Achieve Wealth Real Estate Investing Podcast

James: Hey, audience and listeners, this is James Kandasamy with Achieve Wealth Through Value at Real Estate Investing Podcast. Today I have Ellie Perlman from California. Allie, did I say your name correctly?

Ellie: Yeah. Yeah, you nailed it.

James: Awesome. Awesome. Ellie is a sponsor who owns like 2000 units as a GP and LP. And as a GP and as an active operator, she owns almost 770 units asset under management, almost 100 million dollars in assets. And she focuses a lot on Texas, Florida,, and Georgia, all the States. That's our opening early. And she's in California right now. Has California opened?

Ellie: Not at all. So I live in Santa Monica. It's part of the LA County and we're one of the last counties to actually reopen. So Orange County, they've reopened the economy a little bit so you can sit at restaurants. Here, it's kind of a ghost town. We can't do anything.

James: Got it. Yeah. That's awesome. That's a complete difference within a business-friendly state and a non-business friendly state, I guess, but that's okay. Yeah. Ellie, welcome to the show. Why don't you tell our audience about things that I would have missed out about you?

Ellie: Sure. James. So I'm really happy to be here. Thank you so much for having me. I've been in real estate for over a decade now. I've experienced 2008. I was not an investor back then, I was a commercial real estate lawyer. And I've learned a lot from my clients, mistakes, especially, being aggressive and not, how conservative and what that can do to you in times of recession. And that turned me into a very, very conservative operator and investor. I'm basically originally from Israel. I was born and raised in Israel and I moved to the States about six years ago. I went to MIT and got my MBA degree and shortly after, started purely capital and decided that, Hey, you know, I was in commercial real estate law, I also did property management backing Israel, and now it's come full circle, and investment in multifamily properties was the thing that I wanted to do, I saw a lot of potentials there.

Especially the resilience of that asset class is what drew me to multifamily mainly, that's the main reason among many good reasons. And yeah, that's what we do. I mean, we buy class B properties in A and B areas. We like value-add deals like many other operators and for a good reason. And we're very hands-on when it comes to operating and managing properties. And, as you mentioned, we invest in Texas, Florida, and Georgia. They reopened the economy probably several months now, I don't know if that was the right decision to do it now but it definitely helps with collections and with leasing activities as what we see today.

James: Yeah. Yeah. You're living in a really two great worlds in California with the nice weather and a good investment world in Texas, Florida, and Georgia so that's awesome. So let's go into details about your deals of this what you have the 700 units where you are the operator. When did you get started? And I mean, what was the aha moment that when you are a commercial lawyer, what is that aha moment to say, okay, I'm in the wrong profession. I better go to the other side.

Ellie: Well, pretty early on, I remember that at some point I was with one of many, many meetings 'cause lawyers love meetings. 'Cause we actually, you know...

James: Make money out of the meetings.

Ellie: Exactly. And one of the many meetings, I was sitting there was a round table, really big conference room and my clients were actually developers and they were building apartment buildings, actually, in East Europe. And I remember thinking, I'm sitting on the wrong side of the table. I need to be them. I need to be the entrepreneur. I need to be the investor. Because as a lawyer, if you work, you bill, every hour is a billable hour and you can make nice money. If you don't work, there's no income, there's no money unless you're a partner and you bring some clients, but that's a whole different story.

And I realized that I wanted something that has more cashflow streams and something that I can grow in. When you're relying only on your own profession, 100% on your 10 fingers in what you do every day, there's a limit to how much you can make. There's a limit to how much, you know, your income is capped. And in addition, I found it more exciting to actually be part, I want to take part in the action. I wanted to search for properties. I wanted to speak with investors and that looked a lot more interesting and exciting than representing them and negotiating with banks, creating contracts, negotiating with vendors and contractors, and subcontractors. I learned a lot, but I felt that I have some potential that it was not being fulfilled by doing what I was doing at that time. And that was my kind of aha moment.

James: Got it. Got it. Sometimes while we're doing our full-time job: lawyer, doctor engineers, or in any W2 jobs, I mean, sometimes you have that feeling like what you said. Oh, I really want to enjoy something else, which is more interesting. Is it as part of your youth growing up, but you have certain things that you enjoyed more when you grow up that you think resonates well with real estate searching and operating real estates?

Ellie: Growing up. No, not really. I grew up pretty poor actually and so, I didn't see a lot of investors around me in buying a house. You know, your main residence was the biggest thing that I could think of at that point. It only came through education after I went to law school and through kind of learning about real estate during my career from observing what's happening around me. But as a kid, there was nothing that could really tie me to real estate at that point. It was way too early.

James: Got it, got it, got it. So that's very interesting. And what about these deals that you bought? Can you talk about the first deal that you bought and what are the challenges that you had on that first deal and how many units was it?

Ellie: Yeah. Yeah. So I think for every first deal, there's always kind of chicken and the egg. You don't have experience as a multifamily operator so you need to kind of convince the broker to give you a deal, even without experience and how do you speak with investors and bring capital if you don't have that experience? But if you can't convince them to work with you and how are you going to get your first deal? So for me, the way to kind of bypass this hurdle was to partner with someone that had more experience than me. And through that, basically, my lack of experience specifically in operating properties was not the main focus because then I was working with someone who was more experienced so that was one way. And then a lot of new young syndicators and aspiring syndicators and that's the path that they're taking.

I also see syndicators are just, you know, they just find a deal and they manage to basically work with a small group of investors that, you know, usually, it's not a huge deal, it's not a large deal, but they're able to do it. I have a mentoring program today. I teach people how to do what I do and it works. And I believe in that method because I also had a mentor and I paid someone to teach me everything. So, basically, I'm not going to work with investors' money and learn and make mistakes throughout the way and mistakes are inevitable. I think we are all gonna make them at some point, but you can definitely reduce the magnitude of the impact of your mistakes if you're working with someone that has more experience.

James: Got it. Got it. Yeah. I mean, sometimes, people don't see how much money we spend or how much time we spend to learn from others to shortcut your growth. There's no such thing as we came up on our own. I mean, there's always a mentor or something that has driven us to get somewhere faster, especially in multifamily investment, which is a multi-multimillion dollar investment. And it's not easy for anybody out there to just go and do multifamily. So, let's talk about some of your properties right now during COVID-19. So how's the property performing? Can you give us some numbers and performance and how did you guys do it etc.?

Ellie: Yeah. So, you know, back in March, there was a lot of uncertainty and we didn't know what to expect. Part of it was kind of the media frenzy that was basically shouting 'tenants are not going to pay. There's going to be a huge default' and we weren't scared, but we're definitely concerned because we just didn't know how hard our properties are going to get hit. And we decided to be proactive pretty early on. So during mid-March, we came up with a plan that basically created a kind of a payment plan and with tenants that lost their jobs and so basically allowing them to pay in installments throughout the month and we created an early bird discount. So basically during March, if you're going to pay for April, before April 1st, then you get $50 off of your rent for instance.

And we had basically a lot of tenants that took advantage of it. And what happened is that some of them actually lost their jobs by April 1st, but they already paid us in advance. So that was a way to secure at least some of the collections. And that was part of making sure that collections are going to be solid. We were trying to think creatively, how can we increase income across the board with the properties? And I know that many sponsors right now, they stopped renovating units because usually, you renovate a unit, you invest three, five, $7,000, and then you put it back in the market, hoping you can rent it. And we didn't really stop. We basically switched to renovation on demand.

So we have the model unit that is already renovated and then we show tenants the virtual tour of the renovated units and classic unit. And we say, you have a choice; either you can go with the classic unrenovated units or for $100-200 premium, you can get the renovated unit. And just last week, we had three new leases and they all wanted renovated units. So it takes us about 10 days to renovate it. So we were still making those renovations. We're still making more money. We're just not renovating without having someone that is willing to pay for that specific unit because we still don't want the unit to sit out there and again, being rented and just be vacant. So that was another aspect of trying to boost income as much as possible and really aggressively cut costs. So only required maintenance work carried.

We kind of negotiated open all the contracts with all the vendors, landscaping, even insurance, and started renegotiating. And we were looking for ways to save every dollar we can save was good for us. And we were looking at the numbers by the end of April, April was the first month of COVID when it comes to multifamily because March everyone already paid before we knew that COVID kind of is an issue. And surprisingly, we actually made more money during April, compared to March. Our collections were around 99.5% and our cashflow actually increased compared to March because we saved on costs so much and we actually collect, we were fine. And then May came and I think the trend is pretty much the same or tracking right now. We're speaking, it's May 27th and we're at around 94, 95% collections.

So it's a little bit lower than the month of April, but we still have three or four more days until the end of the month. So every day we're collecting more and more money from tenants and our property managers are knocking on doors, sending text messages, and calling tenants. And really, we're very, very proactive in order to make sure that we collect everything. And in addition to all of that, there's always going to be those who cannot pay. And of course, on each property, we have those who've lost their jobs. And we basically decided that those are struggling and were good tenants before COVID, we're actually going to try and help them out. So we gave away basically gift cards to help them pay for their groceries, Walmart gift cards, to those who were good tenants before COVID, and now they're just struggling. They can't pay, or they made us partial payments because we made good money when times were good and they were a big part of our success or our paying tenants.

And the second thing is I think there's something a bit humane about trying to help those who are struggling right now. We also hope that that would help them give a higher priority on paying their debt once they're back to work and they're making money. But definitely the stimulus checks were helpful. The moment that we knew that they got stimulus checks, we make phone calls and some of them came and paid. And if we weren't following up and just hoping that they will come and pay, some of them would probably use the money for something else. Now we have unemployment that is helpful and Texas, Florida and Georgia are all of those economies are back, they're reopening and many have rehired basically. And that also helps with collections. [17:17-17:21 inaudible] Oh, James, I can't hear you. You're muted.

James: Sorry. Let me start again. So we are just checking all our residents on how many people are going back to work because that's important. So once July ends, the $600 and additional from the federal government that is sent out per week, it's going to be ending soon. So we are starting to check how many people got jobs and how many haven't so that at least we know how bad it's going to be after July. So you're absolutely right. I mean, people are paying, I mean, I'm sure your concession or your gift card that you gave has helped them to make a decision to pay the rent. I'm so surprised and delighted that people are paying the rent with all the loss that they have to follow.

We don't have to threaten them with evictions. We do not tell them three-day notice and people are still paying, which is good. And this is absolutely good for us. It just really is multifamily asset class, food shelter and safety are very important and they can go and spend anywhere else. They can go for a vacation. They can go for a movie either to pay for shelter and food. And maybe they buy a massage chair, like what one of my resident did. So a massage chair and some people bought new cars. That's why people are buying new cars because there are so many deals going on in the car, but the good thing is they're still paying the rent. So do you own your own property management company?

Ellie: No. We actually hire a third party company and they're pretty big in the industry. They manage over 40,000 units and that's why, kind of, early on, we realized that we're good at finding investors, finding deals, and managing the asset. Our core focus is not property management, especially since I'm here in California. And this is the great match between a company that sits in Atlanta, for instance, they know the market inside out. They have people there that are sitting in the office and helping to collect rent, signing new leases. And almost on a daily basis, we're in touch with them since COVID started. Before that, it was probably two, maybe two and a half times a week, on average and now it's almost everyday, multiple times a day. So we're very hands-on and I couldn't be happier. They're actually doing a great job.

James: That's awesome. That's awesome. Did you find any resident that ghosts to the property management company completely? Like they don't want to talk, they don't want to, have you ever seen that?

Ellie: Yeah, we always have those.

James: Yeah, I do have that.

Ellie: Yeah. Inevitable, but thankfully it's a very marginal phenomenon, you don't have five or 10% of your tenants whose ghosting on you and disappearing,

James: Correct. Yeah. There's always a small percentage of people. Does anyone want to take free money given by the cities? Like, in Texas, I mean, Dallas, San Antonio, Austin, I'm not sure about Houston, probably they have done it. They did give a lot of assistance to the residents who can't pay. I'm not sure in Florida and Georgia, did you see that? I mean, did the government or city give out any assistance?

Ellie: Nothing out of the ordinary besides stimulus checks and unemployment.

James: There's a lot of programs in Texas that give assistance to residents who can't pay, who lost their job and all that. So, yeah, we did take advantage of some of the programs because yeah whatever money we can get from the government to help out our residents who are struggling, I mean, the more flesh we make them right now, it's going to be better later on, for the next few months. So we are going ahead and do that. So what about the value-add strategy that you do on your deals? So what worked the most, what's the most valuable value-add that have you seen?

Ellie: Usually, it's a unit interior and you don't have to go all the way and make a beautiful brand new apartment. There are few things that are an eyesore for tenants, usually. I mean, a freshly painted unit that's a must. But in many cases replacing the carpet with vinyl flooring is what we do. In the bedrooms, we keep actually the carpet because tenants don't really care about that. And it saves us, you know, cut the costs at least by half some times. You know, usually, it's just the normal things; black or stainless steel appliances, painting the cabinet doors in the kitchen, maybe backsplash, new lighting. So, and sometimes we pick and choose, we don't do all of them.

So there is a really good market research that goes into it before we start doing anything. It's very tempting to say, I'm going to spend five or six or $7,000. We're going to make a beautiful apartment. But sometimes you're in an area where people cannot pay for you to have a decent ROI, or they're totally fine if the apartment looks good, but it doesn't have stainless appliances, it has black appliances. So we do market research. We actually call all the other comps and we look at the pictures of their renovated units and we understand what's the scope of the renovation around us and how much they're charging as a premium and based on that, we know what tenants like. It's also a conversation we're having with the PM, the property manager. And they tell us, yeah, in this market, they're not going to pay you $30 more if you're going to give them a unit with stainless steel finances and not black appliances, but they really care about the carpet. And so that we're kind of adapting to the market and we're adjusting the scope of the renovation based on the demand and the ability to pay for all those upgrades.

James: Got it. Yeah. I mean, that's absolutely right. You want to look at what the market can support and not do random renovations. And a lot of people have failed when they move from one city to one city. I've seen people move from this city. You know, they are so used to spending 5,000 a door in one city and they go to the next city and they try to spend the same amount of 5,000 a door and it doesn't work. So it's interesting how the demographic is able to support it or not. So that's interesting. What about deals? How do you underwrite deals? What kind of sniff test do you do when a deal is given to you? Like today, let's say somebody's sending you a deal, but before I go there, are you expecting prices to go down in multifamily post-COVID?

Ellie: Yes, but not in the immediate future and not as much as most people expect. I don't think there's going to be 23% discounts for several reasons. One, as you you've mentioned collections, we're doing pretty well with collections. I know some properties are collecting around 70, maybe 80%. So not everyone is doing great, but we're not talking about a 50% drop in collections that can basically justify, you know, fire sales. In addition, you have forbearance. So for 90 days, owners were in trouble now, don't have to pay the lenders. So they're not motivated to actually sell the properties at a discount. Most of the discounts that I've seen today of deals that were closed during April and May and early May were around, I would say four to 5% discount. The problem is that there's a huge gap between the seller's expectations and buyers' expectations.

You know, many buyers want to buy a property at a 15, 20% decrease in price, price cut, and sellers are saying, we're doing well. Why would we sell you at a discount? Now, what they're failing to understand many times is that collection is only one part of the equation. So even if you've collected more than March, there are two other main things that have changed and this is also answering the second part of your question about how we underwrite deals. First and foremost, debts have changed significantly since March. So if in March, it was easy to get 70, 75, maybe 80% LTV. Right now, we're talking about 55 to 65, maybe 68%. So you take a property with the same income, let's say, NOI is the same pre and post COVID, but now you have a deal that you only get 55 or 60% LTV versus 75% pre-COVID, guess what? Your returns are completely different.

In that one part, I think was part sellers don't fully understand. And then in addition, when it comes to our projections, pre-COVID, you know, we were using software that had predictive models about vacancies, concessions, rent increases. And we use those numbers along with, you know, it's a combination of those projections, conversation with our property management company and how the property was basically performing up to that point and came out with a number that makes sense. Now, regardless of what those models are showing us, I'm comfortable buying if the deal makes sense with very little 0% rent increases in the first 12 months. And that also affects the price that we can pay, because obviously you have, you know, the first 12 months you can't really raise rents. Even though I have to say that in some of our properties, we are able to lease only with zero rent increases, but on other properties, we just raised rents about 18% higher during April because we were offering renovated units.

I've talked about before renovation on demand and people are willing to pay a little bit extra. So during April, we're actually increasing the rent from some of our properties by almost 20%. So even though that is happening, I think we trust that that would happen with the next property. And so in order to be conservative, this is what we do. We increase also the bad debt or delinquencies and increased concessions more than what we usually do pre-COVID. So all those factors alongside the debt, basically, you know that affects the returns that we're looking at. And that's why the prices that we're willing to pay for a property, they're not the same like they were before COVID.

James: Yeah. There are other factors. Like the debt and I don't know whether they talked about the reserves that the lenders are asking right now. The Fannie and Freddie, that's gonna, you know, additional [29:30unclear] which reduces your return, even though you're supposed to get back that money in the 12 months or 18 months that, you know, after their deal has been meeting a certain threshold. So that's very interesting. So let's go to a bit more on the personal side. So, after you start doing your real estate business, is there any proud moment that you had you know, that you're really, really proud of that takes you until the end to forget it? I mean, you can't really forget about that particular moment that you're really proud of yourself.

Ellie: Well, we had one property that when we got it on a contract, it was 98% occupied. And after 90 days or I think 80 days, we're close to the closing date and we were asking for the latest rent rolls and T12 because we're always, you know, looking at the new financial information. And I'm looking at the rent roll that the seller is sending me and I'm staring at the numbers and I'm not sure I'm seeing it right but apparently the property is about 80% occupied and he didn't tell us anything. He was hoping we're not going to notice. And it happened over a few weeks and we are about less than a week before closing. And we just find out that the property that was 98% occupied is 81, 82% occupied.

James: So it dropped within a couple of months?

Ellie: Within a couple of weeks. Yeah. So, we were starting to kind of scratch our heads and say, what happened here? And we kind of discover an interesting story where basically the seller was self-managing the property. He thought he was saving money by doing it by himself. He left a lot of money on the table because all of his rents were under-market. But when we took over, we just increased rents by $85. You know, almost 10% increase without touching the units because we had to push the occupancy back up because we knew it was under-market. But he was self-managing and he wasn't really treating his employees and his tenants the way they should have. And at some point, when they heard about the sale, the entire team just got up and left and they all just quit.

And he had to bring a third party company last minute. The third party company comes in, they're looking at the property. And they say, okay, those who are a little bit late paying their rents, they just started evicting people. There was a woman, one of the stories that I've heard, a woman that came from the hospital, after she gave birth and they evicted her because she wasn't paying on time because she just got back from the hospital. So they basically said we have very strict rules and so if somebody, if we don't think they should be here, they're not going to be here. And that's how they ended up at 82% and the owner didn't, I don't know if the owner, even knew, I think he was hands-off at that point.

He felt that, you know, he's almost selling the property and we didn't know if we can close because, you know, I had investors rhat knew they were buying a property at 98%, not 82. The first thing we did was obviously, you know, communicating that with everyone and saying, this is the situation. And we also have a plan of what we're going to do. And I wanted to give, you know, investors the opportunity to say, Hey, you know what, it's not the type of investment I want to be part of, but nobody did. We renegotiated with the seller and said, now the property is not worth as much as it was three months ago. And we also had to negotiate with Fannie Mae because now the property is not stabilized. So Fannie May only gives you a loan if the property is stabilized, meaning 90% occupied for 90 days, and this is not a stabilized property.

And we worked with NorthMarq, they were a great team and they went to work for us and basically said, we can vouch for those sponsors are great operators and convince Fannie Mae to keep the loan even for an unstabilized property. So that was one of I think more interesting dealings that I was part of but it turned out to be fine. Our property management company were able to bring the occupancy back up to 90% within 45, 48 days. And the property is doing a lot better and the collections are good. And it's interesting when you're in that moment, you're not sure how the property is going to perform, but when you have a really strong team, it makes all the difference. And I was blessed to be working with a really, really good team.

James: Got it, got it. That's very interesting because it's, yeah, Fannie and Freddie, they expect the property to be stabilized until they close. They'll keep on asking you for rent roll until you're closed so it's very important. That's a big drop to 82%. It's crazy. So, yeah. Thanks for coming for the show. Why don't you tell our audience how to get hold of you?

Ellie: Absolutely. So you can find more about me if you go to elliperlman.com and I also have a free guide for you. If you want to look at a deal, there's basically a free guide. You can download on my website that will basically teach you all the things that you need to look at when you're evaluating a deal, all the crucial deal components. And that's basically how you can reach out to me. If you want to email me. My email is [email protected].

James: Awesome. Awesome. Thank you very much for coming to the show. I'm sure we had tons and tons of value from your knowledge and our discussion. Thank you.

Ellie: Thank you, James. It was fun. Thank you so much for having me.

James: Bye.

James: Hey audience and listeners, this is James Kandasamy from Achieve Wealth Through Value-Add Real Estate Investing Podcast. Today, I have Sterling White. Sterling is from Indianapolis and he focuses in Indianapolis and Louisville, Kentucky, currently owning almost 400 units with valuation of 19 million, his company's called Sonder Investment Group. Hey Sterling, welcome to the show.

Sterling: Alright. Welcome everyone, it is Sonder Investment Group is one thing I did want to do.

James: Awesome, we'll get that right, Sonder Investment Group.

Sterling: If then off camera, for those of you who are from Louisville, he pronounced it Lewisville so, it sounds like you do too. So, that was hilarious. But get your popcorn ready everyone, it's about to be a show.

James: Awesome. Sterling is very popular in BiggerPockets, you know, I've been, you know, getting his blog posts on BiggerPockets for many, many years. Wait, how long have we been doing that?

Sterling: Oh gosh, I-- four and a half, five, four years, three and a half years. I don't even know what day it is anymore James.

James: And you have been interviewed on BiggerPockets podcast for many, many times, right?

Sterling: I would say Episode 308 and then also, I've been on their Best Deal Ever podcast, which is like a spin off from their main podcast, but yeah.

James: Okay, that's awesome. Well, that's BiggerPockets, this is Achieve Wealth, we are still one of the top 24 Real Estate podcasts for 2019. So, you are in the right place. So, Sterling, why don't you tell our audience about yourself, about your story? Because I think you have a lot of good stories to share that can be inspirational to others.

Sterling: Yeah. So, just a little background on myself, I'll give everyone like a cliff note version. So, born and raised in Indianapolis, as James mentioned earlier, fraternal twin brother and single mother and we grew up on welfare, section eight housing, food stamps and I'm sure of other government assistance my mother didn't tell me about. And I remember the environment that we grew up in just wasn't the best. And I remember one instance my brother and I were actually sitting at one of those little multi-color like Fisher Price type tables, we're about six years old and as soon as we get done eating dinner, we go upstairs to-- we're playing like PlayStation or Sega or something and a bullet comes right through the back patio where we were sitting. So, I may not be here, he may not be here, but at the end of the day, decided to not be a product of that environment and use that as fuel. Got started in real estate 2009 on the construction side, fell in love with the industry, not so much getting my hands dirty, and then shifted to the investing. Bought first deal 2013, no money out of pocket with leveraging my mentors cash at that time, scaled up to 150 single families and then in 2017 made the entire shift to multifamily in scale portfolio, just under 600 units, exited out of all the single families and now just all multifamily.

James: Yeah, I remember when I was reading your blog you were all about single family and you know, I didn't care, but I did learn a lot. I'm happy that you wrote that blog because--

Sterling: The content marketing too, that's a whole nother, yeah.

James: Yeah, we'll go deep into that because I think, you know, writing blogs like that where you generate content and sometimes people say, "Why do I need to write?", right? I mean, that is definitely credibility establishment when that happens, right? So, I'm happy for you that. So, coming back to your-- so, after you finish your studies, you said-- did you go directly into real estate? I know we missed that part on how did you move to real estate, why real estate was the aha moment. I mean, you said you did some construction but, why investment?

Sterling: Yeah, so, I was in college at the time, I actually dropped out at a later point, college was not for me. I took chemistry one and two, a total five times. Yeah, chemistry, it was--

James: Chemistry is fun man, even though I don't enjoy it.

Sterling: So, during those college times, during the summer, my roommate's dad owned a construction company and he saw that I had some free time and that's how I got started. He said, "Hey, I see you're around the house oftentimes.", and I also was doing entrepreneur ventures and then that's how I was able to earn some money.

James: So, when you were having free time, and when your, you know, friend's father saw you and there must be something that has attracted you to go and try out this. Because the reason why you had free time because you didn't find something that was motivating enough for you to go and do, right? But what was the trigger point? Maybe I should go and try that out.

Sterling: One thing that I always did enjoy and seeing, because also, I was able to visit some of his houses that he had because he owned rentals, not my roommate's dad did and also, he owned rentals. I really enjoyed the element of seeing a house in distress condition and then seeing the aftermath, once the value is created, and then you're able to see afterwards so, the before and then after. So, that's what I enjoyed. And then on the construction side, I was helping the bricklayers, I provided them the mortar to be able to lay the bricks, huge grind for sure but after that project is, I started from the beginning and then it was on the fire station to look back and say, "Wow, I was involved with all that.", such a cool experience.

James: Yeah, didn't you write a blog about it? I remember someone writing a blog, doing a wall, is that you?

Sterling: Will Smith has a--

James: No, not Will Smith. I mean, this is from a BiggerPockets somewhere, I mean, either podcast or a blog where someone said they build a wall, it was very cool. That's fine. So, how did you move-- I mean, so, before going into multifamily. So, on single family, was there any limiting factor that you had? Because you know, you're moving from construction to investment side of it, was there any limiting factor, you know, limiting hurdle that you had in your mind, and how did you overcome that?

Sterling: Yeah, I would say I had no limiting beliefs when I was making that transition, and what really helped with that was feeding my mind as much positivity. So, that same roommate that got me started in construction, he has also been pivotal in terms of another aha moment that I had in my life, which was, I was at a college party, yes, I'll call it what it is and having a good time and I ventured out on my own. This is my early 20's and I'm out on this boat, and there's this, and I'm all by myself and there's this beaming question that comes down to me and says, "Sterling, is this what you want to do with your life?", and I answered back to that question, "No. This is not.". Since then, I cut off all my friends because they weren't going where I wanted to go ultimately. I cut off all the news because there was so much negativity and then I started with a lot of self-improvement and that allowed me to get a lot of the limiting beliefs out and replace those with more empowerment. And I still believe I have limiting beliefs to this day and I'm always looking to become self-aware to identify those and replace those with more empowered ones.

James: Got it. So, when you started on a single family, did you-- I mean, how did you start buying deals, how many single families did you have before you transitioned to multifamily? And how did you buy that deal? And how did you make money on a single family to transition to multifamily?

Sterling: Yeah, so, just got up to about 150 of those and I'll start it with one, and that very first deal was, it was a $25,000. It was in about, I would say a C neighborhood, C plus neighborhood and it was not a shed, those of you who may be on the West Coast or East Coast, you can actually, in Indianapolis get some very affordable houses, you couldn't get that for that much now since things have gone up. And I presented that to my mentor, he funded the purchase price, and also the rehab and one thing before all of that happened with that deal, I was working for him for completely free, and that's how I got started in the investing side and was able to compact his 20 years knowledge into the two and a half years that I worked with him.

James: Got it. So, did you use any, but-- so, you went up to 150 single family houses? That's great. That's crazy because I stopped at 13.

Sterling: I wish I would've known that sooner.

James: I cannot take it after 13. But did you have the infrastructure to manage that many houses or did you have like a system?

Sterling: Yes. So, ended up from that mentorship, shifted to a, finding a partner that was very similar, in terms of our ages, because I outgrew that original mentorship, and he was behind the scenes of an operation of a operator that managed closer to about 1000 single families. So, he understood how that worked and we were able to lay the foundation to start building up on that and scale our portfolio.

James: Got it. And how did you buy these houses? Is it through normal MLS or you did off market marketing?

Sterling: A mix of just about everything. So, doing the bandit signs, that was one route and I remember doing those way back when and there was someone who always would go down and take them out. So, that was one. And--

James: I did that too.

Sterling: Oh, did you?

James: Of course, we all are hustlers.

Sterling: Yeah. It was funny, there was a stapler, you would take a PVC pipe, and then you would take the staple and-- a staple gun and put it on there so you can hang the sign all the way up on a telephone pole.

James: I didn't do that.

Sterling: So, people just couldn't jump up there to--

James: Oh, you did the more advanced bandit sign. I did the one that you just put in, you know, on the side yard and all that. You did the one that is harder, more effective because people can see it from early and nobody can come and grab it. But you're right, every time you put in and after a few days, the city or someone's going to come and take it out.

Sterling: Not if you put it all the way up there. So, that was one route, was purchasing from the MLS and then also taking the direct to owner approach as well. So, a multitude.

James: Which one was the most effective? Made you the highest money? Bandit sign, MLS and, you know, direct to seller marketing.

Sterling: I would say the direct to seller was by far. The MLS, had success with that, but that took a lot in terms of offers, which most of it, whichever channel you go through does, that's the same thing but in essence is, I would say it was the MLS and also the direct to seller approach which included mostly direct mail.

James: Got it. And how did you transition to multifamily and why?

Sterling: Because managing that many single families was a pain in the grass.

James: But you had someone helping you out, right?

Sterling: Yeah, there was a whole team that was involved with the acquisitions.

James: How many was the team?

Sterling: 15, 16 team members.

James: Yeah, that takes time.

Sterling: It worked out on the property management side.

James: Okay. Yeah, I had like 13 houses all on my own so, just crazy, right? So, yeah, that needs a team, 150 houses needs a team. So, why did you move to multifamily?

Sterling: More so, economies of scale was the biggest and then also looked at, okay, where we want to go in the future, which was ultimately shifting to the multifamily at some point so, why not do it sooner rather than later?

James: So, what are the key learnings that you took from single family to multifamily acquisition and operation?

Sterling: Yeah, I would say more so is the management. I mean, if you're able to manage that many single families, so, yeah, if you're able to manage that many single families, the same could apply. Of course, there's some more, what is it? Small day to day changes that would be different on the multifamily side but managing 46 single families is a lot more difficult to manage 1 46-unit apartment complex, which was my very first deal in 2017, which was a 46 unit. And then so, there's that, and it's just a lot more labor intensive, because scaling to that many single families is, it wasn't 1, 2 transactions. There was close to about 100 to 125 transactions, because a lot were one offs, a package of two, maybe a package of three or four every so often. And then, from the multifamily, that very first deal was one seller, one transaction, all in one single location. So, once that happened, it was like, light bulb went off.

James: Yeah. What do you think, I mean, in terms of like value add, right? Because multifamily is valued differently from single family, I mean, did you find that out halfway through? Sometimes people do like single family, I have people who just want to do single family. But I moved from single family to multifamily. What did you see in terms of value add and how did that change your strategy?

Sterling: Yeah, I would say that is a great point. So, also, what was learned is, underwriting was a different style. So, looking at it from, "Okay, the NOI is, let's say it's this, we're purchasing at a 7% cap, in, let's say, five, six years, we're going to be looking at an exit. Let's be a little bit more conservative at a seven and a half or eight and not bank on cap rates or so much going steadily be compressing.". So, on the single family-- on the multifamily side, we took more so that it's valuated as a business versus on a single family, there's more exits and so, there was, "Okay, this is one if we exit to an investor, okay this is one if we exit to retail..", so, those were also differences too.

James: Got it. So, tell us about more about your multifamily journey like, how many units you started and how many units you have right now and how did you grow each one of that, I mean.

Sterling: Yeah, so, started with a 46 unit then acquired a 50 unit and after that 2 80-unit apartments and then 156 units. So, exited out of the 46 unit, the 50 unit and now just own the 2 80 units and the 156 unit.

James: Why did you exit out from the smaller ones?

Sterling: Because they were smaller.

James: That must have made you a lot of money too, right?

Sterling: Yeah, I mean, the one that was a 46 unit is one that was the boiler system. So, that was the old age property. So, there was heating the boiler, that was affecting the, I mean, in terms of the expenses, and then also, we wanted to be able to push up the rent a little bit more and we felt a little bit capped off. And also, we were transitioning to more desirable assets and just step above in terms of the neighborhoods. And so, with all those things considered, that and we're not able to have on site staff, that's why we made the transition selling that one and then also there was a 1031 buyer too.

James: Got it. Yeah, smaller one can be a problem with the onsite buyer. So, where do you see yourself going from now on wards on multifamily or any other asset classes?

Sterling: Yeah, so, have shifted more from the older style. So, the ones that have been built pre 1970's and shifting more to those in the, what you would say, B class, that have less heavy lifting.

James: So, how do you under write a deal? I mean, can you like, walk through your basic sniff test? Because, I mean, this is a market in the Midwest state, right? So, how-- what would you look for when a deal is thrown to you by a broker?

Sterling: Yeah, so, more so just looking at and-- so, I go the approach of going direct to owner. So, I still do have brokers send over deals, but in essence is, looking for cash on cash to be in the double digits, that way myself as operator, our team as, when we do the equity split, that we still have enough to provide our partners double digits so, there's that. And our IRs to be anywhere between 15% to 18% on a three to five-year horizon.

James: So, what would you look for, I mean, I'm not talking about the compensation structure. Oh, yeah. So, basically, you say the end result is what they look at compensation structure, right? Before that, do you look at the area, the demographic, the household incomes and all that?

Sterling: Oh, yeah. So, looking at the-- so, we look at the overarching market and ensure like, Indianapolis is very diversified in terms of the businesses, you got Simon Property Group, which is one of the largest real estate investment trusts in the world, you've got Eli Lilly, which is one of the largest pharmaceutical companies, you got Blue Cross, which is one of the largest healthcare. So, looking at that from that, a high level and then go into the submarket, looking at how are the schools, how is the crime, that's always something that's very significant. And then, also yes, looking at the median incomes, ensure that when we're doing the value add that that submarket can support it or absorb it.

James: Got it. So, let's talk about off market strategy, there you talked about, how many multifamily deals have you bought using your off-market strategy?

Sterling: All of them.

James: Oh, all of them. So, basically, this broker doesn't exist, I guess. So, you bought like, what? Almost 4 to 500 units on all of market?

Sterling: That is correct.

James: Awesome. So, let's talk about that. What kind of strategy did you use to get off market deals?

Sterling: So, that is a secret, just kidding, no, I wouldn't do that. So, it all starts with a co-call and I know there's people on here that a little bit screams like, "I don't know about a co-call.", but in essence is, that's the route that we go, we pull a list, we'll use something such as rihanme.com or even costar.com, not affiliated with either, but those databases you can pool these properties that are between 75 to 200 units in let's say, Indianapolis, Indiana or Austin, Texas, and then from there, further narrow down the list and say, "Okay, I want the assets that haven't been sold in the most recent five years.", and then further narrow it down, "I want the rents market rates between 700 to $1,000.", and then that is very niche of a list. Most of them will be owned in LLC so, skip trace the LLC and then find the persons, the principal, the owner, and then give him a call.

James: Got it. That's-- well I do a lot of off market as well. So, that's why I want to understand that, how are you doing it and all that. But it's impressive that you found all of your deals off market. I think I found like almost three of my deals were off market out of my nine deals that I've done right now.

Sterling: Yeah, it's a whole separate infrastructure, it's one thing because you think of it when I first started building that out myself, I was the one that headed all of it. So, that's a full-time job because that's what brokers do on a full-time basis. So, I was doing that on top of everything else but then I decided to document what I was doing, put an infrastructure in place and now hire people to do that and then now, they, when an owner raises their hand, they just set the appointment with me.

James: So, what kind of infrastructure did you have to do that? Because that's a lot of work.

Sterling: Yeah, it is. So, a researcher is the first one, and that's the person I'll provide the criteria to, they'll go to St. Louis, Missouri, pull all those properties, and then most of are owned in LLC so, they'll skip trace the LLC. Second role that comes into play as the co-caller, they're the one that places all the outbound calls. And the third is, you could say, the acquisition's manager where the appointment is set with me, or I then hop on the phone call. One of the questions I always ask right from the beginning is, "Why now being open to selling?", just to understand if there actually is a motivation, if they're saying, "I just want to hear your offer, and I'm looking for something that I couldn't resist ultimately, and then I would sell.", then that person wouldn't be a good fit. But if there is something to where, not a slam dunk deal, especially in today's environment, then that's when I would retrieve the T 12 as well as to start the underwriting process.

James: So, where do you get the list for the initial, you know, such?

Sterling: Rehanme and costar.

James: Rehanme and costar. So, do you use both of it or, do use both in conjunction of each other?

Sterling: I use Rehanme right now and formally, I would use costar because I had a, what is it? The agent that we used, we used apartments.com and they had access to costar because costar bought apartments.com so, they would just send that from the data that I wanted.

James: How accurate is Rehanme owned information?

Sterling: Not accurate, same with costar. And I'll give you all the prime example for costar, which is one of the most reputable, if not the most reputable when it comes to data, had a representative, one of their reps in the office of one of the apartments that I have here in Indianapolis and I said could you pull the data on this specific property and they pulled the property and also the owner information, I said, "My information is not there and I have this property.". I said, "Don't add it." but, yeah.

James: The same thing happened to me when I first talked to costar, I told them, "Hey, can you pull my property and it's under somebody else's name and okay, forget about it.". No point of selling anything else to me.

Sterling: So, it's just one of those things that yes, these places are a good starting point. but still you have to go the extra mile and actually do your own due diligence.

James: Yeah, but that was like almost five years ago, maybe they're better right now, right. So, okay, after you get the data out from Rehanme, do you basically do skip tracing? What software do you use for skip tracing?

Sterling: So, public records. So, have it found an absolute science when it comes to skip tracing LLCs, I've looked for just about anything. So, if anyone who's on here who knows a software or a service that offers that, I would love to hear about it. There's some I've actually looked at two, but they don't work. So, the route is to go public record to find out who filed the articles of organization.

James: Okay, after that, how you find their information?

Sterling: You use a source such as beenverified.com, B-E-E-N verified.com, or there's truepeoplesearch.com, whitepages.com, just one of those providers to type in their name. Hopefully it's not as common as John Smith.

James: Yeah, I've heard about beenverified, I've never really used it, but I've heard about it. That's good. So, okay, so, now you have all the information, the owner's information, you're going to get your acquisition person to call these owners, right? So, how would they first call and how would they pick up the call and how would they approach the sellers?

Sterling: So, sometimes it does vary on script, whether they get the gatekeeper, or they get the decision maker, but it's more along the lines of, "Hey", it goes ring ring, "Hey John.". Well, I'll speak from my side is how we go. "Hey.", ring ring, "Hey, Sterling here, Jim, did I catch you at a bad time?", and then the person on the-- or we could just do some role playing right now-- no, I was going to say we could do role play but--

James: I'm a tough guy.

Sterling: Because this is what I do with the team is that, we do role playing on a daily basis, going back and forth of objections. But the opening is just more so, "Hey, Sterling here, I just bought Bit Wood Apartments across the street from yours and wanted to personally reach out to see if you'd consider selling.". So, it's more of just straight to the point, transparent. Then from there, a lot of times they'll say not interested, "John, I completely understand. I'm sure you get these types of calls all the time. Tell you what, give me 30 seconds, if you don't like what you hear, I'll hang up on myself.". So, that's how the dialogue goes and then we also go into some additional questions.

James: Yeah, I get a lot of calls too, maybe one of that is your guys too and I wouldn't know. Because you mentioned, Austin in the beginning, but I will say I'm not interested, forget about it, because sometimes you're very busy on the phone, or I mean during our day time and suddenly someone calling and asking something irrelevant, we want to hang up as quickly as possible, but it's fine that you said, "Hey, give me 30 seconds, you know, so that I can explain it.".

Sterling: Yeah. You're just looking to buy as much time as possible.

James: Yeah, it's all about connection and numbers, right? End of the day, right? I mean--

Sterling: Contacts equals contract.

James: And that one person who said yes to you could be $10 million deal, right? So

Sterling: Yeah, that deal that we were talking about offline was a $7 million deal and that all started with a co-call. And of course, there took many people see, "Oh, it was a co-call that closed on this deal.", but you don't see all the contacts and all the work that happened until it got to that point.

James: Correct. Yeah. I think my-- yeah, I'm-- you know, we made millions of dollars just by co-calling, co-texting, that's what I use.

Sterling: It works best-- it works. But at the end of the day, whatever channel anyone uses, it's about consistency.

James: Yes. I mean, you can do broker relationship, but I think it's, you know, you probably get the normal deal at the same time, for a newbie it's just so hard to get with brokers, right? I mean, they already know you're a newbie and they're not going to waste time giving you the best deals out there, right? So, that's good. So, let's talk about content marketing because you are expert in content marketing to get invest acquisition, let's walk through that process. How did you thought about content marketing? How did that have worked out for you? And how does the investors are attracted to come and you know, connect with you through content marketing?

Sterling: Yeah. So, it all started with the book, Jab, Jab, Right Hook by Gary Vaynerchuk. Phenomenal book, he's an influencer out there. But in terms of that book, planted the seed, and in essence, Jab, Jab-- the jab jab is, value, value, value content, content marketing, free content, and then the right hook could be invest with me, what is it? Does it go with my coaching? Or whatever your services happen to be, and-- but the original title of the book was supposed to keep saying more jabs, and that's the exact process that I take it, is put out a lot of content, a ton of content and then also, I use Grant Cardones 10 x rule, philosophy with pushing out a lot. Because the thing is, it's so noisy in the marketplace so, overall from the content marketing is to provide value and those of you who are just getting started that are thinking, "I don't know what value I can create.", share your story, people would want to hear your story and also document your journey as well as far as the content.

James: Got it. So, what are the content channels do you use? You use blogs, podcasts?

Sterling: All of it.

James: YouTube? Oh, you're on all of it.

Sterling: Yeah, I would say more so now is on, I've pushed to the video side. And so, I have my own podcast Real Estate Experience, which James is on and that will be airing soon. So, there's that is one channel and then also, I use all the social media platforms to post that content. So, on the audio side, iTunes, SoundCloud, Spotify, through the podcasts which a lot is shifting more to the, what is it? Listening, and then have the video side, got YouTube, got Facebook, got Instagram, in which I could take like what you're doing here James is, you could take the video from this and be able to post it on all those platforms and repurpose it.

James: So, which one do you think is the most effective in terms of connecting with investors and investor, you know, acquisition?

Sterling: Yeah, I would say in terms of, when I got started BiggerPockets was huge and then also, being on others' podcasts really help, just those two channels alone, of course I had a multitude of other channels but those two really did help with brand awareness.

James: Got it. That's awesome. Alright Sterling, I'm sure you had tons of value to our listeners. Why don't you tell our listeners how to get hold of you?

Sterling: Yeah, so, you can visit Sonder Investment Group and contact me on there. My email is Sterling@sonderinvestmentgroup, and also, I'm on Instagram, Sterlingwhiteofficial. If you have any questions, slide into the DM with any questions.

James: And how do you spell Sonder?

Sterling: S-O-N-D-E-R Investment Group.

James: Okay. Got it. Okay, awesome. Alright. Thanks for coming on the show.

Sterling: Alright. Have a great one everyone, keep being awesome.

James: Thank you.

James: Hey, audience, and listeners this is James Kandasamy with Achieve Wealth Through Value Add Real Estate Investing podcast. Today I have an awesome guest and we're going to be flying very high with this guest. His name is Lane Beene; Lane is an F16 pilot who has been doing multifamily syndication and recently has been doing development. He owns almost 700 units in DFW area and also there's another, like out of that, another 200 plus units in the Longview, Texas which is a tertiary market. So we're going to go a bit more detailed into that as well. He has been recently working on a hot development project near Austin almost 300 units with a $15 million equity raise and a total valuation of the project of almost $52 million. Hey Lane, welcome to the show.

Lane: Thank you so much, James, for having me on the show this afternoon, I'm excited to share with your audience and share with other up and coming real estate investors on what I've learned so that they can become a better millionaire and they can get to their financial goals safer and more quickly than I was able to do.

James: Yeah. Yeah. We always want to share. I mean, real estate investors are really interesting people. This is one profession where people like to share how they come up in their business. I'm not sure why or maybe we are just within the circle of people who like to share. Maybe there are a lot of people who don't share but in general, I've seen like a lot of my friends in my circle we like to share, and we have all these podcasts, which gives all that information. So it's very, very, very interesting just investment asset class. So tell me about; you are doing, I mean F16 is for me from I can see from the ground, it flies very fast. It's super sophisticated. Do you know the rough estimate of a cost of a F16?

Lane: It's a lot; we'll see syndication for sure.

James: Does it go to billions or still in the millions?

Lane: Me and you and our whole network of investors would probably have to get a good debt, we would have to get a good financing to make it right. I think James, I think that the basic model is right around $40 million and then the the luxury apartment F16 is probably $45 million or more so that's for one and you've got to have about 24 units of that. So 24, times 30 is a pretty big tax liability. So that's kind of what it is.

James: So to fly a plane, I presume to fly a plane, I wouldn't say simple. I mean, it's already complicated; to apply an F16 must be more complicated and so like in general, how many knobs do you have to turn to make it fly? How many controls do you have?

Lane: Tough question there to answer James...

James: Or is it all automatic?

Lane: But I'd say it's like this, imagine you're doing brain surgery while you're juggling four bowling pins. That's sometimes what it's like and then other times it's like, imagine watching your kid play the violin at a recital, it's so boring and you're just trying to keep yourself awake. Then other times it's almost impossible brain surgery while juggling bowling pins. So between those two extremes, the number of buttons and the number of switches and the number of displays you have to watch varies greatly.

James: You are still flying right now. I mean, you're not a retired person, you're still flying. I mean, is it because you enjoy it flying?

Lane: James, I've got the best job ever. And flying is like riding, and some of your audience I know is going to love this and some will probably will hate it, but it's like riding a roller coaster with no rails. I grew up in Fort worth in North Texas, and there's a big amusement park here in the area where I live and it's called six flags and I know a lot of people have probably been to six flags before, but I remember as a kid, when I was in the seventh or eighth grade there was a roller coaster that we would ride and it took four or five minutes to ride and then they'd let you off. On certain times of the summer, when it was like a day week there was no line. So you could sprint from the exit back around through the line and then get back in line and it would take you about two minutes to race from the exit of the roller coaster back to the end and I think I rode it 42 times without not stopping. It's so much fun.

James: That's very interesting analogy.

Lane: So now flying an F16 is like an adult roller coaster, but there are no rails and there is no line.

James: And it can fly because no one is up there. I mean, you probably have some, you say it's a wide sky and open sky and you can fly, it's very interesting. Throughout your career, I mean, throughout your life, you became an F16 pilot, at what point did this aha moment of the real estate come in at what point from real estate to multifamily came in?

Lane: James, that's a great question. Here is a short story or a short answer to a very long story. I was in the air force and I was in our squadron lounge drinking coffee on September 11th and somebody said, well, is an accident. And we went in to watch television and there was; that was when the first aircraft hit the world trade centers and then not too long after that, the second aircraft hit the world trade centers. I remember thinking what was going on here? No one really knew at the time and one of the senior pilots that was a pilot for American Airlines was right beside me and he said, that's it and I looked at him and I said, what do you mean that's it? And he said, the economy, the airlines, the travel industry is over.

James: I mean, even after the first plane hit?

Lane: Almost immediately and I think it was 10:30 here and about 11 o'clock he said, that's it. And I said, well, what do you mean that's it? That's not it because maybe you don't understand, but Lane Bean is going to become a commercial airline pilot and make a half million dollars in work one time a year. So you can't just stop that. That was my goal. And he's like, no, that's it and sure enough, that was, the economy changed forever. So I went into a period of what I was trying to do was totally gone. I was going to be, my career was going to transition from the air force pilot to commercial aviation, to be an American Airlines, Delta pilot, or United pilot that didn't work out because for the next 10 years, those companies stopped hiring pilots. So I went into a tailspin thinking, what am I going to do now? So what I did was I was always very interested in making repairs. I liked doing house, I liked doing carpentry work, working with wood, working with my projects on my own house and improving them. So in my neighborhood, and this is right around 2000, so 20 years ago; and so in my neighborhood, there was a vacant house that had been vacant for six or eight months and I thought, well, if I can improve my own house and make it better, why don't I try to buy this one and rent it out and make it better? And so I did.

After learning that process, I thought, well, this isn't that hard, bought another one, bought another one, bought another one, bought another one, bought another one and eventually I had 10 single family properties buy, rent, renovate, improve it and then hold it. But then 2008 came where you could no longer continually advantageously finance these houses because I had too many. and they said, well, now you have to either one, put a very large, you can't get favorable financing on single families at this rate, or you have to go to commercial and so that's when I went and transitioned to commercial, which is for your audience. I know they know, but that is multifamily, five plus units and that's what started my career in multifamily.

James: Very interesting because I did the same, I went up like 10 properties and I bought one more 11 and I was thinking, I have to go to commercial loan because they didn't want to do it and that's where I have to jump the multifamily. Because he just very hard to do a single families in terms of scaling up and all that. So cool. I mean, and how did you build up this 700 units in DFW and Longview? Can you quickly tell us what's your timeline in terms of moving from 10 single families, what was your first purchase in multifamily and going to 700?

Lane: Some really great lessons here to share with your audience if they are in the process of maybe operating or syndicating their own deals. I had this mentality and I was pretty good at single family, I had 10 of them and they were all doing really well and I didn't need to sell them or anything, but I had the attitude of DIY because as a single family operator, you have to DIY, do it yourself. That's what you have to do because there's just not that much revenue to hire professionals; you can, but it's more difficult. I took this attitude of DIY, I'm going to find it, find a multifamily property. I'm going to finance it myself, or very little of partners. I'm going to acquire it. I'm going to manage it myself. And let me tell you for everybody listening, listen very carefully to what I'm about to say, DIY doesn't work in multifamily. You have to partner with a good team.

Now, the question you asked me was not DIY, the question you asked me was how did I get started on my timeline? I'm mentioning that I had a do it yourself mentality and I took that mentality into multifamily syndication or operations for two straight years. It was a complete discouragement because I had no results or progress whatsoever because I wasn't reaching out to other professionals and utilizing their skill sets. I was trying to develop my own skillset. And so for two years, I made no progress whatsoever. Then I finally learned that in the multifamily community, because the projects are bigger, you have to develop a team. Once I developed that team, I was able to accelerate and get properties and acquire assets and manage them correctly and safe and securely much more quickly and much more efficiently and productive. So that's the timeline. Two years of complete strikeout, and then starting at month 24, when I changed and stopped trying to do it myself and started trying to partner with other professionals and experts in the field, my results sky rocketed.

James: What was the first person that you think was the team member that you wanted and who the other person that you think is the most crucial team member?

Lane: Somebody just like James or somebody, that's has Achieved Investment coaching. Somebody that can hold your hand or can just be there to help you. I tell this to everybody, I say, when you hire someone smarter than you, you show that you're smarter than them. And so my advice is not to egotistically brag, is to surround yourself with very smart people and the very first person you need is a coach or a mentor or an advisor that's already successfully walked that path. They don't have to be a hundred years of experience, but they need to have some experience where they can say, hey, Lane, James, hey, don't do that. I would recommend you direct your efforts here. Let me connect you with my friend who is a broker, let me connect you with my friend who's a commercial insurance specialist. And then that's how you start building these networks. That's how you build your team. But the answer to your question clearly is find an advisor or coach or mentor or partner that has experience. That's who I would put on my team first.

James: It's very surprising, not say surprising, it's sometimes when you are coming from a different world, like you came from the airline industry and I'm sure it's a very complicated world. I came from being an engineer and it's complicated world, but we are all within our own world. Sometimes we think this is the world. This is how everybody should be reacting. This is the best that everyone can do. But suddenly when you go out of your network and meet another person, which come from completely different circle and you start talking to them and they tell you things that you have never heard before, then you realize, okay, your circle is too small. So, I think that's very important for you to go and listen to other people who are, as you say, that was smarter, who has done it is very important because people who have more than thousand units for them buying 50 units is not a big deal. They already done it, they can tell you all the shortcuts and commercial is no joke. It's not like single family. You can make mistake and get away with it, commercial is multi-million dollar deals. If you're syndicating it's worst because now you have a lot of passive investors money in it too. You don't want to make mistakes.

So you're absolutely right, just find people who are willing to share as we start in this podcast in the beginning, real estate is an area of investment where people are willing to share. If you go to biggerpockets.com, you open a free account and you ask one question, that's like a hundred people answering you. So can you do that in stocks? I mean, first of all, stocks is very hard to do because you don't have control itself. No one knows what's happening in the management. If Elon Musk smokes weed then the share goes down. You can't ask question, will the price go down if Elon Musk smokes weed. No one knows. . But in real estate you can be more predictable. Same thing with bonds. I mean, it's an investment asset class, but not many people knows about it. For me, it's very highly secretive investment method. It sounds very simple, but it's a much bigger than that, bonds is huge. I mean, even same thing with Bitcoin and crypto, all that is you buy by chance. You do not know what's happening behind it. They say there's some server running behind it and all that, but real estate is like, you can make sense out of it. I say, there's a lot of people who are willing to share for free. Go to Facebook groups, go to meet ups.

The problem I see is people really do not want to take action to do it. So that's good. It's very interesting on how did you find out and how did you move towards that stage and you have 700 units right now and you're going to tell them, but before we go into development and the details of that. So you own three or 500 units, maybe four to 500 units in DFW area, which is a major core city, it a business hub, it's a city by itself and you have like 242 units in Longview, Texas. So that's more of a tertiary market. Can you describe, why did you invest in a tertiary market compared to currently focusing on DFW and what are the differences you see between this primary market and the tertiary market, or I mean the city market and the tertiary market?

Lane: Well, for your audience, James, I know they're looking probably in different States and areas and regions and you have a national representation and so market selection, I have a four pillar funnel and I call these the four principles of real estate investing. This funnel real quickly is the very first one is strategy; so you have to have a clearly defined strategy. The second is a team; you have to have a professional team. The third of funnel and this is sequential, is market selection. Then the fourth is property identification or criteria. A lot of people revert or invert that funnel and they begin to immediately look at property and then they maybe jumped to strategy and then they jump around and I believe that's wrong way. I believe you have to start in the order and the sequence that I talked about. So before I ever looked at any property, whether it's a good or bad property, or how big or small it is, you want to make sure you evaluate the market. So what you asked me was, you said, why would you want to go to a secondary or tertiary market or non-primary market? Why is that better or worse or advantageous or disadvantageous?

The reason is because in the area where I invest and I'm familiar with the primary markets were getting overheated, and what do I mean by that? They were being priced to perfection. In other words, they were being priced so highly, there was no margin for error, or there was no attraction in the return because the markets and the amount of money that was going into these was driving the competition to the point where it had to literally be perfect. And the pricing was priced to perfection is what I turned to termed it. There was really very little return to be had in this market with any level of risk mitigation. In other words, if the rents didn't just accelerate like a rocket ship, you weren't going to be able to make the return that you expected; or if expenses didn't flat line like you want them to, or taxes or insurance went up, which it did substantially then your perfect pricing model was in jeopardy. That is exactly what you are seeing now in the primary markets, because expenses have continued to rise, but because of COVID the revenues and the revenue increase has flat lined.

So a lot of these assets that are in primary markets that has suffered from perfect pricing, they're going to be in trouble because they will not make their rent growth projections. So the answer to your question, let me summarize in ten seconds is this, the secondary markets and the tertiary markets have not suffered as greatly from what I coin perfect pricing as the primary markets have in Texas.

James: Oh, okay. That's interesting because I didn't talk to anyone recently about tertiary market and secondary market and how is it? What you're seeing is that market seems to be performing better compared to the primary market, because primary market is basically everybody overpaid, I guess, because it's just so much competition and the brokers are more advanced and there are so many betas and best and final, and you end up paying the highest price end of the day and you're right, you're basically depending on around growth and usually the County are more aggressive as well in terms of a tax appraisals. So, okay, very interesting. Very interesting. So let's go; I can't hear you Lane.

Lane: I would add to that. So you do have to understand though, there are differences in the secondary market and there are differences in the tertiary market and that's why I said first strategy, because you may not be able to execute the same strategy in the Austin downtown area that you would execute in the outer lying areas of Austin, even though it's the same market, the sub-market may be different. So it's just important that you understand and remember I said that funnel, or the four pillars have a strategy, have a team that can execute the strategy and then identify what market would be the best or sub-market and then at the very end of that notice, that's when I said project specific. This is a 1985, 200 units, garden style but I've already answered the top three questions and that's given me an 80% green light, yellow light or red light. If it's red, don't even worry about looking there for projects and if it's yellow, that's where you may have a little bit of consulting with your coach or consulting with your advisor, mentor. Should I pursue this, is the opportunity right? And in the East Texas market, the one that you're describing, we found a yellow light with a good project, and we were able to execute correctly.

James: So is turning around a multifamily investment deal more complicated than F16? The more complicated part of the F16 or...?

Lane: The real estate part is easy but the personal part is harder.

James: Okay. Okay. Got it. Got it. Got it. So let's go to your development. So why did you start, I mean, after you have this 700 units you started working on this 300 units development in Austin, mainly Austin. So why did you take that decision and can you walk or the rational?

Lane: Sure. And so James, your audience is listening today for one primary reason, as we span back and ask, what value can I add to your audience? What value can you add? Why are they really listening? I believe that most of them would say we're listening because we want to use the vehicle of multifamily real estate to reach our financial goals. And so the underlying question is I want to become, I want to reach my financial goals, that's pretty much what people want to do. They want to do that and then they feel like multifamily investing or working with James and his group is going to be the best, safest way. So I believe that's what everybody is trying to do. I feel the same way. So the very first thing is, like I already mentioned strategy and as we were looking in 2018 and mispricing to execute our strategy became so thin that we realized, I don't think I can really do this strategy anymore because I can't find a good acquisition price that gives me enough margin for error and at the same time an attractive investment that I can execute a value add strategy, which was what I was trying to do. We looked at at about that same time, the tax incentive job tax bill of 2017 came out and it really advantaged redeployment or recapitalization of capital gains and that was the opportunity. It created opportunity zones.

So if you were to reinvest capital gains into an opportunity zone project, it was extremely tax advantaged. And so we looked and we thought, boy, this is a great idea. It's kind of like a super 1031 exchange for your investors or your audience that don't know about that and I can explain that more detail if you'd like, but I said, let's look at all the opportunities zones and how can we pair opportunities on investment projects with what we do multifamily investing real estate and put those two things together because the two principles of key worth of building net worth are this one efficiently place your capital in a cash producing asset. So I'll say that again, because this is important to hear, efficiently place capital in a cash producing asset. Number two principle is execute that transaction in a tax advantaged event, if possible. So how could we do those together, development project with an opportunity zone? It's a one, two punch for success.

James: So opportunity zone is crazy. I mean, I did cover opportunity zone with Scott Hendricks maybe three to four months ago, which is fascinating on how much a tax advantage that they would get. Did you get people trying to do a 10, I mean, not 1031, trying to move the capital gain from real estate only, or was it from stocks as well?

Lane: Most of the people were already associated with real estate investing. And so it was an easy transition for them. However, that is not necessarily a requirement of opportunity zone. When you 1031 exchange, which I know your audience is familiar with, that's a like kind exchange. So real estate for real estate, business equipment for business equipment, you cannot sell your tractor at the farm and invest in real estate. You can't sell your art collection with a capital gain and invest that money into real estate. However, opportunities zones not required, it's a capital gain. So you can still Google stock at a capital gain, reinvest that capital gain into an opportunity zone and have tremendous tax advantages.

James: Yeah, it's very interesting. So let's talk about how did you select this 300 unit development place. I mean, can you walk us through what was the process? So you decided I wanted to development, I want to do opportunity zone development. So how did you choose this side or did you look at nationwide and how did you come to this particular 300 unit site development?

Lane: Yeah. So, James, again, what you're asking me is how do you select market? What adds value to a real estate market? And that's number three. I mean, that's one of the very first things you want to be able to identify. So there are three things, in my opinion, that establish consistent value in a real estate market. Number one, is demographic changes; are more people moving into that area or are more people moving out? An example, California, as you've read and you may be familiar with more than I am, a lot of people are exiting California because of taxes and other things, job loss and other areas. There are other parts of the country where they're experiencing an out migration of population. So that's a long established trend that doesn't happen overnight. It doesn't happen by this afternoon. That's a trend that is established over a long period of time. Some markets are having an inflow of people moving to the area. So we can get into all detailed analysis and data. But let me tell you this one example that anybody can understand, and this example last year had 21 million data points, 21 million. So that's a pretty big number. It's the number one way U-haul rentals. What city in the United States has the number one, is the top choice of one way rentals to this city, Houston, Texas and that area around that. So more people are moving to Houston, Texas, or that area around Texas, wherever than any other place in the country, according to U-haul truck rentals.

So the number one thing is demographics. Where are people moving? That's going to create a demand for housing, number two, job growth. Where are the jobs being developed? A lot of jobs are being lost in areas and in cities and in governments that are not favorable for government or job growth. California's one of them, high taxes, a lot of government regulation in Texas, low taxes and very favorable job regulations. So number two, job growth. Then number three is the supply and demand of housing in any one market or sub market. So those three things are the way I chose the market. I looked at the entire map of opportunity zone areas and they are identified by census tracks and then I said of all of these areas, which one has the most favorable of those three conditions and it's the Texas triangle, it's North, Texas, South westbound San Antonio and then eastbound to Houston and then back to North. So that triangle, or what I refer to as a Texas triangle, that area contains 85% of the Texas population and it contains the majority of jobs and anything invested in that area as all those three things that I've mentioned.

James: Yeah. I mean, for the audience, if you guys want to know about what Lane is talking about, just Google, Texaplex there is a documentary which shows the Texas triangle and how much growth is happening in this triangle. I mean, if you look at when Texas had 50% of the job growth from 2009 to 2000 at that time I was 15,19, 18 by now. So job growth after the last crash happened in Texas. I think Texas is going to continue to grow, even though now we're in Covid and it's just so favorable. If you look at everywhere that Covid has affected, nothing is wrong with where it is being affected, it's just there is are some vulnerability to that market and Texas is one of the first state to open up. So we open up, we open for business. So yeah, I mean that Texaplex area is really, really powerful. But how many sites did you see before choosing this one particular site in Austin?

Lane: We looked at a lot, James and a lot of the opportunities zones, the federal government gave the authority to governors to say, here's the criteria you identify, whatever it is you want and a lot of those governors across the whole 50 States delegated that responsibility to state mayors or regional governor officials and some of them did a really good job of identifying areas that needed to redevelop and then some of them, I think, turn their homework in the last hour and they didn't do a very good job. So a lot of the opportunities zones that have been developed they don't have any financial or investment fundamentals that would make anybody want to invest there. So they're very challenged. A lot of the other ones were more creative in what they were trying to do, realizing that as you stimulate this one part of the city, the other parts of the city may benefit from that even though they may not be the most in need at this time and so we looked at a lot and we concluded that almost 80% were areas that had zero financial incentive or investment incentives. You just have to recognize that and then just move on. So we found ones that we had those three qualifying characteristics.

James: So let's talk about the loan that you get in this development deal because I believe it's a hard loan. So tell us what the loan that you get in this double meaning, what are the advantages that you're seeing, or even a disadvantages that you've seen in this hard loan compared to your normal buying already built apartment complexes.

Lane: So a development project has a lot more risk than just buying an existing project because if you buy an existing project and a management, the property management messes up, well, maybe you can fire them six months later and you can just rehire them in within a matter of month or two, they may be able to correct what was a problem and get you back on track. But if you hire a development where it is just dirt and they mess the foundation up, or they mess up something, they blow the budget. Six months later, you may have spent a whole lot of money and you have nothing to show for it. There is no income because there's nothing to rent. So it's a lot riskier and there's a lot more risk involved. Therefore the funding and the development costs, you're incurring a greater risk. Well, obviously the government recognizes the fact that we have to develop new housing for our growing population and we have to replace existing stock. The government through the HOD program, Housing Over Development has created some very financial terms and financing conditions to encourage guys like you, James, your audience members, and myself, to develop this new property, to meet the future needs of our country. The program that that we're under is called HUD221-D4. It's the development of new multifamily housing and it's the gold standard. It's the Cadillac of financing. We just closed our loan and it's a 40 year fully amortized loan fixed permanent and we got a 3.35% interest rate fixed for 40 years and it's permanent. So I'd never have to worry about it. So that's the advantage, the terms are almost impossible to beat.

James: What about the prepayment penalty?

Lane: So it's a 10 year prepayment penalty and this escalated down. So at 10 years it can be paid off, it's fully assumable and the the difficult part is it's just very difficult to get. There are a lot of qualifications for the sponsorship team, for the market, for the strategy for the project itself. There's a tremendous amount of oversight. And so it's very rigorous in that regard, but it has very, very advantageous benefits if it meets your strategy team, market and property and business model.

James: So having, I think you're still in the early stage of development right? I don't think they even break ground yet, but would you do this again? Development compared to buying a deal that is reasonably priced, that's already building?

Lane: Yes. And the reason that I would say yes to that, even though we're going to have two years of development, that is not cash flowing. The reason is because when you pair the right development opportunity with the tax advantages of an opportunity zone is what I call boom shakalaka. It's the one, two punch. So let me kind of give you some general ideas of the cost. Our project 320 units, we're building it at about the same price we can buy an existing class A project. So we're building and the price to purchase existing is roughly the same. Now in some markets that doesn't work because the cost to build is a lot more than the cost to buy. So you have to understand your financial model. Then now when I put that in, combine that with the opportunity zone tax benefits, we're expecting a three, or we're actually expecting a four X equity multiple. That means that for every dollar you give me at the end of this project, I'm going to give you back $4. So if you were to do that with an existing project that was not opportunities zone, you would pay a 20% capital gain on those $4 or whatever your tax bracket was. But for simplicity sake, let's say you were to pay 20%, this opportunity zone, if I give you back $4, you're cash is taxed $0. So immediately, without any appreciation or any change, the benefits of that appreciation have a 20% tax benefit because it's an opportunity zone. The opportunity zone does have requirements. You have to hold it 10 years and so the hold period is a little bit longer, but couple that with the right financing, which was a HOD221-D4, which is a 10 year hold, is the perfect match for our business model and it's the perfect financing structure for development project, with opportunity zone tax advantages.

James: Also the loan, as you're talking before the show is like, you had it from beginning, from now until the end, until you own it for 40 years, there's no refinancing in between, you don't have a change loans at all? So very interesting.

Lane: That's correct and so the same that developers get, let's say you're a fantastic developer, and you're the best there is. And you develop a project and you say, hey, this project is going to take me three years to build and so I need a construction loan and you get a three year construction loan and you nail it, at the end of 24 months, you've perfected, you've been under budget. It's the perfect model. COVID happens, now the value of your construction and your development, you nailed it. But the market took a 20 or 30% decrease. Well, guess what? Your loan doesn't care. You have to pay this loan off in nine or seven or eight months. You just finished construction. Nobody's renting because of COVID-19, it's stay at home or that. And so that's how it developers go bankrupt. It's not that they necessarily blew their project. It's just the financing lined up with a horrible market condition that they may, I mean, who could have predicted that? No one, but there's going to be developers that are fantastic developers that unfortunately got wrapped up in a very unfavorable market condition. Our loan, we have 40 years to pay it off. So right now it's 2020. This loan does not come due until 2060. So we're going to be able to ride a couple of cycles out even if it does turn back cold.

James: Yeah, that's very interesting, because usually construction, that's the biggest risk once you're doing the beginning and you just start construction and suddenly the construction guy said, okay, everything frozen up, we are not giving you money. Or your LTV goes down. Now you bring more money. But in this case, your loan is different and couple that with the opportunities zone tax advantage. So did you have any normal investors who didn't want to take advantage of the opportunity zone tax advantage? Was there anyone who just invested in this who brought in cash rather than a capital gain or 1031 money into this?

Lane: Absolutely. So James, I think, and again, this is so important to emphasize, the keys to building your net worth are number one, invest your money efficiently in a cash producing asset. Number two, if you can, make that transaction tax advantage event, there were investors who recognize the value of Austin, Texas, recognized the value of what we were doing. And they said, this is a good deal with or without the tax advantages. Real estate in general is very tax advantage and so there were plenty. In fact, probably half of our investors did not use the right type of capital that would benefit from opportunity zones. The other half did, and both halves, both sides are equally pleased with the project. The ones that didn't use the right capital they're still going to get a great return. They're just going to have to utilize the taxes in a slightly less advantageous way.

James: Yeah, very interesting. So let's talk about yourself. I know the loan is 40 years from now, but I'm not, I don't know what's your plan with that, but where do you see you going from now? From F16 pilot, you're still flying and you're doing all this multifamily syndication, and now you're doing development, where do see you moving forward from here?

Lane: Well, James, that's another great question. So you're asking a lot about my goals and I love real estate. I love to help other people and the reason that I love to do that is because this is my purpose and that's to help you, James, help James' audience to become a better millionaire. That's what really gets me charged up and why do I say that? Because you have a passion in your life, maybe it's real estate, maybe it's a hobby. Maybe it's your community. Maybe it's your church, whatever it is, your family, travel, whatever. That's great. But sometimes we're so engaged with our nine to five vocation that we can't spend our talents and our passions where we really desire. So the vehicle of real estate allows passive investment and it allows you the financial wherewithal so that you can hopefully break away from that employment and you can get more free time. So now you can spend your talents your times and your treasures, where you really get the most satisfaction. I hope that you use those for the altruistic good of mankind. Maybe it's the boy Scouts of America. Maybe it's your community. Maybe it's your church organization. Maybe it's your travel or other things.

But if you're working 50 to 60 to 70 hours a week, which a lot of us are out there doing, it's very difficult for you to have extra time, money or resources to really leave the impact or the influence that your life passion could. So you asked me a question and I wanted to back it up with that color, the ask, what gives me a kick? It gives me a kick when I can help James become a better millionaire or I can help James' audience become a better millionaire. The vehicle I'm going to drive us there, is multifamily investing and I'm driving the bus, get on the bus, let's become better millionaires and then when we get there, you get off the bus and you say, I'm going to do this. And I'm going to make the world better through my community involvement or through my, whatever your passion in life is.

James: So that's awesome. One question I have for you is, was there any moment in your life where you think that I was really proud of what I did in your real estate business? That moment you can never forget it until the end. Can you describe that moment?

Lane: Well, there are certainly moments like that all the time. I'm very, I get a big charge out of real estate. I love to talk about it and I would say the, to answer your question, most clearly was one of my properties. The very first property I bought. I didn't know very much, and I didn't have a lot of the experience that I have now. And I was swinging, like I said, I had been doing real estate, single family for 10 years and then I transitioned to multifamily and I did, I was just killing myself with effort and I made no progress, zero results. And then finally somebody gave me some good advice. I went underneath the council of good counsel and I was able to acquire property, it was in my hometown here in Fort worth and it was a value add reposition of an actual vintage asset and we basically did a really nice job. I teamed with smart people, we executed a plan and that property, the very first property, this was a 25 unit property in Fort worth and it competed for property of the year for the apartment associate Tarrant County and won. This is a 25 unit property competing against all assets, less than built prior to 2000. And so that was 1500 properties in Taron County and it was number one and so I'm really proud of that fact. As much of it as this is lager or whatever you want to say [48:08inaudible].

James: No, no, no. I would never say it's a luck. I mean, when I won the property of the year for San Antonio, it was very surprising itself because I'm sure you went to this gala, the dinner gala, that apartment association have, where they have two, three tables of 10 people each from each company. Capstone, Greystone, all kinds of stone there and every time their people won the award they get a big clap and the whole room becomes very loud. I'm not sure what they do that in Fort worth, but in San Antonio, they did that. And when I won, it was surprising because I was the only one standing and going because it was a snowy day and no one else came and I'm not a big management company. But when we won, I was going alone. Did you have that same experience where you're walking alone where everybody's wondering, who is this guy?

Lane: Well, like I said, the properties that were in competition, they were run by professionals and a long established, I mean, it was pretty much like a high school team beating the Dallas Cowboys. They were not expecting a 22 year old, 1965 property to win. And it was like I was Rudy from Notre Dame and so everybody gave me the golf clap and I'm sure that under their voice, they were like, who's this guy?

James: Yeah. I know I had that. I had like a very quiet, everybody was quiet because they didn't know who's this guy, which company he is, which stone is this guy. But they clapped at the end, but it was like just some of proud moments that we have in our life. Where we able to beat all these big guys out there. This is not the IRO of the year award. This is property of the year. IRO of the year you compete within the IROs. It's not many IROs anyway, but property of the year you compete with all the big guns out there. All the class A's, all the top notch property management company, it just complete different. So awesome, Lane. So tell audience how to get hold of you.

Lane: Yeah, I'd love to. And like I said, my goal and I get a charge out of helping other people invest and get better. I want you to get there faster and safer than I did. And if there's anything I can do to help you, James, or your audience, I love to help out. I love talking about this. It helps me when I talk about it with you and understand what your goals needs and desires are to sharpen my own skill and sharpen my own skull. I try to educate people and try to train people and I have basically, I link all of my videos and education series onto my Facebook and LinkedIn page. So you can find me on LinkedIn at Lane Beene, you can find me on Facebook, two places. One is pilot legacy private equity group and that's where we post all of our training and video education or you can also find me on my website page, which is pilot-legacy.com, or you can email me directly and talk to me about anything, like I said, I'd love to talk to and help you, James, or your audience or any market studies or anything I can do, certainly do that or you can email me the [email protected].

James: Awesome. All right. Thank you very much for coming on, I'm sure all of us obtained lot of value out of your knowledge and the discussion itself. Thank you.

Lane: Thank you, James. And your audience. Good luck to you.

James: Hey, audience and listeners. This is James Kandasamy from Achieve Wealth Through Value Add Real Estate Investing Podcast. Today I have Raj Tekchandani from the Boston area. Raj is a co-sponsor/KPGP in 650 units across Georgia, Florida, Kansas City, and Texas. Hey Raj, welcome to the show

Raj: Thanks, James. Thank you for having me

James: Good. I'm happy to have you here because I want to talk about technology. You are a technology guy turned into a multifamily investor, right?

Raj: Absolutely, I can speak technology all day long

James: Yeah, absolutely. So I want to make sure I give you an opportunity to explain some things that I missed out. So why don't you tell us about your story? How did you get started and how did you end up being a multifamily investor?

Raj: Sure, I will do that. So hi guys, I've been in technology for most of my career, I did Undergrad Computer Science, then I did an MBA in high-tech so purely technology-based and wanted to become the next big company founder. A lot of my jobs were mostly startups but when I realized that I'm sitting on a lot of options and not going anywhere, I said, I need to diversify and started looking into real estate investing that was not until 2012, but that was just a side gig. I still was fully devoted to my job, which was startups and it was in data analytic space and we're building a platform to connect all the data in the world together and put meaning into data, using something called a Data Lake. A lot of formal companies were using our software, financial services, but there was no real estate company using it.

But anyway after I finished my five years with that company, my stocks options fully invested. I was like, okay, what is my next startup? And by this time I had started collecting my grants from the little investments I'd done. I had started investing in 2012 in one Condo in Orlando, Florida, and gradually went on to buy more because the prices were very attractive and I could see the prices going up and I said, let me just get in there, so I got in there, fortunately, had a good property manager that helped us take the worries or headache off our head and the cash flow was beautiful. So in about 2016, I said, okay, they need me to see this look and I bought actually a 15 unit multifamily near my house in Boston and I wanted to do more of that because I'd heard, you know, multifamily the whole economy is upscale. So I said, let's get into multifamily and that experience was interesting, to say the least. I had not too much knowledge about the underwritings and how to really look at expenses and that came in as a very expensive learning lesson for me in terms of multifamily. So from there on, I said, this is too much work, I can't do this. I found a good property manager and he quit and then found another one then he quit and it's like, this is too much. So I said, no passive investing is my way to do it, this whole active thing is not my thing and I'm still working full time on my job. So I started nesting passively with some investors.

The first time I looked at a passive deal I was like that's too much, there are too many zeros in here, I can't do this but gradually as I understood, I took learning and took all the courses and reading blogs and podcasts and I got comfortable with investing passively and then a couple of passive investments and I was like, this is great, I have my nine condos, I have my fifteen hundred, which has now started giving me cash flow and now has passive investments. Interestingly, it was almost matching up to my startup salary. And I was like the options are great, but what if the options don't mature or do much? So I took a bet and I quit after five years of my job to do real estate full time and that's how I dig more into multifamily.

But interestingly at that point, I had this idea of another startup, which didn't go too much far because I wanted to take these learning from data analytics into real estate and now that I'm doing multifamily and doing all this, I'm not seeing too many systems out there. It's still very, laborious jobs, the property management company is a lot of work on paper and even the underwriting was very painful. So I was like, what if there's an automated software machine learning data, whatever we have learned in technology to build that. So I met up with the person at MIT, Jennifer, she had done a Ph.D. in Real Estate Technologies, like Artificial Intelligence Machine Learning for Real Estate. I'm like wow this is a person that I

James: Talk to right?

Raj: Yeah, so I sat down with her and she went through her thesis with me. In fact, she was nice enough to explain her thesis; there are too many companies out there that are doing what I'm trying to do.

James: So what was the thesis about?

Raj: The thesis was the use of machine learning and artificial intelligence in real estate

James: But is it real estate underwriting, or is it real estate analysis or--

Raj: --Real estate analysis

James: Is it for investment or is it--

Raj: So she actually worked for MITs and Darwin program buying the advisory real estate

James: Oh, okay. So they're basically looking at investing

Raj: So they're looking at investing so mostly commercial real estate, eventually, from her thesis, she came into that, MITs fund. She was working there at that time. But in her research, she had looked at a lot of technology companies, right? From doing everything from sensitivity analysis to underwriting to figuring out where the locations thesis are, property management companies that are looking to do automation based on the [inaudible06:24] so a lot of machine learning in there.

Actually, one of the companies that struck me at that time was in [inaudible06:33], which is what I had been thinking about, sort of how to automate underwriting and how to take all the data that's been sitting in, all these Yardi Matrix and all the places that been collecting data. How can we leverage that to say, okay, well, this is a property that I'm looking at in multifamily, this is the address and boom, we'll go and run into algorithms and come back and say red light, green light, yellow light based on all these factors and in [inaudible 07:02] was doing that, some of that, I talked to the CEO there and start using the platform.

So I had some suggestions for them into building other plans and other features on the platform but at that point I said, you know what, I'm more of a user now, and they're not technologists, I want to use these technologies that are out there, I can talk about what features they need, like lease analysis. In one of the deals we went inside in the back and you're looking at 150 leases, one by one, what is matching up. There's no use of doing that, those leases should be fed into a system and outcomes, and these are the mismatches

James: The lease [inaudible 07:38] should be automated

Raj: This is a tenant profile and based on this tenant profile and this property and this neighborhood, this tenant profile will be surviving through any downturn, that's what you need to know on tenant profile

I'm sure somebody will build it in there; I think [inaudible 07:55] was already thinking about doing that. Anyway, from that I said, okay, I'm going to stay as a user, I started using these technologies but then I got stuck more into the whole underwriting piece and managing the properties, finding the properties, I was like talking to brokers, now I'm talking to this and that's how I met a couple of good people through coaching programs that I said, okay, it's time to take the next step, move from passive to active, and see how the big things are done. I wanted to be closer to the action. So that's how I got into active investments

James: Got it. I mean, that's a lot of things there. So I want to go a bit more in detail on that, but that's good. I mean, so right now you're a full-time real estate investor, right?

Raj: Full time real estate investor. Yes. I mean always thinking of the next technology ideas

James: Well, that's the problem with all these tech guys coming into real estate? I also think the same, let's automate this, and let's create a system on this

Raj: Yeah. But I mean, I keep in touch, keep a pulse on that. So I don't know if you know about this organization called CRE tech- Commercial Real Estate Tech, middle of New York and they are looking at all these things, all kinds of who's doing what, which company is being funded. So I keep in touch with them. I'm a member of them, but just looking at ideas, someday somebody has come with a great idea that we are still a little behind than other industries in terms of use of technology

James: Oh yeah. Real estate is so manual. I mean, there's not many people investing in technology and it's a bit tricky too because a lot of people component

Raj: And I was told one day that, (AI) Artificial Intelligence, the biggest tool, billions of dollars are being traded in real estate based on excel spreadsheets. That is the technology of choice of all these big reads and fund managers and they're just doing Excel spreadsheets

James: Yeah. I don't know why the real estate is just so hard to automate in terms of location because even like, if you look at a street, one side of the street can be completely different valuation from the other side. And how do you tell that to the software? You can't tell them that people have different preferences going in

Raj: Well, if you feel that, you can tell that by how many murders were on the left side of the street and how many murders on the right side [inaudible 10:16] I mean, I just think the crime rate, our school districts and there are so many factors you can pinpoint it. Now there's so much data being collected on all of this, right? You just have to leverage the data and every time a property gets sold, a property gets bought that data is entered into a system, right? The analysis entered into the system, even for an upgrade, all the data has been entered so you should be able to tell that if I put granite flooring in this, or I put up vinyl flooring in this, or whatever, this is the gorgeous fettuccine down the road, right? Because that's [inaudible 10:50]

James: I think that's what [inaudible 10:52] does, right? Sometimes they do a lot of underwriting, they try to predict what is the rent going to be, but I'm not sure how big they are. I know there were some people really excited about it, but some people really didn't like it. I saw it once; the tool looks good for a tacky, right? If you're a second, it looks like everything's done for you. But I don't know for me, I don't feel comfortable yet.

Raj: I think there's nothing. So all that said, James, there is no equal end to be having boots on the ground. So this is what I've learned

James: Well, for real estate, you have to go to the property, you have to do the cost yourself

Raj: Exactly. So you'll do all, that saves you a lot of time, right, because you can do the cost, the real analysis is done when you're there and you're looking at the property because we walked away from a deal that had everything looked good on paper and technology tools and everything, because this one building down the slope, had some structural issues that we didn't know, I mean, no technology tool will tell you that turning on some like pillars that are like fake

James: Correct. There's no way to know. I mean, as I say, I love all these tools, but I don't know for me, I don't want to pay so much money for this tool unless it giving me an automated thing.

Raj: That's where the progression has to happen. The more they have to get better and they have to get cheaper for that option. Otherwise, excel spreadsheets help people doing their report

James: One day will, right? I mean, if you look at it right now, we need a buyer agent, we need a seller agent to do a house transaction and the reason for that is so much people touch, right? I mean, a seller needs to know that he's getting the best value for his product. Only people can see the house and decide whether it's a good house or not, right? It's a bit hard for computer AI to really say that this is a good house for this person, right? Maybe one day it will.

Raj: It will. They'll cut short the time or for your needs maybe

James: Correct. And I know a lot of startups were trying to do all this right there. I mean, every tech guy who was introduced into real estate in the behind them is [inaudible 12:53], oh, I can do a startup, even syndication people are trying to automate right? They're trying to rank the sponsors, they tried to give stars to sponsors and everybody is trying to do all this but as I said, it's very hard to give a star ranking to sponsor there are so many other things that are involved. I mean, one day probably, yes. But we are not there yet with the technology, the information we have so how do you feel? I mean, you and I are almost the same, right? I mean, we're always in the technology space and suddenly become real estate. Do you think you've wasted all that lifetime in tech space?

Raj: No, not wasted. It's a game, it's life as it plays out, now where I am my biggest strength is my value for my time. I mean, I control my time in what I'm doing, when I was working tech job, I mean, you had management meetings on Friday afternoon. I was like an owl, now if you go look at my calendar, you'll never find a Friday afternoon open because I dropped it

James: Okay. That's good. Yeah. I mean sometimes people who have studied so much in certain fields, I don't know. I do see some doctors moving from being a doctor to becoming a real estate investor. I mean, at the end of the day it's all about time, right. Time and how much [inaudible 14:13]

Raj: I mean it's time and it's what you enjoy. I mean, I also realized that a lot of what I do in real estate is marketing and I love marketing

James: Nobody cares in the tech company

Raj: Yeah. So when I'm even in my tech job, my last job was in marketing. So I was basically a demand generation for this data analytics back on rebuilding. So basically evangelizing technology for people that don't understand it, it's sort of marketing. So writing blogs, writing white papers, writing all this stuff, simplifying things for them. That's what I had become in my technology job also because nobody wants to hear the mumble-jumble of data lakes and medication and all that stuff. It's like, bring it down. What does it do for me? And now he's the same thing, syndication and all what does it do for me? I mean, so marketing is basically attracting the right people and getting rid of people that you don't want in your system.

So that's why even in capital raise or even the deals that we do it's very important to figure out who your customers are which in our case is investors and it took me a little while, my first four deals, I was like talking to everybody and anybody like, okay, this is what we have and I was like, no, that's not me finally figured out the people who are attracted to my deals, especially are tech executives, like me that have collected a decent paycheck, they have a decent amount of wealth, they want to diversify, they're paying a lot of taxes and they are paying [inaudible 15:50] that. So they want to learn about how real estate can help them with taxes, how real estate can help them diversify, a lot of them have invested completely in the stock market, which we have done that in the past and I've lost a lot of money in stock and that's why I never want to go back to stocks anymore and I'm trying to teach the same thing through my formal education.

James: Yeah. Surprisingly not many people know about real estate. I know probably all the listeners here, they will. I mean, you are already learning and listening to podcasts about real estate, you already know, but it's very surprising to know how many people don't know about real estate and don't know what passive investing. I mean, people know that you can go buy a house and give it for rental, but nobody knows that I can put the money with a sponsor who will do the work every time

Raj: They know real estate investing, they don't know realistic passive investing

James: Correct

Raj: Yeah, passive investors have become my passion

James: Yeah. I mean, that's why I wrote my book too because not to introduce real estate to passive investors, I want them to be a bit smarter. I mean, sometimes when they got introduced to real estate, they think, wow, my God this is the best thing they just follow one way of thinking, right? So

Raj: You just stole my line that's what I say, because, at smart capital, we make you smarter

James: Okay, good. Because I mean, first, you get introduced to passive investing, second is how you become smarter, right? So let's talk about that. I mean, you said you have done some really cool stuff for passive investors and incorporating some technologies and all that

Raj: Absolutely. I mean, again, nothing was planned. It just happened over time, my first deal, when I presented to some of my friends, they said, Raj take my $50,000. I'm not going to take your $50,000. You need to sit down with me, understand what it is

James: Well, that's the problem with me. I don't like just taking money. I want you to understand the deal. Cause I believe it's a good deal

Raj: I actually know the four friends that I had, I bought them tandoori chicken. I said, come sit with me and I'll explain to you what it means. So I bought wine and food. I said, look at this, I'm going to tell you what it is if you understand it and if you still want to invest, that's great. I want you to understand it because I can take the money and invest it, I mean, that's not a problem, that's the easiest thing for me, but I really want you to get smarter in my sense, you know, that's why smart capital and so that small group grew into a little bigger group and I created a meet up in the Boston area on just apartment investing and teaching what it is and growly slowly

And I kept it small for a number of my first year I did it in my office in a conference room. They were like 35 chairs and who can come but we kept it very educational. That was the thing. We'll take a topic, we'll discuss the topic or make sure that anybody in the room is understanding and if there is somebody else experienced in the room, they're absolutely allowed to speak up and do so, kept it very educational, very different meet ups. A lot of people said, okay, Raj's meet up is educational so we're going to go there, and then I didn't have enough space so I took a bigger space now the membership in that whole meet up has grown to 600 plus people but we now get about 60, 70, 200 people monthly and I've kept it monthly and still, we talk about educational purposes

There's no come have beer, learn about network and go back. That's not it. So to answer your point in doing so right, I've internally built some systems to make sure this is a smoother process for me. So in terms of the thought leadership platform, I have my meet up, I started doing blogs consistently. Obviously I'm active on Face book, LinkedIn, and really wherever else I can post my blogs. I also to become a member of the Forbes relisted council so I can do some technology related articles there and talk about what I'm thinking. So yeah, I've done all these things and now I have in a way that I've created this CRM and systems and attracting investors who, whatever platforms that they can get onto podcasts like this and talk more about what I've done in my past and just share my experiences, that's basically it.

James: So how do you decide on doing a deal? Let's say someone brings you a deal, right? How do you decide this is a good deal, I really like it. What are the things that you look for?

Raj: So the first thing I like, ideal deals only very few people. I mean, as partners, right? I mean, I'm not into numbers of deals and I don't count the number of doors. I don't do that. I like to enjoy myself, I mean, to [inaudible 20:30] my life, you're going to be just chasing money and [inaudible 20:33]

James: You want to be peaceful too, right. Reinvesting the right sponsor because you can make an investment any--

Raj: --People that I enjoy, I mean, the deals will have good and bad times. One of our deals is we haven't done distribution, but I will say that I'll invest that deal again. I believe so much in the team that even because I'm so close to the deal and my investor is saying, Hey Raj, we haven't distributed work. I said it'll be fine. It's just because I trust the people that I work with and I could do another deal with them. So I'm very selective about who I work with, these are people from my coaching backgrounds, I've heard them say I hear them strength and they have to be complemented with my strength. So if I'm good at finding markets and I say, what, I'm going to invest in Orlando or Kansas City or whatever markets that I have in my head because I've done some research on data on that and obviously then underwriting should make sense but my number one criteria is the people that I work with and do I add value to them and they add value to me. So I will claim I'm not a good asset manager, I've never intended to be so I will always look for a very strong asset management on the team

James: Got it. So you basically look for the sponsorship and how the team complements with you as well

Raj: The dealership and the numbers should make sense, but that's true for everybody. You will not invest or be participating in the deal, that doesn't make sense

James: Yeah. What do you look for in a very strong sponsorship team? That you really like? I mean, what personality, integrity or--?

Raj: --Integrity, number one is integrity, right? I mean, the track record is okay, but I think track record, I've seen these guys done. I mean, it was not done like 15, 20 syndications, some of them have, but some of them are still early in the stage, they have done maybe two syndications before this one, but I've seen them through the coaching classes and going through with them to on due diligence trips. So I always go and make sure that I'm on part of, once we go sign up, form a structure, I'm going to get involved with all the due diligence and all everything. So I'd sit down with them and see what their work ethic is, how passionate they are about it, and will they stay committed with me?

James: Got it. Very interesting. What about, on other things, in terms of the underwriting or in terms of market analysis, have you done any; have you incorporated any technology things into analyzing that?

Raj: Yeah. I mean, I do my own technology things. I mean, I haven't written software for that, but I do look at a lot of data

James: What kind of data do you look for?

Raj: So, I mean, a standard feature, like population growth, job growth, and median income. We will also look at STEM jobs, right? I mean, I look at if it's a technology oriented job, are there or not because I mean, in these times the properties that are doing well, are people technology, company, people working from home, right? So all of that is important as well [inaudible 23:34]

James: Got it. Very interesting. So is there any proud moment throughout this real estate career that you think oh, I did that and I feel really proud about it and you can never forget about it until the end?

Raj: Well, the proud moment was I'm into partner with you on my first deal. I mean, that was a very proud moment. I told you right when the first time I looked at syndication when a friend of mine presented to me, he was on the GP side, I was on the limited partner side. He says "Raj I got the deal." And I said, "What is this? This is like 300 units. I mean, there are too many zeros. There was no freaking way."

So now when I did my first deal with that number of zeros, I mean, it was not 300, it was 152 units that deal was a very proud moment for me having gone through understanding what it means and then the other proud moment was to convince some of my investors to partner alongside with me right now that I learned this and I'm sort of sharing my education.

I don't even call it capital raising. I'm giving them an opportunity to participate with us. I'm doing them a favor, sometimes I feel that way and that's one way to look at it and I'm saying no, every deal of mine for my side has the same investor. The first investor is always the same, that's me. So I'm going to invest in these deals, I've done the research; I've been to the property. Now I'm presenting it to you this deal, why I like it, and you're welcome to join along, so the proud moment was to getting that achievement, right? The first one and the second one becomes easy. And then the first one was the problem

James: Got it. Awesome. Can you tell our audience how to get hold of you?

Raj: Absolutely. I mean, I have a website, I'm very active on Facebook, but my website is smartcapitalmgmt.com. My email is [email protected]. Easy to use to get to me or LinkedIn. Facebook also is there

James: Awesome. Thanks so much for coming. It's so refreshing to see how someone from the tech industry moved directly into a multifamily investor. I think a lot of people do, right? But there are still tons of people who don't, right? So it's just the thought process and sometimes the desire to technologize everything, sometimes it's hard, right? Real estate--

Raj: -- Why do you want to do that? I mean, you want to enjoy what you're doing, right? If building a technology company is your passion then real estate will not be the thing, but leveraging technology to get smarter is another issue

James: Got it. Awesome. Well, thanks for coming. I'm sure everybody got tons of value

Raj: Thank you, James. Thanks for having me

James: All right. Good

James: Hey audience and listeners this is James Kandasamy from Achieve Wealth Through Value-Add Real Estate Investing Podcast. Today, I have an awesome guest, his name is Ronnie Philip. Ronny is from Dallas he's part of Kingly Acquisitions, owns almost 572 right now assets under management and focusing a lot in Atlanta and Texas, right? Texas market in San Antonio, say hey, Ronnie, welcome to the show.

Ronny: James, it's an honor to be on your podcast. So, thanks so much for having me.

James: Thanks for coming in. I always like to bring people who are able to add value to the audience, and, you know, I know you personally and I think we've met like 3 or 4 years ago or so, maybe 2 years ago, I can't remember. But, you know, we know pretty-- for the past few years and, you know, just impressed with all the mindset and the progress that you have made, you know, being in, you know, mid 20's, right? So, and you're doing big things, so, why not you tell our audience about yourself? Whatever I missed out there and you know something about yourself, before we get into the more detailed topics.

Ronny: Okay, great. So, I guess you can start out from the very beginning of my real estate career. I start in 2015, I dropped out of college, I was supposed to go to pharmacy school, I was like, three classes away from applying, but after working in a major retail pharmacy, I realized that wasn't the end game. So, I dropped out of college end of 2013, got my real estate license, and became a real estate agent. And then from there, I started helping people buy and sell homes and, you know, and that was fun. And then I realized--

James: Hey, hold on. You have to get started again, I lost you just now. Yeah. 1- 2- 3.

Ronny: So, yeah, to give you a little bit of background about myself. I started off in real estate in 2015. So, I dropped out of college when I was 21 years old, end of 2015. My background is medical, actually. So, I've done a lot of things in the medical field from home health to work at hospitals and then pharmacy, and I was applying for pharmacy school end of 2015. And then, I realized the job market back then was really tough. So, people weren't able to get jobs full-time in the pharmacy. so, by the time I would graduate, which would have been this year, 2020, I just didn't feel like that outlook would have been great. And I was right; a lot of my friends who are in a pharmacy, unfortunately, aren't able to obtain jobs. So, I think one gift God's given me is foresight. So, I was able to see that.

So, that's when I got into residential real estate as an agent. So, I started off as an agent, helping people buy and sell homes, and then went into flipping houses, you know, with investors, and just kind of went from there. So, helped my dad with flipping houses so, pretty much from finding the deal to, you know, rehab everything from start to finish. And that was pretty good, and then I realized those two businesses weren't scalable. So, end of 2016, I realized I need to find a different way to create wealth because you can build up a residential real estate team as an agent for like a major brokerage and then sell it for a good equity multiple, I realized that because a few of my friends did that. And I wanted to build something I can build up and sell, right? And something that's backed by real true hard assets, and I saw in the single-family space, that wasn't scalable as well. So, I decided, June 2017, I formed Kingly Acquisitions, and I was like, "Okay, I'm going to end it 2017, I'm going to finish out my residential stuff and then only focus on multifamily." and, you know, moving forward.

And that's when I met you, I met you at a conference, you know, and we became friends and, you know, the whole story from there, you know. I remember literally a month after a conference, you posted in a Facebook group, "Hey, there's an opportunity to learn or by due diligence." and stuff, right? So, I drove down to San Antonio and then helped you on one of your acquisitions from lease auditing to unit walks and I learned quite a lot and it's crazy. Like, I think probably less than a year and a half later, I closed on my first deal-- first deal in Texas, that'll be my third deal, 208 units in San Antonio. So, I think the power of visualization is real. So, that's kind of my background.

James: Absolutely. You have gone a lot. So, I want to go back to the beginning. So, you know, to make sure that I don't miss out some of the details that you have given. Is this your first podcast?

Ronny: Multifamily, I think so. I don't think I've done any other interviews. I've interviewed a lot of people--

[Crosstalk]

James: Now you're being interviewed by me.

Ronny: Yeah.

James: So, Ronny used to have a, and maybe he still has it, is a TV show, right? I can't remember what's the name of it.

Ronny: Yeah. I have 2.

James: Yeah.

Ronny: Yeah, the Ronny Philip Show and then the Commercial Cash Flow Show.

James: Yeah, he does a really good job interviewing people but now he's getting interviewed so, it's my turn right now. So, I think one thing that I want to make sure that the audience and listeners understand when Ronny says that I posted in the Facebook group, I basically posted for help or due diligence for one of our property in San Antonio and that group was like 20,000 people, right? And, well, while that group, 20,000 people, it's actually a multifamily Facebook group where all the 20,000 people want to invest in multifamily, everybody want to do it, but there's only one person who said, "Okay, I'm going to come down tomorrow." Not because he's in San Antonio, he's in Dallas, and I'm sure there's thousands of people out of that 20,000 from Dallas and California, even from San Antonio. But, you know, the burning desire to really learn, you know, it's only being shown by the people who are really serious. And as I said, there's 20,000 people in that group, everybody want to be multifamily investor but when someone tell them that, "Hey, there's a free training here, come down now, I'm going to give you guys a free training." That's what exactly I mentioned in my post. I said, "I need help with some due diligence, you guys come, you can learn, this is real hands on." But I started seeing everybody giving reason, "Oh, I got something tomorrow, I got something today and I wish I'm in San Antonio." Well, I mean, to be really successful in life you have to take action, right? And you have to make the move and that's why Ronny, you know, now you know he's owning like almost 573 units because he took the action, right?

So, if any of you listening who thinks that you want to be a multifamily investor, who'd love to be able to, really ask yourself whether you really want to be. Because people who really want to be, would take action and would, you know, take the first step, right? Especially when I was giving a free training, it's an on-site training, no gurus out there teach on site due diligence, right? Everybody take them to a bus, a bus to go and show you the outside, "This is what we buy." They show you the number on Excel, they do two-day conference and they sell all kinds of courses. But I was saying, "Hey, come and I'll show you the real stuff."And people didn't want to do it. So, I'm just saying that, you know, when someone say they really want to do something, most of the time, they really do not want to do it. I mean, they just don't have the burning desire.

But people who have burning desire, I mean, the people that you have seen out there who has been very successful, they have taken the action, they really have a burning desire. So, that doesn't mean you can't change your, you know, your wants to a burning desire, you can, just make sure you go deep into yourself and ask whether you really want to do it. So, I just want to give a credit to you because I remember very clearly when I posted my request in that group that had like almost 20, 000 now, I think that group is like 31,000 people. Out of 20,000, maybe 5 people responded giving reasons and one person said, "I'm coming tomorrow."And it was you, right? And I'm sure you really learned a lot on that day, right? When you come, right?

Ronny: Oh, it was absolutely a great learning experience, and that helped me, not only in the tangible skill sets of, you know, the property walk, what to look for exteriors, you know, interior walks, lease auditing, all those different things helped me get to really understanding when I go and do my own deal, what to look for. And it's just crazy, like, you know, a little over a year later, I closed on my own property in San Antonio, which is, it just blows my mind, I own in San Antonio now, you know?

James: Yeah, absolutely. I mean, yeah, you have to take action, right? I mean, you know, once you take action, you should be able to get somewhere rather than just talking. So, there's no point of doing that. So, coming back to your-- you had a good foresight that if we graduate this year, 2020, it's going to be a bad year for any jobs right now, because we have like almost, what? 30 million people right now unemployed. I think we have 30 million people but, it's a lot of people unemployed and it's just not the best market for any jobs right now. And what is the biggest issue that you saw in single families, and you said not scalable, not able to sell, is that is that the biggest one? And how many single families did you work on before saying that multifamily is the way to go? And how did you get that moment that multifamily is the way?

Ronny: Yeah. So, I guess on both sides, coming from the agent side, and on the investment side, not sure the number of transactions, well over 20, I would say. I think, just realizing on the agent side, when you build up a real estate sales team, and you become an agent, and you're having like 30, 40 people working for you, and the revenues like, on a 1.5 million, right? As far as commission, you can't really sell that. You can't sell that team for any money. Like, I know, one friend, he was the top agent in a major market, right? Some multiple case studies, you know, Phoenix, North Carolina, and then Alaska, and they sold their businesses between 80 to 120,000, something that they built for six years. Yeah, and I was shocked. And then maybe that, you know, 2-year referral fee and stuff. And then when I realized, I went all in, I joined a Mastermind, dropped like 12-grand on a Mastermind. I was like, 22, it's not like I had just a ton of money lying around, but I invested myself to accelerate growth. And I've always done that in expansion mode, especially in our 20's. Like, it's really important to be in expansion mode.

So, I realized on that side that, that's not scalable. And then when I started flipping, you know, doing, you know, few projects a year, I'd say probably 3 or 4, but those 3 or 4 projects like, was doing everything, right? Managing the general contractor, you know, sometimes doing sub-contracting, trying to get the project together, sourcing materials, finding deals, being on wholesalers list, I literally used to get 100 emails a day, and I got sick of it. I got sick of it. And I realized like, could I have scaled up business? Yeah, but did I want to know? No. Right? Because I think it was after going to that conference and meeting you, I came to the realization that, "Hey, this is actually something that's scalable, if you can work hard." And it takes the same amount of effort to do a big deal, as it is to do a small deal.

So, that's from a book called What it Takes: Pursuit to Excellence by Stephen Schwarzman, he's the co-founder of Blackstone. So, I realized it wasn't scalable when it came to that. So, I just thought, like, whenever you build a business, like can you build it up to sell it? And if you can't, why are you in the business? You know, it's like, let's just say something happens to me and, or whatever, right? Would I be able to pass this down to my family? On the single family sited and on the residential agent side, it's really hard to. So, that's why.

James: So, I mean you are 26 years old, right? I mean, you, probably when you started you were 24 year old, I mean, you are looking at-- I mean, so yeah, okay, so you said, "Forget about single family, I want to look at multifamily." Did you have your age as a limitation? Say, "I'm a young guy, you know, all these guys are-- How am I going to buy this multi-million dollar deals?" Did you have that on yourself and how did you overcome that?

Ronny: I never really looked at my age as a disadvantage, to be honest. I feel like I have an advantage because like, ask anyone, right? If you could change-- if you could go back to 26 like, how much money would you pay to go back to 26?

James: I would pay a lot.

Ronny: Exactly, right? But that's nothing no one can do, right? They can't go back in time, right? So, I think as far as age goes, that-- well, I felt like that was an advantage.

James: Got it. Yeah, it's a very impressive. I mean, I'm sure a lot of listeners out there who are listening to you, a lot of them are agents as well, some selling single family and I never understand why a lot of agents like to do transactions. I mean, same thing with brokers and multifamily, but a lot of them just like to do transaction. I mean, not say I don't understand, I can understand some people like to do transaction, they want to take less risks, because once you come to the investment side of it, you're taking a huge risk. So, your mindset, your characters, your tolerance to risk is different, right? So, I can understand why is that, but I mean, with the knowledge that any agents have, they can make a lot more money coming into the investment world, right? Is there any advice that you want to give to any real estate agent on why they should move on to the investment world and not just to do, buy as an agent or to sell as agent? Even though that seems to be very lucrative.

Ronny: Yeah, I think you know, it all depends on your preference, right? So, I think being an agent definitely has its advantages, but one thing I learned is like if you stop being an agent, then what happens? You know what I mean? Like, where's the money you're making going, right? Are you-- if you're investing in properties whether single family or investing passively in apartments or, you know, being a general partner on a large apartment complex, like what we're doing, you just have to really see what it is.

So, advice for agents, just say, I'm going to give advice to someone around my age, getting-- let's just say they just got out of college, right? And they want to do what I'm doing, the path I would recommend them taking, is let's just say, they, you know, they're 22 right now, and they just got a finance degree, right? What I would do is, I'd go work at a large brokerage, right? Marcus and Millichap, CBRE, Cushman, JLL, any of these ones, right? Be an analyst, learn that side, then get into investment sales, right? And why? What is the skill sets in multifamily, right? Net worth, liquidity, track record, raising equity, sourcing deals, asset management, property management, the list goes on, right?

So, I think it's building skill sets one by one by one, because whenever you're young, most likely, unless you sold a tech company, you'd have a big balance sheet with liquidity, right? Well, you have other aspects in that, you know, list of skill sets as a general partner on what to do, right? So, I'd start off as an analyst, then go into investment sales, and why is that? You build the skill of underwriting, right? And keep in mind, a broker's underwriting and principal's underwriting are almost always different, right? So, do that, then getting into the brokerage side and you start building relationships with owners and you want to become known, right? So, become known in the commercial real estate space. You can be the broker, right?

Everyone, there's a lot of younger guys in the field that I really admire, just because their work ethic, right? So, they become owners and then what I'd do to transition to the GP side is, I'll start investing passively into sponsors I want to partner with, right? For example, James, say I'm a broker, right? I'd started passively investing in your deals, right? Whether it's, I'm selling you a deal or whether it's another one, right? And I would invest in markets I want to know about, San Antonio, Atlanta, Dallas, Houston, Phoenix, you just name it, right? Whatever market you want to be in. And I feel like that is a good transition to becoming a principal. Another alternative would be trying to go work for a sponsor, like James or like myself, or like any of these groups out there. One thing I've learned is not-- right? Whenever it comes to that aspect so, that would kind of be my advice on people wanting to get into the business. Understanding, being a being a broker, it can be lucrative, being a general partner can be lucrative and being a passive investor can be lucrative. Study all three and decide which one you want to do, but there's a certain path that comes to all of them.

James: Yeah, I mean, right now, even I have multifamily brokers and sponsors as well investing passively with me as well, right? So, they asked for reasons why they invest, but it's a good way to learn how other people operate, right? Sometimes you think you know everything, right? But you're absolutely right. I mean, you can go and work as an analyst and you can go into the investment sales and learn how the business is done, or get to know how the true business, right? I mean, sometimes our circle of friends or circle of influence is so small, we think this is how it's being done but, I can tell you this, like three, four levels above any level, right? That you need to be able to explore and able to grasp what are the complexity, right? And you can really learn a lot from that levels, right? So, I mean, you have done a lot of investor relationship building and you've looked at a lot of deals and you know, bought some of it, and at the same time, what do you look for in a deal when you look for a deal? Ronny: As far as a deal wise, so I'll give you our markets, Texas and Georgia primarily. I like Tennessee and Florida as well, but I think primary focus is definitely Texas and Georgia. Primarily, we focus on B and C class value, add. So, true value adds where there is actually room for growth as far as rents go, as far as management goes, I have one common denominator on all the deals I'm in as there has been management deficiencies, right. So, there's always ways to improve that, and the guys I partnered with have brought property management in house. So, that definitely helps a lot, as far as you know, making things run more efficiently. So, the markets I'm currently in are, Atlanta, Georgia, specifically submarkets Stone Mountain, and then it's like, East Point area, but Atlanta proper, just four miles west of the airport, and then San Antonio on the northeast side. So, we're looking for pretty much every value add, right so I think it has to have diverse employers, job growth definitely has to be there. So, those are some of the things I look for. James: Got it. And I also understand that you are able to build a lot of connection with investors, right, to raise money from them and invest in this kind of deals. And I think you have tried out many different methods in connecting with investors who are looking for this kind of opportunities, right. So, can you talk about some of the methods that you think, very efficient or most successful? And what do the investors look for when they want to invest, like 50 hundred thousand or 200,000 with you? Ronny: Yeah, I think, really, first and foremost is caring about investors as people is really important. That's definitely important, as you're raising money this is a mindset is actually instilled in me.

James: Okay.

Ronny: I didn't know any better, right? So, they were just like, Ronny raising money is the easy part. Right? So, I just said, okay, raising money is easy and that's what I'm known for, that's one of my strongest skill sets. In a general partnership is raising the equity, right. First, you got to really make sure you understand what your investor wants, right. So, I think it's having like a really thorough process. Let's just say, hey James, I need you at a conference, for example, right. What I'll do is I'll get you a card, I'll follow up with you, you know, then within the next day or the next week or so, right. And then set up a time for a call, schedule a call, and then I just start asking him specific questions. Hey, what's your dummy Lobo by yourself, what's your background? Did you invest in single family? Have you invested in multifamily before every cash flow investor? Is that really important to you? Or are you a value-add investor or are you a hybrid? And our minimum is usually between 50 to 100. And, we do probably a deal a quarter, want to see what markets you invest in, what your capacity is, right.

As far as it goes, we had different types, right. And then, understanding if they're a sophisticated understanding, if they're an accredited investor or not, and then I label it in my database and go from there. And then I'd be sure and stay in touch with them and just kind of go from there, but it's building a true relationship. When it comes to investors like a one thing I always like to say, is my friends become my investors and my investors become my friends. So, it's all about building the right relationships with people and understanding what their goals are. Like, for example, let's just say my dad, he's in his 50s, and he's retired, right. And his primary thing is cashflow, right. So, that's a different type of investor, if I have a deep value add deal, right. You want the cash flow, right. Well, let's just say, a younger guy like myself, I like value add deals, I don't really need that much cash flow, because I can take more risk right now, right. So, you have to understand what type of investor you have, and then label accordingly in your database and stay in touch with them. They're not just investors they're people. So, that's what understanding what their long-term goals are, and how can they grow together, like how can you help them grow in their investment experience? How can you make it the best experience possible? What are some things we can do?

Like when I do videos, updates, I keep in touch with my investors. Every time we do a monthly update, say, hey, did you have any questions? Right. So, I think it's really caring about the investors as people is the most important thing. And really getting detail when you're having an investor call, to really understand the school into detail, ask the hard questions. And that you can, for example, let's just say you're doing a 506-c offering and can only do a credit investor on my CRM, I can just click a credit investor, and it pulls up the list of people. And I take detailed notes of every call, right. A lot of people I've seen who have struggles in raising equity, don't take the time to really understand who their investor is, and then also understand, hey, which markets do they invest in? Some of my investors, Texas only, right. Some are like, hey, as long as it's the same type of criteria and then you have to understand, ask them what their expectations are. Cash returns, IRR, equity multiple, hold time, right. Ask them that first and then say, hey, this is what our acquisition criteria is, and then see if it matches. James: Yeah, it's very interesting. Listen, let me break it down a bit more, because I think it's very important for people who are looking at raising money from others to understand and also for passive investor, when you want to look for sponsors who are really asking all this question, because it shows that they care about you. I mean, so what you're saying is ask them about themselves at the same time, ask about the investment goals, whether it's cash flow, whether it's equity multiple or they're trying to multiply their equity for value investors, I get to just keep on going into details of what is the understanding, I think that people know that you really care about them. You're trying to just understand, what's their objective in investing with you or investing within real estate, that's a very valuable method that you have just let us know. Ronny: So, I mean, I just think it's really important for people do that upfront. Because as you get, let's just say go to conference, you get 20 business cards, right? You can just keep those stacked for a while there's like a certain amount of time, or it just becomes awkward to follow up after like two or three months or whatever, right. So, I think following up immediately after we have talked to them is really important. And then getting a time to set things up and making sure you have everything tracked. So, that way you can just really understand what their goals are, hey, I'll be ready to invest in Q4, I'll have a default few, full deals that sell at the end of the year, I'm ready to Invest now, right. Because some people want to invest with you, but they can't because they're not like that. So, that's another thing to understand is your investors timeline. James: Correct. I think just keeping that relationship is just as important, right. People appreciate you and they know that you're serious and they just have that trust with you, right. I mean, at the end of the day, we are trying to have a win-win situation where they are trying to find an opportunity, and as a sponsor you are trying to raise the money for your investment deal. So-- Ronny: And also, another point I'd like to add, it's, I'm not raising money from investors, I'm providing them an opportunity to invest. Right, because I think it's a different mindset. Whenever you feel like you're raising money, which you essentially are, right. You don't want to come off as desperate you can say, because there's actually only a few limited spots on the deals, like our deals fill up relatively fast, right. Even like the San Antonio deal, I mean, that was the fastest race that I have ever done. Like it was just, I mean, every deal is so different, right.

So, it's just understanding that and then not putting pressure on investors, like say, hey, let us know, like we even had a deal we had under contract during COVID, right and a very large scale, very large equity raises. And, I was raising money for that one, everything was going well and stuff and then the whole shutdown happened, right. And then people started messaging me and saying, hey, I want to invest in the deal, but I'm not sure what my business is going to look like in the next few months or whatever. I said, no problem, whenever you're ready, just this, let me know. So, you shouldn't be pressuring whenever it comes to talking with investors, but you also have to have a sense of urgency as well. So, it's a healthy balance. James: Got it. Yeah, it's a skill by itself. Clearly, it's just a gift by itself right on how you communicate with investors and people love that you are being open and direct and honest about it. It's just how the raising of money. Communication works with investors, right. So, I mean, you have been into a lot of due diligence of properties, right. So, is there any due diligence that you thought was like, I didn't think about that that's very interesting aspect of the deal, or something that you learn during due diligence that you want to share with our audience? Ronny: As far as due diligence goes, I think it's really important to have the right team. For the guys, I've partnered with for the past three deals, it's the same core group, right. And I think all of us have complementary skill sets in getting things done. Even having them having property manager in house, like when we're doing due diligence on a deal, we had under contract earlier this year, it helped a lot. Everything was in house, we have the lead, the blogs and stuff. So, I think it's really making sure you have the right team, as far as deal specific on one of the deals is like stab blocks. So, realizing how expensive-- James: I haven't found, and I know about it. I mean, just for the audience, that blog is actually a circuit breaker, electric circuit breaker which can cause fire to be easily triggered, right? And the insurance market is expensive and sometimes the lenders can give problem when you have a blog. But when it's a very subtle way, you have to really know when you're doing due diligence to look for these kinds of things. So, go ahead. You were saying about this.

Ronny: Yeah. So, I have like an experienced team. Yeah. So, I just thought that was a surprising, because I've done due diligence on many of your deals, many of my own, many for other sponsors, and there's always something new when it comes to that, but I think having the right team, like having a construction team on site, all the different trades, do everything in one day. Ideally, it was like a 200-unit deal. Usually it will take like a day, if it's like more than that, it will probably take like, two days, right.

James: So, then step breakers was found by the sponsors, or was it found by the Inspector? Because it's very tricky to find that.

Ronny: Yeah. Oh, yeah.

James: Was he like, he didn't know when before buying the deal? Only when you walk it through the--? Ronny: I must be--

James: Right.

Ronny: I'm not sure on that. Yeah. I think so.

James: It must be, they didn't tell you.

Ronny: Yeah.

James: They didn't tell you. Ronny: Yeah. So, we found that and then that's being addressed. Yeah. So, I think that's important. And so, it's also, I just used auditing. James: Before you go to list auditing, I mean I just want to make sure that I communicate this to brokers that are listening. Please let any major things that you already know, for anybody who was coming and visiting, you want to let them know, because you do not want them to get caught after the day add money.

Ronny: All right.

James: I've seen brokers who hide things from me. And, I don't really appreciate it because it's like you're trying to trap us into a day add money and now you cannot get out, right. I mean, if you find out about the step lock breakers later on, I mean, I have walked properties on my own. I meet this single guy who is a broker and I told him, hey, this property as a step lock and I do not know whether they know or not, but I'm surprised they didn't. I mean, this is an experienced broker this is not like newbie, right. So, I would really appreciate any brokers, stamp log, any asbestos, right, on the drywall. Please let the buyers know, so that we can get the transaction closed smoothly rather than having a surprise.

So, we don't feel like we got caught by the brokers and of course brokers can say they didn't know right, but if they didn't know, I mean I've questioned their experience level, right. The credibility and the same with sellers, I mean the buyers also want to have a long-term relationship with the brokers. So, we really appreciate brokers letting the buyers or sponsors know all the issues with the property, so that when we buy, we have going on smooth sailing. Especially now with pre-COVID, we are having post COVID right now, we are in a buyers' market. So, day one adds money, is so last year. So, yeah, you want to make sure you've done everything so that the transaction goes smoothly. So, it's back to you.

Ronny: Yeah, I think transparency is key. I was just going to add on like lease auditing, having the right property management team, like the guys have Code GP, they have a person with like 20 plus years of experience. So, time is something that they have, right. So, I think that's as far as experience goes. So, having the right team is really important, and then focus on what you're strong at. And then, what you're not so good at or still learning, have other people on the team be able to take care of that. So-- James: Got it. Is there any proud moment in your life until now? I mean, I know you're just like 26, but at least you have like three, four years of multifamily experience right, or real estate experience. Is there any proud moment in your life that you think that, I cannot forget that until the end? Ronnie: Yeah. Closing my first deal. That was probably something I'll remember forever. That was a deal, it was 212 units in Atlanta Georgia and grazes between my first deal and my second deal. I think it's probably less than three weeks between my first closing and my second closing, because we were both under call, that was kind of interesting. So, and then signing my first Fannie Mae loan on my first deal, that was pretty cool. So, having that experience, so I think doing the first deal is always the hardest. And then doing the second one, it gets a little bit easier. A second one's like a bridge loan, right. And then every deal is so different. But I think it's about being consistent, doing transactions and doing quality deals, like all our deals, certain the values have gone up because we bought it at a right price. So, that was probably what I'm most proud of, and then you just continue to grow. I just don't think it's normal, like March 2019, I did buy 172 units, three transactions, I thought that was pretty good. But knowing that, it doesn't stop there. I want to continue growing and partnering with quality people like yourself or the guys I've partnered with is really important. So, that was probably what I've been most proud of. James: So, where do you see yourself, five years and 10 years from now? Ronny: So, a five-year goal, I do more like buy time and 30 goals. So, we'll just do that. So, top 30, I'm 26 now, I want to be top 50 and MHC owners. So, billion in assets under management by the time I am 30. As far as a 10 year goal, I want my multifamily business to always be the foundation, but I really want to grow into the private equity space and you know, raising a fund and buying deals, like I would love to raise like a billion dollar fund, an equity fund and provide joint venture equity to other sponsors and different things like that. But there's levels to everything and obviously doing new development construction. And then being able to give, I think that's really important like, especially for people either not wanting to go to college or transitioning out of it, what is that step, like?

Maybe I can create some sort of internship program, and I am thinking like group and kingly acquisitions and help people get into multifamily especially when they're young, and then being able to give back, right. I think that's really important. Building an orphanage in India, like that's one of my goals. And, yeah, I think giving back is really important because we can make all this money and we can do all these things, and have all this units, but having a direct impact on your residents, on your partners, on just people in general is really important to me. James: Got it. Awesome. All right. So, Ronny, why don't you tell our audience and listeners how to get in touch with you? Ronny: Yeah. So, the best way to reach out to me, just any social media, you can just search Ronny Philip, on Instagram, on LinkedIn, connect with me on LinkedIn, that's probably the best way, and we'll go from there. And if you all have any questions, don't hesitate to reach out to me. I'm a pretty open and transparent guy. And you can also find me on YouTube, Ronny Phil is my YouTube channel. So, I'll start doing a lot of different blogs day to day as a young apartment investor. So, those are the best ways to reach me. And I'm sure you have my contact info in the show notes. James: Yeah, I mean, I'll really make sure we put that in. So, thanks for coming in. And, I'm sure you added tons of value for a lot of people who are trying to get started or have already started in this multifamily investing. Thank you. Ronny: Thanks, so much for having me on the show. I appreciate it. James: Absolutely.

Today Guest is Scott Choppin. He is the founder of the Urban Pacific Group of Companies, a Long Beach, CA based real estate development company, founded in 2000, that focuses exclusively on urban infill and affordable housing communities throughout California and the western US. Over the last 18 years, the company has developed nearly 1,700 units of unique to market urban housing communities throughout the Western United States. Presently, Urban Pacific has created a new housing innovation called UTH, which provides middle income multi­generational housing to urban families, while producing market superior yields on invested equity. Historically, Urban Pacific's UTH projects have delivered 29% IRR yields on equity. As well as real estate development, the company provides project and development services to major commercial businesses across the nation through its subsidiary, Urban Pacific Realty Advisors.

James: Hey audience and listeners, this is James Kandasamy from Achieve Wealth Through Value Add Real Estate Investing Podcast. Today I have Rama Krishna from California. Rama has been focusing a lot on apartment purchases which is averaging around 30 to 40 a units and at the largest you have done were 59 units. So it's going to be very interesting especially for a lot of people who are trying to get into the game and also looking for like high cash flow as well, you're going to go detail on why sometimes the smaller deals makes a lot more money than larger deals. So hey Rama, welcome to the show.

Rama: Thank you James. Thank you for having me.

James: And one of the things that we want to talk about apart from going into Rama's strategies and businesses, we want to go into what asset manager can do during these Covid19 crisis that has been happening right now. Hopefully I can publish this podcast as soon as possible. But I'm sure it's going to be very relevant because it's going to take a few months for this crisis to subside I guess, it may take a few more quarters to fully subside. So Rama, did I miss out anything on your credentials?

Rama: No, not much I think. So just to kind of re-summarize, I am based out of California in the corporate Bay area of San Francisco, an IT professional. So just to recap like 90 seconds. I started like from real estate two years back started from single family homes and I always want to actually to do Real Estate but the problem is in Bay Area, really hot market. I cannot get any cash flow. It's kind of very hard to find deals and I didn't want to do out of state because I have a very stressful IT job here. I cannot travel out of state to do these things. I was postponing doing real estate for so long time, but three years back kind of pull the trigger, bought my two single family homes, one in Raleigh and Atlanta, that's where it started and quickly realized that I cannot scale with single family homes and got into multifamily, bought eight apartment complexes between 20 to 80 units. That's a more like a sweet spot for me. Like doing the deals. We can go further into that. One thing, we started, we didn't talk before is that construction projects, two new construction projects, 97 and 92 units in Raleigh, Durham, North Carolina. So they are like devalue adds, value adds and the new construction mostly into that existing apartments and new developments.

James: Got it. That's very interesting. I think we should just definitely talk about you and maybe do a separate podcast for the Covid19 asset management because there's so much of information that I want to get from you and I think the Covid19 thing is also very important. So that's going to be another podcast maybe before or after this. So let's go into details; the market that you have been focusing on that, I know we talk offline before this is Florida, Kansas City and Ohio, and you are sitting in California. At what point of your work, you are very stressful IT guy. I mean, I was a stressful IT guy too. What was that aha moment saying that hey, I better go buy something else or did you play around with stocks and realize stocks is not for you? So what was that aha moment that said that you need to go and focus on buying a multifamily apartments?

Rama: So I did two businesses, IT businesses, products and the consulting business. I did stocks, options and everything. It was a lot of active businesses, I need to be there, and I am really active, let's say if somebody can start restaurants, like franchises, you need to be there in that actively. So you are there to be part of the business, then you cannot succeed in that. Even IT businesses or consulting or product development, everything is active here. Even where a lot of people have a lot of money from IT as freelancing or like full time jobs, but the problem is if they stop going Monday morning they cannot make money. That's the main part for me to getting into the Real Estate and then I bought these single family homes, I'm getting like $200, $300 for each single family home as a cash flow. But then I wanted to scale it, but at the same time I thought I cannot scale it.

The problem with apartments at the time for me personally living in Bay area, these apartment complexes are so expensive. These are like 20, 30, 40, $50 million. I didn't even know that we can buy a apartment complexes. The two things, kind of the aha moment for me is we can buy apartments as a common man with syndication. Syndication is another thing. I was buying single family homes myself and I know a lot of my friends actually buying single family homes out of state. They buy in Texas, North California; they buy everywhere all the single family homes. But if you combined 10, 20, 30 people combined, we can actually buy larger complexes, larger commercial properties. That was a [05:17unclear] the syndication itself was an aha moment for me.

James: Was that from someone talking to you or from bigger pockets or you're talking about syndication or what happened? How did you find it out?

Rama: I learned about this syndication with a webinar from Neil Baba, you know Neil? He was having this weekly or acting monthly multifamily fundamentals webinar. So two years back in November 2017, I had this is a webinar from him and the moment that I did the webinar, I first reached out to him Neil, I want to meet you, this is really good, this is crazy. Then met in a Starbucks in Fremont and I told him after this Neil I want to learn this thing. This is exactly what I wanted to do and he said there's a boot camp coming up. He would come in February and I said I'm going to sign up on that. That's when it kind of started, kind of working from single families to multi families.

James: Got it. What were the few key things in that discussion with Neil that you have was like, wow, this is suitable for me. What was your personal thing that you think that oh, this is very interesting for me. What are the aspects of syndication that was very attractive to you that you think [06:40unclear].

Rama: Three things, Oral apartments is a kind of a scale in the single family home model that what I'm thinking. I know the real estate passive income, but then I cannot buy a hundred, 200, 300 single family homes. The first thing is scale. The second thing is run as a business, like I did my IT businesses before. So apartments is also a business, you need to increase your income, decrease your expenses, and then efficiently run your operations. Make sure that you know everything like people management and you talk to your property managers and investors and your brokers and seeing like identifying this analysis, everything. Run it as a business. Third thing aspect is a syndication model itself. I have like hundreds of friends here and other acquaintances, old colleagues, a lot of people are high net worth individuals. If I can prove myself in this business, I can definitely syndicate and raise capital. So those are the three main aspects for me that kind of struck the card when was talking to him and also the fundamental thing, hey we can buy larger complexes like this. Like I was not even imagining the common man can buy apartments. Those are the three main aspects.

James: Got it. So now you're sitting in California, after you talk to Neil you come out and you already go to his boot camp. Why you went from California to Florida, Kansas City and Ohio? Which deal did you buy for us? Which state was that?

Rama: For my multifamily?

James: Yeah. Multifamily.

Rama: The first five deals, I bought it in Jacksonville, Florida.

James: Okay. Why Jacksonville, Florida? Why not Las Vegas or Utah or Texas? Or is it just that you landed there by luck?

Rama: So I want to actually buy a multifamily in Raleigh, Durham and Atlanta because that's where I started. When I started researching about markets for my single family homes, with all the research I did, I picked these two markets, Raleigh and Durham.

James: Okay. What are the things you saw in Raleigh, Durham and Atlanta that were like awesome [08:49unclear].

Rama: Some of it I think was I'm reading all the articles and reading all the articles and everything with the technology stuff happening also there and jobs moving in, I didn't actually connect the dots at the time, When I did the boot camp from Neil then I was able to connect the dots and say hey, these are good markets. Then I was started offering on deals in North Carolina and Atlanta. Like none of them were pencilling out, like what is this? Even two, three years back it's not working out. I can't imagine now, maybe like with Corona, it's never kind of worked out for me because I never purchased in the last three years. When I started multifamily again I started looking into these two markets, Raleigh, Durham and Atlanta. I was offering ton of properties. I visited brokers' network. Either the deals are like C minus, really bad locations or bad tenant profile. The income is bad, which numbers are working on but the thing is I don't know how to do the deals there or it's too expensive where it just didn't work out for me.

The vision for Jacksonville is when I was trying to expand markets from single family homes, I was looking at Austin and somehow actually got into Jacksonville because of the property manager or the property manager was actually offering, they do turnkey single families home as well. So I was talking to them doing due diligence, everything with them and making sure what kind of deal on single family homes that they can help me on, on rehabbing and the stuff. Then I suddenly like after talking to Neil, I said, guys, I'm not interested in single families. No, we have deals, this is like 60k and we have this 140k [10:39unclear] but they said okay we'll help you in multifamily as well. Let me know if you find any deals. We'll help you manage. That's when Jacksonville started and then they also kind of helped you and due diligence and everything. Then we'll look at a few deals together and we bought this 20 unit deal and that was on market actually, but it's the heavy lifting stuff like the roofs are bad, two, three units are down; it's really heavy lifting. I thought, okay, let me just get into it. The twenty unit is most like a cost of a one condo here.

James: Looks so cheap when you look at California?

Rama: You know what I'm going to lose here, let me try it out but we made really good money on that. So definitely that's the good, I got the money from my friends and family first, not as syndication. It's more like a joint venture. A lot of my small multifamily is a joint venture. We can go into details how we've structured those. So that was very good deal. Look back right now. We did that and then quickly since I liked the market, I kind of learned about Jacksonville more. The more I know it's like a really hot market, then the found more deals in the end of that eight months to nine months and then they all are smaller, 20, 30, 12, 32 to 59.

James: Syndication. I mean syndication; you can put larger money and buy a hundred plus unit or like some gurus say by start with a hundred plus. Why did you start with 20 and 30? And what is the driving motivation for that?

Rama: Neil actually encourages to start with small, he never said go more than a hundred units, but I'm part of a team of multifamily Mark Kinney. He suggest only a hundred plus units because of several reasons because you're putting effort on a 20 unit, it's the same as 200 units, go hundred plus. I totally believe it from a mentorship perspective, he's different. I did that because when I did my eight LLC taxes for last year and all the administrative work that goes behind these things. I would totally agree with Mark and also any other gurus out there that say go hundred plus units. I totally agree on that from effort standpoint. But there is money to be made in this 4,200 unit space as well. And a lot of people ignore it. There is definitely a possibility that you can put your operations hat there and your creative hat there to see how you can profit from it. You also know from the investor perspective as well.

James: Yeah correct. I started with the 45 units and I really love it just because you really learn a lot from smaller deals and you don't have to go much bigger deal and you forget, you cannot be like skipping elementary school and middle school and try to go direct to high school. I mean you can do it once in a while or when the market's so good but the fundamentals of real estate is really learned on the smaller deals, even with single family. You start with single family and you move to the smaller deals.

Rama: There are pros and cons. For example, the pros are you don't need to have payroll. The con is also the same thing. You don't have a staff and then your property manager may be sitting in some downtown office somewhere. They don't know what's happening at the 20 units or forty units. So you need to have very kind of a good property manager, even for a hundred plus units also you need a good property manager, but at least you have staff. If you can talk to them, hey, what's going on? Because the regional might not be at the site all the time. The regional might be like going once in a month, once in 10 days, whatever. But you have a staff day you can talk to, hey, what's going on leasing, what are the foot traffic? What are other strategies that you have always or do you have going on these units? Have you did the make ready? All of these things. There is a long [14:38unclear] clean you can talk to someone. But if there is a 59 unit somewhere in the west side of Jacksonville and my property managers sitting on downtown, they don't even know the pool guy's coming, they don't know that the lawn is not cut for the last two months. So there is good and bad, especially if you're doing out of state property manager, no asset management. That would be more difficult. But there are ways to mitigate that. Have a local partner in your deal that is onsite, on the ground goes once in a week or so.

James: Did you have a local partner there?

Rama: One in Jacksonville but not in Kansas City and [15:2unclear] but now Jacksonville, I have changed my property managers, she's really hands on and she actually sits in one of our office. Jacksonville Unit has an office actually. So she's really good and now I can think of acquiring more properties in Jackson, I was thinking not be acquired more. But if you have really good property manager who is hands and kind of trustworthy, then you can definitely; these are really cash cows.

James: Yeah. I mean the people play the most important aspect in property management. It's a people business. So once you find a really good people, you are motivated.

Rama: You are local or have a partner locally in the 40 to 80 unit game and it's definitely worthwhile to [16:08unclear].

James: Because it's not many people look at that space. I mean, the market was so hot right before, pre-Corona, I would say. Now we have to talk about pre-Corona and post-Corona. Pre-Corona is so much of capital looking for deal and everybody just buy the bigger deals.

Rama: Yeah, I do buy the deals in the three bands, James like 40 to 80, 80 to 160 and 160 above. 40 to 80 is where I do kind of deals with mostly JBS and then also syndicate patients deal where you don't need an onsite staff, we can operationalize and make sure that let's say if you have multiple 40 to 80 deals in the same market, you can actually have some scale within that. Have a maintenance person who I only see for properties. So 80 to 160 units where our focus primarily from a syndication perspective when we can have staff. 160 plus is an institutional level where the different companies move there, which I'm not going right now. But I would love to go 160 plus.

James: 160 plus, okay. I think that still does not answer [17:16unclear].

Rama: [17:17unclear] but at least you have a different set up [17:20unclear]

James: Different level of people. Yeah, professional investors I would say maybe. That's good. Yeah. I mean so how did you structure this JB on the smaller side? Because you really don't have to do syndication for everything, I mean, if you have a few guys who are your family and friends who are willing to put some large money, you can just do a JB and explain to the audience how did you do that JB and syndication.

Rama: Yeah, even if it is JV, I would want someone like they do perform some tasks. It's not that, you know, hey, like it's a JB and I'll do all the work. They allow us to have to do some work on that. Because they all structure James two options here. One, either I put less money and they put more money and everybody will have an equal share. Let's say I'm giving very rough example. I bought 50K and other people put 100K each or 200K each, whatever it is. And each of the 3% will be attached to person of the [18:15unclear].

James: Got it.

Rama: That's one option. The second option is I've also put 100K but all three people will put 100K into the deal, but I get 50%. They both get 25%. It's just very high level examples. Either I put less money in and take an equal percentage with the other investors or I put more money and take higher percentage. But same money as others.

James: All these deals you're buying in these different cities is it all value add or de-value add or cash flowing? How's that?

Rama: Most are value add as some are de-value adds as well. I'm kind of going away cookie cutter stuff, but the cookie cutter stuff, I'd still do it. But for the long-term part. That is more kind of relevant for a JV structure because for syndication I need to perform two to five years, I need to exhibit. But if I find a deal, which is really kind of a long-term goal and that is also good for this model where I don't need to worry about performing something in three to five years, I can even take a bridge loan and refinance it and keep it for longer term to the cash flow that's fine. If you don't get to cash flow, that's also fine. At least you can get all the rehab money from the lender and renovate it fully and then go to a permanent loan and keep it for like another six to eight years or 10 years.

James: Do you finance with the bridge loan in the beginning itself?

Rama: Yes. Yeah. Half of the loans I deal with now are bridge loans.

James: Okay.

Rama: Half of them are Freddie Mac. But see this is a de-value add. I know I can get all the rehab budget from the bridge loan.

James: Yeah, correct. De-value adds make sense for...

Rama: And then refinance it.

James: Got it.

Rama: So it's like kind of a cookie cutter or a little bit like value adds, I go with Freddie Mac loans.

James: Got it. Yeah. I mean the smaller ones has less competition. Sometimes you make a lot more money because there's no payroll and some people like my 45 units people just like to stay in a smaller community because they don't like bigger and the people, a lot of residents like a smaller communities, they don't need all these amenities. They just say we want housing.

Rama: Yeah that's true and another trend is happening, the build to rent. They're doing a medium density bill to rent the whole complex is for Randwick. So they built a town home complex or a single family home complex only for rent because we will be rendered national for some, and especially this post-Corona, it will be delayed like three more years, people will not be looking at home ownership. But at the same time, they don't want to live in apartments. They can live in a town home community or the kind of a little bit less density, a single family home community, maybe more density, single family home community. They're okay with that, right? Because they still have the pride of ownership. You have a better tenant profile and they can also feel that they're living in a regular home than an apartment complex. So the build to rent a town home and a single family home concept is growing as well.

James: So let's say you get a deal; every day you get a deal right now, I mean you're getting into brokers I presume. So what are the sniff test do you do on the deal? Because sometimes they list too many deals?

Rama: Yeah. I have my 60 seconds rule, 60 minutes rule and I don't know, 60 days like I see the more you go, you're going to spend more time on this deal. So the first thing I do is go to the justice map or CoStar just to see them demographics. For what is the median income and demographics mix on this and how the income is growing in this area. If that is a bad area I just...

James: So every deal, the 62nd is that few steps go to CoStar.

Rama: Yes first go to; no, I don't need the CoStar, District Map is free. Just go to justicemap.org, just put that address.

James: What's that website called?

Rama: Justicemap.org.

James: Oh justice map, yeah, justicemap.org.

Rama: Just go to that, put the address you will see the census block. What is the median income, what is the demographics mix and how the income is changing. Then you will see the first sniff test and then I'll see the rents. Nowadays what I'm seeing is the average rent, like around $750 or about; I'm not going to C minus, C property, C plus or B. So I can quickly take a deal out, 60 seconds or less. And then next step will be go to the bond writing and see what the rent projections are, go to Rentometer or any other, I can go CoStar or Rentometer and see what are the rents. Are they below the market or not because I don't care about the rent growth, what happened in the next five, six years, what is in place rents and what I can achieve the market. That is where I focus. Let's say if it is $75, $150, $200 below, then definitely if it's like a C plus, B area, 45K or 40K median income and the demographics mix is good and everything, then I definitely go to the next level and traditional spend six days or not. Then to go to the 60 days.

James: That's probably including the best and final and all that.

Rama: Yeah every step that you go 60 seconds, 60 minutes, 60 days you're going to waste your time, effort, money on a deal. You need to talk to programs you need to visit, it adds up the cost, time and effort, energy.

James: Yeah. It's crazy how much work you have to do on progressively. So is there a lot of competition even on the smaller deals?

Rama: There will be. Yeah. And it sounds especially previously that lasted two years, this competition for everything. But the 40 to 80 unit spaces, James, the smaller people cannot buy those and they still want a track record and know everything. They don't want to give it the deal to anyone. The bigger people are not interested in this because and the same thing that you said it's too much work. Definitely there will be competition but if you do a JV structure and especially you can do a long-term goal or maybe a tentative exchange because on a largest syndication it'd be 20, 30, 40 people. It's going to difficult to convince everyone, hey, let's do a 10, 31 exchange. So on a smaller deal if I get a 42 unit I know the JV people, like we have five people, so once we got a bridge loan, we renovate, and we'll sell. Say if somebody wants to know by this thing, we have a bigger pool of money in the pot for the 10, 31 now we can from 42 units they can go to 80 units and then they can move to 160 units. I can spin off three fourth, 10-31 exchanges like that and quickly it can go from 200 to 800 units within two to three years or four years.

James: That's interesting. You can start from small and just doing 10 31 and start increasing.

Rama: Exactly, on syndication it's not kind of very difficult. I have 40 investors, like half of them, hey, I need my money back. I let them say, let's just enter the one. Okay. Then it'll be difficult to coordinate this.

James: Oh, right. Interesting. Yeah. I never done a 10 31 exchange up until now because I don't prefer it so much because I'm worried that it costs me to buy the wrong deals. Because all sellers love 10-31 buyers.

Rama: TO be active, don't disclose that you're a 10-31 buyer. Have those deal flow, you need to be really active. Every time I have four to five, six deals, then I can pick the right one. Hey, I'm not going to go wrong on this because it's a B property, eighties construction. What are the criteria that you have? The rents are like a hundred dollars lower. I'm okay to even or pay 100K - 200K on this because on the 10-31 you want to certain the deal, you want certain to close it. So picking the right property and make sure you're doing the due diligence and then do the 10-31 because yeah. So worst case, you'd pay taxes and it's not like another wall. It's better than going in the bad deal.

James: Correct. Yeah, absolutely. Absolutely. Absolutely. So tell me about your value add strategy. Do you do interior, exterior and from deck and you define what's the most valuable value add that you have seen?

Rama: No, I do de-value add, like if the roofs are leaking, like falling down we get a new roof and completely renovating the units to top-notch, [26:57unclear] dollars also into the C properties. I think the thing is weird to see the holistic picture. There is no one specific thing that I do, which is the most value add, just turning it on the property to create the maximum value out of this. Like if it is a exceeded deferred maintenance, the problem with deferred maintenance is you don't get any rent bump if I change my roof. But you need to make sure that you negotiate the deal. Okay. Hey, this has a roof issue and if you're paying the market price, but for a de-value add that doesn't make sense. If there is an exterior deferred maintenance I would love to know everything in place and only do the interior value add. That is the best thing to do if I can get, but I'm not afraid of de-value adds. I did full redevelopments also I'm doing new construction as well, so whatever the maximum value that you can out of the property on the rent. That is what I looked into it.

James: Got it. So that's very interesting. So tell me about yourself. I mean so you are an engineer and you are doing real estate right now, where do you see yourself in the next five to 10 years? Pre-Corona or post-Corona?

Rama: If we didn't have the same conversation January James, I was thinking I would retire in 2020. Like I had two deals. I was about to go under contract at backdoor on one day I was at the deal also I'm at 80% on the fence to back out. Completely changes. So things like this, you go back to the square one, go back to the drawing board or go back to school. . Then rethink your strategies. Yeah, definitely. De-value adds and new construction. I want to get maximum value out of it. Cookie cutter. I'm like mostly ignoring, but if I can do long-term goal, I'm okay with cookie cutter. If not that I can get out three to five years and do this like kind of churn. It's just a lot of work. A lot of people think when you're just come into syndication or a multifamily, it is a passive income. This is not passive income at all, like zero. For investors, yes. So I would continue doing what I'm doing, but it'd be more conservative. The new rules. The rules have changed.

James: The rules have changed. Yeah.

Rama: The playing field changed. The game is changed. Everything is changed. But the fundamentals remain the same. We will be renters' nation. The multifamily will not go away. People need place to live. The next one year will be a little bit at least six months to one year. It will be tough in the operations perspective, fully focusing on operations on what I have and I'll continue the story, but the story now will be much better. You will see what is the need for passive income now you know better. Things might change. People are getting laid off. So you need to get your passive income streams. The story becomes stronger now and nothing changed in that perspective.

James: Correct. Correct. Also in the stocks market you can lose your money, but in a brick and mortar real estate, you don't really lose the money.

Rama: The capital is reserved, you have a hard asset. You can go and touch, feel it, and then that's not going anywhere. You might have instead of 8% returns, you might have 2% returns or 1% returns, at least your capital is reserved. Stock markets you're bidding down like crazy there. You're losing half of your money or more than half of your money. So the story got better and maybe easier to pass on this thing. But there might be challenges raising capital in the next few months because people might have lost money in stock or lost their job, whatever it is. But eventually it will come back. The people will remember this. They know the value of passive income more than before. I'll continue the value adds, the de-value adds and new construction strategies into the multifamily.

James: Got it. Is there a proud moment in your life that you think you're really, really proud that you cannot forget? I mean, until now, I mean, of course you're going to do a lot more things right, but until now when you started this business.

Rama: Yeah. The first 20 unit deal, when we actually renovated this thing, I really felt happy. It was actually really bad property. The roofs were really leaking and everything; the tenants were bad, the backyard, everything was all trashed and completely, we re-profiled this thing. We did maybe more than 70% returns on that. The manufacturer, that's one thing. Overall the transformation that you do kind of really was proud moment for me and also the land development deals that I'm doing. It was 18 months of effort for us to get these 97 units a town home project, we closed it in February. So I was really proud of that new development site.

James: Got it. So you're like moving from one domain to another domain. That must be a happy moment. Why did you move to development?

Rama: As I said, I like this North Carolina, Austin, Atlanta hot markets because I would rather do it in this market, but there are no deals out there in a sense too expensive. You know Austin? All seventies and eighties property itself is so expensive. I would rather build new but there are unknowns. There are risks for new construction. It's not that easy to hazard zone.

James: [32:54unclear] building, if it's [32:57unclear].

Rama: Everybody will be building, it has its own staff but overall I want to be patient to find the right deals and find the right construction partners, find the right type of investors. Not everybody will be interested in new development. You want cash flow. You're not going to get cash flow. There are a lot of risk also. You might lose your capital also in that because there are no assets.

James: You have to go to so many entitlement process and city approvals and all that.

Rama: Exactly, there are red tapes involved, there are so many things involved but I would in a market like Austin or North Carolina I would rather to build than buy a seventies or eighties product. That was the main reason for me to get into new development because I liked the market, what I can do in this market because I love North Carolina, I love Austin, I love North Atlanta. What I can do in these markets from a Real Estate perspective, the only answer for me is the new development.

James: Got it. Interesting. So tell our audience how to get hold of you?

Rama: Yeah, you can reach out on my website is zovest.com; you can reach out at [email protected] and I'm active in a lot of Facebook groups, you can reach out to me there as well.

James: Awesome. Thanks Rama for coming in. Happy to have you here and happy that you add a lot of value to our listeners. Thank you.

Rama: Thank you, James. Thank you for having me.

James: Hi, audience and listeners, this is James Kandasamy from Achieved Wealth Through Value-add Real Estate Investing Podcast. Today, I have Bruce Petersen, my buddy from central Texas and in Austin too. So, Hey, Bruce, welcome to the show.

Bruce: Thanks for having me. It's just going to be a blast. This will be the first person I've done a podcast with that I actually knew before the podcast.

James: Good, good, good. So let me just make sure I introduce Bruce properly. So Bruce owns like almost 940 units as a GP, he's the operator. He focuses a lot on Austin and San Antonio and he has done overall almost 1100 units. And how long have you been in the industry, Bruce?

Bruce: Started my education in 2011. I bought my first 48 unit property as a syndicated deal back in 2012.

James: Okay, awesome. So tell our audience before becoming a multifamily syndicator what were you doing?

Bruce: Well, like we talked a little bit before we started here, I'm a college dropout. I'm the guy that did not thrive in a formal education environment. It was sucking the life out of me. So I dropped out of college, fell under retail because you know, I don't have a degree, there's not a whole lot open to me unless I want to start my own business. And back then, I had ideas but nothing formal. So I went into retail and I did that for 18 years. I quit working for other people at the age of 43 in 2000, I guess it was 13, I guess. Well, no, 2010, I think. And just started looking around and trying to figure out what to do with my life. I did a Google search to find somebody to help me invest in real estate because I didn't know how to do it. And I got very lucky and found a really good mentor. She helped me through the process on the first one, even a little bit on the second one. And you know, we've been off and running since.

James: Got it. Got it. So, you have like almost 940 units. I mean, did you expect Covid-19 to happen and cost this recession?

Bruce: Did I expect it? Of course, I expected it. Nobody saw this shit coming. This is that whole Black Swan thing, right? That Holy crap, this is probably going to make 2008/2009 look kind of small. I'm not worried, honestly, I'm not Chicken Little, I'm not a pessimist. I'm not a doom and gloom guy. I'm the eternal optimist. We're gonna make it through this without question. Things are a little dicey right now. What kind of collections are we going to have for the month of May? I'm not sure. People were worried in April, but April turned out to be pretty good. We averaged about 95 to 96% across our portfolio o we're fine. May, we're already starting to see a prepaid rents being made now. This is April 29th, right now, that we're recording this, but we're starting to see prepaid rents come in like we normally do. So I think we're going to be okay.

James: Yeah, I mean, we were worried about April payment. Now we are going to May 1st week, right? I mean, next week I guess. Well, this week we are going to May 1st, so it's just crazy. So hopefully things doesn't change. And did you do anything different in your property that you have ensured that everybody's taken care of and was paying on time and you know, what did you do differently right now?

Bruce: Yeah, just like you, I believe you have your own management company as well as we have our own management company too. So we're on the phone all the time with our staff, first and foremost, making sure everybody is healthy; both physically and mentally. I gotta make sure that we are the voice of call for our staff right now to make sure they don't get panicked. If they feel panic or concern coming from me as the leader of this thing, we're all doomed. So that's the thing. I'm an eternal optimist anyways, but I'm going way above and beyond to make sure that they feel we got this under control, guys. But you know, outside of, you know, making sure everybody's safe, we have closed all of our offices, you know, we're the whole touchless thing you're hearing about everywhere. We do self-guided tours. We've done virtual tours for leasing. We're still leasing, right? One of my properties, we've actually leased more in April than we did in March and that blew me away. We leased probably about 25 to 30% more in the month of April than we did March. So that was really surprising.

James: That was surprising in one of our properties. We virtually list more than when they were in the office and we were joking, Hey maybe we don't need staff in the office

Bruce: We haven't gone that far but...

James: The prospects are running away because we do face to face, maybe we should do everything virtually.

Bruce: Well, it's funny that we're rethinking a lot of things in this industry right now. What do we really, really need to do our jobs effectively? You know, just like all industries, all companies, you know, not so much for us, but companies that go to an office every day. How big an office do I really need, cause it looks like maybe my staff can truly work from home? So there will be things that change after we come out of this. So it'll be exciting. I think we're going to be better off for it. And a lot of people think, yeah, I'm a nut for saying stuff like that, I'm naive. I think we will be better off. It's going to take some time to get to that point but once we do fully recover, I firmly believe we're going to be better off as an industry, as a country, and as a world, honestly.

James: Got it. Got it. So let's go down to the market and submarket and all that. Right? So why did you choose Austin and San Antonio?

Bruce: I live in Austin. It was easy. My mentor taught me to buy something for your first deal that you can get to within an hour, hour and a half, maybe. And I thought, well, it's not much closer than 10 minutes down the road from my house. So I bought down the street from my house.

James: And it's an awesome market by itself, Texas and [06:12 crosstalk]

Bruce: Austin's a little...well, I guess a lot of major cities are like this, but I live in a really nice part of town, but I'm only 10 minutes away from my properties, which are kind of a much more working-class area, we'll put it. But that's why we decided to buy here because it was a great market and it was right down the street. And then we branched out to San Antonio. Same thing. We can get to it within an hour and a half. My regionals can get back and forth easily. There are no worries there. So it's worked out very well. You know, we happen to be in one of the hottest parts of the country to buy and it happened to be my backyard.

James: Yeah. Yeah. I was looking at the numbers published by CVRE talking about cities, which was performing very well before the Covid-19 and Austin is number one, so it's crazy out there. So what do you think the difference is between Austin and San Antonio?

Bruce: Austin? I'm more profitable here, almost, always. San Antonio does well for us, but we're almost always more profitable in Austin. The pocket we've always bought in, in Austin is an incredible pocket. You know, I've got a studios going for over 900 bucks and it's in Rundberg and the Moore. If you Austin, that's by big city standards, it's not a dangerous neighborhood, but by Austin standards, it's one of our rougher neighborhoods. But I've got studios going for over 900 bucks. I've got three bedrooms. I'm the only one in the submarket that has a three bedroom but they leased for as high as 1749. So, we do better in Austin. We prefer Austin again cause we live here, but we have higher class properties down there. We have B plus properties in San Antonio. We've always had C to C plus properties in Austin, but they've been more profitable.

James: Got it, got it. I mean you are similar to me, right? I mean we have our own vertically integrated company. But how did you structure your company in terms of staffing?

Bruce: Well, first of all, and a lot of people don't understand this, especially people first getting into it. The management company owns the employees. And I hate to use the word own because that sounds, you know, like they're just animals or you know, they're just numbers. They're human beings that we love dearly but they do work for the management company. They do not work for the properties at all. So a couple of things there that now, I'm free to move people from property to property as I see fit. If they're owned by that property, that's one specific investor base. This is the same investors that invested in the other property down the street. So it gets a little weird moving salaries and people around for property to property but we don't have that problem this way.

And then secondly, with the PPP, the Payroll Protection Program that they rolled out that not many people that I know guys cause it all filled up with who's Chris hub. But what happened is a lot of people were told that, look, if you're a GP and that's your only exposure in multifamily, we're not going to support you with those PPP and this is an investment for you. Oh, but I have a management company so I have an actual functioning business on top of an investment so I get to submit for the PPB through my management company and I didn't have any problems. So that's the way we structure it and it works very well by having everybody under one umbrella too instead of spread over the properties. I have more employees in that one company so I can get better insurance rates as well.

James: Got it, got it. What about in terms of like you and the site management stuff? I mean one of the roles that you do, I think, I believe you have original, I'm not sure whether you have a VP of operations or not and then going down to the site staff, how did you structure it? How did you do your split off with roles and responsibilities?

Bruce: So in the beginning, like all entrepreneurs, when you start a business, you got a new company. We wore every hat and my wife and I, every single hat and then we had the onsite staff. So we've never done the onsite work. We've always bought large enough to afford a onsite staff. But then as we started to grow, we started to bring in, we've got bookkeeping now in-house. We've got a regional manager in house. We have a director of operations, but not a director of operations, he's actually an operations manager. He's doing all the back-office work. He helps set up vendor contracts. He renegotiates vendor contracts that people are having issues. He works somewhat as our tech guy also. So that's the way we've laid it out.

And then Stephanie, my wife and I, we are basically the two people that provide direction, leadership, and vision and make sure our culture is exactly where we want it to be. So day to day, like boots on the ground, we don't do a lot of that anymore, but we're always involved every single day; digesting numbers, making decisions based on reports, walking properties, make sure everything looks right, making sure rehab projects are going as planned. But again, day to day operations, we don't do a whole lot of that anymore.

James: So do you think that owning this own property management company is a good thing? Do you like it?

Bruce: I actually love it, but as many people will tell you, and I know that you're thinking of this now or I shouldn't put words in your mouth. It's a bitch; it is. You're always dealing, you know, it's a transient industry, people are always quitting. You're always losing people. You're having to let people go, unfortunately, sometimes. So it's just this never-ending cycle of replacing people. But this is what I've done my whole life. In retail, I was always in a leadership position, so I'm used to hiring and firing and firing is not fun but sometimes you have to do it, but it's the hardest thing that we do, without question. The construction company is not that bad. It gets frustrating sometimes dealing with subcontractors and the asset management company, you know, that's pretty, pretty easy, relatively speaking. Yeah. It's the management company that's a pain in the butt sometimes. But I love my employees though, so I love having it.

James: Yeah, it's a huge turnover, in the property management company and you are like hiring and firing. Sometimes we think we just keep on hiring and firing, you know, what else are we doing? So finding the right person is always the hardest.

Bruce: Yeah. And finding the right person that even...so I just got word that one of my property managers, yesterday, late in the afternoon, sent an email to her regional manager and say, look, I'm giving my two-week notice. This woman is spectacular at her job. She runs an incredibly profitable property for us, but she's got some medical issues within her family; not her, her husband, her mother, and her father all have medical issues right now so she had no choice. First, I've got to go, I'm sorry. So, you know, even good people have things happen beyond their control and there's more turnover that we've got to deal with now. But it's fine, we'll get through it.

James: Yeah, it's crazy out there. And what about underwriting? Do you get a lot of deals off-market or from brokers? I mean, before this, pre-Covid, we're not talking about Covid. Nothing is happening right now.

Bruce: Right, right, right. I've gotten a few things sent to me off-market, but for the most part, all my deals have been fully marketed properties. You know, you're plugged in with the big brokerages in town. CVRE, ARA, HFF, JLL, those guys. So you know, usually they're fully marketed deals, but yeah, I do all my own underwriting. I'm a one-stop-shop. And I think that you and I were taught a similar process and there's nothing wrong with the way everybody else seems to be being taught today, but it's not the way I do it. You put 400,000 billion trillion people into your GP because nobody could raise 5 million bucks, but everybody can raise 12. So if everybody gets together a raised $12 an hour, first of all, you're going to paying yourself because you're probably doing this illegally. But secondly, you're giving away the whole pie. I want the pie for myself. You know, if I got a 20% promote and I carved it up amongst five or 10 people, all of us are getting that much. It's more work for me but I get the whole pie and I'm fully in control. So yeah, we do everything ourselves.

James: Yeah. Nowadays, I see syndication being put up by like six people, seven people and sometimes 10 people, and there's more than 10, I've seen a lot. And there's no way 200 or 300 units, you need that many people to manage the assets. You probably need like one maximum two. And maybe the third, maybe the other half a person to do investor relationship. But that's like, I really want to say investor relationship person nowadays.

Bruce: Right. Well, you make a good point though that you still only came up with three people because legally, right, you notice, they have to have a legitimate job in your general partnership. You know, how can you justify 10 different jobs for people? Do you get assigned these investors? You get assigned Mr. GP number two, the toilet rehab; how do you do that? Yeah. It's just too complicated. One at a time, build your own database and raise your own money.

James: Yeah, it's crazy. It's crazy. So in terms of value, and I'm sure you do a lot of interior and exterior value add and all that. What are the most valuable value-adds you have seen between interior and exterior?

Bruce: So I'll start with ROI, right? So the biggest return on investment project I've done to date is we kicked out everybody's favorite company, CSC, right? The company that would manage our laundry rooms for us, and they didn't manage anything. They put a little washer dryer in there, they barely came out to service it. They'd come out sometimes to collect and you sometimes get checks. They hold...it's just a nightmare. So I was at a month to month situation when I took over this asset, and about a year and a half in, I decided, you know what, we're going to buy our own units. And we spent $40-42,000, something like that, to buy our own units. We took our monthly laundry income up from 1,450 bucks a month, to $6,000 a month.

My ROI is well over 100% and it improved the value of my property by about $900,000. So not everybody's in that situation because you get into those ironclad contracts that you buy from the seller that you bought it from, and you're stuck with that contract until it runs its course and those are 10 year contracts, almost always. So I just got lucky there. But that's been the most profitable one I've done so far. And everybody knows to have laundry on-site, but I think a lot of people are hesitant to do it themselves. It's really not that hard.

James: Yeah, it's not that hard. I mean, yeah, if I can, I'll buy it myself; if I'm not under contract and I'll do it myself. And you are right. Actually that's one of the...in fact, it is the highest valuable value add because on one of my properties, we spent like 31,000, we're making like 2,500 per month. That's a lot of money. Right? And you're spending 38,000 and you get like millions of dollars in value increasing. Right.

Bruce: Exactly. Yeah. It's incredible.

James: And you're right. The company never come and service. It's hard to get. And they steal money as well sometimes. And they are hard to negotiate the contracts. Right? So why wouldn't we do that? So very interesting. So I want to talk about your book because you're going to be launching a book. Hopefully, I can align this podcast launch with the launch of your book. Let's talk about your book because a book is very hard to write and why not talk about it.

Bruce: Okay, so this came up on another podcast that I'm working on getting booked onto and they're like, okay, help me understand it. You said you're a college dropout and you wrote a book. How the hell do you write? Look, I barely know how to use a library, but I know how to pay somebody that's really good at pulling information out of my brain, putting it in a book form. And now, I can go through and kind of red line and say, that's not the way I speak. So to be fair, I did use a ghostwriter and many people that write books, they use a ghostwriter. But that's what I did. I paid somebody a fair amount of money, I'll be honest, but it was a skill that I didn't possess. So I knew enough that it was something I couldn't do and I knew I had a book that I needed to get out. It was important for me to get this book out and so I reached out to some people to help me write it. And it's taken about nine to 12 months, but we're finally about to launch. The launch date is May 5th so things are going really well so far.

James: So you're doing a reveal the title of the book?

Bruce: Am I allowed to cuss on your podcast?

James: Yeah, absolutely.

Bruce: It's syndicating is a bitch and other things you haven't been told.

James: Syndication is bitch and other things?

Bruce: Yeah, 'Syndicating is a bitch and other truths you haven't been told.'

James: Wow, that's awesome. Yeah. That's something people think real estate is so easy, right? Syndicating real estate is so easy. Right? So can you talk about some of the most carriers stories from the book or you want to hold on to people?

Bruce: No, no. So I'll start by kind of say, I said I had to get this book out. Let me tell you why I wrote it and then we'll go into a couple of stories. You know, we've all been to real estate conferences and expos and two-day seminars and all this stuff. And the stuff that they're teaching from this stage, it's all legitimate stuff and these are good people teaching it and giving you basically a two-day sales pitch or you know, a sales pitch at an expo, whatever it is, they're almost always selling something to either try to sell their program, their education to you. And again, I firmly believe these are good people and they've got a good product, but you're only hearing for the most part. There are some out there that are exceptions, but you're only hearing the dog and pony show. You're only hearing about the rainbows and lollipops, the unicorns. I'm going to do this. And yesterday I'll be a billionaire.

Okay, that's not going to happen. This is hard. What we do is hard. You know, we make mistakes. Things that come up that we never saw coming, there's no way we could have known they were coming so things surprised us all the time. So I wanted to be the guy...again, let's think about the person pitching from the stage that they tell you the truth, the scary stories, the arson, the dead guy in your pool, losing 5 million of your investor's money. If they tell you that stuff, I'd say 50% of the people that would've signed up, would go, ooohhh, no. I don't want to do this.

So it's not in their best interest to give you the story. Again, I don't believe they're lying, I think everything they're teaching is legitimate. But my book is pulling back the curtain to show this is every bit of the step in how to syndicate a deal. Everything. I laid everything out. You don't need a course but I want to tell you some scary stories along the way and we'll laugh together. I cussed a little bit in the book too, but I want people to understand, most people that I think they can do what we do and not that I'm brilliant, I'm not brilliant, I'm a college dropout, but most people shouldn't do it.

Most people don't have the intestinal fortitude to do this because it is very difficult. It's very stressful. There's a lot of work involved. But yeah, I just want them to know what they're getting into before they try to do this. Many people, I'm hoping, will read the book and go, okay, thank you for putting this in a book. I now know I don't want to do this.

James: I think you're going to just create more money raisers out there because most of the money raisers are raising money because they don't want to be an operator.

Bruce: Right.

James: Being an operator, you're absolutely right. It's a really, really hard job and nobody talks about it. Because most of the people who are taught, they are not even operators. They're more marketing arm off the operators. Right?

Bruce: Yeah. And that's another reason I don't want somebody else raising money for me. I'll show you my deal, Mr. Money raiser but I don't know what you're out there saying on my behalf. Are you making weird promises that I can't back up? And yeah, so that's another reason I just don't like using them myself.

James: Yeah. And that's why even in my book, Passive Investing in Commercial Real Estate, I talk about make sure the passive investor, whoever you're talking to, are they the backbone of the deal or not? The operators are the backbone, not the money raises. I mean there's nothing wrong about raising money for investment. You actually showing the parts to real estate investment but the passive investor needs to understand that they have to really understand who's behind the deal. And a lot of times people behind the deal are not really on the spotlight, they're somewhere far away. And a lot of times the money raiser doesn't even want to show them because they're worried that they go directly to that.

Bruce: Right. And I've actually had some times, you know, I've had people say, yeah, I was going to invest in this deal, but then I asked the syndicator who the actual operator was and they, Oh, wait a minute, how do you not know?

James: There are too many layers, I guess.

Bruce: Exactly. They had no idea who they were raising money for. They were raising money because I get a cut, you know, which probably again is being done illegally if you don't know who you're pitching a deal on behalf of. So yeah, there's just such a mess out in the industry right now.

James: You know, there's this concept called sub syndication now. That within a syndication, there's sub syndication and within the sub syndication, there are many layers in between. And yeah, I dunno.

Bruce: Or they raise money as a syndication and then take that money that they syndicated to put it into a syndication. That's too complicated. There are too damn many layers. No thank you. You're a great guy. You're doing good by your investors, but I want no part of you raising money for me, just no.

James: Yeah, that's different from fund to fund. Fund to fund is where even the fund, I mean this is probably the SEC lawyers can talk about it, but the fund itself will have PPM and there's another fund that has a PPM. Right. But that is different. I think that's legal, right?

Bruce: Yeah. There are ways to do it legally without question, but I really feel many people aren't doing it legally. James: Yeah. Yeah. I'm not sure why people want to walk the gray line. I mean if you get caught, I mean you can be in very big trouble, right? Why do you want to walk the gray line? Why?

Bruce: Well, the same reason Bernie made off existed. People make really bad decisions chasing dollars and I don't want to take time to build up the multiple thousands of people on a good, robust database of investors. I don't want to take the three to five years that that's going to take so I want to shortcut it by bringing in one of these other people in. And I don't really know much about them, but they said they could help me raise money for my deal. And it just, and then you got the people that are out there raising thinking, I don't have to do anything except just pitch somebody on a deal. That's my involvement. You know. So I hate to say these things cause it's kind of harsh, but because I know a lot of these guys that I think some of them it's just laziness and others, it's greed.

James: Yeah. So who do you target? Who should be reading this book?

Bruce: Basically. And that's important too. Cause I don't teach you how to invest in real estate. I'm assuming if you're trying to look into syndication, you're already investing in real estate. So I don't need to take the time to teach you how to invest in real estate. So somebody that's a single-family rental investor or maybe a flipper or maybe they bought some small apartment complexes themselves, somewhere between a five 12 maybe 24 units but they're not getting to the scale that they want to be able to hire staff or full-time staff or better quality staff so they're looking for a way to try to, you know, grow exponentially but safely. So it's those people, I think. It's the people that are already in it but they want to take it to the next level. Cause again, I'm not going to teach you how to do a spreadsheet. I'll do a proforma. There are other ways for me to teach you that but that's not what this book is about at all.

James: So this book would basically tell you all the hard part of doing a syndication and is it just catered to multifamily or is it any other commercial...?

Bruce: What I say in the book is and I probably stole this line from Jean Drawbridge, right? My attorney, my syndication attorney. But look, you can syndicate a Snickers bar. A syndication is basically just everybody pulling their money together to go make a purchase. That's it. Then you have a security definition and there's a word too, but syndication is we're just going to put our money together, go buy something. That's what a syndication is. So I do talk about that in the book, but I also say, but we are going to talk about multifamily syndication because that's my experience. But yeah, you can go out, most, I would guesstimate, I've seen stats about this, but I'm going to try to remember of all the major purchases in the nation, not in Austin, not at San Antonio, but in the nation, across every industry, almost every single one of them were done as a syndication.

It's very rare that one person will put all the money in for a deal and buy it by themselves. Talking about us buying the Dallas Cowboys, you know, investing in a restaurant, anything, almost everything is a syndication. So yeah, you know, anybody can do this intellectually and if you can master the art of a syndication, then, again, you can syndicate anything but I'm talking to you about all the individual team players you need: your attorney, your real estate attorney, your syndication attorney, your bookkeeper, your management company, the broker, the mortgage broker. I tell you exactly who you need exactly when you need them, what you could expect to pay them. And then, I give you the whole rundown of your 60 to 75 day purchase.

What does that close process look like? I walk you through your due diligence period of 20 to 30 days, and then after due diligence, you're wrapping up your loan. I walk you through everything. So I want you to know how to do this yourself. You probably still need a mentor, honestly, because a book can only do so much, but at least I'm giving you the blueprint.

James: And where is it available?

Bruce: It's going to be audible. It'll be Amazon. It'll be Barnes and Noble. It's going to be everywhere, everywhere books are sold.

James: So that's going to be on May 5th, right?

Bruce: May 5th

James: Yeah. Are you the one who writes the book in audible?

Bruce: No. I wanted to, but my ghostwriter said, Bruce, look, we'll do whatever you want. You're the client, but I'm telling you right now, do not do that because you've never done it. She said, you've got a good voice. You're a very good communicator, but you've never done this. It's going to take you forever to get through it because you're going to screw a lot of things up. You're going to get frustrated, you're going to get pissed. I know you. It's like, Oh, okay. So I had somebody else read it for me, but the next book or two, I hope to read my own book because again, I think I have an energy that somebody just reading it is not going to have, so I'm hoping to read my next book myself, but we'll see.

James: Got it, got it. What is one advice that you would give to passive investors who are looking to invest in syndication?

Bruce: Well, I tell them that, first of all, you're investing in a business. You're not buying into real estate. You're investing into a business that happens to buy real estate. That's it. Just like any business you ever invest in, things can go wrong, things will go wrong, and if you can't handle, maybe we have a hurricane or a tornado or a fire and I can't send out a distribution or Covid, I might not be able to send out a distribution for one, two, three, four quarters until I get an insurance check back in or Covid until the economy opens up. I might want to be able to send the distribution for a while. Long term, our trajectory will be up, but you know between now and then, we're going to do a little bit of this. And if you can't stomach that, if you're going to lose your mind, if I say I can't send you distribution this quarter, do not invest in this deal with us because no matter how hard we try, how good we are on the front end and due diligence, things are going to happen, things are going to come up. So if that's not you, then please be self-aware and don't invest.

James: Got it, got it. So let's go to a bit more personal side, right? Why do you do what you do?

Bruce: Why do I do what I do? First of all, I worked in retail for 18 years and that sucked. I thought it was fun until I realized, this really sucks.

James: You must be happy right now because retail has crashed.

Bruce: Retail is totally destroyed. Exactly. But it's fun. The biggest thing...I would say, the most fun I have is also the thing we talked about that's the hardest. It's working with the employees. It's watching them grow, watching, you know, developing them, being a leader to them, and then having. Part 2 James: Okay, go ahead.

Bruce: All right, so you asked, why do I do what I do? Again, it's for my staff. I like communicating with the staff and working with the staff, but also, you know, you always hear people talk about, you know, we're in the business of creating safe, clean, nice places for people to live. You know, we did a school supply drive at one of our lower-income properties for three years in a row before we sold it. And these are people that can barely afford to pay their rent, to be honest. Right? They barely make ends meet. And so, we decided we were going to buy all the kids - there were 87 kids on this 120 year property. Who knew it'd be that many, but we bought backpacks for all the little kids. We bought all their school supplies.

We reached out to the schools to say, give me the school supply list for each grade at each of these schools. We provided all that for them, had them come into a vacant unit. They walked in the door, got some pizza. At the front, my daughter standing in the kitchen, handing out pizza, they walk to a table where my wife and our property manager was handing out the backpacks. Then they left that room and went into one of the bedrooms where my autistic adult daughter was in there. She was participating too and she was giving them their bag of supplies that they could now put in their backpack and they walked off. And it's that stuff that, you know, money's one thing, returns are another thing. It's really making a difference in somebody's life. And I know that sounds cheesy and kumbaya crap, but it's true.

You know, I cry fairly often in this business because we do get to make a difference. Now some people, you could give them a free car and they bitch because they have to wash it or put gas in it. Give them a bright, shiny new puppy and they're pissed because they got to feed it now. So some people are just miserable people; they're just mean, they're mad. But most people really do appreciate when they can see that you are really in this with them and you care for them. And that's the real good part.

James: Got it, got it. Yeah, it's definitely a fulfilling journey helping our residents and at the same time taking care of employees as well while providing returns to your investors. You are impacting multiple level of hierarchy there. And is there any proud moment in your career that you can never forget throughout your life? I mean, this moment I'll never forget it until I die.

Bruce: You said proud. Now, do you mean with respect to a staff member or attendance or like a personal achievement?

James: Anything.

Bruce: Well, selfishly, right, we've talked about school supply drive. That's probably the best thing we've ever done. That was my wife's idea. I owe her all the credit for that. It's phenomenal idea. But on a more selfish level, we were the rental owners of the year for Austin of 2016 for the national apartment association in 2017 and we were the Realty multifamily investors of the year for 2019 so that's been cool for me. Because they recognized those school supply drive things that we were doing so that's probably the coolest thing and the proudest part outside of just helping other human beings.

James: Awesome. Awesome. All right, Bruce, why don't you tell our audience how to get hold of you

Bruce: So you can go to the website if you're interested. I'm apt-guy.com. I'm basically the apartment guy. You can follow me on Instagram. That's the social media I try to stay the most active on it's apt.guy or Facebook, the APT guy. If you're interested in the book, again, there'll be on the first page of the website. It'll tell you how to get it. Again, it launches May 5th. So yeah, that's the best way to get ahold of me and try to follow along with what we're doing.

James: Awesome. So the book is going to be an Amazon, I guess, right? Absolutely.

Bruce: Amazon. Audible. It will be at all bookstores too.

James: Oh, cool. That's awesome. All right, Bruce, thanks for coming. I'm sure everybody got tons and tons of value out of your knowledge bombs out there.

Bruce: Oh, dude, I really appreciate it. Again, it was fun to do one with somebody I knew personally.

James: All right. Bye.

Bruce: Alright, buddy.

James: Hey, audience and listeners, this is James Kandasamy from Achieved Wealth Through Value Add Real Estate Investing Podcasts. Today I have Jeremy Cyrier from Boston. Jeremy is one of my mentors, you know, I'm happy to have him here to talk about commercial real estate and Jeremy has been focusing on taxes and a lot of markets out of North East U.S like Rhode Island and you know Massachusetts and of course Texas and he have done a lot of bills, you know, I think he used to syndicate and now he's also investing as a passive investor and he focuses a lot on multifamily medical office buildings, retail and also office. Hey, Jeremy, welcome to the show.

Jeremy: Hey thanks, James.

James: So, what's happening? I mean with all this covid 19, I know you're not in New York, but you're in Boston, which is, you know, almost near to epicenter there. I mean, what's happening with you personally and the commercial real estate business right now? Jeremy: That's a great question, we're all healthy, we're home. I've got four kids, eight and under and it's a little crazy, but we're feeling just frankly blessed at this time to have a moment of pause in our lives to focus on the basics together. I think, you know, amidst all the tragedy that's unfolding around us, that's actually a blessing.

James: Yeah. Sometimes you know, you have to look for positive things in a, you know, whatever situation that we are in right now. Right? So tell me, I mean, about what are you seeing right now in the commercial real estate space? What was happening in February before this whole covid 19 and now we are in the middle of it. This is like almost in April, mid April to, you know, towards the end of April. What are you seeing right now that has completely caught your attention and create that "aha" moment for you?

Jeremy: Well, I'll tell you the interesting thing is we've been over the last three or so years saying, well, when's the recession coming? And we were looking for it, we're looking for leading indicators of a recession and here it is, it's upon us and it's more of a black swan event than really any of us would have expected to have happened to such a point where I've been talking to people about this being similar to our country being invaded and the government shutting down our economy is a defense mechanism. So, that's a pretty fascinating set of circumstances for us to be operating within right now in any business, let alone the commercial real estate space.

James: So do you see a lot of transaction has died down right now from what you were doing two months ago and

Jeremy: Yeah, so the, one of the things I do is I track data, so I live outside of the Boston market. I track that data very closely to see what the volumes look like and I'll tell you the 2020 Q1 data was up 75% in terms of sales volume over Q1 of 19 and so it was a very healthy start to the year but as soon as you go and you shut down the economy, all the volatility comes into the market and buyers start to pull back, lenders try to figure out what to do, who to lend to, how to lend and then you've got sellers pulling back saying, am I exposed here? Is this a dangerous time for me to be selling my property?

So, I'd say the first month of this event was really characterized by people trying to figure out what's going on, what's happening and this last month it's being characterized with more intentionality. Okay, here's what I'd like to see happen in three months, six months, nine months, twelve months. So the discussions are moving forward to a, I'm going to stop focusing on the hourly new cycle and I can see more of a two to three day new cycle and within that environment I can start to think strategically about what's next for me.

James: Got it. So do you see, so you're saying sellers are starting to look at more strategically, so, I know some people were talking about V-shape versus U-shape and I think some of the V would have changed to U right now, right? I don't know where the Nike swish. Right. So where do you think we are heading from March, 2020 you know?

Jeremy: Yeah. What's the letter of the alphabet are we going to see? You know, I listened to a great webinar, which was done with KC Conway and Eddie Blanton, Eddie's the president of the CCIM Institute. KC is the chief economist, they got on a webinar and I think you can see this; you can catch on YouTube and KC got on and he talked about the letters and he goes through the different shapes. Some of them I'd never heard of before, but they, like, what happens when you have a fiat currency recession, it's a Q, I guess but he said, you know, if early on we were hoping for a V he thinks it's going to be a W and I think he's right, I think the W is, we go through an initial dip, we have a recession now.

We start to rebound and recover, in the summer, people start to get outside and start to circulate and you know, return the flow of capital but we go back into a secondary recession in the fall driven by two primary things. One a concern over covid, you know, spiking again and the second being the, all the bad news that accumulated from March through September that shows up and we see a secondary recession as a result of what's happening right now. He said it's probably, and I think he's right, we probably don't start to see the volatility come out of the market until this time next year, 2021 and it's just going to be a matter of writing this, you know, writing things out the best we can in 2020 James: So, when you talk about the second V, right, I mean, I think first of the V and after that is another V which is coming in, which makes it a W? Right? So are you saying the, from your perspective, do you think the second lowest point will be lower than the first low point or will be higher than the Jeremy: I don't know but I know those low points take a lot of pain and they dish it out and so in our business, in commercial real estate investing, is it, people have been asking me: Okay, so when one of the deals are going to show up, you know, where are all these distressed sellers? Well, it takes time. Right? James: What kind of time, why do you think we need to take time? Jeremy: Well, if you look back historically when we go through, we've gone through recessions and they happen just about every 10 years in the last four years. This one was a longer cycle than we'd seen.

So typically you see expansion kickoff and the third year of a decade, you see a transition year in the eighth year of the decade we go into a recession, then we come back up and out. This one didn't happen that way. I think it's because the Obama administration didn't push the FDIC to recycle assets like we'd seen in prior recessions, which extended the recovery period, it took longer to recover and expand in this last cycle, so as a result of that, the cycle lasted longer. I think it just was a longer period of protracted growth. So we have, you know, in the time frame of how things tend to play out, on the inside, you might see real estate deals two quarters after a Dow correction, but typically I see like a fourth to six quarter lag off the Dow.

And there's a reason for that, if you follow the money, so start with the Dow. What is the Dow? The Dow is a highly liquid market people are trading on nanoseconds and they're trading based on projections and perceptions. So from their companies, their shares are devalued, they, report, you know, revenue, they have revenues coming in lower, their earnings are lower, they start adjusting their P and L's, they lay off people. Okay, so unemployment comes up. Then they start to look at their real estate and they say, well, we need to reduce our exposure of real estate, we're not demanding as much square footage. Let's give some back. That goes back to the landlords. The landlords get the space back, they rent it for less or they can't rent it. They burn through cash?

Then they go to the bank and they say, hey bank, I'm having some issues. Bank says, okay, well let's work with you for a little while and see if you can get through it. That takes another three or six months before ultimately hits the point where the bank says you have to get out of the asset, we've got to take it. So, it's a slower moving asset class. That's one of the reasons why people like it. I mean, when you're buying, you want it to happen now you want it to be fast, but when you own this, it has less volatility than the stock market does and that's one of the reasons why people get excited about building durable wealth in the space.

James: Really interesting. So, I just want to touch back on what you mentioned just now. So you said during the Obama administration, the 2008 crisis, you said FDIC did not recycle assets as quickly as you know. So can you clarify that because that's completely new and I never learn about that. Jeremy: So, if you look back at the savings and loan crisis, this was back in the late eighties, the tax reform act. What happened was depreciation schedules were changed on how real estate was owned and written off. The tax world had distorted real estate evaluations, that combined with the junk bond industry and banks investing in junk bonds, chasing yield, okay, to make money. So, those two things together broke down the system and what happened was banks, the FDIC went into banks and said, we've got a lot of, your balance sheets are a mess, your ratios are out of alignment, we want you to call your notes and recapitalize. So, banks actually started calling owners up and saying, you have to pay us in 30, 60, 90 days. Pay off your mortgage. Well, okay, but when all the banks are doing the same thing, there's a problem. So owners were foreclosed on, they dropped their prices to liquidate their buildings. They filed bankruptcy and all this real estate ended up coming onto the bank balance sheets and the FDIC came in and said, okay, well now we're going to set up a corporation called the resolution trust corporation to liquidate all this stuff, flush it out. Okay? Establish the market bottom and then we'll come out of it. So, in 08', a lot of people were thinking that was what we were going to see. We had finance and demand induced recession and so we expected to see real estate defaults go back to the banks.

The banks would take the properties over, the FDIC would come in and say, push the stuff back out on the street, market down, recapitalize, and then we'll get back to business, they didn't do that. Instead what they did was they came in, they closed the really sick banks and they, a lot of them were set up as M and A deals. So they had other banks buy out the sick banks to dilute the balance sheets and then clear off the sick real estate. But what they ended up doing was they did a lot of forbearance agreements and they extended loan terms so that they could keep the owners operating the assets even through all the pain of the recession. So as a result of that, we never saw a real mark down or mark to market on all those properties. They weren't quote and quote recycled.

So if the idea was to keep all the real estate and everyone's in all the owner's hands, you saw fewer deals on the buy side and you just saw these owners just barely making it, holding onto these things, waiting for the economy to start to pick back up and for demand to come back into the space so they could recover the valuations and ultimately refinance the bank off the asset or sell the asset and recover or just break even on it. That takes a little while to do that. So I think that's one of the reasons why we saw this sort of longer cycle this time. I mean, a lot of people were looking at Trump's administration and his policies for continuation of this. I do think that was part of it but I think what we really had was, we had a long recovery and it took us until 2013 to really jump into an expansion phase from 08' but it wasn't like a jump, you know, it, it was kind of a slog to get there. James: Yeah. You can see 2013 onwards and other property, the caplets not comprising a lot more compared to, you know, from 2008 to 2012 right. Jeremy: Yes. James: So do you think that's gonna happen in this market cycle where somewhere there's going to be, you know, FDIC going to come and do inaudible15:42 Jeremy: I don't, I kind of think that's not going to happen because if you follow the logic here with me. So country gets invaded, government shuts down the economy. People are forced out of business. Landlords default on mortgages. Banks have to foreclose on property. FDIC makes them and says; now you got to recycle the buildings. So if I'm the owner of the building that went through that whole horrendous experience, I'm looking at the government going, "Well, wait a second, you shut down the economy and now you're telling the bank to take my building away. How can you do that?" So I'm not sure that's the outlet on this one, I think the outlet's probably going to be just a market and it's going to be buyer demand and what buyers are willing to pay but it's going to be driven by two things over the next couple of years. One is who your tenant is, their stability and their durability to pay rent and number two, the lending resources that you have available.

My concern about this situation we're in is banks freezing lending, to attempt to reduce their exposure to the degradation of net operating income? That's a concern because they take the debt liquidity out of the market, when that happens, that slows transaction velocity down considerably and that will bring pricing down and that's, you know, if you're buying and that's the time to buy, when money's hard to get, when it's easy to buy and money's hard to get. James: Would you still be you have a challenge in terms of lending, right? The terms may not be as favorable during the peak tomorrow.

Jeremy: But it's interesting, I think the lenders, when we go through recessions, they get picky about who they lend to, having relationships with your lenders is critical so your local banks are extremely valuable. They want to know that they've got strong hands operating these assets and using the money correctly. So those are elements to be very focused on in maintaining those relationships. It's the national banks that concerned me with inaudible18:30, so working on a deal last week and well as Fargo said, well, we're not doing it, we're not doing the deal, we're not lending period. Just shut it off.

James: Yeah. Except for multifamily, I presume all of the asset classes, like very less in terms of landing multifamily. I know Fannie and Freddie still doing it even though they have additional visa requirement, which is good for multifamily, but I think it's just hard to do any deals anyway right now because no one knows what's the price. Jeremy: What's the price? James: And no one knows what the cap rate, I definitely know Capita has expanded, right? Definitely not compressed as they, from what, two months ago but how much it has expanded, right? And who's going to take the risk of, what are they buying? Right? No one knows.

Jeremy: You get back to good old fashioned cash flow and I always tell people, there's always a market for cash flow in any market cycle, there's a market for cash flow. So the key is figuring out who the tenants are and in multifamily, where do they work? It amazes me when I talked to multifamily investors about their properties, I asked them, when your tenants fill out credit apps, you know, our rental application, you get their place of business, wherever they work, you should be cataloging every single employment center in your portfolio and finding out which industry sector they're in because you could, I mean for all you know, you might have 60% of your tenants working in the cruise industry. You just don't know, you know? So having an idea of what your economic footprint is by income diversity in your multifamily properties is really valuable information to have.

James: Yeah. Even multifamily near to airports, right? Where there's a lot of workers from airports and the airports are shut down, right? So that can be a bigger issue as well in terms of demographic, right? So yeah, we never really looked at it because, you know, but I recently looked at, it looks like we have really good diversified in my portfolio, but I don't think so many multifamily bias have done, you know, demographic analysis until now, recently, right? Jeremy: Yeah, it's good to do. James: Now, it's like, okay, you better know who are your dynamics. Jeremy: Yeah, you want to know who is paying rent. So I have a question for you. James: Sure. Jeremy: Okay, so multifamily deal making, where the deals are, where are they going to be. One of the things that KC Conway mentioned on his webinar that fascinated me was he said he expects to see hotels converted into multifamily housing and he also said, we may even see cruise ships become multifamily housing. James: I just heard recently, I mean in fact, this morning I was listening to a podcast, by Robert Kiyosaki and Ken McElroy, who are talking about 10 years ago, someone was pitching this idea, let's convert the cruise ship into a moving condos and sell the condos as an apartment. I mean, if you heard about that, I was like, wow, really? Maybe that's coming back. Jeremy: It may, these crew lines they're going to have surplus cruise ships, aren't they? James: Yeah, absolutely. Jeremy: I don't imagine demand will drop off for a considerable period of time and hotels. James: Yeah. So let's go back to the tenant demographic analysis and the economy. Right? So, looking at what happened 2008, we did some kind of a benchmark with what happened then and what happened now but what happened now is basically the service industry and the people who want a paycheck, you know, paycheck to paycheck, right? People are living paycheck to paycheck, they are the biggest impacted because everything stopped, right? So the people who have higher pay, who are basically living in A class or you know who are working on a normal, you know, highly paid job, they are working from home, they didn't lose their job, right? So, this is my thinking, right? My thinking is just like, yeah, I mean people, once everything opens back up, you know, the paycheck to paycheck is going to go back to work, right? But there's also going to be a global economy slow down because now this virus has impacted almost every country, right? The whole economy, the whole global economy is gonna slow down. So, my thinking is, you wanna multifamily class B and C, you know, where people are living paycheck to paycheck, they're going to go back to work and they might be a quick recovery, but people want class A, who are, you know, who are working from home, the company is going to have impact, right? That's where the Dow is going to have impact cause now your corporate profits going to come down because now you have a global economy slow down, right? So, I think even though now you're saying this is just my thinking, maybe we can just, you can figure it out whether you're thinking of the same, the class B and C is gonna is getting impacted right now. Class A not so much, but it's going to swamp later on, maybe in the second part of the W right? Or the V in the second.

Jeremy: Well it's starting already. If you look at, office work and employment and you read the news, you're going to see that companies that didn't lay off office workers are reducing their salaries. James: Okay. Jeremy: And you're hearing about owners saying, you know, the owner of the company saying, okay, I'm going to waive my salary, everybody in the organization is going to take 10, 20, 30% pay cut with a floor, you know, not to be no less than. So following that logic, you're taking all that money out of circulation and it's not being spent, of course that slows things down so the question is how long you, you definitely have a slowdown, that's, inevitable but the second piece is how long those people stay employed? And are they able to get through this and operate at a level that with those cuts they can sustain operations and then start to pick back up when spending returns and it's going to be incrementally returning. It's not, it doesn't just, this won't be a light switch so we're talking about W's and then I talk about it's a dimmer switch, you know the dials so you go and you can flip the switch in the room and the lights come on, but there's the round dial, you kind of push the knob and then you can adjust the, I think we're going to be doing that for a little while, turning the lights up, turning them back down, turning them back up and it's going to be partially in response to people hearing about hotspots or breakouts of covid until we have a situation where majority of the population has been exposed and we've processed the virus or we have a vaccine to manage the virus.

James: Yeah but this is going beyond the virus, right? So, I mean maybe the vaccine is already up in the next, you know, eight months or one year. I'm sure people are saying one to one and a half, but I'm sure the administration is going to cut a lot of red tape too, you know, well that. Jeremy: Hey, they built a nuclear bomb pretty fast, right? They had to.

James: Yeah because you know, during these times, everything is all hands on deck, right? So all the processes get thrown away or you know, there need to be some kind of leadership happening there but I think it's happening, but I just think the second order effect right on the overall slow down on the job losses on how the world is going to change. Right? And how it's going to impact commercial real estate. So, well, what do you think would be impacting a commercial real estate? Let's say, you know, you have experience in office, multifamily, retail. So let's go to each asset class and see, you know, what do you see it? Jeremy: All right, retail, very, you know significant damage to retail. Okay? I mean, department stores are pretty much talking about the end of their era here this may be an extinction event for the department store. James: So do you think if today we have a vaccine, what would the impact be if you already have a vaccine? Jeremy: If we had a vaccine, for the department stores? James: Yeah, for the department store for the retail industry. Jeremy: I don't know that they really cut, they survive longer, but this is devastating for them when Walmart, Target, Costco and Amazon are seeing 25 to 35% revenue growth, all that money is flowing, you know, flowing in different directions than Macy's and Lord and Taylor and Nordstrom's.

So the department stores are definitely, they were weak coming into this, this is terrible for them. General retail, you know, I think quick service restaurants like with drive-thru's come back very quickly, the drive thru is kind of an ideal service model for this environment where we'll be going through and coming out of and the cost hits a point, it's a low cost dinner, you know, dinner for the family, to go to Chick-fil-A, you know, and grab, you know, feed the family for 50 bucks. So quick service comes back quickly, I think some of the other sectors where we've got, you know, experiences, you know, it's interesting, services and experiences were really kind of the bellwether in this e-com impact on retail real estate but they're getting hammered and so you're going to have some service and experience spaces return, they'll reemerge from this and the weaker ones, they just won't make it back. They won't make it back, so it's, I think in restaurants, full service restaurants, maybe half of them come back from this. It's just going to be very difficult to reopen all those. James: But don't you think someone is definitely going to buy that space? Somebody else that have the same vision as the previous owner. I mean, maybe the original owner is no more there, 50% have gone right because they kinda lost it. Jeremy: You're going to see new operators come in and it's, that's, look restaurant, full service restaurants, they can be recycled and you're going to have operators say, well we, you know, we made it through, let's open another location cause it's on sale. We can get the equipment and refurnish it and open and go. So there'll be opportunity there for new operators. James: So the industry is not going away, it's just the operators are disappearing. Jeremy: The operators that disappear, it's a slow recovery for them. It's a difficult recovery and the real estate; there will be some good restaurant real estate that will become available. It will happen. Okay, so I know retail, that's sort of my take on it. I wish I did.

James: Are you seeing a lot of distressed sellers right now. I mean are you doing a lot of transactions right now?

Jeremy: No, not right now. I think it's early.

James: Yeah, I think it's still early. I think people are just riding through their cash flow. Just walk up and watching and nobody knows what's the price and nobody, not many people are distressed.

Jeremy: Yeah. Multifamily, I agree with you, if you segment by class ABC, you look at the populations that are renting from those units. The A-class seemed to be more insulated because they tend to be professional, high-income office working James: Those that work from home as well, right? Jeremy: Yep. The B's and C's tend to be more service level and they've got a lot more exposure in this environment. So, you know, they get laid off quickly, but they get rehired first because they're lower cost, the office workers, they get hit later and they, you know, they're slower to come back. I mean, what's that rule of thumb, if you've got, for every $10,000 in salary, it takes you a month to replace, to find a new job. James: This new ratio. Jeremy: I know this new ratio if it's true, but I've heard that. So the bigger question that I've got on multi-family is the suburban versus urban, we've been in an urban cycle the last 10 years. James:Yes. Jeremy: And I've been. James: Explain that a bit, what do you mean by urban cycle? Is it people building more multifamily in the urban areas?

Jeremy: Yeah, it's the live, work, play, lifestyle, millennial, you know, millennials and baby boomers wanting to live in the city near where they work, walkability people that live in rich environments. There was a quote that I was reading today from Goldman Sachs and they're saying, they're expecting a flight of millennials to the suburbs from urban markets and it makes sense. What does this suburb offer? Less density, more value for what you rent, you know, you may be working from home more so they may be making decisions about, well I could have done a one bed but I have to get two bed cause I need a home office, that's a consideration to take into or keep in mind and then there's just the overall comfort of, hey, you know, I don't want to be in downtown New York right now. That's not a good place to be, I want to get out to the burbs and just have some more space. So I think the idea of urban versus suburban is it's going to be a big topic here over the next four or five, six years.

James: Got it. So I think that's very prevalent in where you are, but you also buy in Texas, right? I mean, from what I see in Texas, everything is a suburban mid-rise apartment, not in style apartment. So I mean there is very people I know who buy apartments near downtown, even though they [33:34unclear]

Jeremy: Sure James: It could be depends on which market you're talking about. Jeremy: Yeah, I agree with you on that. In Northeast, we have a very clear urban, suburban experience. You know, Texas, you guys just keep building rings.

James: Yeah, we have a lot of land here, right? So everything is garden style and [33:58unclear]

Jeremy: Yeah, as long as you got the water.

James: Yeah but there could be like tertiary market where it could be more interesting. I'm not sure it would be less density or not, I mean everything seems to be less density for me in Texas just because we have a lot of land here, you know, people move around pretty well, everybody, I guess so. Jeremy: Yeah, you got a lot of roadway. James: Yeah. Could that also mean that there's a lot more investment coming from the coastal city to places like Texas or Florida or where Jeremy: It could mean that, yeah. What's interesting about the last cycle nationally, the suburbs have been kind of out of fashion. So, it didn't have the same run up in value that the urban markets did so I started to see that the last couple of years where investors were starting to look at suburban markets and say, well, I can still get some yield there, so I'm going to go invest in the suburbs. This is now going to really bring that conversation to the forefront.

James: Yeah, I think that's why I like places where you are like Boston is called like gateway cities versus you know, places like where I inaudible35:17. Jeremy: Yeah.

James: Suburban market, I would say so. Jeremy: Yeah. So industrial, I'm still bullish on industrial. I think we'll see some dislocation in distribution and port industrial, I don't know what the future looks like with China. I mean we import a lot from China through Long Beach and it goes to the inland empire and I think we're going to see some of that shift to other port markets as we start importing from other parts of the world but overall with consumer behavior shifting, it had already started before this. If there's been anything that's going to accelerate the demand for industrial spaces, it's this because you're going to have ghost kitchens, you know, restaurants that basically just, they're like catering kitchens that they just run full time, they have no seating and they deliver food, you know, basically meal prep. You're going to have more demand for online consumption and distribution and shopping, that's going to put more pressure on existing in industrial inventory, I sort of thought the industrial market was peaking in the last couple of years, but that may not be the case, there may still be some runway in that market. James: So when you're talking about industrials, basically, warehouses where, you know, products made and distributed, I would say, right? I mean, I can see that with more manufacturing going to be coming in house right now, I mean, with all this, that's one shift that's going to be permanent. Jeremy: Yeah. James: Everybody knows that, right? So, do you think industrial would be the asset class that most beneficial from that? I mean, because I'm looking it's going to be a lot more manufacturing factories coming here; I just don't know which assets.

Jeremy: Yeah and that's really, I mean, if you remember doing 102 in CCIM and we talked about basic employment. James: Yes, absolutely. Jeremy: As soon as you start to see manufacturing coming back into the United States, that's going to be really good thing for our economy. James: Correct. Jeremy: It's going to really boost multifamily, a lot and it will help retail and it'll help office but you know, it's really a value, it's a power source, it's an economic engine for importing money into economies, local economies. So, I think industrial overall in terms of, if you're on the buy side, it's like you want to be really careful about industrial exposure to China, but the rest of the industrial story I think it's going to be a good place to be, I think it's going to be a good asset to own.

James: So, is industrial equaling to manufacturing factories. Jeremy: Yeah, so manufacturing, flex R&D, so that's research and development, Warehousing, distribution, bulk storage, cold food storage. Just there, you're going to see that stuff cranking. James: Cold food storage Jeremy:Yeah, cold food storage. James: This is not the same storage that we are talking about now? Jeremy: No, we're talking about like freezer facilities that type of thing, yeah. James: Why is that? Jeremy: It's because people are going to be continuing to demand home delivery of food and you got to store it somewhere.

James: Well, I never seen one when I drive around, so I don't know.

Jeremy: Kinda funny looking, you know, if you, sometimes on the outside they're a little funny look.

James: Now, it's going to be looking nicer because it makes more money. So how do I position myself or anybody else listening? Let's say if I want to take advantage of this manufacturing coming in house right now. I mean, how would a commercial real estate investor should be able to position? Jeremy: It's a good question. So you want to, you know, the main thing about manufacturing is you want to find buildings that have good characteristics for an efficient manufacturing operation. So grade level, you know, Celeste slab on grade buildings with ceiling heights in them that are preferably 16, 18 feet or higher, that have good loading access, you can get a truck, tractor trailer, multiple tractor trailers in and around the building to access it, plentiful parking for labor so typically you're gonna see, you know, one parking space per 800 square feet is kind of the building code standard for manufacturing warehouse but depending, you know, power supply, how do you have enough power coming into the property and utility services.

So you could probably, you know, you're probably going to be able to find some outlier properties that you can bring into that market and you know, convert over and, I mean, the other thing is you might want to be looking at retail and converting that to distribution, zoning is restrictive for that because typically municipalities don't like to see industrial uses in retail locations but you may end up seeing big box or department store or retail buildings that have those characteristics of what I just described cause a lot of them do being converted to that use, it could be manufacturing or it could even be distribution. James: So which market should we be looking at to position ourselves for this kind of industrial asset class? Jeremy: I think you can look at pretty much any market in the U.S, I think this is not a specific market, now if I, you know, I think you do this, you to follow that formula in any market in the U.S now if you want to do a, let's look at the demographics and the economic drivers in a market. You want to look for population growth, employment growth, that it's, you know, if there are more people move in there and live in there and it's growing, that's a good thing because people demand space. James: Yeah. Well I mean the other way to look at it also is like, if there's already a manufacturing hub in that city or state, you know, that could be a good expansion place, right, if you find some assets around it. I guess

Jeremy: It could be, the other thing you're going to see are companies trying to find manufacturing redundancy. So if they've got a facility that goes down in their location, they can continue supplying from an alternate, which is, it's really interesting cause it's sort of contrary to what Gordon Gekko would tell us to do, right? Build shareholder value, become more efficient and be more profitable, do things faster and increase volume and the way you do that as you bring everything into one location and make it as streamlined as possible but now we're looking at a situation where, and this has been going on in manufacturing for a little while, customers demand redundancy because if there's an event or a disruption to a location, they want to make sure that they still have a continuity of supply chain.

And so they're getting what they need so that's even more important now than it ever was. So we'll see some of that. So I think you gotta kind of get into that world and talk to people and find out you know who's looking at bringing things home who isn't, and then start to think about the properties that they could be using and you might even have the opportunity to go out and pick up some land and put something on the land for someone. James: Yeah. And I'm sure there's going to be some kind of government incentive to do that, right? Because now the government wants lot more manufacturing. Jeremy: So I think so. Yeah. So office. James: Yeah, let's go to office. Jeremy: You working from home, if you had a choice today to go to the office or work from home, which would you prefer? Is the question and I got to imagine a lot of people are saying, I'd love to get back to the office. I miss talking to people, socializing that's missed and I think the home office thing is great, but boy, when it's home officing and schools are shut down, it's really hard. James: That's a good point. Jeremy: This sort of experiment is, you know, forced home officing can companies do it? We've got a variable that shouldn't be there and that is the kids, the kids should be in school. But it's, I think people go back to the offices, but they, you know, offices may end up seeing a similar thought, which is, hey, instead of piling everybody on the train or getting their buddy into the center of the city to work, maybe we need to have a smaller office in the center of the city and then have some suburban offices, spread people out, improve their commutability and create redundancy in our workforce. You know, with people being closer to their smaller offices. So I think that, I'm hearing that a little bit in the market now with people I talk to, I think that's something to keep an eye on that. So again, I kinda like the suburbs, I think there's an opportunity in the suburbs and office may actually be a suburban opportunity here. James: Got it. So what you're saying is people are just going to go back to office. I mean, it's not going to die. Jeremy: I don't think it dies. No. I mean if anything, you know, we've gone from, in the office space, I mean you see these offices where people are like in their benching and I mean I went into an office building and people were waiting in line to get in the bathroom, in an office building and the reason is that the building was built for more or less one employee for every 300 square feet and when companies come in and they go, we're going to be more efficient, we're going to get 1 employee in for 135 square feet, all of a sudden the bathrooms are overloaded, the parking is overloaded and that the buildings, it's too dense. The amount of people in there, it's not designed to carry that density. We'll throw a pandemic in the mix and the idea is for us to be six feet together in this world we're in right now. Maybe we're going to see that, you know, that office demand change where you know, I want to be able to shut my door to an office, I don't want to be at an open bench next to my colleague sneezing on my keyboard, you know, so that, I think we would go back to the office.

It's important, the nature of the office is to bring us together and for us to work and collaborate, share ideas, but also to have deep work time, need to be able to do deep work and we need to go somewhere to do that. So maybe it's not about packing as many people in and forcing them to assemble and work together rather spreading them back out a bit, providing some, you know, some work from home, some work from the office days, maybe your home two days, three days in the office. So I, this is a fluid one, but I think we go back to offices. I think it's how we do work. We can do it this way, you know, we can talk to each other, but it's not as fast in my opinion, information slower than it is in person. James: Oh yeah, absolutely. Yeah, I was talking to a doctor, Glenn Mueller, right? So I'm sure you know him, right? This was like two months ago when we're looking at all of the asset class and office was the opportunity it was going from, into the expansion cycle. Right? So, and I asked him the same question, what about people working from home? He said, well, you know, humans are social creatures, you know, they like to be together, right? And you're absolutely right about communication and deep work and all that, just so hard to do working from home. Right? So I think people are going to go back to the office, especially after the vaccines is [48:47unclear] right? Jeremy: Yeah, I will make this prediction. So just like after 9/11, the U S government moved in security and defense. This is a healthcare crisis; I think the next decade will be a healthcare decade. We tend as people, we tend to overcompensate for a trauma that we just experienced so that we never have to feel it again and so I think we're going to see when we rebound from this, healthcare will come back very quickly because there'll be such a backlog of demand for everybody else who's not suffering from Covid but has a knee replacement or you know, an oncology treatment and everything, they're going to be there, they need to get in for services but we're going to have a situation where healthcare is going to be at the forefront of government decision-making, investment and in development of protective and planned responses to anything like this coming again. So I see that space is a very fascinating space to watch and get involved in as you see us start to come out of this and these discussions come to the forefront. James: So how should we prepare for that opportunity too?

Jeremy: Well, it centers around the hospitals and if you follow a hospital strategy, they've been merging with each other to become more efficient as they struggle to operate profitably in a very narrow margin environment and one of the things they've done is they've expanded by going out into retail locations and creating outpatient and urgent care services that essentially become a feeder for the hospital. So I expect to see more of that because that's a lower cost way for hospitals to expand. Hospitals are very expensive and they tend to be constrained geographically because of where they were cited. You don't see a lot of just new hospitals being built around the country. They tend to have additions put on them. So as a result they expand out into multiple locations that become more like a hub and spoke model. So I'd be looking at anything in the healthcare space in the next several years. I think it's just going to be really good place to be. James: So are you talking about like medical offices or you're talking about labs or life sciences Jeremy: Medical office, yes, I can't really comment on life science, I don't follow it very closely, it's so specialized, but I probably should know more being out of Boston cause it's just a center for it, I hear about all the time. I just kind of go,"...oh yeah, labs, ugh" But, that I, anything with healthcare, I'm loving it in the next several years. James: But even on medical offices, I mean, the tenants have a long lease terms, right? I mean, how would that increase the valuation of the property as a real estate investor? One is, we look at the cash flow, the other thing we want to look at value increase as well. Jeremy: Well, there's, it's durability, yeah, that's one of the great things that medical office offers you is 90% and higher renewal probability rate. The you know, historically it's been a recession, quote and quote proof, investment class, not this time. I mean, I was looking at data last week 42,000 healthcare professionals lost their jobs, were laid off. I mean, you go, what, no way. James: Why is that? Jeremy: Why is that? Because hospitals aren't allowing for elective procedures, urgent care only. So they're laying people off, it's a fiscal nightmare for the healthcare system right now. So they, that's short term, okay? There was the version, what is it, version three of the P we're on now that just came out and there's billions of dollars going to the healthcare system, which is a good thing. James: Got it. Jeremy: Good thing. So short term healthcare is volatile that may be the opportunity to pick up some property, I think that over the next decade it's going to be a wealth builder. James: Okay, so you mentioned about some of the healthcare which is located in the retail centers and all of that become like a hub and spoke model. So that's like single tenant healthcare, right? Compared to a multi-tenant. Jeremy: It could be single tenant, could be multitenant. You might have a medical office building with four practices in it. Sure. Yeah. James: Got it. Jeremy: Yeah, I think those are really good investments. James: Okay and it could be offices converted to medical offices. Jeremy: Yeah, it could be. Yeah, I mean it's, I just looked back at 2001. I mean if you were in the like the metal detector, you know, security business in 2000, probably not really interesting. James: Right, like 2001 [54:48unclear] Jeremy: Yeah, so that's what I see here. I'm like, this is going to be interesting, there's going to be an overreaction in healthcare. I think there's going to be opportunity there. James: Could there be like construction of healthcare facilities like medical offices or do you think just buying new medical offices. Jeremy: I think there could be development, we're early on that. I don't know that's anything that we're going to see probably for three years. I'm just following the trend, I'm kind of following how people are, what they react to and then where they go and for us to come out of this and not have a national discussion about how are we going to be prepared for the next pandemic. James: Yeah. Jeremy: Yeah, it's going to happen and money is going to flow there and, and there's going to be a lot of pain and people are going to say, I don't want to do that again. James: Yeah. Jeremy: I don't want to hear about ventilators next time. You know? And so, I think that presents an opportunity for investors to get in front of that now. James: Yeah. I'm sure for the next three, four years people are going to say we didn't want to have that healthcare problem again. Right? And I don't mind paying for this. Right? Some kind of thing. It's going to be a lot more investment. So I think medical offices would be a really good investment. Jeremy: Yeah. I liked it before this and I like it even more after that. James: Awesome. Good. So what about other asset classes like self storage or mobile home parks and you know, what else is there, warehouse I think is probably part of the industry.

Jeremy: We talked about warehouse, hey, you know, self storage, kind of a maturing asset class in this last cycle but I think it's still very viable and it's a good place to be. You are going to have dislocation of residences the next couple of years so self storage is going to be valuable to people who need to store their belongings, mobile home parks, I mean, look, everybody needs a place to live and if it's affordable, you know, it's gonna work. So again, there I think I see an opportunity too. James: Got it. I think multifamily; we did talk to her in detail about it, right? Do you think there's going to be a lot of crash happening in the single family space because there's so much short term rentals, people bought a lot of short term rentals as second houses and probably right now there's no short term rentals happening. Jeremy: Yeah, that's not so good like kind of the Airbnb, I mean you're sort of in the hospitality business there so yeah, those folks are gonna need to convert to long term or sell. James: Correct. So I think there's going to be, you know, a lot of people, you know, giving up their second short term rental houses that way to the banks. It could be a lot more houses available I guess. Right?

Jeremy: Yeah. That could be an opportunity, you know, if you want to buy and rent or buy in rehab and then resell that space could have some volume coming through. Yeah. James: Okay. Got it. Interesting, yeah, I mean, did I miss out on any asset classes? I think that's the more important. Jeremy: I think we got most of them. James: Yeah and do you think we are going to be much better in terms of economy wise? Just because there's going to be a lot more base employment, which is manufacturing happening in the U.S.

Jeremy: I'd love to see that, I hope our companies can come home with that and who knows, I mean with the unemployment rate being what it's going to be for a while and the wage growth that we didn't really see in the last 10 years, and we just lost on that, maybe there's an opportunity for us to employ people that otherwise we couldn't have a manufacturing basis to make it make sense. I don't know. I'll leave that up to the manufacturers to figure out. James: Got it. So, I didn't want to forget one asset class, which is hotels, right? I'm not sure whether we went deep into hotel. So that's going to be, I think the hotels are really suffering right now.

Jeremy: Oh, it's terrible. James: Right now. Jeremy: When I hear 9% occupancy rates. James: Yeah. Jeremy: That's bad news. James: Yeah, that's crazy right now. So hopefully hotels survive through this downturn, I guess. Right?

Jeremy: Some will, look, we still need hotels. James: Yeah, I know. Jeremy: We still need them so they're the strongest, best located hotels will come out of this thing, others, you know, they'll fail and they'll either get bought at the discount and with a lower basis they can compete in the market and grow back out or you're going to see them reused for something else. James: Got it.

Jeremy: That's maybe the multifamily conversion. James: Yeah, if the city allows it of course, then they can be a lot of studios and efficiencies, I guess and I've seen that happening in some cities and some projects. All right, Jeremy, thanks for all the value, can you tell our audience and listeners how to get hold of you? Jeremy: Sure. So you can check out our stuff on CREinvested.com, that's C R E I N V E S T E D.com, I've got an investment course there, that is available and if you ever want to chat with me, you can email me @jeremy that's [email protected] James: Yeah, Jeremy is a wealth of knowledge. I mean, he's also a senior CCIM instructor, right. So that's a lot of knowledge if we came in, absolutely, you will be a really huge value to connect with you and just to learn from you. So thank you very much for coming on the show. Jeremy: Hey, thanks James, it's a pleasure. James: Alright.

James: Hey, audience and listeners, this is James Kandasamy from Achieve Wealth Through Value-add Real Estate Investing. Today, I've Cody Payne and Michael Tran from Colliers International out of Dallas market. Hey guys, why don't you say hi to our audience and why don't you introduce what you guys do?

Michael: Oh, Hey everybody. Michael here. You know, we focus mainly on multitenant, mid-rise office buildings or industrial buildings or industrial parks. Anything between three to 25 mil is our typical range that we work on.

Cody: And I'm Cody Payne and I work with Michael and that pretty much sums it up pretty well. We sell investment office and industrial buildings in Dallas Fort Worth.

James: Got it, got it. So you guys are brokers, right? Do you own any of these as well?

Cody: Yeah, actually we do, we actually just did a syndication not long ago where we pulled together a few investors and bought a portfolio of five office buildings down the mid-cities. And we've even done some development also.

James: Got it. So office and industrial; nobody has talked about this asset class in the show. So I want to go really deep into how people make money out of this asset class because I'm a multifamily guy. I'm so used to multifamily and a lot of people knows multifamily very well. It's like seems to be like the only asset class out there. Right? But I'm sure there's a lot of people out there who's killing it in industrial and office. Right? So, I want to go deep into, you know, how an active investor would look at these two asset classes and you guys absolutely will be you know, giving a lot of value in this discussion. So let's start with industrial. Can we define what is an industrial asset class and how does it look like when I drive by, how can I say this is industrial and is there any different types of industrial that I need to be aware of when I drive by and when I'm going to look at something?

Cody: Yeah, absolutely. So industrial is going to be, you know, your big box, tall, concrete warehouses that you'll see as you're driving along the freeway or in some other parts. These things can range anywhere from tenants utilizing just a couple thousand square feet up to a large shipping receiving warehouse that you'll see, that can be half a million-million square feet. A lot of things that I think a lot of people are familiar with is, seeing those tall, 24 36 foot tall concrete structures where a lot of 18 wheelers are backed up to that are loading, unloading, cross-docking and things of that nature. That's what your typical image of a warehouse industrial is. And a lot of people look for that and that's one of the key asset classes that a lot of investors are looking for right now.

James: Well, so you said a lot of investors, I mean, it's a very relative term, right? And I'm not sure you guys know how much people invest in multifamily. So is that same equal in people investing in industrial and office or is it like coming from your knowledge in a multifamily is like crazily too many people and industrial is like a niche [03:26unclear] ?

Cody: So the office and industrial it is a little more niche. I wouldn't say there's as many buyers for it as there is for multifamily. I mean, you, obviously there's a lot more multi-families than there are mid-rise office buildings, especially out here in Dallas, Fort Worth and even in Texas as a whole. But it's very niche specific. And so, that's why a lot of times you'll see a multifamily guy refer out if someone's looking at buying an office building or even vice versa. Because we won't sell a multifamily complex just because we're not as aware of it but the buyer pool is still very good. We get a lot of multifamily people, especially over the past three, four or five years, that have really started to hone in on the office industrial market as compared to my 10 years prior to that.

James: Got it. Got it. Yeah. Even in my book, I mentioned that, you know, all these asset classes, they are somebody who's really good at these asset classes. And a lot of passive investors just look to, you know, seek to this kind of operators who are really good at industrial office or multifamily. There are people who specialize in this and they're really, really good at it so they have to seek for that operators. So that's good to know. It's very niche market. So, coming back to industrial, how do I identify a sub-market...how do I find an industrial, which is a really good, in terms of location, how do I say if I look at this building, I can say that this building is in a really good industrial location. How do I say that? What are the factors I need to look at?

Michael: You know, one of the main ones nowadays is access. A lot of the logistics chains, they kind of make sure they can get the 18 wheelers in there, parked. That's why a lot of the users that are looking out that way, they're always making sure that they're centralized too. So like, let's say the great Southwest district here just South of DFW Airport; that's one of the biggest industrial hubs over here, you can get to almost any part of the metroplex within 20 to 30 minutes max. And then you'll have Alliance, which is in North Fortworth. I think that's a sleeper town that a lot of people overlook here but they're just building more and more bigger boxes up there. And it's due to 35 West Highway that goes all the way down to Austin, even down where you guys are at. So that's become another major hub press as well. And FedEx, Amazon they're all up that way. And you've got little pockets up in Plano as well which is probably about 30 minutes from the airport and they've got some major like Toyota is looking to move up that way. And they've got everybody else just following them over here.

James: So do you look at, like for example, in multifamily, we look at household demographic, we look at median household income and income growth, job growth and all that. But it looks like industrial is different, I guess. Like you have to look at how convenient it is for the 18 wheelers to meet and compare and also seems to be some kind of adjacency with the certain key distributors like Amazon or Toyota. So is that key factors, I presume?

Cody: Yeah, absolutely. And actually, we've got a map behind us.

James: So those who are on YouTube, you can definitely see the map.

Cody: Yeah.

James: To really, you know, talk numbers in terms of what?

Cody: Just as the Dallas Fortworth airport right here. And this is the great South West district that Michael was talking about. This is where you'll have a lot of warehousing and a lot of it up North as well. Amazon's got a large center as well. So you've kind of have the same thing, which is growing a lot out here where Hillwood has their Alliance airport. And then the same thing back over here where Dallas load field is, there's a lot of warehouses over there and there's a lot off limits. So you know, a lot of these guys where we see a lot of tenant velocity and things of that nature are going to be closest to the airports because that [07:49unclear] Fortworth because here and going to Fortworth and go to Dallas and go South and go North and they can receive from one of the largest airports in the world right here.

James: Got it. So it's basically access to the airport and access to the highway and how can we get to go to other big cities, I guess, right? Fortworth, Austin.

Cody: And they don't necessarily need highway visibility cause that's your most expensive parcel of land, but they need good access to it. And so having that nearby that airport, they've got access to I-20, I-30, 183, 360, and so that's a really good hub. And that's why that district is such a large district and continues to expand.

James: Is there like a park, like an industrial park where the city or the government is allocated or is it like, is there random everywhere?

Cody: They're more spread out. James: So there is no like tax incentive offered by any government or any cities, I guess.

Cody: Well, yeah, certain cities will offer certain tax incentives. I know Dallas offers quite a few in certain areas and even if you start getting into like the opportunities zone areas and things of that nature.

James: Got it. Got it. Got it. So, you talk in terms of industrial, in terms of square footage, right? That's what you said, or square footage and access, access is also an amenity. But I presume, what is the average price per square feet in terms of industrial buildings?

Michael: So that is a very good question cause those can actually range anywhere between 50 a foot all the way up to, you know, building new. It also depends on the age of the building, ceiling height, [09:39unclear] in the building. So there's a lot of factors in industrial that you have to account for. How many docks as well. Dock high, grade level doors or are you familiar with any of these terms?

James: No, no. This is all completely new. But it's important. I want you guys to share that level of detail because I want people to really learn how do you, cause I'm going to go to their underwriting later on. So that's going to features of the industrial, is that like a class A, class B, class C industrial buildings?

Cody: Absolutely. Go over some of the rates that you see on some...

James: Yeah. What are the class As?

Cody: Are you asking for rental rates?

James: Rental rates and also buildings, right. I presume that's all correlated?

Michael: Yeah. So rental rates, you'll see anything, depending, like I said, very niche-specific stuff. So like you'll see anything from $4 a foot all the way up to 10 and sometimes even higher and triple net or some of the newer industrial products coming out. And then you have if it's, you know, if it's in the less desirable area, they'll Teeter with the four to seven modified gross or industrial gross as you'll hear. And those usually have some expenses in there that are charged back to the tenant. As for space, if the space is less desirable, you're going to see more of that industrial gross number anywhere between, you know, five to seven. Newer stuff, like I said, $10, sometimes triple net, just depending on area and access.

Cody: And a lot of times is that building size gets larger, that rental rate, well a lot of times go down.

James: Okay. Okay. So before we probably go further, can you define triple-net because a lot of people in the residential stage, they are not used to this triple net. Can you define triple net, what does it mean?

Michael: Yeah. So if you can ever in residential, try to charge them triple net. But when I was saying it's a triple net, basically it's taxes, insurance, and common area maintenance is charged back to your [11:46unclear] Sometimes you can get an absolute triple-net deal and that's where the tenant also care of the roof and structure. It's not as common in industrial unless it's a single-tenant deal, but most of the time you're going to see this regular triple nets.

James: Okay. Right. Interesting. Because we don't have that in multifamily. That'd be awesome. So triple net also means that if the property taxes go up, the landlord doesn't get any impact. We still get the rents that we supposed to get, I guess.

Michael: That's correct. And sometimes, you know, your tenant, if they're a little more savvy they'll have like a protection on no higher increase in five to 10% on their common area maintenance or taxes. So let's say like your lawn guy wants to charge you way more, that'll force you to just find a new one at a more reasonable price.

James: Got it. Got it. Got it. So what is the landlord responsible for then?

Michael: Roof and parking lot. Structuring the building if it's triple net. Yeah.

James: So does the landlord still get the tax benefits of owning the real estate? I'm presume so, right? Because you own the building, you own the roof and you own the real estate, I guess, right?

Cody: Yes. So, well it depends on the tax benefits that they're getting, but if it's, you know, ownership of the real estate tax benefits, yes. Now if it's business-related or some of that nature, that's for them, obviously.

James: Correct. Correct, correct. And I think the depreciation schedule for industrial and an office, I just want to cover that, is 39 and a half. Is that right if I'm not mistaken.

Cody: I believe you're correct.

James: I think in residential it's 27.5 and all of the asset classes like 39 or 39.5, I can't remember. But that's a good distinction within triple net and the normal deals that we buy in multifamily. So, coming back to my question, I know we talked about different rental rates, but are there any classes that you guys have categorized in terms of industrial buildings? So it's just based on how old they are and there's no real definition...

Cody: Yeah. So they do have classes, you've got B, you've got C, you've got A class and a lot of times that is determined by age and location and building quality and things of that nature.

James: Okay. Okay. Got it. Got it, got it. But definitely have to be in some way accessible near to their distribution part I would say, or distribution hub. I guess

Cody: That's when a lot of them like it, they are very keen on location. But like I said, I didn't have to have highway frontage. In that access is very key.

James: Okay. What about the, who buys the industrial? I want to interview a buyer of industrial parks and industrial buildings and I can never find, but you guys know all these guys, but who buys...what are the typical buyer characteristics or where does it come from? What does he look for? What is his appetite in terms of investment whenever they buy these industrial buildings?

Cody: Absolutely. So there's a lot of buyers for industrial and they increase every day. And you know, even for the small Bay warehouses, you know, we have so many of those people that keep pouring into the marketplace and not just Texas, but in the US as a whole. But yeah, I mean industrial probably gets some of the most cross product or cross asset buyers that we've got. You know, people from self-storage buy these, people retail, past experience, they buy these. We even have apartment owners and operators buy these. But you know, there's a lot of REITs and institutions and things of that nature that are big in it. But no, a lot of, I would say the past 10 industrial buildings that we sold, probably I think, I want to say seven of those were an out of state owners.

James: Got it. Are they from coastal city? Like New York and California? Are they local?

Cody: Yeah. Canada, Florida, Chicago, absolutely.

James: And do you see that this one guy buying across the nation or it's still very localized?

Cody: No, a lot of these people will buy across the nation, but this is a market that a lot of these people will look into.

James: Texas, they like a lot of Texas?

Cody: Oh absolutely. Yeah. And like Michael was saying, you know, because of the Dallas Fortworth economy and things of that nature, it gets a lot of eyes.

James: Got it. Very interesting. So, let's go back to underwriting and industrial building. So I presume that's a rental of the building where the tenants...is it like usually one tenant or is it like multiple tenants or how does that or is it all the 17-wheelers parking need to pay rent?

Cody: Yeah, it can be one tenant. We just sold a very large complex off of 360 and about 80 tenants in it. So, it can be very, very intense with a lot of tenants. And I think the group that bought that had a lot of multifamily experience as well.

James: So 80 tenants in one building. I mean, do they have like counters in it or do they have docks?

Cody: Yeah, so it was a bunch of buildings in a business park and so it was about 22 of them. And so it was just park.

James: So it's like an industrial park where everybody had buildings and they ran the...

Cody: Yeah, they had their own suites and things of that nature. James: Okay. So if it's triple net then probably there's nothing to do with expense ratio for a landlord. Right, because you get [17:30 crosstalk]

Cody: One of those, I believe, were on gross leases still, but with industrial, a lot of people that aren't on triple net are going that way.

James: Okay. Explain what's the difference between gross lease and triple net?

Cody: So a gross lease, you'll find a lot more in office, in general office. You will absolutely find it in an industrial and gross lease is going to be where the landlord's taking on commonary maintenance, landscaping, repairs and maintenance, you know, HVAC, things of that nature. And so it's more management intensive. Your expenses on the landlord are going to be higher and that's a gross lease. But then you start getting into other types of leases. You know, you've got full service, you got gross, you've got modified gross and you get into like net, double net, triple net.

James: Oh, okay. And what about full service? As you mentioned, because I've seen

Cody: So full service, you're really only going to see that in office. And what I mean by that is landlord pays everything. They pay the utilities, they pay the janitorial, they pay the common area maintenance, they pay taxes, insurance, they cover everything. A tenant goes in as you know, a price per square foot and that's all they pay.

James: Got it. Got it. Very interesting. So let's go to office. I mean in general, people are worried about office. Because you know, people say the trend is working from home. So is that still true?

Cody: Not here.

James: Not probably in Dallas, I guess.

Cody: No. I think office is actually trending a lot more towards coworking and things of that nature. And that's a model that has just expanded and blown up like crazy, especially out here in Dallas, Fortworth. James: So what is a typical investor who's looking to buy office space, office buildings? Where do they come from, what do they look for in an office? What kind of hold time do they have usually?

Michael: Yeah. So their hold time can range anywhere between five and seven years. But you know, we just did a major value-add project in Plano where Toyota's headquarters is. State Farm had moved out and it was probably 20% occupied. That buyer actually, you know, did a bridge loan and he's going to go ahead and get that filled up very quickly, just cause the area's occupancy is not any lower than 80, 85%. But where these buyers come from, same thing as the industrial guys, cause a lot of industrial buyers also look at office and office guys look at industrial as well. But like I was telling you the other day on the phone, we've noticed a huge influx of multifamily buyers moving into office just because the returns are a little higher. And so, we had like that last guy, California we've got one in Chicago looking at one of our deals right now. We've got a couple of local groups out here that know these office buildings really well too and they know the trends of the area and how the occupancy is. So one specifically we're working on right near White Rock Lake in Dallas. That one's at 92, 93%, and that one's always been full ever since anybody can remember. So that's where these buyers come from. Any other questions?

James: Yeah. How do you decide this office space is in a good location? Other than knowing, I know Plano is hard and I know free score is hard, but how, what are the parameters you look for in terms of like like you know, jobs growth in that particular submarket?

Michael: So, yeah, so you look for competition within the area for that office building, comparables in that market to the building because if you know the market really well and you know every building, you'll see that some gives you like a better bang for your buck. You know, some will have a lot of amenities that they're starting to offer. [21:48unclear] groups are starting to do incubator spaces where they have a smaller coworking model and then their tenants will grow into spaces that are available in their building that they have rooms. And so they'll convert, you know, a small executive office and they can charge anywhere, you know, 35 to $45 per square foot just for a room. And as that tenant grows, they can grow within the building. But if you want to look at like specific markets like Las Colinas Irving area, are you familiar with that area?

James: Yeah.

Michael: Yeah. So you know that area has a lot of office and that's one thing you need to make sure of when you're looking at a deal. How many other class B or class A properties can your tenants look at before they commit to a space? But if you're looking over in Dallas, like where White Rock is, our building is the only building for the next two or three miles before you hit a highway, either going towards 75 or going North towards 635. And so that's why this building has been able to capture a lot of the people who don't want to drive all the way to 75 and fight that traffic every day or drive North on 635 and fight with that traffic as well.

James: So you probably look at a cost, what the VPD, vehicle per day drive on that nearby highway, I guess. And I think you probably...I mean, as you mentioned, you look at other office supply in that area and I'm presuming you look at vacancy rate as well, on nearby office. And what tool do you use? Is it CoStar that you guys is primary for this industrial and office?

Cody: Yeah. So there's a lot of tools you can use CoStar and Craxi and things of that nature. There's a lot of, you know, real capital analytics as well. They track a lot of good stuff. What I would also say on the office side is it's probably one of the product types. It's a little closer to multifamily as far as kind of a how to make them successful and things of that nature. Because, you know, when people go look at a multifamily complex, they usually have a couple options. And so a lot of times what they'll look at is amenities, access, recent renovations, things of that nature. What can they do for me on a new move in? And so office is very much a model that is driven just like multifamily. And so, keeping up with the times, making sure the renovations are good, making sure the building offers things like the deli or wifi and stuff of that nature or coworking style environment. Those things all help office buildings succeed.

James: Got it. And what about this vacancy rate? Cause sometimes they're not...I mean multi-families and people that need a place to leave and vacancies are pretty low I guess comparatively to office, I mean different tenant profile. Right. So what is the average vacancy rate? I mean, how do I know like this area, this is the vacancy rate because somebody can be like six months, one year or somebody can be a few months, right? Depends on the area, I guess. How do you determine what is the vacancy rate for office and what are the lease terms in office?

Cody: Absolutely. So the vacancy rate is going to be area driven. And so, you'll have certain areas like downtown Fortworth, which will have a certain vacancy rate and then that is going to be very much different than Las Colinas, downtown Dallas, Plano Allen, McKinney, Frisco. We pulled something earlier today working on a few things out in the Allen and McKinney area up there by Frisco and you know, they're class B office spaces around 5% on the vacancy side, which is very good for office, especially with more and more supply continuing to come up out there. In Los Colinas, it's gonna move a little bit more. And so, in my career, I've seen Los Colinas go down to almost 30%, and come up to somewhere around 10.

But there's a lot of supply out there and there's always things shifting. Fortworth, I believe their occupancy is higher than what's being shown, but that's because XTO owned a bunch of the office product out there at one time and they recently sold a lot of that off. So some of that's being converted to hotels and things of that nature. But what you want to look at when you're buying an office building is yes, the area of vacancy, the area rental rates, but also the velocity of tenants, how many tenants are moving in that area. And then you also want to look at what are the size of tenants, the square footage sizes that we have and what is really the area tenant size. And so, some people will buy a building and they'll have 10,000, 15,000 square foot units, when the area is really commanding three to 5,000 square foot tenants. And so they'll see a lot longer on market time. And so what they need to do is chop those spaces down.

James: And do people who buy, you know, I just want to add industrial. So industrial office, are they people who syndicate deals, like what a lot of multifamily people do? Or is it REITs or is it some institutional or some rich guy from the coastal areas?

Cody: It can be a rich guy like yourself or it could [27:23crosstalk]

James: I'm in Austin, Texas.

Cody: It varies. When you start dealing under $5 million, a lot of that's going to be private.

James: But is it a lot of syndication happening?

Cody: Oh yeah.

James: Oh really? Okay. So, syndication is not a multifamily game only is also in the office and industrial. Okay. That's really good to know because I didn't know that.

Michael: Yeah. And to go back on your question, you're asking about these terms. So you want to make sure that, area driven but you also want to make sure that your TIs are not going to eat you alive.

James: Yeah. So TI is tenant improvements; just for our audience, for them to know.

Michael: Yes. So and you'll see a lot of these guys in office that are moving. Sometimes they really want like a gold plated wall finish out and you just can't do that for them. You need to make sure you get that lease term where it can get your TIs not in the red for the first year. I even try to keep that around like $10 or so per square foot. But you'll see those terms go just depending on what they need done to the space, how many offices they need built out. You'll see that range anywhere between three years, five years, seven or 10, sometimes 15. That's really big one that's usually the range you'll see on a lease term.

James: Got it. So I think it's all up to negotiation and how much the landlord is going to pay and how strong is the lease terms and all that. How do you qualify your tenants? I mean, let's say I'm a buyer, I'm buying an office space with 10 different tenants in it, how do I say this is a class A tenant, this is a class B tenant and this is a class C tenant. And how do I say that?

Michael: So when we underwrite a lot of these deals, we're looking at the tenants, how long they've been there. We can also reach out to the seller or ourselves if we know the tenant what their credit rating is. And you can give a write upon them. Like we were selling a three tenant deal out in Las Colinas and some of the tenants themselves put in their own money. They put in 500,000 in improvements to the space work for them. So that was one of the things that we made sure that we had in our OM when we were underwriting that deal and how much time they had left. Cause when you're looking at these, you're like, Oh man, this guy, he's only got a year or two left. But you know, a year or two ago they put $500,000 into this space. So sometimes it was a really big key factors, explaining these commitment levels of the tenant.

James: So you said credit rating. Is there data that you pull out from them or you just look at history and how they [30:18unclear]

Michael: Yeah, all those things combined.

James: But is that something that way you can pull from the credit rating of the tenants? Is that a system or you just have to look [30:30unclear]

Michael: Yeah, not always, but you know, when you're working a lease deal when I used to lease back from the day, we would get tenant financials from them, sometimes, yeah.

James: So based on their financials and what's their commitment to the space that's where you establish their credit rating, I guess?

Michael: Yes. And comfort level and then like, Oh, okay. I feel like their financials are good enough for me to say.

James: So it's very subjective then because I mean, somebody who want to sell the deal, he may say to all my tenants are A-plus credit rating, I guess. So, I'm just trying to quantify that a bit more, but I think it looks like there's no real...

Cody: Sometimes you would have like an A-plus credit rating or something of that nature is when you've got like a DaVita or something of that nature in the building or a FedEx or something like that. But a lot of times, office buildings will have, you know, a little bit more generic companies, local regional firms. And so that's why Michael said if they're going to spend a lot of money on the finish out, they'll say, Hey, we'd like to see your business financials just so we can make sure that the money we're spending that you look like someone's going to be in business for the term. And you know, they're pretty much used to that.

James: Got it. Got it. So let's say a building is being sold right now and some of the residents have like one or two years left in their lease. If they get to know that somebody's going to buy this building, will they start negotiating with the new buyer or the new buyer have an option to know whether they're going to be renewing? How does that work? Cause you know, that basically increases your risk.

Michael: Yeah. So typically they do not know until you're pretty far along in the process. So they'll usually get attendant estoppel, which will signal to them that, Hey the building may change hands to a new owner. But although they're getting that, it's mainly just a lease verification to make sure also their security deposit is transferred over as well. And you know, you don't want to alert the tenants, but you also want to make sure that when you're working on these, they're paying what they're saying on the OM and it's matching what it has on the estoppel as well.

James: Got it. Got it, got it. Well, Michael and Cody, thanks for coming. I mean, can you tell our audience and listeners how to get hold of you? You guys are doing really big deals in the DFW area. I'm not sure, are you guys covering any of the areas other than DFW?

Cody: I'd say 95% of the business that we've got is in DFW now. We will branch out and sell a couple of things here and there. We're actually about to bring out a 20 story office tower out in Corpus Christi. That's a relationship that we have.

James: Let me know if some of the towers in Austin is coming for Salem. Probably I can even buy one.

Cody: Absolutely.

James: I just heard there are 37 new towers coming in Austin.

Cody: Well, there's a lot of people that are looking out there, I can tell you that.

James: Yeah. So why not you guys tell our audience how to get hold of you guys.

Cody: I'll do it. So yeah, Cody Payne, Michael Tran. Our number is (817) 840-0055, we're with Colliers International, we're office and industrial specialists and we've got some really good self-storage and retail guys here as well.

James: Good, good. Guys, look for a specialist because all this asset class, there's a lot of nuances to it as so much of details. Not everybody can do this. And you know, these guys are some of the best in the industry. Thanks for coming on

Cody: See you.