate sellers. What What’s the conversation like with some of your investors when you’re raising capital?
Shannon Robnett 34:50
You know, most people that we’re that we work with work with us based on reputation based on knowledge based on who we are and what we do. So it’s true really kind of a we’ve had, we’ve had a shift from from people looking at it going all I wants appreciation, everything’s going up, give me some more of that, to really maybe being a little bit more balanced in their portfolio and going, you know what I really need to get some cash flow in my portfolio, I can afford to take some risk and some appreciation on these deals. But I like cash flow, we’ve always dealing with people who are looking for the tax savings, you know, we do a lot of tax planning with our investors. So that you can come in and we can say, hey, you know, you need some some of this, you need some of this, you need some of this, we can tailor that product, and help you put together a plan. But a lot of people are shifting back to what I think should be normal, where you’ve got a balanced portfolio, you’ve got cash flow, so you can always take your appreciation deal. What you’re looking for is as you know, the growth and say, Well, if that doesn’t come through, and it takes three or four years, I’m not trying to, you know, get all I don’t have all my eggs in one basket. And so I think we’re seeing people kind of go back to what maybe is a little bit more normal, and more maybe what I think it should be where you’ve got a portion of your portfolio that’s looking to grow and a portion that’s tax free, or in the tax realm of things, and then a portion that is cashflow based.
J Darrin Gross 36:17
No, no, definitely the the cash flow is certainly a lot more are getting a lot more attention now than then, you know, when it was just low cap rates and just turn it in or kind of thing. Yeah, getting get in get out. Let me ask you this COVID kind of introduced, you know, a sense of place that perhaps maybe I needed to be in a certain place before now I can be almost anywhere. I know, certainly Idaho, Boise specifically have benefited significantly from that just, you know, people looking for a place that they rather live than where they were knowing that they could work from anywhere. Do you see that continuing? Or do you do you see the the work placed, kind of normalizing and being more, you know, on site, as it historically were, or some sort of a hybrid of that?
Shannon Robnett 37:24
Well, as you know, I’ve been my physical address is in Puerto Rico, and I live there and have lived there for the last four years while conducting a lot of most of my business in Idaho, and then expanding into into other markets. But, you know, I think that the ability to work from a lot of places, is going through its initial evolution, I mean, it’s kind of like, you know, we got turned loose, and everybody went and did and the whole work from home thing was all the rage, and everybody was doing it. Now you see a lot of the major corporations kind of pulling it back. But you know, I was talking to a guy just today that, you know, he’s been working remotely for a company out of Palo Alto for 10 years. And so I think that that, too, as technology allows us to do that, we’re going to do that more, I know that Boise went from an average median income of $74,000, a year in Boise, Idaho, to $92,000 a year because of COVID, and people that moved in with the higher paying jobs. So I think you’re still going to see pressure that way, I think you’re still going to see, you know, people wanting to work outside of the office. But I think employers are going to pull back on that. So you’re going to wind up with a little bit more of a hybrid. But the technology is there that wasn’t there five years ago, you know, we’re conducting this, the zoom 1000s of miles away, and not having any glitchy stuff, like we used to have with Skype, you know, and any of that kind of stuff. So I think that that’s gonna make it a lot more practical. I think we’re gonna go through the evolution of, you know, there was just this court case where a woman was caught, not actually working, but she built her employer for it, she actually has to pay the employer back. So I think there’s gonna be some more of that employee tracking stuff. So they recognize that you are working when you’re working remotely. And I think we’re just gonna go through that evolution. But I know that work from home is here to stay. And we’re actually incorporating that into some of our designs on our on our projects, because we know that people want those workspaces in the home again.
J Darrin Gross 39:26
Yeah, that seems to make a lot of sense. building that into the design there for for piano players.
Shannon Robnett 39:33
You remember when they used to build houses with a phone desk, right? I mean, no, desk and the phone sat over here and there was this thing called a phone book and, you know, get a pencils and a tablet there to take note. I mean, you know, we’re just going back in time to go forward in time.
J Darrin Gross 39:52
Right? No, I was laughing. As you’re saying that. I remember the phone was attached to the wall. Yeah. I’m very short cord Yeah, you couldn’t get away from the noise kind of. That’s funny. Hey, Shannon, 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 their risk. And there’s three strategies we typically consider. We first looked to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid or minimize the risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation could be their clients, investors, the Feds tenants interest rates, however, you would like to frame the question and identify what you consider to be the biggest risk. And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you Shannon Robnett. What is the Biggest Risk?
Shannon Robnett 41:12
You know, in my business, the Biggest Risk is taking on the project and having things like prices increase on commodities. You know, we started a construction project. And our lumber costs estimate went from 3 million to 9 million. We locked in on the way up and caught it at about five and a half million, but it was still a two and a half million dollar Upswing on that. Those are the risks that we take as developers on brand new ground up. And so there’s always that question that you have to ask and it comes back to your underwriting? Do you have the runway to absorb this? Can you get from here to there so that you’re not, you know, your framing is in the first third of your job? If you’ve used all your contingency in the first third of the job? How are you going to finish the rest without additional cash? So are you properly capitalized? Have you underwritten correctly? Do you know that three years from now when you’re built out on a 200 unit apartment complex that you’ve you’re going to be able to sell those are the risks that we take that that sometimes keep me up at night?
J Darrin Gross 42:29
Yep, know the budget and the actual definitely plan accordingly, I guess. Hey, Shannon, where can the listeners go? If they’d like to learn more connect with you?
Shannon Robnett 42:43
You know, the easiest place to find me is just ShannonRobnett.com. You can go on there. You can connect with us there you can get on my calendar. I’d love to have a call with you. chat with you about what you’re doing what we’re doing. But we’re we’re we’re there or you know, all the socials. You can find me out there.
J Darrin Gross 43:02
Got it? Well, Shannon, I can’t say thanks enough for making time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.
Shannon Robnett 43:12
I appreciate it. Darrin, thanks again.
J Darrin Gross 43:15
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