JF2747: How to Find Private Investors for Buy-and-Hold Deals ft. Sam Primm

What’s the best way to find equity partners for long-term hold deals? Sam Primm—owner of FasterFreedom, FasterHouse, and Midwest Property Group—shares how he finds private investors for his deals and his strategy for refinancing and turning around these properties.

Sam Primm | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Sam Primm. Sam is joining us from St. Louis, Missouri. He’s a GP of 109 residential units and 50,000 square feet of covered storage. Sam, can you start us off with a little more about your background and what you’re currently focused on?

Sam Primm: Yeah, for sure. I appreciate being on. What I’m focused on now is growing this education brand. Where it all kind of started was just wanting to not work for somebody else my entire life and not do the whole nine-to-five until you’re 65, get social security, retire, enjoy retirement, and then you’re too old to really enjoy it. I started that journey about seven years ago and as you kind of said, it’s been pretty good so far; I’ve been getting some good traction and creating some multifamily and some self-storage. Now I’m just focused on growing that and then growing my brand to teach other people how to do the same thing.

Slocomb Reed: Nice. I know you are a general partner… These 109 units and 50,000 square feet – how many deals is that?

Sam Primm: That’s five apartment complexes. It’s a 12-unit, a nine-unit, a 32, 27, and 29. Those are five, me, and one partner, Lucas, on all that together. Then the self-storage facilities – there’s two of those.

Slocomb Reed: Gotcha. Did you say that you and your one partner – are you 100% owners of the apartments, or are those syndicated deals?

Sam Primm: Nope, we’re 100% owners of those. We also have about 90 houses in our rental portfolio asl well.

Slocomb Reed: Nice. And the covered storage as well – that’s just you and one partner?

Sam Primm: Yup.

Slocomb Reed: That’s awesome. So these are not deals then where you were bringing in limited partners or raising capital?

Sam Primm: Not really, no. We have a little bit of a hybrid of what we do. What we do is we bring in private investors through our network, sometimes we give them part ownership of the facility or the building for a couple of years, and then with increased equity, we buy their ownership out. Sometimes we just give them straight interest-only based on their investment. So each deal is a little bit different. We’ve done a hybrid model, whatever makes sense for the investor, because they’re family or friends, or usually acquaintances kind of thing, people that we have a relationship with. They’re definitely not that syndication route of people we don’t know, accredited investors kind of deal where you give up a lot of the equity.

Our goal is to always own 100% of the asset, whether it be right off the bat, or we give up a small percentage of ownership to get the money. Then with equity increase, with increasing income and decreasing expenses, and just running it more efficiently with our team, we’re able to create equity that we can cash out and buy out the limited partner, usually within two to three years.

Slocomb Reed: Sam, do you consider yourself a long-term buy-and-hold investor then?

Sam Primm: Yes, for sure. Everything we bought, our $26 million worth of real estate so far, we’ve probably only sold three or four houses, and those were for tax purposes. The goal is not to sell, it’s to hold for a long time.

Slocomb Reed: You’re speaking my language, man. I’m a buy and hold guy too, and very familiar with that 20-ish unit space, I have a couple of those. I’m wrapping up the value-add on one of them right now that I just acquired four months ago. Very familiar. I’m also personally interested – I know some of our Best Ever listeners are as well, Sam… I’m personally interested in finding ways to bring in private investors for buy-and-hold deals. Let me tell you what it is that I’m thinking about doing myself. Because similar to you, I, or a partner and I, are 100% owners of everything that we’ve got. We’re not reaching out to strangers, looking to raise capital, underwriting to a five-year hold, working on delivering on an IRR; we’re in it for the long haul.

What I’m considering doing is finding ways to either bring in debt partners or equity partners that I have the ability to refinance out of ownership in the property in a relatively short period of time, call it one, two, maybe three years. Is that what you’re doing with your private investors, you’re bringing them in and giving them a small equity piece, and then as you’re able to force appreciation, you’re refinancing your debt in order to buy them out?

Sam Primm: Exactly what we’re doing. Our play has been more of that two to three-year timetable on pretty much everything. We haven’t quite done it in one year to be able to, especially in today’s market, get a deal that you can just get so much equity and so quickly. So it’s usually been a two to three-year play, it’s been exactly that. We give them a little bit of cash flow in the meantime that the building’s producing, to just kind of keep them going. They like that and they have to pay ordinary income on that, but we buy them back out and give them a little bit of a kicker on the back end after two to three years. That makes their actual entire return appetizing to them, and they get taxed at that at cap gains, so that they like that as a way to get around that and not have to pay a lot of taxes, or as much as they might have to.

Slocomb Reed: Yeah, that’s awesome. You said you started investing in commercial real estate seven years ago?

Sam Primm: I started investing in single-family real estate, so I have a single-family realm, the multi realm, and then the self-storage. The single-family started in 2014 to ’15 timeframe, the multifamily started in 2018, so that’s a little bit newer. I started with the singles and then kind of graduated up to the multis. And then the self-storage has been about a year and a half to two years, so that’s even newer.

Slocomb Reed: Starting with apartments in 2018, I get what you’re saying about not finding a lot of big forced appreciation opportunities. Assuming, Sam, that you’re familiar with the way a lot of apartment investors talk about stable versus value-add versus distressed opportunities, most people who are underwriting to the five-year hold are looking to be in that value-add space, where they have the opportunity to improve the property, raise rents, increase NOI a bit, and provide three to seven years from now a solid, annualized return or IRR equity multiple for limited partners.

What I don’t often hear about interviewing people on this podcast is investors who have succeeded in bringing in equity partners, and then refinancing those equity partners out of ownership in the property, so they can own it outright. The question I want to ask – I can’t think of a more sophisticated way to put this, but how distressed of a property do you have to buy in order to be able to set it up this way, where you’re bringing on equity partners that you can refinance out in two to three years?

Sam Primm: That’s a great question. Our very first one that was pretty distressed, it was a 32-unit. We jumped in, and that’s relatively a pretty small building compared to a lot of the apartments out there. But for us, going from single-family, it was a big jump doing it this way. And that was a little bit more of a mess. In the first six months, we’ve evicted 18 of the 32 people in there. We did our best, but just trying to figure that out, because it was a pretty distressed property. So that one we were able to actually create more equity faster; that was the two-year play. Our investors ended up taking some equity and we were able to increase equity so much that they ended up getting a 29% return on their money when we bought them out.

But what we’ve done recently is we’ve been able to find properties through some connections we’ve made in brokers that are turnkey. They’re in great shape, they’re B class, B-plus in nice areas where they’re just more mom-and-pop owned, not owned by huge companies, and they’re 30% low on their rent. Recently, there’s a couple that we’re still in the process of that they’re just so low on their rent that with tenant turnover, we’re getting things up to market rent with minimal repairs. When tenants renew, we’re usually not bumping them all the way up to market. We don’t want that many vacancies and we don’t want to just come in and be like, “You’ve got to pay market.” We’ll try to meet him in the middle.

You know probably better than I do, doing all this in the space a little bit longer, that a 27-unit if you’re able to over two years, three years, raise rents from let’s say 900 a door to 1,150 or 1,250 a door, that’s really going to increase the overall value of the building by increasing that income, and managing in-house allows us to limit that side of the expense. So expenses go down, income goes up, it takes two to three years, and just with the relationships we’ve had with the banks and the people we use, it has worked out so far that we were able to give people their money back and we usually give them an overall return of maybe 12% to 18% by the time everything’s said and done.

Slocomb Reed: That’s awesome. To your point, Sam, we recently went through a $50 a month rent increase on a 24-unit that a partner and I own 50/50. At an eight-cap, estimating conservatively, that $50 rent increase across 24 units increases the value of the property by $150,000, based on an eight cap. First of all, you can’t buy an eight cap that’s actually cash-flowing and performing right now. But for the people who are listening who are still buying and renting single-families and duplexes, I hope you hear what Sam and I are saying about getting into larger apartments, and the ability to force appreciation and increase cash flow. An incremental rent increase on a single-family incrementally increases one rent. An incremental increase on a 27-unit increases 27 rents, which does a lot more for you financially. Tell me, Sam, so far in your investing, what is the biggest challenge you’ve had to face?

Sam Primm: The biggest challenge for a while was finding deals. We’ve always wanted to be aggressive, we’ve done pretty well, as you said, the 109 units earlier – that’s great, that’s nothing to get too excited about, but we’re pretty excited about it. But we’ve been doing it for four years, and we bought a couple our first year of multifamily investing in 2018. Then we went about a year and a half, two years without buying anything. We were focused on other businesses and doing other things a little bit. But we were trying to buy multifamily, and we probably underwrote maybe 75-80 apartments over those two years, and we probably offered on maybe 20 or 30, and we just couldn’t get anything.

So over this past year, year and a half, we focused on relationships. We developed relationships with brokers, we’ve created packets about us and our companies and sent them out to brokerages that deal in the commercial space, and just really started to develop deals. We got a really great brokerage relationship now who’s brought us three deals in the past eight months, and we bought all three of them. A $2.7 million deal, a $3.65 million deal, and then a $5 million deal, all of them he’s brought us; we’ve got first look at them, we were able to get them without any competition because of the relationship we developed.

So that was a lesson learned for us and hopefully for the listeners, it was one of our biggest struggles, was just finding properties. We’ll figure out how to take care of the tenants, we’ll figure out how to rehab if we need to rehab, we figured that out. But you can’t even do any of that if you don’t find a deal or you don’t have access to deals.

Break: [00:14:50][00:16:46]

Slocomb Reed: Sam, in my experience, when someone goes a couple of years underwriting deals, sending LOIs, and not buying anything, it’s one of two things that gets them out of that slump. One of them is exactly what I think you’re mentioning here, that you networked your way out of this slump by developing better relationships with brokers who could bring you deals. The other thing that I see that helps people get out of a slump is they change the way that they’re analyzing opportunities, or they finally recognize how they can capitalize on a shift in the marketplace. You were just saying recently that there are some more stable turnkey buildings that you’ve been able to buy, because they were owned by mom-and-pop landlords who aren’t really professional landlords or property managers, whose rent just hadn’t kept pace with the times.

Every MSA in the United States has seen rampant rent growth, if we can be frank, and that’s putting a lot of people who aren’t paying attention behind the wheel when it comes to keeping their rents up with what’s going on in the market. Is this a part of your success in taking down deals recently, after that – not a two-year hiatus, but two-year period where you weren’t buying anything? Is it about changing the way that you analyze the deals as well, or is it strictly the relationships that you formed?

Sam Primm: I think it’s a couple of things. I think it’s mainly the relationships we’ve formed, and I also think there were a lot of talks, and still is talk, of caps gains going up for people. There was talk that it was going to double, and all this stuff. A lot of these people that have had these for a long time are thinking “my taxes might double”, so they’re at least exploring selling, and they’re exploring taking these to some of these professional brokers. And these professional brokers are telling them, “Hey, you can get this for your property”, when they’re like, “No way. No way I can get 3 million for this property. I thought was worth 2.5, or 2.3 million.” They’re like, “No. With today’s rates, with the low-interest rates, I know they’re excitedly going up… With low-interest rates affecting the cap rate, your cap rates are going to go down as the interest rates go down, so you’re going to be able to get this much.” I think that’s how the last three we’ve gotten have been people that did not believe that they could even sell at the price we bought it at, and we’re happy with the price we bought it at.

So these people maybe aren’t as in tune to the rental rates, as well as the cap rates, and what these things are trading for, so they’re just trying to get ahead of this potential cap gains tax rate going up, and then they’re shocked at what they can get, because they’re just not in the space as much. I think that’s mainly it, honestly. I don’t think we’re underwriting them a ton differently.

We do look at future appreciation and rent growth a little bit, probably sometimes more than we should, [unintelligible [00:19:36].23] buying these things that what they’re operating for currently. I’m not really hedging too much on what they’re going to be operating for, but we do do a little bit of that. Maybe we have grown some confidence and underwrote them a little bit differently, but overall, I think it’s just the relationships, and then the market talking with the cap rates… And these people – they don’t understand that it can trade at a seven cap, they’re thinking it’s different.

Slocomb Reed: Sam, how many metro areas is your portfolio in right now?

Sam Primm: Everything’s in St. Louis, from the self-storage, to the multis, and singles. All in St. Louis, where I live.

Slocomb Reed: In your backyard. Do you guys self-manage?

Sam Primm: We do.

Slocomb Reed: I imagine that that level of experience and expertise in your home market is one of the things that allows you to hedge, as you said, on rent growth. You’ve got a lot of experience right there in St. Louis, and you’re not relying on a third-party manager to increase those rents for you. I know some of my real estate clients as an agent here in Cincinnati – sometimes they end up with a third-party manager that they have to push to be able to achieve market rents, because some property managers are behind the times as well on what’s happening with rent growth.

Sam, one last question, before we transition this conversation… Do you have a target metric for how much NOI, how much cash flow, or how much you need to increase a property’s value in order to be able to bring on equity partners that you are refinancing out of within two to three years?

Sam Primm: We do, yes. It’s kind of different for every deal. The goal is to be able to create enough equity – we kind of back into it – to be able to buy them out in that three or four-year time frame. If it’s going to take us five, six, seven, eight years, we probably won’t do it. So we need to be able to increase those rents quickly enough to get them their money back, plus a healthy kicker on top, is what I call it, on the back end, in that two to four-year timeframe, to be conservative. We look at that and we do look at the fact that we know the backyard really well. You kind of alluded to it, but it’s almost like insider trading, because I know the market so much better.

We flipped 250 houses a year here, we grew up here, we have a rental portfolio here, so we know it’s so well that I do feel like I am ahead of some of the curves of some of these hedge funds or these other people that aren’t in the space, where I can maybe avoid a deal that I think won’t be good in a few years, and maybe take a chance or do something that someone else won’t. So yeah, it’s kind of a roundabout answer to your question – definitely, we just make sure we can get their money back in three years. If we can’t, that’s our metric of – if it’s going to take five to six years to do it, we just don’t feel comfortable with where the market will be, where interest rates will be on the refinance at that time to take that deal down… So it just needs to happen sooner than that.

Slocomb Reed: It’s also a lot easier to be aggressive with your projections when you’re not using other people’s money, or you’re not using other people’s money long-term. Do you have a specific number with regards to how much you need to be able to increase rent or NOI in order to successfully cash-out refi your equity partners?

Sam Primm: I don’t know that there’s a specific number. Like I mentioned earlier, Lucas, my business partner, he is the engineering, background, underwriting guru. We look at them together and we have a sheet that we’ve made that we’ve improved over the years. And I don’t know that there’s an exact number; he kind of says, “Here’s where we need to be. Go get it,” and I go negotiate and get the deal. Not to sidestep the question by any means, but he’s definitely the one that has the exact numbers and knows that. His strength is underwriting, that deal-forming background, and my strength is networking, negotiating, buying, finding the money, all that kind of stuff. So we kind of yin and yang kind of thing to be able to do a lot more by offsetting each other’s strengths and weaknesses.

Slocomb Reed: So the metrics required to pull off one of these deals are fairly subjective. It’s on a deal-by-deal basis, it sounds like.

Sam Primm: Correct, yes. I don’t think that we’re talking about getting into the funds and all that stuff. In the future, we’ll probably need to be able to have that and have a little more, “This is this, this is this,” as we go after accredited investors and all that stuff. But for now, it’s been more relationship-based and deal-by-deal basis. I think it goes to show that it can be done in a few different types of ways.

Slocomb Reed: Sam, thank you for indulging my curiosities, and Best Ever listeners, I hope you’re getting some value from this as well. Sam, you said at the beginning of this episode that you’ve been focused primarily on your education brand. Tell us more about that.

Sam Primm: My education brand is something that I’ve done over the past year or year and a half. I started to post a little bit about the things we were doing with all of our companies and started to just get some traction on Instagram and Facebook, just from my local friends. Then I started to just take that onto a broader scale and created the Faster Freedom brand. That’s a brand where I give away more free information than pretty much everybody on TikTok, YouTube, and Instagram. I just give a bunch of free information, and then teach people how to buy real estate using other people’s money, whether it be single families, multis, or storage. I show them what I do that works, and what doesn’t work, and then we have a mentorship for those who want more. But it’s just more about getting my story out there, growing the brand, and giving back. Eventually, I think it’ll be pretty monetizable. But right now, in order to grow your brand, you’ve got to give away free information, that’s the phase that I’m in.

Slocomb Reed: Awesome. And the goal here is to create mentorship opportunities for people in the future. You’re in the phase now of reaching out with free information, connecting, building relationships, demonstrating the value that you have, so that you can build on that brand in the future. Yes?

Sam Primm: Yeah. We do have a mentorship already. We have 230 students right now, so we do have a mentorship. Now, I’m not going to do a heavy sales pitch on it here, or in anything I do. It’s just, “If you’re interested, hit me up, here’s the free training, check it out. Schedule a call with my team; we’ll make sure it’s a good fit. Great. If not, just enjoy the free stuff,” kind of mindset. It always will be that. We’re to the point where we are starting to monetize. We had 19 signups last week so we are getting traction and students are crushing it, but it’s more about just helping them. If the mentorship’s what you want, then we have that kind of mindset.

Slocomb Reed: Well, Sam, are you ready for our Best Ever lightning round?

Sam Primm: Let’s do it.

Slocomb Reed: What is your Best Ever way to give back?

Sam Primm: I recently started a nonprofit, it’s called Greater Giving. It’s focused on mental health awareness in the St. Louis community. That’s something that I’m an owner of, and on the board of. We’ve raised $140,000 last year; the goal is 200,000 this year. We give back to families that are in need, we give to charities that need money or support. That’s the way we give back, and it’s been awesome.

Slocomb Reed: What is the Best Ever book you’ve recently read?

Sam Primm: Think and Grow Rich is a great book. I’ve heard about it a ton, I’ve read the Rich Dad Poor Dad stuff, but Think and Grow Rich really opened my mind. It was written 80-90 years ago, it was written like it could have been written yesterday. But just replacing that word rich with happy, successful, whatever you want; it doesn’t have to just be about money. Think and Grow Rich has been great.

Slocomb Reed: Yeah, looking back on it now, Napoleon Hill has a very antiquated writing style. It’s a book that’s definitely about joy and happiness much more than it’s about money. He was limited in his vocabulary of talking about joy, for sure.

Sam Primm: 100%.

Slocomb Reed: What is the Best Ever skill you’ve developed through commercial real estate investing?

Sam Primm: The best skill I’ve developed through this is just being able to relate to people. It’s helped in growing relationships with private lenders, it’s helped in growing relationships with brokers, and talking to banks… The banks we deal with – we have some Fannie money out, but we also have some small local banks out. So just being able to connect and develop and be authentic with people, they feel your authenticity, and then it just makes it so much easier to raise money to find deals, to fund sourcing, just being authentic and real and connecting with people.

Slocomb Reed: Sam, what is your Best Ever advice?

Sam Primm: Best Ever advice would be to just know that you have the ability to do what you want. You don’t have to take the blue pill for the matrix analogy, you don’t have to do what society says, you don’t have to work every single day for somebody else, making somebody else wealthy while you’re getting by, and retire, and give $800,000 to your three kids. You can create your own path and you can take control. You’ve just got to know how, and you’ve got to be willing to do it. Every single person listening to this podcast right now can go out and create their own future if they want. They just have to believe that they can.

Slocomb Reed: Where can people get in touch with you?

Sam Primm: As I mentioned earlier, mainly TikTok, YouTube, and Instagram are my three platforms. So message me on Instagram, I’d be glad the message back. And then fasterfreedom.com, they can find out a little bit more about what we do as well.

Slocomb Reed: Well, Best Ever listeners, thank you for tuning in. Sam and I are kindred spirits, and being buy-and-hold investors, we’re willing to take on more distressed assets for opportunities to cash-out refi. If you’ve gotten value from this episode, please subscribe to our podcast, leave us a five-star review, and if you know someone who would get value from listening to this conversation with Sam, please share this episode with them. Thank you and have a Best Ever day.

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JF2745: How to Analyze Political Climate Effects on CRE Markets ft. Sam Liebman

Sam Liebman, Founder of WealthWay Equity Group, has witnessed the drastic changes one election can have on an entire real estate market. In this episode, Sam shares his decades of experience navigating politically changing markets and his strategies for adapting to these shifts to keep business thriving.

Sam Liebman | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m with Sam Liebman. He’s joining us from New York City. He’s the founder of Wealthway Equity Group which focuses on syndications. He has a 30-year career in commercial real estate and his current GP portfolio is over 1800 units and 30 properties in New York and Texas. He’s also the author of a book that was just published in the last month, in January of 2022, titled Harvard Can’t Teach What You Learn From The Streets. Sam, can you start us off with a little bit more about your background and what you’re currently focused on?

Sam Liebman: Yeah. First of all, thank you for having me, it’s a pleasure. I was a kid from Canarsie, Brooklyn; I came from a very poor family, dysfunctional family, and I just kept fighting, fighting, fighting. We call Canarsie the mafia minor leagues, because every [unintelligible [00:04:16].03] seems to be connected. But when you grow up on the streets, you learn certain street smarts, you learn to get your spidey sense tingling, you think out of the box; you have to, it’s survival. And I used those lessons from the street and I combined them with the traditional education to become street smart and know my stuff.

One of the things we did was mastered the fundamentals. Started off as an accountant, a CPA, had a firm for a while. Then when I was doing people’s tax returns, seeing what they made, I felt like everybody’s scorekeeper. They were making millions, I was keeping score. I said, “You know what? I want to be on the other side.”

Slocomb Reed: Every accountant I know tells the same story of how they got into real estate. You have a 30-year career in commercial real estate; how long have you been on the GP side of syndication deals?

Sam Liebman: Well, I started off as a GP. What happened was in 1992 — I had worked as a chief financial officer at Mountain Development Corp at 27, and I got what I call my Harvard education there, because the company started with myself, a secretary, and the owner, Bob Lee. Three years later, we had over 20 million square feet in five different states. So I really got tremendous exposure, which is really important in the learning process. Then through accounting, I had met one of the clients who called me in one day – this was in 1992 – and said, “We want to buy all the banks foreclosures.” That time, you could buy properties for three times rent roll; nobody wanted Manhattan real estate. I said, “Well, guys…”

Slocomb Reed: When was this?

Sam Liebman: This was 1992. Cap rates were going from 9.75% to I think 12%, interest rates were 10%, and I always tell people, the best time to buy real estate is when nobody wants it. The price you pay is a permanent cost; you can’t change that. But if interest rates are high, that’s a variable cost; you can always refinance, you could always pretty much go down, and that’s what we did. Those properties that I bought for $575,000 are now worth $15 million, for a lot of different reasons that we did, and that 9.75% initial interest rate is now 3%. Well, lower. So I said, “Guys, let’s do syndication.” “What’s that?” I said, “Well, instead of buying two buildings with your money, we could buy 10.”

That sounded appealing until they saw the documents. I managed to streamline the documents and we bought our first deal, 110-112 St. Mark’s place, I remember that. September 23, 1993, we closed; it was 22 two-bedroom apartments, 50-footer what we call, and two stores. $575,000. And I remember all we needed at that time was $290,000 in equity, including fix-up. At that time, under nine people, you didn’t need to do a full-blown PPM as long as it was under nine people. So if I got a guy who put in 50,000, now the average went down to 30,000. We had people put in in these buildings at the time $15,000, that and now $500,000 investors, and we bought 40 of those buildings for dirt cheap. We thought we’d fix them up, and we would have cash flow and appreciation. Did we ever think about these prices? No.

Slocomb Reed: So you’re talking about investments that happened 30 years ago, turning 15,000 into 500k. Now, how much of that appreciation do you attribute to the 30-year hold period and how much of it do you attribute to, say, other factors like you purchased a distressed asset and forced appreciation, or you bought in areas where there was – the buzzword now is gentrification of course… You bought in submarkets that have since shifted – how do you factor that appreciation over 30 years?

Sam Liebman: Okay, good question. For New York City, the main thing was the political climate that changed. In 1993, most of the buildings were rent-stabilized or rent-controlled buildings. We were only allowed to increase rents according to the rental guidelines each year, that ranged from 3% to 5%, depending if there was a one-year or two-year lease. Buildings were in horrible shape, because there was no incentive to fix up the building, because the rents were controlled. In 1994, they came out with vacancy decontrol, which was a game-changer.

Initially, what that let you do is if you could get an apartment vacant and the legal rent became $2,000 or more, the apartment became decontrolled. So if you had an apartment that was $1,200 a month and somehow you could get it to $2000, it became decontrolled. Now, what’s the importance of that? Well, they came up with this new technique, and it was basically if you put capital improvements in the apartment, you improve the apartment, you’re able to recoup one fourtieth of the cost, monthly. So if you put $40,000 in basically, you could raise the rent — and the tenant had to be out, the apartment had to be vacant. So for 1000, I put 40,000 in, make it really nice, get it over 2000… Ket’s say I only got 2500. That $1500 for the apartment, when you divide the extra income by the cap rate, it’s a lot more than the $40,000, of course. And by the way, in the city, because everything got better, that $2,500 apartment became worth 4000-5000. So the political climate was a major reason. Also, there were a lot of abuses in there; throwing tenants out. The game was to get an apartment vacant, by any means possible, [unintelligible [00:10:26].03]

This displaced a lot of buildings, but we became multimillionaires, and we did it the right way. There were tenant buyouts, again, using that cap rate formula to increase valuation. Over the years, the cap rates dropped, obviously. Now that was a change in the political climate. What I would tell your listeners now, if they’re looking for buildings, beware of the political climate where you’re investing. For instance, there’s a movement for national rent control, and it is horrible, because Minnesota, Minneapolis just passed, maybe two months ago, universal rent control, limiting new buildings to 3% increases. And they were all crying, “We need more affordable housing.” But what developer is going to sign a $30-$40 million construction loan when insurance is doubling, real estate’s doubling, and operating expenses and construction costs are doubling because of the pandemic, and then they’re going to cap you. So 10 projects immediately stopped, you could look it up.

Slocomb Reed: I want to hear a little bit more about your experience with the changing political climates and markets where you have been buying your properties. I know you have your current portfolio, some of it is in New York and some of it is in Texas… How much did the political climate of each of those states or each of those MSAs play into your decision to invest in those areas?

Sam Liebman: A big part. When we invested in Manhattan, we owned over 40 buildings or so at one time; it was a positive political climate. That has changed dramatically. I will not touch anything in New York City right now. I think I have a couple of buildings left.

Slocomb Reed: Sam, let’s go back to Manhattan. Can you give me a couple more inflection points? You talked about decontrolled vacant units in 1994. Can you give me examples of other political inflection points that drastically changed the commercial real estate landscape for New York City?

Sam Liebman: Sure, there’s a lot of them. Interest rates went down obviously over the last 30 years. The dollar became stronger; we’re talking about now. But over the 30 years, the dollar was weaker, so a lot of foreigners –and there was no virus… A lot of foreigners came into this country because they had cheap dollars. There was also a lot of political… Like the EB-5 program.

Slocomb Reed: What is the EB-5 program?

Sam Liebman: The EB-5 program, I think it was passed during the Obama administration. What that enabled was a foreign person, like Chinese or whatever, to come to the United States and invest, I think it was originally 500,000 and that became a million, and basically get citizenship. All the big companies now are getting all this EB-5 money that was funneled towards these big projects. So it was a way of getting tremendous amounts of foreign investment in this country. In fact, China was the biggest beneficiary. I remember probably about four years ago the quota was filled in January; that’s how popular it was. And there were other popular programs; there’s a lot of popular programs now, from the federal government.

Slocomb Reed: And you’re saying that the popularity of these programs for bringing non-US citizens to the United States is having a big impact on the real estate market in New York City.

Sam Liebman: Yeah, they were bringing in a tremendous amount of capital into the United States.

Slocomb Reed: So just to make sure, our Best Ever listeners and I are on the same page with you here… The influx of capital to the city increases property values, increases rent rates, correct?

Sam Liebman: Well, it increases demand. You bring in the money, you’ve got to do something with it.

Slocomb Reed: Yeah, of course. How long have you been investing in Texas? What about Texas attracted you to the markets where you’re invested there?

Sam Liebman: That’s a great question. I sort of saw what was going on in New York City, a little bit. About 2006 I think it was, somebody convinced me to go to Texas and take a look at what’s going on there. What I saw was tremendous potential. I saw infrastructure being built, schools being built, technology, and also there was a migration from California. I think it was close to, at that time, 200 people a day were moving into Austin. You had the West Campus part of Austin,  where the University of Texas is, and you had about a mile away downtown. And it was vibrant, it was entrepreneurial. And they had a master plan in Austin, it was called UNO – University Neighborhood Overlay. That plan really attracted me, because they were very pro real estate. They were rezoning areas, and they wanted capital to come in and build up the city. You had a young workforce, educated workforce. It had everything… Except water. But it had everything. They were building parks in Dallas, they were connecting uptown to downtown. So I saw all this going on, and I just said, “Wow, this is a great place.” And I just liked everything about it.

Slocomb Reed: So you said Austin had a master plan, UNO, and that plan excited you. On a smaller scale, Sam, in the city of Cincinnati, we’ve seen some tremendous revitalization of the urban core, and there were some major players, both governmental and private capital in making that happen. Since then, a lot of other neighborhoods and villages and jurisdictions in the MSA have come up with their own master plans for virtualization, publicized them, and many of them have not come to fruition at all.

When you see master plans like UNO in Austin, and you see potentially emerging markets that are demonstrating an intentionality about being pro real estate, how do you know that these are plans that will actually be acted upon and how do you know that they will actually result in pro commercial real estate growth?

Sam Liebman: That is a great question. The perfect example of that is Atlantic City.

Slocomb Reed: Atlantic City?

Sam Liebman: Right. Atlantic City, all the casinos, all the other things that are built there – Atlantic City failed because the jurisdiction there failed to develop the outer areas. The whole reason people came in was with that promise that they were going to build up the outer areas. It never happened, and that crushed Atlantic City. I’ll give you another area, Trenton, New Jersey. We bought a building there because we were promised — we’d met with the city council people and they were going to build the Mets… Or no, the Yankees had a minor league baseball team they put in; there was a hockey team put in, and they were going to do all these things. New jurisdiction came in, new political people – nothing happened. So you’re 100% right with that, that is a tremendous point. You don’t know, because one election can change everything.

Slocomb Reed: Is it really the elections that determine whether or not these sorts of master plans come to fruition?

Sam Liebman: Sure. Who’s controlling the money?

Break: [00:17:53][00:19:50]

Slocomb Reed: Let’s create a hypothetical situation. I’m tracking some emerging markets, let’s say, in the Southeast and in the Midwest. My investors and I are looking for cash flow, but we’re looking for long-term growth. I identify three markets, hypothetically, where I think strong growth is possible, and I am seeing a political climate that is favorable to the development of my asset class in these markets. If I see a brilliant opportunity, obviously, I’m going to pounce.

When I’m looking at not necessarily marginal deals, but when I’m looking at opportunities that would require that the market grow as is expected in the current political climate in order to reach my metrics, what should I look towards to ensure that the current commercial real estate favorable political climate will survive? Should I just be tracking elections? Is there something else? Is it possible, and how can I make myself certain that a market is going to remain with good conditions for developing commercial real estate?

Sam Liebman: Okay. Well, it’s a good question, and you have to decide if you’re going to be a pioneer or not. I don’t want to be a pioneer; I’m going to wait to see what’s being developed, how projects are getting approved or not approved. We do look at, in Austin for instance, how many student housing properties were put in for approvals. You can see, you can talk, but I’m going to wait until I see progress before I jump in, especially if you’re doing construction. You want to see unions, you want to see what the climate is there. Are they friendly towards developers? What are the views? We have an ever-changing political climate now, and depending on who gets in, it can change everything.

Just look at the president — not getting political, but from Trump’s policies to Biden’s policies, it’s a 360, 180-degree turn. So what I do is I follow — I don’t want to be a pioneer. I want to follow a pioneer and see how it is.

By the way, in Texas – that’s what happened in Texas and Dallas. There was a company called Power Properties, and on Gaston Avenue we bought over 20 properties. We watched our properties go in, renovate these classy properties, and we saw the rents they were getting. And they were the pioneers, we just followed them, and we were very, very successful. That’s a perfect example of what I’m talking about.

Slocomb Reed: Thinking about inflection points – you don’t want to be a pioneer, you want to follow the pioneers. I’d like to talk about this using Simon Sinek’s language around the bell curve of innovation. I don’t know if you’re familiar, let me give a quick summary for our Best Ever listeners. Everyone knows what a bell curve is shaped like. When you’re talking about innovation, you start the bottom left corner, and you look at the bell curve of the population. Let’s say it is the population for us; I’ll use two examples. One of them is the air pods from Apple that are in my ears right now. Someone has to innovate, and that’s where the bell curve starts. Apple announces that they’ve created this new headphone experience, this new phone call experience, whatever you want to call it. Apple is the innovator.

There is a group of people, a certain percentage, the moment Apple announces any new item, they immediately go wait in line in front of the store 24-48 hours, because they want to be the first to have it. Those people are called early adopters. The early adopters want to see an innovator or a pioneer come up with a great new thing, or create change in the marketplace, and then they want to pounce on it.

After you have the early adopters, you have the early majority. The early majority needs to know that not only has an innovation taking place, but some people have gotten positive results with that innovation. I would be early majority when it comes to these air pods. I don’t stand outside of a store and wait for anything in the cold for 24 hours. But as soon as I saw other people wearing them, I needed to know, because I hate holding a phone to my head. After then after early majority, you have late majority, and then you have what Simon Sinek calls the laggards.

I’m hearing you say, Sam, that you like to be either an early adopter or in the early majority when you see that a political climate is favorable in an emerging market for commercial real estate and development. Where would you put yourself, and how is it that you identify those moments at which you see that the innovators are innovating, or you see that there are early adopter developers coming in and that they’re seeing some success? How do you track that?

Sam Liebman: Okay. So it was an old saying in real estate, you’ve got to have a nose; a nose for deals. On my tax return, when it says occupation, you know what I put down? Opportunist. I’m an opportunist. I made it fortune buying other people’s mistakes. Now, you can be a frontiersman and go out in the wilderness if you choose. I choose to find other people’s mistakes, obvious value-add… My success and what I try to teach my students and followers is to master the fundamentals so you can see opportunities overlooked by others. That’s how I did it.

I don’t go with bell curves, I don’t go with this. Yes, I look at demographics, I look at all of that… But you have to get to a point, as you know, as a developer, where most of the stuff you do is on the back of an envelope, because you know so much that you get a few facts, and boom. That’s where you need to be. You need to be where a deal comes in, you can act fast, you know what to do, and that’s why I say I’m an opportunist. You haven’t yet, but if you asked me, “Well, do you want to go in the commercial sector, do you want to go in the residential sector?” It doesn’t matter, I want to go where the opportunity is.

Sometimes it’s development, sometimes it’s rehab, sometimes it’s in industrial, sometimes it’s what you explained to me, warehouse, which is very good. So that’s what I do. I get so many deals in that you have to weed through them and I have so much experience that I know pretty much right away which one I want to pursue and which ones go into the circular file.

Slocomb Reed: Back of the napkin math is incredibly helpful for deal analysis. I know doing my own off-market lead generation here in Cincinnati, I know apartments. Sometimes I don’t need the back of the napkin to know whether or not a deal makes sense if it’s an apartment building in the size range that I’m already operating. But I’m also looking at office, retail, other commercial uses, and I still need more information and more analysis before I know that I can pull the trigger on something. So that makes a lot of sense.

Sam Liebman: I’m going to tell you something that might differ with you. I think office buildings or retail – there’s going to be Armageddon, and you’re going to be able to pick up those prices at tremendous discounts soon. You don’t need to live in a city to do business with the city anymore. You know what the occupancy rate in New York City is right now? 30%. Now, in my humble opinion, I don’t think it’s ever going to go over more than 65%. If I’m right, all these leases that are going to mature — we have a law firm, 30,000 square feet; you’re paying $80 a foot. You only need half the space now. “Hello, landlord, we’ve got to talk. I don’t want to pay anymore $80. I can get better space for $55 across the street.”

Now, if you look at the ramifications of that, where the owner now has to retrofit the old tenants from his 30,000 square feet to his 15,000 square feet. Maybe the bathrooms are on the wrong side, he’s got to redo that; it costs money. Then he’s got to retrofit the new space for the new tenant, 15,000 square feet. He’s got to pay retrofitting it, he’s got to give TI to the new tenant, probably four or five months free rent, he’s going to have to pay a broker, and he’s going to have downtime. Now that’s one tenant. And this is what’s happening in Manhattan. So I hear people say, “Well, they’re going to be vacant. Maybe they’ll repurpose the space, convert it to residential.” Yeah, maybe you can do that. But actually, when you convert it to residential, it’s not that easy. You’ve got to cut the building, so you lose a lot of space.

I’ve been through it. Remember, I bought the buildings for 575,000 that were 4 million in 1993. I’ll tell you another story. We bought a package of 15 buildings in Dallas, we paid I think was 12.2; five years before that package was $56 million. So this can happen.

I believe that the retail sector, because of technology –and we’re seeing it happen– and because of the office building issue, there’s going to be Armageddon, and banks are going to be inundated with foreclosures. I have a lot of relationships with banks, and they agree with me; they’re gearing up for it.

Slocomb Reed: So whether or not you pounce on a deal has much more to do with the micro economic factors impacting that particular property and its particular distress, more so than trying to predict the markets that are going to see growth?

Sam Liebman: Well, again, the price you pay is, to me, the most important thing. The price you pay is a permanent cost, so yeah. If you’re talking about where I see it going – I could be wrong; actually, I hope I’m wrong, but I don’t think so. One of my successes is being able to time markets. I timed the market in the ’90s, I timed the market in the 2000s… And right now, we’re sitting back, we have a tremendous amount of capital, and we’re just sitting back waiting for the right time to pounce in again. There’s a shortage of rental housing, for a lot of reasons… So I do think that the rental housing sector, which is my favorite sector, because you can get tremendous financing. Who’s going to finance an office building or a retail building? You think you can get attractive financing for that? Maybe if you have a small shopping center with Triple A tenant, you will. But for an office building – banks don’t want to go near that unless you put in a personal guarantee, 50% cash, interest reserves… Who wants to do that?

So I go where the financing is, and residential is the place to be. I think residential is going to keep going up, for a lot of reasons. But the housing market is too big, too strong, too high; people can’t afford houses. There’s also a change in culture with millennials. A lot of millennials would rather rent. There’s a movement now called build to rent; have you heard about that?

Slocomb Reed: Yes, I have. It’s much more popular in other parts of the country than where I am in Ohio, because it has a lot to do with market rents. My understanding is it’s much more popular on the coasts than it is in the middle of the country, because the rents that you can command are proportionally higher there, relative to construction costs.

Sam Liebman: Well, my point was though is the change in the younger generation and the older generation, that they don’t want to own, they’d rather rent. Everything has become disposable and portable now, so you’ve got to look at that. Restaurants are changing the way they construct their restaurants now, because millennials would rather take the food, bring it to their house. It’s like my wife and I. At night, she’s on her iPad, I’m on my iPad. It’s getting to be where there’s no reason to leave the house anymore, which is sad, but it’s the reality.

So all these changes in culture, all these changes – there’s a lot of them. People have asked me, “So where do you think real estate is going to be?” The answer I say is, “It’s Bob Dylan’s song. The answer, my friend, is blowing in the wind.”

If the wind blows this way and interest rates go up, there are other factors or variables, and I can tell you which way I think it’s going to go. If the wind blows right, and interest rates go down, or something happens where they change the laws, I can tell you that. But I can’t tell you which way the wind’s going to blow. And that’s the problem, there are so many more variables than there were years ago.

Slocomb Reed: Sam, are you ready for our Best Ever lightning round?

Sam Liebman: Oh, I never did one of those.

Slocomb Reed: What is the Best Ever book you’ve most recently read?

Sam Liebman: My book, Harvard Can’t Teach What You Learn From The Streets. No, there’s a very good book that I read years ago and I read it again about two months ago… It’s called the E-Myth and it’s by Michael Gerber. I don’t know him or anything, so this is an independent one… But the premise is, to be a successful business, you need three qualities. You have to be entrepreneurial, you have to have management skills, and technical skills. And if you lack in any of those, your business will fail. I’ve found that to be — it’s only like 110 pages, an easy read. I thought it was a great book, really…

Slocomb Reed: Totally, foundational. What is your Best Ever way to get back?

Sam Liebman: That’s what I’m doing now. I’ve given up trying to be the richest guy in the cemetery. Honest to God. I wrote this book, Harvard Can’t Teach What You Learn From The Streets in English, with real-life stories. You can learn to build lasting wealth through real estate by mastering the fundamentals; that is what people don’t understand. You must master the fundamentals to build upon. It’s like being a tennis player and you’ve got a forehand, and right away you want to learn the backhand. But if you don’t master that forehand, there’s going to be a part in your growth where you’re going to play someone that’s going to take advantage of what you didn’t perfect.

So I always mastered the fundamentals, and I’m giving back by doing podcasts that I hope people will learn from, I’m giving lectures, I’m mentoring young kids… I love it, because a lot of kids are lost now. When you mention real estate, it’s a big, hot subject now, and you see these kids… I’ve got a kid coming in Tuesday, he’s in graduate school, and he’s going to come in and start, and I want to keep getting more kids involved. I love it. I love doing it. That’s how I’m giving back.

Slocomb Reed: You’re leading right into our next question here… What is your Best Ever advice?

Sam Liebman: Master the fundamentals, be a gym rat, be passionate. Develop passion. That’s what I did. Real estate was the perfect industry for my personality. Bricks don’t talk back. I never wanted to get involved with raises and salaries of people, but I love increasing property value; it really turns me on. I’ve never been focused on how much money I was going to make, I always focused on, “If I do this right, there will be money.” Master the fundamentals, love what you’re doing, and don’t take shortcuts, especially in due diligence.

Slocomb Reed: Sam, how can our Best Ever listeners get in touch with you?

Sam Liebman: samliebman.com. I’d be happy; if you go in – just join, it’s free. We have articles, see all my buildings. With the building, I put a story of what we did to it pretty much, which I think people will find very interesting. My passion right now is to teach. I’m working on an online real estate academy called Street Success Real Estate Academy. I market myself as the kid from the streets who overcame a lot, became successful, and I’m the same guy I always was; straight-talking, no bull, and that’s it. I’m who I am and I did alright.

Slocomb Reed: Awesome. Well, Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please subscribe to the show, leave us a five-star review, and please share this episode with your friends so that we can add value to them, too. Thank you and have a Best Ever day.

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JF2712: Lessons Learned Managing $2+ Billion Portfolio During COVID ft. Jilliene Helman

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the next Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, Jilliene Helman—CEO and Founder of RealtyMogul—shares seven lessons she learned while managing her real estate business during the pandemic.

Register for the Best Ever Conference here: www.besteverconference.com

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TRANSCRIPTION

Joe Fairless: Welcome to another special episode of The Best Real Estate Investing Advice Ever Show where we are sharing the top sessions from the Best Ever Conference 2021. This year, the Best Ever Conference is back in person, February 24th through 26th. Come join us in Denver, Colorado. You’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year that is still relevant today and will be beneficial for you.

Jilliene Helman: Perfect. I’m going to go ahead and kick us off. I’m Jilliene Helman and I’m the founder and CEO of Realty Mogul. Realty Mogul is an online marketplace to invest in commercial real estate transactions, sometimes known as crowdfunding for real estate. We connect investors to real estate investments around the country. Since its inception, Realty Mogul investors have invested in over $2.8 billion of real estate through the Realty Mogul platform. I thought it would be fun today to talk through lessons learned with $2.8 billion of real estate during COVID. I can assure you it was more fun to have a $2.8 billion platform pre-COVID. But we learned a lot during COVID and I thought that it would be helpful to share that and share some of those lessons learned. I’ve got seven lessons to share today and then I’m going to give you a little bit of insight into where we think the market is headed, the types of deals that we don’t want to do, the types of deals that we do want to do.

Lesson number one is you play defense before an economic crisis, not during it. What do I mean when I talk about playing defense? First of all, underwrite well and don’t do deals that don’t meet your underwriting criteria, don’t stretch to do a deal. I sometimes see real estate operators changing assumptions, trying to make deals work, convincing themselves that this deal will be different than the last one, it’ll have better tenants or better collections. That’s just bad news, that’s incredibly important to play defense before an economic crisis. The second thing that we learned is that you have to have a strong property management team in place. During a time like COVID, we saw strong management separate the property’s performance compared to comparable properties. Our best property managers were proactive, they were working with tenants on payment plans, they were helping our tenants to complete rent assistance applications, and they were incentivizing tenants to pay rent online. These all had really positive effects on maximizing collections and occupancy right in the heart of COVID. There’s no such thing as “set it and forget it” with management companies, you have to actively manage them. That was even more true during COVID when so much was changing so quickly.

The other one around playing defense is having open conversations with your lenders. It was absolutely critical to our success in managing through COVID. COVID has caused lenders to take an increasingly proactive approach in managing properties. Having open discussions with your lenders as to how COVID is affecting the property and the steps that you’re taking to mitigate those effects is incredibly beneficial for your lender. But you have to have those relationships pre a crisis like COVID. At the end of the day lenders are made up of people, which means that you have relationships with those individual people, and those are absolutely critical. Now, why is it critical? There were times during COVID when we needed the lender to do a draw request for construction expenses that we’d already spent pre-COVID. Or maybe there was an extension on a loan that needed to happen or a payout of additional proceeds for good news money. If you don’t have strong relationships with your lenders, in times of crisis, it’s really challenging to get them to do what you want them to do.

Lesson number two is the proforma is always wrong. I shared this on stage at the Best Ever conference last year and I’m repeating it this year because I just think that is such an important lesson in times of crisis and not even in times of crisis. But knowing that the proforma is always wrong, what are some ways to combat that? First and foremost, it comes down to underwriting. Underwrite a minimum 10% budget contingency, scale back the number of units that you’re planning to renovate and release per month, slow it down, use a cap rate at exit that is at least 1% greater than your cap rate at purchase, and increase vacancy and bad debt to stress test your pro forma. If your stress test financials are still acceptable to you from a risk-return perspective, that’s probably a deal that you want to do. But it’s impossible to predict, in good economic times and particularly in bad economic times like COVID.

Lesson number three, take a breath, be deliberate. In times of crisis, things can feel really, really crazy. Many people forget to plan and forget to prioritize. When COVID hit, we took a breath as a company and we came up with a plan. We reassigned folks who were working in the originations team onto the asset management team. We drafted communications around that plan and we came up with two priorities, limiting the priorities and measuring them because what you measure gets done. The number one priority was the health and safety of our tenants and our team. The number two priority was keeping occupancy up and shoring up cash reserves. That meant immediately halting renovations, halting rent increases so that we could keep people in their units, and cutting all non-essential expenses and repairs. When you’re looking at an economic cliff, cash is king, and we took deliberate actions across our assets to ensure that we shored up cash. That’s it, two priorities and a plan.

Lesson number four, don’t be afraid to innovate. Going back to our priorities, the first was the health and safety of our tenants and team. In the very early days of COVID when it was still unclear how dangerous it was, it was still unclear exactly how it was spread, we didn’t want the property management teams interacting with the tenants. This led us to use software to do virtual leasing and self-guided tours. It’s still shocking to me how many units were leased via self-guided tours. At some properties we measured the data, the conversion rates were higher through a self-guided tour than they were when a property management professional joined the prospective tenant in the unit. It was pretty remarkable and amazing and it’s something that we’re going to continue to use post-COVID. I think it’s a real lesson of not being afraid to innovate.

Lesson number five, do experiments and test the market. Lesson number five was a big one for us in the face of the pandemic. We decided to start testing the market and the appetite for renovations back in June 2020, just a few months after the pandemic started. Sure enough, we were able to keep hitting renovation premiums in many of our assets. Step number one was making sure that we shored up cash and shored up capital so we stopped all the renovations. Then we got back in the market and started testing. It turns out, as more and more people were stuck in their apartments, a nicer apartment was even more important than before. We approached the first renovation post-COVID that every property is an experiment. When the experiment worked, we doubled down. We had one property in the height of the summer, which was the height of COVID in Texas, where we leased over 40 renovated units over the summer using virtual leasing and testing the market. It worked very, very well.

Lesson number six be a stellar communicator. This is particular for all those sponsors and all those operators who are in the audience today. But providing detailed updates to investors is critical in good times and in bad times. Investors are reading the news and wondering how the pandemic has affected their investments. Providing detailed transparent and regular updates eases uncertainty and increases confidence. We increased the frequency of our updates to monthly from quarterly and we were available and receptive to questions, calls, comments, and ideas from investors.

Break: [00:09:07][00:10:46]

Jilliene Helman: Lesson number seven, which is my last lesson here, is to take a position. There’s a lot of fear in the midst of an economic crisis and in the midst of not even an economic crisis, but a global medical pandemic. It’s really important that you can overcome that fear, and the only way that you can take a position is by overcoming that fear. I want to share an excerpt from our June 2020 investor communication. “Choosing to invest in today’s market means two things. One, you must assume the world is not ending, and two, you believe the country will recover in the future.” I’m reminded of Warren Buffett’s quote from his recent Berkshire Hathaway shareholder meeting in which he said, “One of the scariest of scenarios when you had a war with one group of states fighting another group of states, and it may have been tested again in the great depression, and that may be tested now to some degree, but in the end, the answer is never bet against America.”

That, in my view, is as true today as it was in 1789, and even was true during the Civil War and the depths of the depression. We do not believe we are in for depression, namely, because of recent massive government intervention. The US has never seen the extent of monetary and fiscal stimulus that we are seeing today. As a reminder, this was June 2020, 90 days after COVID hit in full swing. We decided in June 2020 that we wanted to play on offense, and we assumed the world was not ending, and we believe that the country would recover. Data told us that supply and demand fundamentals, particularly in apartments, made it such that investing still made sense. In the ’08 and ’09 crisis we had an oversupply of housing, today we have an undersupply of housing. That, coupled with low interest rates, made us get back in the market. We decided to get back to finding real estate investments that met our due diligence criteria and we based it off of a deliberate assessment.

I’m going to share that assessment with you completely transparently. Here are the things that make us afraid in today’s market and made us afraid in the height of COVID in June, in March, in April. Unsurprisingly, most of these were on our list well before COVID. I gave a presentation at the Best Ever conference last year, you can go back and you can look at my list from last year, and there are not that many that are that different on what makes us afraid. There’s one in particular on what we’re excited about and I’ll talk through that one in a minute. But let’s talk through first what makes us afraid. There are a ton of landlords who got sucked into the WeWork craze or the Silicon Valley craze. That’s doing master leases to tenants with no credit quality like WeWork, that’s something that we’ve avoided since inception, and we will continue to avoid. The next one is office with significant rollover. We’re not afraid of office today and we can talk more about that, and why we’re not afraid of all office. But we’ve been afraid of office with significant rollover for years. What tenants are going to come in and replace those tenants? We’ve questioned that for a long, long period of time.

The other thing that we’re afraid of is retail unless it’s Main and Main. We’re not afraid of retail the way a lot of investors are, but the reality is that retail is significantly overbuilt. We just have way too much of it around the country and we have a lot of big-box retailers like the old K-Mart, the old Sears boxes that are not functionally working, they’re functionally obsolete. But we do like retail in Maine and Maine. Given that it’s out of favor, cap rates are higher and given where interest rates are, retail can be a great place to find strong cash on cash returns. But you have to be very, very careful about where it’s located. The next one is hospitality. We hate hospitality. Hated it before the pandemic, certainly hate it during the pandemic, and I expect that all hate it after the pandemic. Clearly, there are deals to be done today, given just how much distress there is in hospitality. If you’re willing to stomach that risk, if you’re an operator in hospitality, there are certainly some amazing operators. But I still believe it’s the worst risk-adjusted return in any real estate asset class that you could think of. You have nightly tenants in hospitality, it’s an operating business, and I don’t think that you’re paid for the risk of that operating business generally. Thankfully, we had almost no exposure to hospitality when COVID hit, and it’ll go down as the worst-performing asset class during COVID. Even though there’s a ton of opportunity in it today, I still don’t like it.

We’re also worried about the impact of insurance costs rising in markets like Florida and Texas, predominantly due to climate change. You look at Texas right now, I just got a note this morning that we had a pipe burst due to the cold freeze that’s happening in the Texas market. You can underwrite for this. But when I see standard 3% increases in insurance expenses year over year, this is a red flag for me. Insurance costs are going to go up until there is government intervention. I think that if we can’t get control on climate change, we will see government intervention. But for now, we want to make sure that insurance costs are being modeled appropriately.

The other red flag is modeling a refinance with Fannie or Freddie that is less than 4.5% or 5% interest, two to three years out. I wish I had a genie bottle to know where interest rates are going to be, but I don’t. In the absence of concrete data, we don’t think it’s prudent to guess where interest rates are going. I don’t like business plans where it’s a value-add business plan, it’s being acquired with bridge debt, and then there’s an assumption in three years that you can replace that with Fannie or Freddie debt at 3%. That’s just not going to fly, even if we get lucky. That’s where interest rates are three, four, or five years out from now; not something I’m comfortable seeing in underwriting.

The other thing that makes me really afraid, is sitting in cash when inflation starts to rise. That is the single best way to lose purchasing power. Personally, I’m trying to get capital out, I don’t want to be sitting in cash; of course, I always have cash for a rainy day, but that’s something that makes me afraid. It makes me afraid for a lot of Americans and a lot of investors who are going to see their purchasing power decline when we start to see more inflation, and the Fed has said that they want to start to encourage inflation; they’re actively trying to encourage inflation.

Alright, switching gears to be a little bit more positive here. Where do we think that there may be an opportunity? Well-occupied apartments with reasonable bad debt, financed with long-term, fixed-rate debt. This has really been the bread and butter of how investors haven’t used the Realty Mogul marketplace to invest, pre-COVID and post-COVID. I’m a huge believer in apartments, I think that they are some of the best risk-adjusted returns in real estate. Even though the pricing has been bid up, even though cap rates have come down, I think that it is one of the safer areas to invest in commercial real estate. But you have to look at the bad debt. We sometimes will see operators bring transactions that they want to use the Realty Mogul platform for, and it has terrible bad debt during COVID.

There’s an expectation that with better property management it’s going to get better, with the rent relief bill we’re going to get that money back… I don’t like that story. I’m not afraid of bad debt today, 2% to 4% bad debt is kind of where our portfolio is running. The economics of that portfolio still work even with that kind of bad debt. Hopefully, you can get a little bit of a discount off the pricing because of that. But I am very cautious of bad debt today and where that property has performed during COVID. We’re big, big believers in long-term fixed-rate debt. Debt is incredibly cheap today compared to where it’s been historically. We don’t know where it’s going to go, but if we can lock in that interest rate and we know what the underwriting is on a long-term fixed rate debt, that gives me a lot of comfort.

This next bullet was on my “where we’re afraid” last year at the Best Ever conference, and now it’s on my “where there may be an opportunity.” That is new construction in growth markets with a late 2022, 2023 delivery, even better if the costs are fully negotiated and locked in. We believe that construction costs are going to rise, and we believe that transactions that are just about to go vertical, that already have their costs locked in, are going to have a significant advantage to new construction in 2024, 2025, 2026. We are investing in new construction, we’re investing specifically in growth markets that we believe in, but we’re also investing in some markets that we believe are going to recover in 2022, 2023, 2024 that are hard hit today. Where we wouldn’t want to buy existing apartments there today, but we’re interested in doing construction projects that are going to deliver in 2023 when we expect the market to recover.

I’ll walk you through a couple of examples of those. We also like growth markets – Austin, Dallas, Denver, Raleigh, Charlotte, Columbus, Phoenix, Jacksonville, Salt Lake City, Nashville, growth markets, people are moving, positive demographics, jobs are moving, markets that we want to invest in. I mentioned on the last slide that we’re not afraid of office, so we like office with long term credit tenants, and a functional need to be in office. As an example, we have the DEA as a tenant in one of our properties. It’s hard to imagine that the DEA is going to work from home, so that’s a tenant that we like.

Triple net with great tenants, I’ll walk you through two examples of that. Retail at Main and Main, ideally trading at a discount; and not yet, but NYC, LA, and Miami in 2022 and 2023. These are some of the hardest hit markets during COVID, they are some of the greatest rent declines during code, and yet we believe that people are still going to live in cities. People are creatures of habit, people are social creatures, they’re going to want to be back in cities at some point in time.

Break: [00:20:13][00:23:10]

Jilliene Helman: With that, I thought it might be fun to quickly go through the deals that we’re invested in via the Realty Mogul platform since COVID hit, to give you a sense of the type of deals that we felt comfortable offering up to our members in the heart of a pandemic. To be clear, none of these are available for investment, there’s no sale of securities, you can’t invest in any of them. But I wanted to give you a sense of the types of deals that are sort of — the crystal ball that Ben was talking about. These aren’t even crystal balls, these are deals that we did in the heart of COVID.

The first transaction is a deal called NV Energy. Now, people may think that we were totally crazy, but in the middle of COVID, June 2020, we did an office deal in Las Vegas, Nevada. What could sound stupider? Las Vegas, Nevada, heavy, heavy, heavy hospitality market, very challenging, obviously, for job creation, and for the economy. When travel was getting shut down, when people were not choosing to travel, we did an office deal in the heart of Las Vegas, Nevada. Now, how did we get comfortable with that and why did we make that decision? This is an office building that is leased to NV Energy, which is owned by Berkshire Hathaway. It provides energy in the state of Nevada and elsewhere. There are nine years remaining on the lease, we got fixed-rate debt at 4%, and there’s double-digit cash flow. At the end of that nine years, investors will have 100% of their principal out and will still own the property. Pretty good risk-adjusted return from our perspective.

We did another triple-net deal in the heart of COVID, closing Q2 2020. This was a triple net medical office deal leased to Covenant Health, 10 years remaining on the term, fixed-rate debt at 4.15%, double-digit cash on cash returns, and strategically located right by the hospital. They cannot afford for a competitor to come in and lease that space from us. So it’s strategically located, long term, and leased to medical. As we all know, medical has been doing okay during COVID.

The next one, a two-pack portfolio of apartment buildings in Dallas, Texas. I think that this deal and the next deal are probably the main COVID discount deals that we got, to be completely honest. A lot of uncertainty around apartments in that Q2 timeframe – these close in Q3 – but a lot of uncertainty around apartments. That is not the case today. Apartments are well bid up, it’s incredibly competitive, multiple offers, hard money at the signing of PSA… But I think that this deal and the next one was exceptions. Parks at Walnut, 308 units in Dallas; that’s a growth market, there’s been huge, huge job creations and new companies that have announced that they’re moving into Dallas pre-COVID and even post-COVID, and fixed-rate debt at 3.06%. I think this is one of the cheapest loans in our entire portfolio across 15,000 units that have been transacted on the Realty Mogul platform. This is a value-add strategy, so testing the market with value-add, going in, making sure that the market can bear it even during COVID, and then renovating those units.

Very similar is this transaction, 9944, that was also closed during COVID. A very similar story, right next door to Parks at Walnut, fixed-rate debt at 3.18%. Again, very, very cheap. The ability to generate meaningful cash on cash returns because of how cheap that debt is.

The next transaction, Casa Anita, 224 units, closed in Q4. This is in Phoenix. We like Phoenix, Phoenix is a growth market, testing renovations, renovations are turning, and excited to be in Phoenix. We hadn’t done a lot of transactions in Phoenix, we couldn’t find the right transaction. But we found it in Costa Anita and we like Phoenix a lot. We think Phoenix will continue to be a growth market. I think Phoenix was one of the best-performing markets during COVID from a rent growth perspective.

Next one, Gravity [unintelligible [00:26:47].12] This is a deal a year ago that we wouldn’t have done and, this year, we’re excited about it. It’s a ground-up development transaction in Columbus, Ohio. It’s planned to be stabilized in 2024, so we expect the economy to be in a very different place in 2024. 382 units and mixed-use. We’re very excited about this, we’re excited about Columbus, which is another growth market, and a transaction, again, that we would not have done a year ago, that we are open to doing today, and that we’re excited about doing today.

The next one is another deal just outside of DFW in Plano, Texas, built in 2000, 73 units, stabilized asset, hold it for cash flow. The next one is very similar – Turtle Creek, Fenton, Missouri, 128 units, 2018 build, completely stabilized, 12-year fixed-rate debt at 3.10%. The business plan here is to set it and forget it, generate cash flow, hold the asset, do a little bit of renovation with tech packages, so putting in USB ports, but not a lot of work here. Really hold it, set it and forget it, and take advantage of that long-term fixed-rate debt that is incredibly cheap.

Next one, Toluca Lake Apartments, a ground-up development deal in Los Angeles, California; delivery in early 2023. This is also a deal that we would not have done last year or the year before. Had we done it last year or the year before, we probably would have delivered right in the heart of COVID. That was very concerning to us 12 to 18 months ago. Today, with the delivery of late 2020 to early 2023, we think that the economy will recover, and we think that there will be a good opportunity to get back into primary markets – LA, New York, Miami – for 2023.

That leads me to just reiterating lesson number seven, which is to take a position. I shared at Best Ever Conference last year that the first-ever deal that I did was a duplex in Compton in 2013. I started Realty Mogul eight years ago; had I never taken a position on a duplex in Compton and I had a crowbar in the backseat, I never would be where I am today. I wouldn’t have built the real estate portfolio that I have personally, and I wouldn’t have helped a lot of investors all over the country use the Realty Mogul platform to build their own real estate portfolios. It’s so incredibly important to take a position and overcome your fear.

One of the things that I learned in COVID was it was incredibly mental to say “We’re going to get back in the market, we’re going to take a position, we’re going to take risk. WEe’re going to find transactions that we think are the best risk-adjusted return transactions in the market today, but we’re not going to sit on the sidelines.” In any real estate cycle, including COVID, including the 2008-2009 recession, there’s always an opportunity. Whether it’s distressed debt, whether it’s buying apartments, whether it’s buying distressed hospitality if you have the stomach for that; there’s always an opportunity, but you have to take a position, you have to know that the proforma is going to be wrong, so you want to stress-test it, and you want to play defense before an economic crisis, not during it.

I’ll leave you with the lessons learned with $2.8 billion of real estate during COVID. I hope this was incredibly insightful and helpful as folks look to manage their own real estate portfolios or get into real estate deals today. There will be another economic cycle. I don’t have a crystal ball and I don’t know when it will be, but there’s an opportunity to prepare today, even for the next economic cycle. I’ll leave you with one disclaimer, because I should. Whether you invest directly or indirectly, there’s still a real risk to investing in commercial real estate. Things do not always go right; all proformas are wrong. Real estate companies can surprise you and disappoint you. The Realty Mogul platform gives investors the opportunity to discover investments that used to be out of reach for most, and you can use it to create your own diversified real estate portfolio.

I won’t always be right, we won’t always be right, but discerning investors deserve a discerning investment platform, so we built one at Realty Mogul. I’m so pleased to share some of our investment thesis with you and share some of the transactions that we did in the heart of COVID, that I think are representative of the types of transactions that we’re going to continue to look to do as COVID continues and as the economy starts to recover.

Joe Fairless: Well, I hope you gained some useful insights and actionable advice from this previous Best Ever Conference session. Remember, if you’re looking to scale your investing in 2022, we look forward to seeing you in Denver. Get 15% off right now with code BEC15 at besteverconference.com. That is code BEC15 for 15% off at besteverconference.com.

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JF2705: Beyond the Pandemic: Adapting Investment Strategies to the New Normal ft. John Chang

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the Best Ever Conference 2022 at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, John Chang shares his top strategies for managing your investments during the pandemic, including how to navigate the economy, understanding the market changes, and what you should be aware of moving forward.

Register for the Best Ever Conference here: www.besteverconference.com

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TRANSCRIPTION

Joe Fairless: Welcome to another special episode of The Best Real Estate Investing Advice Ever Show where we are sharing the top sessions from the Best Ever Conference 2021. This year, the Best Ever Conference is back in person, February 24th through 26th. Come join us in Denver, Colorado. You’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year that is still relevant today and will be beneficial for you.

John Chang: I’m going to cover four things in my presentation today. I’m going to cover some information about the economy, some of the economic factors affecting our business, some of the top headlines we’re all seeing today, and give you an understanding what’s really going on behind those numbers, some of the leading real estate trends that investors are looking at, and some of the outlook performance there, as well as top strategies for the current climate.

I’m going to start in with kind of the key ingredient here, which is that the pandemic is the one big thing. It is causing a great deal of the issues that we’re facing as a business. Until we get the pandemic under control, the economy cannot heal. We’re already making significant headway into what’s happening with the vaccines; that, of course, is the key ingredient to driving forward economic recovery. But there’s still a lot of headwinds; we still are facing some challenges over the next six to nine months as we grapple with this global health crisis. We can see the light at the end of the tunnel, but it’s not there yet, we still have a ways to go, and that’s going to be something we’re battling with.

One other thing that we’re seeing as a major challenge has been jobs. We lost a record number of jobs, right as we came into the pandemic. We basically gave up 10 years of growth giving back 22 million jobs. As we came out of our lockdown, we got half of those jobs back, we got 12 million jobs back but it was really just not enough. We hit a point where it flattened out and we started losing momentum. That really weighed on the economy and our ability to move things forward. There are specific sectors that captured the worst of this. There is the restaurant industry, the hotel industry, and those areas are still in the process of recovering.

When we look at what happened with retail sales, they’ve been fragmented. Again, we went into this downturn, we got to bounce back as we got that stimulus, and we got those stimulus checks, and it helps support our economic growth. We actually grew, we hit a new high point last fall as people spend all that stimulus money and unemployment benefits. But as the Cares Act burned off, we can see that we started giving that back and that happened with the jobs. We got that bounce, then it started slowing down, and then we started losing jobs again. Again, there are specific sectors that are being impacted far worse than anything else. That’s again, restaurants and bars, apparel industry, electronic sales, all being hit very hard. Whereas there’s other parts of the sector of the economy like home repairs and internet sales that have hit an all-time high. We’re seeing different parts of the economy perform differently. Depending on what happens with the vaccine, the timeline to recovery could vary. But I do need to point out that once we get through this, once we get to the back side of distributing the vaccines, once we hit that herd immunity or that critical mass, we start to see a couple of new things come into play.

First of all, the amount of money in money market mutual funds hit a new peak over the last few months. It’s come down a little bit since then and the amount of money that people have put into savings over this cycle is 2.8 trillion greater than normal, what I would call normal. Because if you look back historically, basically this number doesn’t change a whole lot until the pandemic. We have all of this money sitting on the sidelines and it has the potential to come back into the economy very, very quickly after we get to a vaccination. Sometime in the second half, we could see this wave of money, four and a half trillion dollars start to come back into the economy. We’ve already had $2.2 trillion put in with the Cares Act, we had another 900 billion added to the economy through the second round of stimulus. Well, this is what could be the fourth round… We may have a third round of stimulus coming out shortly. This could be a fourth round, four and a half trillion dollars in cash flowing back into the economy. That’s why many economists have raised their forecasts for 2021. Right now, the baseline is right around 5% expectation of growth, which is fantastic. We haven’t hit that number in 30 something years for an annual rate of growth.

Break: [00:05:49][00:07:28]

John Chang: On top of that you could see some huge gains. Morgan Stanley is at the top of the pack. They’re saying, “Hey, we’re expecting 2021 to have 7.6% growth.” A lot of other economists are saying 6.5 or 6% growth and everything in between, it really doesn’t matter. If we break 5%, we haven’t done that in forever, that’s going to be huge, that’s going to drive our economy forward, that’s going to be a key ingredient to our success. Now one of the other things that, as I was preparing this, I saw so many baits happening online, in the news, and arguments. I look at so many of these things and I just shake my head because I don’t know where people get this information. It doesn’t make any sense to me. I want to dispel some of these top myths that I see all the time.

The first one is that there is this huge wave of evictions coming, that as soon as these restrictions on evictions burn off, as soon as we get to the other side of this, and all these, evil landlords are getting ready to kick all of their tenants out because they have been paid. But the reality is far different from that. What we’re seeing across the media is that rent collections are actually far better than people expected. Things are actually going relatively well. Yes, they’re down. If you look at the graphic there in the bottom left, you can see that the spread between those two lines has widened up. That’s because the first package of stimulus was burning off and the second round hadn’t started in yet. People’s unemployment benefits were burning off, people didn’t have cash anymore, they burned through their savings, and their ability to cover their payments was becoming a challenge. So yes, rent collections have tapered a little bit, the spread. I compare it between 2019 versus 2020. The news always talks about “Oh, rent collections are only 90% or 85%, or whatever it is.”

But you have to compare it to 2019, what’s our normal behavior, and that’s where I’m drying up that spread. It varies by class, it’s those bars in the top left hand corner of the slide. If you look at the map, you can also see it varies dramatically by metro. It’s hard to remember this. We’re all living within the context of our own little world. If you live in the Northeast right now, you’re thinking about snow. I’m in Phoenix right now and I’m looking out and it’s sunny and 80. There’s your own reality within this and that’s true with the pandemic, when you look if the experience of somebody in San Francisco is entirely different from the experience of somebody in Dallas. You have to look at what are the rent collections doing in different cities across the country? How are they performing? What about my asset class? What are the experiences there? But I can say that the numbers tossed around in the headlines are not going to materialize. They’re exaggerating this to capture the headlines.

The next big topic I see all the time is this wave of distress, that there’s this huge, huge issue with investors ability to pay for their properties, and you see these distressed numbers, and that there’s going to be foreclosures, and there’s literally hundreds and hundreds of billions of dollars in distressed funds, targeting assets that are going to come to market when the owners can’t pay. Now, this has been a very severe recession, we fell into a very, very, very big hole economically, and we’ve had those challenges. But we are definitely not seeing a massive wave of distressed sales. In fact, distressed sales are only about 1% of the total right now, and I don’t expect a huge wave to come afterwards. When you look at the CMBS loans, that’s those bars on the right, and compare it the peak of the financial crisis against the current situation. Industrial,1.3% of industrial loans are 60 days late, 2.5% of apartment loans. These numbers are well below anything that anybody would call a distressed market. Of course, if you look at retail and you look at hotels, yes, there are a lot more late payments, particularly in CMBS.

But I can say with CMBS, the number that gets thrown around all the time because that’s a number everyone has, only tracks CMBS loans. Well, the CMBS lenders were the ones who were not given forbearance. They’re the ones who have the most late notifications. If you look at local banks which are the biggest lender right now, they have very little loans that are late because they are partnering with their investors and helping them get through this. This is why your lender becomes such an important part of your team as you’re going out and looking at how do you acquire assets. Lenders are a critical part of that and they are a team member just like everybody else. Make sure you have the right lender, make sure you understand the types of lending that you’re going to be using. They have different strengths and weaknesses and are applied to different parts of business.

When you look at the other big one was that this is the death of retail. I’ve been listening to this for the last five to 10 years, it’s not true. There are parts of retail that are going to be impacted. When you look at year-by-year vacancy rate change of different types of retail centers against other types of investments, like apartments and industrial properties, actually the movement in vacancy rates has been comparable for the most part. Now you got those old shopping malls out there. Yes, absolutely, they’re a problem, they’re not going to be fixed soon. That’s where a big chunk of that vacancy rate is coming from and that’s where you’re going to see challenges. Those are really redevelopment projects. But when you look at your neighborhood and community centers, I’ve been working with investors a lot on those lately, those neighborhood centers with a grocery store and a lot of necessity retailers are great, they’re doing very well.

The next thing is that the rent collections at retail actually almost fully recovered a huge portion of the spectrum. If you look on the right side of this graph, you can see that there are sectors that face headwinds. Things like health clubs, and entertainment venues, restaurants, not all paying, that’s where you’re going to see problems. But if you’ve got a bank, a grocery store, a pharmacy, and a home improvement store in your retail center, you’re doing great. You got to look underneath the surface, when you see things in the media, don’t take it at face value.

Shifting over to some of the key trends and what we’re seeing there. We look at the apartment supply and demand trends. The net absorption has actually been holding up very well, but we are facing record levels of construction. When you look at the right hand graph here, you can see the class A vacancy rate is coming up very dramatically, the class B and class C are pretty stable. In fact, darn near record low vacancy rates. Those are doing very well but we are seeing record levels of construction in 2020 and we will see about the same level of construction in 2021. But then it’s going to taper and it’s going to taper for all property types, the pace of construction. First of all, because of the pandemic and the construction pipeline, but second of all, because the cost of building materials are at a record high as well. That’s lumber, that’s concrete, that’s copper, that’s all the things you’re putting into a building are really at an elevated price point right now, and that makes it difficult for builders to get a project to pencil.

The next thing I want to talk a little bit about is self-storage. Again, as we went into the pandemic, a lot of the self-storage investors were cutting their rates and saying, “Oh, man, we’re going to be in for some tough times.” It actually turned out not to be a tough time for self-storage. In fact, the national occupancy rate in self-storage hit an all-time high in the third quarter of last year, which is our most recent data. We’re seeing some really strong momentum behind self-storage. Yes, there has been a lot of construction over the last few years but that’s also starting to burn off and come back. We could see a new wave of construction in 2022, I don’t know yet, it’s speculative. But one thing about builders is that when they see something hit a record high occupancy rate, they want to go ruin that for everyone. So, there you go.

Break: [00:15:52][00:18:48]

John Chang: The next thing, I’m going to touch on all these other different property types very briefly. As I mentioned, retail doing better than most people expect, vacancy rate up to about 5.6%, and it’s going to continue to climb this year. I think there’s a lot of dark space out there that hasn’t been captured in that number yet. When you look at office, basically leasing activity is on hold. There’s a lot of uncertainty, people don’t know if they’re going to come back after the vaccine or not, but it is still unknown. We’d had this terrible negative absorption because nobody was leasing anything so vacancy shot up. We’re not at a peak yet, we could reach a peak in 2021 but it’s still unknown. Then industrial, which everybody is loving right now, is going to continue to outperform. But there is always the construction wave on that one as well.

I’m going to talk a little bit about some of the key strategies as we move toward a wrap up here. We’re navigating what has turned out to be this massive black swan event and has significantly impacted our business. We all had plans, right? Two years ago, a year ago, we all had plans of what we were going to be doing, where we’re going to go, how we were going to invest. Everybody has a great plan until they get punched in the mouth according to Mike Tyson, and I think he has pretty good knowledge of that. Basically, we were humming along the first two months of 2020, commercial real estate sales were doing great, and then this pandemic hit, the sales activity collapsed going into the second quarter. It’s been kind of on this recovery cycle since then and we are generating a lot of momentum. We are starting to get back to close to normal. We’re not going to get back to normal for a while yet, the vaccine is a key ingredient. Like I said, there are real questions about certain parts of our industry, about certain types of real estate that are going to restrain those as we go forward.

The next one, Wayne Gretzky, “Skate to where the puck is going not where it’s been,” fantastic advice. I’m going to tell you a little bit about where the puck is going right now. When you look at demographics… Actually, I shared this slide two years ago before we hit a pandemic and before any of that was happening. I said, “Look, there’s this wave of young people, there’s this huge generational wave of millennials out there. They’re in a prime spot from a renter standpoint, but they’re moving towards tipping points on other items. They’re looking at getting married.” Now, two years later, the peak of this wave has moved in. 60% of millennials are age 30 and older, a larger and larger share of them are getting married, a big piece of them are moving into that first time home purchase. We saw this wave of home purchases that were sparked by the pandemic, that was momentum that was already moving. We’re just catching up with it, it’s just catching up to the news.

We’re seeing this tremendous wave of people moving out of New York, moving out of the Bay Area, moving out of the Northeast in general, and they’re going south. Again, two years ago, actually, five years ago, we were already talking about this trend as we mapped out the demographics and lifestyle changes. People move to the suburbs, they move to smaller cities when they get older, and they’re moving out of that early phase of career growth. That was driving our urbanization. The pandemic has accelerated this movement and pushed a shift to the south. We have tailwinds and a lot of southern US cities, and we have headwinds in the Northeast and in California. This is not entirely pandemic-driven, this is mostly demographics-driven. As you can see here, when you look at the suburban versus the urban, and I have both apartment vacancy rates, and office vacancy rates up on the screen here. You can see just this dramatic shift in vacancies in the urban core.

Now a big piece of this is new construction, right? Because two years ago, builders are still working on a business plan they developed five years ago and they were plowing new development into the urban core. Now, we shifted and we shifted fast. We had a transition point early in the pandemic where people could work from home, they left and they move out to the suburbs. You can see that the suburban vacancy rate, it went up too, a little bit because of construction, but not nearly as severely as the urban core. Because people don’t need to be downtown anymore to work at their job. We’re seeing a similar trend, although not as significant with office space, we’re seeing the demand for suburban office space gets stronger, and the demand for urban office space get weaker. But again, that trend is still materializing. There’s a lot of uncertainty whether people will go back to the office and what that will look like when they do.

Finally, my third big piece of advice comes from Tom Brady. His statement is “I don’t care about three years ago, I don’t care about two years ago, I don’t care about last year, the only thing I care about is this week.” I’m not sure when he said it, but I don’t think it was just before the Super Bowl as a Buccaneer. I think that this is something he’s been saying and living for a very long time. I was thinking about what’s happening with investments and where people are focusing. What happens so often is an investor buys an asset in 2018 or 2019 and they have a plan for where that’s going to go. Well, the world changed. When the world changes, you have to adapt your strategy. Don’t stick to the plan you made two years ago. It may be a great plan, it may still work, but don’t simply stick to your guns because you think you need to. You can always adapt, you can move capital out of one asset and put it into something else.

When you look at the yields today and the spread over the cost of capital, it is about as wide as it’s ever been. Right now, because the lending climate is so strong, because the lending rates is so low, that investors have a window of opportunity to acquire assets. I don’t want to spoil it but we have a debate later today focusing in on where the interest rates are going. I have a personal opinion on that that I’m going to share today, as well as the four other fantastic speakers. I’m not going to spoil it. But I think that this window we’re in today, with very low interest rates and stable cap rates, it really is something people should be considering as they make their investment decisions. Don’t fall in love with the assets you bought two years ago or three years ago, you need to remember this is about return on investment. If you need to reset your strategy like Tom Brady, then you should do that.

Joe Fairless: Well, I hope you gained some useful insights and actionable advice from this previous Best Ever Conference session. Remember, if you’re looking to scale your investing in 2022, we look forward to seeing you in Denver. Get 15% off right now with code BEC15 at besteverconference.com. That is code BEC15 for 15% off at besteverconference.com.

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JF2671: 6 Benefits of Tokenizing CRE Assets with Shannon Robnett

Have you ever thought about tokenizing your assets? For Shannon Robnett, it’s a no brainer; these smart contracts help provide transparency on the asset, minimize issues with liquidation, and overall are easier to manage. In this episode, Shannon shares the benefits of tokenizing your commercial real estate assets.

Shannon Robnett | Real Estate Background

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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Shannon Robnett. Shannon is joining us from Puerto Rico. He is a multifamily and commercial developer and has done over $350 million of development. Shannon has also personally transacted over $160 million as either a buyer or seller. Shannon, thank you so much for joining us. How are you today?

Shannon Robnett: Good, man, yourself? I appreciate you having me on the show.

Ash Patel: I’m doing great. It’s our pleasure to have you. Shannon, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Shannon Robnett: Yeah, I grew up in a construction and development family. My dad was a builder, my mom was a realtor, I watched them do deals at the kitchen table. That was kind of how I grew up, on the job sites on Saturday and Sunday… And I thought I wanted to go to college and be something different, but the real estate game just kind of pulled me in and I’ve been happily doing that for the last 28 years. I had a lot of ups and downs, but I wouldn’t trade it for anything.

Ash Patel: That’s incredible. So did you not have a natural inkling to go into real estate? Or were you just so bombarded by it that you wanted to get away?

Shannon Robnett: I think that was kind of it. I was so sick of hearing about it and I was so sick of cleaning up job sites. We’re recording this right around Christmas time… I even remember going out one Christmas day, Ash, to go fix a problem on a job site with my dad. And I was looking for anything normal other than real estate. And I got out there, I’m going to college, and my little brother’s making $45,000 a year in 1993 with no college degree, no nothing, and I’m just sitting here going, “I can’t believe I’m actually doing this.” So I quickly reversed course and went back into real estate. It was very short, “I think I’m going to be different than everybody else.”

Ash Patel: What did you want to go to college for?

Shannon Robnett: Computer information systems. There was this guy, Bill Gates was doing some pretty crazy stuff, and then this other guy was doing stuff with a fruit company… And I just thought that would be the path to riches, because computers were everywhere.

Ash Patel: Let me share my story. ’93, I graduated from high school, and that’s when the tech bubble was booming. So I actually went into computer information systems, that was my major. I had like a 15-year IT career, and then I’ve found commercial real estate. So congrats on finding the fast track to get to where you are now. I took a long way–

Shannon Robnett: It just [unintelligible [03:00] knots on my head than you do, because I got into it early.

Ash Patel: Alright. So, a family business… Did you just walk into that business? Or did you start out on your own?

Shannon Robnett: That’s the funny thing about family… Everybody’s business is your business or your business is everybody’s business. But I got done with the whole “I’m going to go to college” phase of my life. I told my dad I want to build a house, and my dad said, “Okay, go get the backhoe.” I’m like, “What do I need the backhoe for? We could just hire a guy to dig the hole.” Literally, by the time I get done building that first house, I had dug the hole, I put in all the utilities, I poured all the concrete, I had hired two of the guys, we’d framed it, we sided it, we painted it inside and out, we built the cabinets… I literally built the house, and it took about 70 days to do that. But at the end of that time, I knew how to do all those different aspects of it, and I realized that I hated every single part of it. So I had to figure out a way that I could be involved in the real estate business without actually being involved with the building of the house. That’s where I kind of settled on the commercial field, and started dealing with that, and then worked through building police stations, fire stations, schools, hospitals, and going that route, but always on my own and always just trying to find the next opportunity to hone my skills, until I finally just realized, “Why am I working for everybody else? I need to be doing this for myself”, and started going down the path of investment building.

Ash Patel: Well, you learned how to build a house, but then you started building commercial buildings. Why not stick to what you know and just keep building houses?

Shannon Robnett: Have you ever met homeowners? [laughter] The reality is when you look at it, when you’re putting in a foundation on a house, it’s the same as putting in a foundation on a police station. It’s one aspect of the job, but it’s much, much larger. I was able to find that by doing 10 large commercial projects, we could do 25 million dollars a year, and in order to do 25 million dollars a year in volume at a 7% margin, I would have to build a lot of houses. So it allowed me to condense time into different projects, and I then took that into the multifamily space and the triple net industrial space and started to run away with that stuff.

Ash Patel: And how many years did you continue to focus on building commercial and industrial?

Shannon Robnett: I still do. We’ve got a couple of opportunity zone developments going right now with warehouse. A triple net warehouse is such a fabulous thing, because like apartments, it’s the incubator space. You get out of your mom and dad’s house, you go get an apartment, then you save up your money, you go buy a house… It’s kind of the same thing. You start a business in your garage, or you and your buddy are going to become window tinters or whatever, you go rent a small incubator space, and then you go build your own building. It’s the same kind of thing, but they’re parked a little bit longer.

We even saw in 2008, when the market was crashing, people were paying their rent before they were paying their house payment, because if they didn’t have a place to do their business, they couldn’t pay their basic bills. So that’s just always kind of been a bread-and-butter slice. And as cap rates continue to heat up on multifamily, it’s still a little bit more lucrative to do the industrial right now.

Ash Patel: And when you say industrial, is that more flex space? I love that space, because it’s so easy to rent.

Shannon Robnett: It is. We’ve got little requirements. You put a 10 by 10 office in the front, a bathroom in the back, a roll-up door, about 2000 square feet, with some basic heating and electrical requirements, and everybody fits in there, from the guy that makes gelato ice cream, to a guy that manufactures bullets, cabinets, tables, or whatever. We’ve got all different types in there.

Ash Patel: Yeah. And if somebody wants more office and less warehouse, just put a wall up; if they want the opposite, move a wall.

Shannon Robnett: Exactly.

Ash Patel: That’s incredible. Is that primarily what you’re building now?

Shannon Robnett: No. We currently have about 500 units of multifamily going, and only about 80,000 square feet of industrial space. So we do what pays…

Ash Patel: So you pivot on whatever asset class is being overbought.

Shannon Robnett: Correct. Currently, we just broke ground on a 190-unit apartment complex, we’ve got a 35,000 square foot supply house in Florida, and 375 single-family homes that we’re doing in a subdivision in Florida as well. We’re kind of asset agnostic, as long as it makes money.

Ash Patel: I love that. I try to get investors to look at that, as well. A lot of people, their best advice is to be hyper-focused on one niche. I’m the opposite, man; find what’s paying, find out where the deals are, where the money’s at, and continue to pivot.

Shannon Robnett: Everybody talks about multiple streams of income, and everybody looks at that and says “I need to be in four apartment complexes.” But the reality is if you’re in apartment complexes, and you’re in notes purchasing, and then you’re in industrial space, and then maybe you’re in a mobile home park, you’re in multiple asset classes, but then you can also diversify that even further if you want to. And I agree with you, I think diversification is good; I think you need to be good at what you do. And real estate is not rocket science, or brain surgery, or even as complicated as tech. So it’s something that you can become pretty good at with a little bit of home study.

Break: [00:08:12][00:09:51]

Ash Patel: Do you do any remodels, or is it all new construction?

Shannon Robnett: It’s funny you asked… Actually today, I’m closing on my first value-add, and it’s an office building. I’m buying an office building that’s a brand new 1980, that we’re going to completely rehab the inside of it; we’ve got the FAA as a tenant and some other space in there, but coming out of COVID, office is in an absolute toilet… So it’s a great buy, it’s a power play at this point; we’re buying it for a lot less than we could even think about building it, and remodeling it… And I think that we’ll learn; we’re going to do our first remodel in 2022.

Ash Patel: That’s great. So why not continue to pick up other assets cheaper than you can build them? So strip malls, retail, industrial…

Shannon Robnett: We are. We’re looking at thatm because it’s been easy — I think there’s been plenty of fruit for everybody in the value-add, [unintelligible [00:10:44].28] got there with the multifamily, everybody’s kind of looking at different stuff… Strip malls are now coming front and center because retail is dying, but they’re in phenomenal locations, so to pick those up and repurpose them… We’ve got one of those under contract. We’ve got some other stuff that we’re looking at. But I completely agree with you. And if you’re stuck in one mindset of “I only do value add multifamily in Southwest United States”, then you really got a small bowl to pick from. Whereas, if you’re willing to look at exactly what you talked about, you’ve got the opportunity to see how you can work all over the nation and continue to pick up where there is still value to be had.

Ash Patel: Agree. If you’re looking for multifamily that’s value add in Southwest Ohio, the penalty is you’re paying three and a half caps.

Shannon Robnett: For a 1972 model.

Ash Patel: Yeah. And you’re competing with 10 other people that have the same mindset as you.

Shannon Robnett: Exactly. And as you know – we’re about the same age – that late 1970s model is starting to show its wear.

Ash Patel: You’re not kidding. So what’s on the horizon for you? What’s next?

Shannon Robnett: One of the things that we’ve started doing lately, just because we were bored, is we’re actually beginning to tokenize real estate. We’re moving that intersection of blockchain into the real estate asset class. One of the things that everybody confuses is they say, “Oh, you’re in crypto.” We’re not. But the technology is so much similar to, let’s say, title chain, that it allows for so many opportunities and so much liquidity for syndicators and developers to bring that to the forefront where people can actually own fractionalized digital currency, that’s asset-backed with hard assets like real estate, and then make that tradable and transferable in a distributed ledger that really opens it up to everybody.

Ash Patel: Can we deep-dive on that?

Shannon Robnett: You bet, buddy. Let’s go.

Ash Patel: Alright. And what I love about this podcast is we have no preset questions criteria, except the Best Ever lightning round. So we can talk about anything we want. For our Best Ever listeners that maybe have heard the term tokenizing real estate, what does it actually mean?

Shannon Robnett: A lot of people confuse tokens and coins. A coin is a blockchain, and that blockchain is digital information that has the first piece encrypted with the information into the second piece, and the third piece. Let’s bring it back to real estate. Like the title, you can go find out how long this property has been in the family, where it was a full section, where it got divided down and became a subdivision… All of that is in a title chain. Blockchain technology creates the same ability to give that information for you, but it also puts that in a distributed ledger, so that you can see it, I can see it, somebody in Tallahassee can see it… Everybody has the ability to see what’s going on here. That creates some transparency. When you do that, you create a digitally transferable asset.

When people talk about tokenization, you’re really just taking what we would normally have as a share in a syndicated model and you’re making it a digital hashtag that contains all the information, the PPM, the offering memorandum, all the waterfall instructions – everything there is tied up in a smart contract. Then that information is put on the distributed ledger, and then how many shares are owned by each individual or each named entity. So it creates some anonymity at the same time that it creates transparency as to who owns what pieces of this. Then what it does the most is it allows for that transferability to start happening. Because one of the things that syndicators hate is trying to find a marketplace for you to try and sell your piece of their pie after two years, when their deal is a five-year deal. This allows that liquidity for that transfer to happen, because it’s a digital transfer, and we’re actually creating the marketplace for that, so that now you can have that liquidity to sell or do other things with your particular digital asset.

Ash Patel: Yeah. And it’s an immutable ledger, so you can’t go back and change things. You can add to it, but you’ll see all the additions on the ledger. The beauty of that is the liquidity. So for the syndicators out there, if you have somebody that says, six months in, “I’m getting a divorce. I’ve got to get out of this. I need to liquidate right now.” You don’t have a lot of options, unless you can find a buyer for that share. Whereas if you tokenize this and there’s a marketplace, it always has a value. So within six months, you might have already gotten 10 to 15% appreciation; you can cash out and get some gains, versus the syndicator saying, “Fine, we’ll cash you out, but it’s a 15% penalty.”

Shannon Robnett: Right. The reality is there’s a lot of products that are coming into the market. But basically, these are all tied up in a smart contract. And that smart contract – it’s really not smart, but it executes on its own. So if you’re doing this liquidity play and you have people that want to move around, as a syndicator, that becomes a headache, because then we’ve got to track the paperwork, and we’ve got to do all this stuff. But with the blockchain technology, it takes care of all of that thought process. It tracks all of those things. So then when you’re sending your distribution out, you’re sending it down the line, like a Plinko machine. It just goes to the lowest piece of the chain and says, “Here, this is your distribution for these chairs or these tokens”, and it creates that ledger. So then it’s really easy to track who did what, who gets the K1s, for how many shares, for how long, and what level they sold at. It allows for royalties to be paid to syndicators when people sell; it allows for a lot of really cool things that people haven’t really thought about. But most importantly, it allows syndicators to begin thinking in an infinite state, where I’ll never have to sell this because I can still get the reward that I would normally get by getting it to this next level without actually having to liquidate the asset.

Ash Patel: Yeah. And how do you equate that to an NFT? NFTs are not really tangible. But in this case, your token is tied to a tangible asset. But in some cases, it works in a similar fashion. You can buy and sell, trade royalties.

Shannon Robnett: I think you could go either way. I liken the NFT as to taking the Mona Lisa, and we all want to own a piece of the Mona Lisa. But then I look at digital securities like Apple or Microsoft. Microsoft doesn’t really have anything that it makes. It makes the surface, but it doesn’t really make anything. It’s all about intellectual property and programs. So everybody understands that you’re not going to buy an NFT, a piece of Microsoft; you’re going to buy a share of Microsoft, but you’re going to buy ownership in the one and only Mona Lisa. So I kind of separate them out that way. The reality is the NFT is one of a kind, and while my apartment complex is one of a kind, there’s a lot of us in there that own it, and we own those digital ownership shares.

Ash Patel: It makes you wonder, why don’t they do fractional shares of the Mona Lisa, fractional shares of NFTs?

Shannon Robnett: Because it doesn’t sound near as cool as non-fungible. [laughter]

Ash Patel: Yeah. [laughter]

Break: [00:17:59][00:20:56]

Ash Patel: I had Neal Bawa on a few weeks ago, and he stated that one of the driving tailwinds for real estate prices is tokenization. Because once overseas investors have easy access to American real estate through tokens, it’s just going to be on fire.

Shannon Robnett: I think that that’s true, and I think that the one thing that tokenization does is it takes out the liquidity question. When people are looking at that — I think that syndication is very popular, and it’s getting more popular all the time, especially as prices increase and yields decrease. But I think the fact that you’re able to create that liquidity so that I’m making a commitment to you for as long as I want to, not as long as you, the GP, want me to – I think that that’s going to change a lot of it as well, and give people more reason to look at parking money or parking capital in syndications, and then knowing that they can get out whenever they feel like.

Ash Patel: I’ve got to ask you… So you started in your family business – did any of your family come with you to the development side?

Shannon Robnett: Well, my brother builds custom homes in a resort area. My dad – he retired when he was 50, having plenty of incubator space that’s kept him and mom happily motorhome-ing and around the world… So my brother does something very similar. We’ve worked together for a period of time, but he’s an exceptional high-end home builder, and I really can’t stand homeowners.

Ash Patel: I love it. Shannon, what’s your best real estate investing advice ever?

Shannon Robnett: I think the fact that you’re doing it. I see so many people that spend so much time analyzing this and analyzing that. If you’re going to get involved with real estate, get involved with real estate and make sure that you’re in it for the long haul. So if you buy a house, hold onto it for 20 years, and you’ll see the value of it. Don’t look at real estate as something you invest in for the short-term. I think you’ll really see where it becomes a really solid asset that gives you incredible tax benefits.

Ash Patel: What was the hardest lesson you’ve learned throughout your incredible 20-year run? Whether it was about partners, finances, transactions, assets, anything; just a really tough lesson that toughened your skin.

Shannon Robnett: I think that the thing that I’ve had to learn multiple times is that you need to often be the answer to your own problem. You can get somebody that can either be a partner or part of your business that can do what you need to do in that business better than you. And that’s always great. But if Tim doesn’t show up today, who’s going to cover that role? You need to at least be able to function in that area. But I see a lot of people, they’re coming into the space and they go, “I only do this part of it. I don’t know anything about the rest of it.” And then all of a sudden, partnerships come apart, as partnerships do, and that person knows nothing about the rest of it. So I think you need to be a master of something in your business but you need to understand to be able to do all of your business to some fifth-grade capacity, in order to not get stuck hanging out in the wind.

Ash Patel: I think that’s what your dad was thinking when he made you do the siding, the windows, the paint.

Shannon Robnett: You know what? You don’t have to agree with him… [laughter] But I completely agree with you. That was exactly his thought process. If you know how to hang the cabinet when the cabinet guy doesn’t show up, you just take care of it.

Ash Patel: Yeah. Shannon, are you ready for the Best Ever lightning round?

Shannon Robnett: I am.

Ash Patel: Let’s do it. Shannon, what’s the Best Ever book you’ve recently read?

Shannon Robnett: I think the one that I’m reading right now is The Creature from Jekyll Island. It’s all about what has happened to our currency and what’s going on with the dollar. It plays out so incredibly strong into what’s happening with inflation right now. It’s really an eye-opener. Where we’re at with what’s happening with the dollar in the world currencies has been 150 years in the making.

Ash Patel: Assuming there’s this massive inflation on the horizon, how do you prepare for that?

Shannon Robnett: You borrow as much money as possible. The reality is if you can pay back today’s loan with tomorrow’s dollar… We’re all experiencing 16 to 20 percent rent increases due to no fault of our own. Why wouldn’t you take that profitability and borrow and acquire other assets that you’re going to pay back in future dollars that are inflated?

Ash Patel: Great advice. Shannon, what’s the Best Ever way you like to give back?

Shannon Robnett: I love my community and I love to be involved in it. As we’re coming out of COVID and you see a lot of businesses that have been struggling, and things have happened, I really make it an effort to buy local and to make sure that I’m contributing to my local charities. I get it, there’s a lot of national charities out there, there’s a lot of national chains that provide great food, and great shopping experiences… But giving to your community, and make sure that when you have the opportunity to be charitable, that you are, and that you do it in a way that benefits your direct community.

Ash Patel: Shannon, how can the Best Ever listeners reach out to you?

Shannon Robnett: The easiest way to do that is just at shannonrobnett.com.

Ash Patel: Awesome. Shannon, thank you so much for sharing your story with us. 28 years in this business, starting out as a residential home builder, quickly pivoting, and now 28 years later, continuing to pivot. Incredible story and thank you again.

Shannon Robnett: I appreciate the time, man. It’s great to share with your audience.

Ash Patel: Best Ever listeners, thank you so much for joining us. Have a Best Ever day.

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