Passive Investing Strategies, Actively Passive Investing

JF2396: Passive Investing Strategies | Actively Passive Investing Show With Theo Hicks & Travis Watts

Today Theo and Travis will be answering their listeners’ questions and sharing their insights on investing in modern real estate development – like how important are entry cap rates versus exit cap rates in underwriting and how important are preferred returns?

Rather than outsmarting the stock market, the best strategy is to mirror it in your portfolio — typically with investments based on market indexes — and afterward, sit back and see what happens.

We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome to the Actively Passive Investing Show. As always, I’m your host, Theo Hicks, with Travis Watts. Travis, how are you doing today?

Travis Watts: I’m doing great, Theo. Thanks for asking.

Theo Hicks: Yup, absolutely. Today, we will be answering another question that was submitted by a listener. Thank you for the questions. This week’s question comes from a listener Jay. We’re going to do a little passive investing a 101 course. The question from Jay was asking us about the pros and the cons of passive investing compared to actively investing, so we’re going to go over a list of pros and cons today. But as always, first, Travis is going to mention why we’re talking about this topic in addition to it being a question from the listeners, about why is this relevant to listeners of the Actively Passive Investing Show… And then he is going to start off by defining what passive investing actually is. Take it away Travis.

Travis Watts: Sure. I’m so glad that we got this question. Thank you, Jay, for submitting it… Because I often forget sometimes. After 12 years of self-study, reading all the books, podcasts, and networking with thousands of people– that there’s a ton of folks just getting started in the space. They’re hearing about the word syndication for the very first time, they’re hearing about passive income, perhaps from the wrong sources… So I kind of want to give our take on it and kind of make a passive investing 101 show.

And quite frankly, this isn’t even about multifamily. You could relate it that way, but I really wanted to dive into specifically passive investing, to Jay’s point, versus active investing. We talk a lot about multifamily syndication, market trends, vetting deals, vetting sponsors, but what about the concept, or the strategy, or the philosophy of just passive investing, multifamily aside? So with that, I want to give you guys some practical math, some practical examples, and I want to go through a few definitions with you just to get started. Before I jump in, Theo, did you have anything else to add before we get going?

Theo Hicks: No, I don’t.

Travis Watts: Got you. All right, cool. So with passive investing, the way I look at it is this is the type of investing that doesn’t require your active participation in the business itself. Hopefully, that makes sense. I’ll give you some examples. Investing in stocks, for example – you’re not the CEO of the company, you’re not an engineer at the company, if we’re using an example like buying Apple stock; so in this case, you’re a passive investor. You’re just going to own a fractional portion of that company, and you’re going to let the team handle the business itself. That’s being a passive investor. You could invest in REITs, real estate investment trusts, you could invest like I invest, in real estate private placements, or real estate syndications as some people call them… It’s anything that doesn’t require active participation in the business.

So what is it not? It’s not fix and flipping properties. So many people think of it that way. Or “I’m going to go buy a turnkey property, a single-family home.” These are not passive strategies, because you’re still having to manage some elements of the business. If it’s not putting a tenant in, maybe eventually you’re doing that, or it’s managing the property manager, or it’s out there seeking and driving to find these properties… There are active components. It’s not wholesaling houses, it’s not day trading stocks, it’s not syndicating your own deals and being a general partner… Those are all active strategies that require your personal time, effort, commitment, inside the actual business of generating the income and the returns.

So with that, why passive investing? I would say this generally falls into two categories for people. You’re either in it for what I call time freedom, which is freeing up your time and having flexibility over your time –I’ll explain that a little bit more in a minute– or you’re in it for just general wealth creation. You’re either more money-focused, or more time-focused, or simultaneously the combination of the two.

Think about this – when your passive income, be it dividends, interest, cash flow, etc., from your assets, when that exceeds your lifestyle expenses (your mortgage, rent, insurance, food, etc.) then you become financially free. This is really the sweet spot of why passive investing and why passive income. I like to think of it this way – we all end up, if we’re ever going to “retire”, with passive income. That could be Social Security payments. That’s pretty passive. You’re not actually working for that money as it’s coming to you in retirement; it’s just being sent to you. Same with a pension, if you’re lucky enough to have a pension, or old enough to have a pension, I guess I should say, these days. Or a lot of people park money in things like annuities, which is another form of converting your nest egg into passive income.

My whole message here is, why not start focusing on that cash flow and passive income generation now, instead of later? There’s not a lot of cons to that. At least you’ll be educated, you’ll have the know-how, you’ll have, hopefully, some diversification built-in, you’ll know different strategies… It’s unfortunate that so many folks either never learn it, or they wait till their 60s or 70s to start trying to figure it out. In some cases, that’s really not a good thing. You may be taking an abnormally high amount of risk at that point, etc. So that’s what passive investing is in a nutshell – you’re trying to diversify, get multiple income streams rolling in to offset your lifestyle expenses, so you either have flexibility over your lifestyle and what you want to do with your time, or just to generate wealth and perhaps pass that on to someone else. It’s just building income streams, instead of the buy low/sell high mentality that so many folks have. With that, that’s kind of passive investing in a nutshell. Theo, I’ll turn it over to you on whatever topic you want to cover on that.

Theo Hicks: Yeah, a lot of the things that you just said are going over the main benefits of passive investing. I really liked how you positioned it that, look, you’re going to have some sort of passive income, most likely eventually, or at least the baby boomers and older generations today; maybe not us, but most people are going to have social security pension, some sort of passive income coming in. So why not just do it now instead of later; why just rely on getting Social Security or pension? Why don’t you just also passively invest now so you can kind of have both of those? Just in case one of those happens to go away, especially our younger generation.

So I want to go back over to what Travis just said a little bit and extract a list of the benefits of passive investing. Then I also have a list of cons or drawbacks, but all these are going to be compared to actively investing. Before I even go into that, I’m going to call these potential pros and potential cons, because it’s not like every single passive investment is going to have all these cons or all these pros to the same degree, same with active investing. So it’s going to depend on the three things that Travis talked about all the way at the beginning, which is going to be the market, the deal, and then also the team you’re investing with.

So assuming that you’ve got a passive investor with a team who’s got a level 100 skillset, a level 100 market, a level 100 deal, as opposed to that person who’s actually investing having a level 100 experience, a level 100 deal, a level 100 market, all things being equal – what are the pros and cons of being a passive investor in that amazing active investment or actually being the active investor? I’ve got four categories for the pros and the cons. It’s going to be control, time commitment, risk, and return. So I’ve got benefits for each of those four points, as well as potential drawbacks for each of those four points.

Let’s start with the pros first. This is what Travis talked about, and that’s going to be the time commitment. When you’re passively investing, you have a lot more flexibility over your time. Of course, this is the Actively Passive Investing Show, so passive investing isn’t completely passive, so to speak. It’s not like you do nothing. You still have to look at deals and understand what’s going on, but it’s not going to be as large of an ongoing time commitment as being that active investor who needs to actually work in the business, as Travis said. That’s probably one of the major benefits of passive investing over active.

Also, from a time commitment perspective, you can also look at it from a lower upfront time commitment. Because when you’re actively investing and you’re managing your business, that takes a lot of time; it’s like a full-time job. But it also takes a lot of time to get to that point in the first place where you actually buy your first deal; because you need to have the money, the team, you need to find a lender, you need to raise capital, or have enough money to actually do the deal before you even actually have a deal in the first place, that you have to manage. So the upfront time commitment for you as a passive investor is going to be a lot less, because you’re just finding someone who’s already done all that upfront work and then you are just investing. So you don’t need to have an insane amount of experience or expertise in whatever asset class you’re investing in, because you’re relying on an experienced team member.

Also, from a risk perspective, passive investing, again, all things being equal, has a lower risk than actively investing. Same reason, because you’re plugging into a proven system, a proven business plan, a competent team, in addition to your ability to diversify more easily across multiple asset classes, multiple markets. When you’re actively investing, you’re usually focused on one asset class in one particular market, so you’re not very diversified.

The fourth point would be return. So from a passive investor perspective compared to actively investing, you’re going to most likely see more consistent returns. Passively invest – I’m going to get my monthly distribution or my quarterly distribution. Whereas if I’m an active investor, I might not get paid off at first; I might have to wait until the sale happens actually make money. Also, if you look at it from a time perspective, passive investing has a lot higher return on your time too, because you’re making money without having to actually put forth a lot of time. So before I go into the cons, I want to pause there. Travis, any thoughts on those?

Travis Watts: No, I think that was an excellent job. Thank you for covering those.

Theo Hicks: So the cons – again, they’re gonna be related to the same four points. We’ll start with the point of control. Sure, you have a lower upfront time commitment, a lower ongoing time commitment, don’t need expertise, don’t experience… But the flip side of that is that you have no control over the actual business plan of what you’re investing in.

Using stocks, as an example, you have no control over whether or not the CEO gets fired, or how much money gets invested in R&D; all you can do is just select what you invest in and then let the team do all the work. Same with real estate – you can pick what you want to invest in, what team, what market, but once you invested, you have no say over the business plan. So really no control once you’ve actually invested; your control is exclusive to picking what you invest in.

And then from a time commitment perspective, sure, there’s a lower upfront time limit compared to active investing, as well as a lower ongoing time commitment compared to active investing, but it is possible that you need to have more of a financial foundation before passive investing. For example, if you need to be an accredited investor, you need to meet the liquidity of the net worth requirements. Whereas if I want to actually invest in say, a house hack, I can just bring five grand down, get a 3.5% down  loan and get into actually investing. Or you can do creative financing, 0% down, or you can be a syndicator where you’re not bringing that much money to the deal. Whereas if you’re a passive investor, you may need to be accredited. It is possible to be sophisticated, but you still need to have some level of knowledge of investing before you can passively invest; whereas active, technically you don’t need any experience or money to do a deal.

And the last one would be a return perspective. So you’re going to get more consistent returns, as well as a higher return on your time. But by being an active investor, you’re going to have a higher upside potential by being the active investor, compared to passively investing. When you’re passively investing, you might just get a preferred return, you might participate in some of the upsides, but the return on investment, the ROI percentage is going to be much higher when you’re actually investing, compared to when you are passively investing.

And then I really couldn’t think of any downsides from a risk perspective in passive investing; maybe that can be related to the lack of control. But as long as you’re investing with a competent team that’s implementing a proven business plan in a valid market, then again, all things being equal, a lot less risk when passively investing compared to actively investing. Those are my lists of pros and cons.

Travis Watts: Excellent list. On that last point, I was just thinking out loud here… Yes, to your point, there are really three areas of risk. You have the sponsorship team, the market you’re in, and the deal itself – those are all risk points. So I don’t want to make it sound like there’s no risk in passive investing; absolutely not true. And it has so much to do with the team. It’s just simply their ability to execute the business plan. But then also thinking, there’s a lot of things out of all of our control. What is the Fed going to do? What’s the government going to do? What tornadoes or hurricanes are going to come through? We don’t have a say over this stuff. We can do things to insulate that risk, like have insurance or buy an interest rate cap, etc. But at the end of the day, there are always unforeseen things that can happen. But it’s a lack of control, I would say, when you’re an LP like me. I’m doing my best due diligence ahead of time; that’s my active portion. I’m making that commitment, I’m sending funds, and from there, it’s really not in my hands. So that can be a risk for sure. Great points.

What I want to cover quickly here is just some practical math. Again, this is kind of a passive investing 101 episode, so I want to depict the differences between someone who’s got $10 to start and someone that’s got $100,000 to start. We’ve got people listening from all different types here; someone that may be very young, that wants to start their journey. My nephews are starting their passive journey now, around 18 years old, which is fantastic. I didn’t get started until 20, so they’ve got a little bit of upper hand if they commit to it.

Then you’ve got folks who — maybe they never really intended to be an investor. They started a business, they were successful at what they did, they sold their company, and now they’re sitting on a few million dollars… They don’t know what to do with it. So there could be someone definitely with 100k plus to invest at this point.

So I kind of want to cover both of those really quick – how do you get started with $10? Well, again, we’re talking about passive investing, not necessarily multifamily. So for my nephews, they’re starting with a little bit more than that, but still, they’re buying shares of publicly-traded REITs, real estate investment trusts. You could potentially find a REIT out there that’s publicly traded, that has a $10 per share price attached to it. Let’s run those numbers. So if you bought a $10 share, and it had a seven-cent dividend per month, that’s 84 cents per year, that equates to an 8.4% yield, or cash flow, or dividend, whatever term you want to use. That’s an example; you could literally get started with that. It’s usually free to open a brokerage account these days; it’s no commission trades, etc. So that could be your starting point.

I got started with house hacking. Theo, you mentioned that. I just bought a house that I was going to live in myself at a depressed price in 2009, and I rented out a spare bedroom, and I had a roommate basically paying my mortgage.

So you can start in different ways. I would deem that pretty passive. I didn’t have to work or do any labor there. I just had a spare bedroom, I collected a check every month, and I had to deal with just someone living there. So I would say that still falls under passive.

There’s a lot of barrier of entry sometimes to private placement investing, which is mostly what we talked about on the show. You may have to be an accredited investor and perhaps you’re not, you may have to come up with 50,000 or $100,000 to get started; maybe you don’t have that right now, you’re not a millionaire, etc. So the concept here is that you have to graduate, –you don’t have to, but– I graduated to the level of investing in private placements. I didn’t start there. Everyone’s going to have a different starting point. But to your point earlier, Theo, you have to have a way to earn some income, then perhaps save some money, and then build up that nest egg so that you have more options and more things you can invest in, that may have these higher barriers of entry.

But here’s what I want to compare and contrast. I just used that $10 per share REIT example. It’s the same philosophy and the same concept for private placements. Let’s say you have $100,000 to invest, and you invest in multifamily syndication, you’re getting $700 per month; that’s $8,400 per year, that’s an 8.4% return annualized. So all you’re doing there is you’re adding some zeros, but it’s the same game, it’s the same concept.

So if you’re interested in the passive journey and the passive concept of time, freedom, wealth creation, financial freedom etc, just know, you could start with that 84 cents a year, work it up to 8,400 a year, work it up to 84,000 per year, so on and so forth. You just accumulate, it’s a snowball effect that takes time and commitment. As I often say, it’s simple, it’s not easy. Simple on paper.

So I’ll leave you with this thought… Most people have the investing mentality, as I mentioned earlier, of buy low sell high. Nothing wrong with that, but note that that builds net worth; that builds equity, that builds your nest egg. And that’s important, but that’s what that is focused around. Now, if you invest for cash flow, you build wealth, you build income streams. So it’s vastly different; it’s not highly marketed, it’s not highly talked about, because most stocks aren’t paying a dividend, and if they are, it’s 1%or 2%, it’s very low, so it’s very hard for most people to ever retire on yields like that. It’s kind of how our system is created.

We’ve talked about the 4% rule, I’ll just touch on that – the stocks, bonds, and mutual funds world that we’re all used to suggest to a lot of folks that you live off the 4% rule. So you have a million bucks in your retirement account, you withdraw 4% a year, and you live on it. That’s 40k. And then you’re pulling out of your nest egg every year, and the theory or the logic is that the stock market historically goes up more than 4%, so you’ve got a margin built into that. Not a big fan of that myself, but that’s how our system is built and I think that’s why so many of us think “nest egg.” Save, save, save, or max out your 401k and put it all in under the mattress or whatever, and then one day you have enough money. But really consider passive income in exchange for that philosophy. I think it can be very life-changing. I know it has for me, and it has for so many people. Thank you for listening to this, as we tune into that alternative message, perhaps. Theo, any closing thoughts?

Theo Hicks: Yeah, just to kind of go back to what you just mentioned… I like how you focus on that barrier of entry, because again, one of the pros and the cons would be the upfront time commitment or the upfront investment of needing –at least for my real estate syndication perspective– to have that liquidity, that net worth. Something I didn’t mention that you mentioned, which is that the actual money to invest, that $50,000 or $100,000 minimum investment. But then you said, well, that’s one way you can passively invest. But you can also get started for as little as say $10 by passively investing in a stock or in a REIT.

Of course, there are different pros and cons of passive investing in different types of things. Maybe one day, we’ll do a show on the pros and cons of the various types of passive investments. I know we’ve kind of hit on that before, with talking about REITs and stocks versus syndication. The whole point is that it is kind of a myth that I need to be a millionaire and have $100,000 in order to passively invest. So I need to be an active investor first, become a millionaire, have $100,000 in cash before I can passively invest. Not necessarily the case. You can get into other types of passive investments for a lot less, while you continue to work at your full-time job to save that money. So if you’re young and only have $5,000, you might not be able to invest in a syndication. You may be able to invest in a crowdfunded real estate deal, but there’s other options out there besides the $50,000, $100,000, $500,000 syndication investment.

I don’t have anything else on this topic to mention. Do you want to say anything else, Travis, before we sign off?

Travis Watts: Yeah. And to your point, Theo, there are so many ways that you can be a passive investor. We’ve only really hit on private placements, and stocks, and REITs. But one of the places that my wife and I live, we have our car there that we leave for us, but then we also signed up for this platform where we rent our car out to other residents and we get passive income off of that. That rental income is essentially paying all the expenses for that vehicle being there, and that’s just a creative outlet that you can do. You can invest in ATM machines, you can loan out money at a high-interest rate to people for various purposes, whether that’s a business, whether that’s real estate, note lending, tax liens… There’s so many different things out there. I just wanted to paint the picture of being passive versus active and why you might consider that.

The only thing I’ll end with is a quote from me. A famous, famous Travis quote – “The most important asset that we have is our time. Passive Income can help free up your time so that you can pursue the things that you love.” That’s my philosophy in a nutshell, my mission, and my message to the world.

Theo Hicks: I’m going to start doing that. “A famous man once said…” “Who’s this famous man?” “Me.” Travis, thank you so much for joining us today and providing us with your famous quote and breaking down the pros and cons of passive investing versus active investing, and at the end giving us examples of very creative ways to create passive income, like renting the car out.

So that’s all we have for today, thanks for tuning in. If you want us to answer one of your questions on the show or in our 60-second question segment, you can email me at theo@joefairless.com, and we will add that to the calendar. Again, Travis, thanks for joining me. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Travis Watts: Thanks, Theo. Thanks, everybody.

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JF2395: How to Manage Your Property Management Company | Syndication School with Theo Hicks

JF2395: How to Manage Your Property Management Company | Syndication School with Theo Hicks

Theo Hicks dives deep into the themes of property management. Ensure that prior to hiring, you ask the right questions. Set expectations upfront with your management company in making sure they can accomplish the job AND have the willingness to accomplish it.

Theo unpacks the five points in dealing with property management: How often do you want to interact with the management company? What types of reports do you want to receive from them? In what form would you want to receive these reports? What metrics should you be looking at? What other things can excellent asset managers do? Listen to this episode as Theo sheds a light onto these compelling questions!

Weekly Performance Review Spreadsheet: https://www.dropbox.com/s/j17v0ib4euafbo0/Weekly%20Performance%20Review%20Template.xlsx?dl=0

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment indications. I’m your host, Theo Hicks. In the last Syndication School episode, we talked about when to bring your property management company in-house and some of the pros and cons of that. We’re going to continue on the theme of property management company today, and talk about how to manage your property manager.

As a GP, whether the proper management company is in-house or a third party, one of your main responsibilities is to oversee them, to manage them. You aren’t going to be doing the property management duties of actually helping residents sign leases and show units, but you’re responsible for making sure that the property management company is doing those things. So I wanted to do an episode, that I thought I’d done before, but it must have slipped through the cracks, to talk about some of the best practices for managing your property management company, after you’ve acquired a deal and have assumed your position as the asset manager. We’re going to go over five questions to think about.

A theme you’ll see here is that a lot of these management duties, overseeing the management company will go a lot smoother if you set proper expectations upfront, rather than once the property is closed on, management takes over, you explain to them exactly what you want them to do, make sure that before you’re going to hire them, during this screening process, you’re asking them the right questions to make sure that they’re able to do what you need them to do after they’ve taken over management. So what are these things that you want them to do? We’ll go over that in a second.

The theme you’ll see between all of these five questions or five points is that you need to set expectations upfront with a management company and make sure that they’re actually able to accomplish these things and are willing to accomplish these things. As I mentioned in the episode about in house management, setting expectations and having the management company do what you need them to do, implement your business plan to your liking – obviously, a third party can do that but you can get more out of in-house, because it is your management company. You’re in control of that management company, as opposed to overseeing or working with a separate company.

The first question to think about when you’re managing your property management company is how often do you want to interact with the management company? Ideally, you’re going to have weekly calls with your management company. Some people might do it every two weeks; I doubt anyone does it every month, but maybe they do. I’m sure in smaller deals or smaller portfolios it might be a once a month, “Okay, is all the rent collected? Good. Okay, I’ll talk to you next month.” But for larger apartment syndication deals, the ideal is at least once a week. Especially if you’re doing a value-add type deal, or an opportunistic deal, or a deal that involves some sort of renovation to the property, then you’re going to want to maybe even have more frequent communication with your property management company. And then once the asset is stabilized, maybe you can move just to strictly weekly calls, or every two weeks… Again, maybe monthly, but I don’t think that’s probably a good idea… Or as needed. But the idea is that you want to have frequent conversations with your management company.

So again, when you’re having those original conversations, you want to make sure that they’re willing and able to speak with you that often, or however often you want to speak with them, so that you can stay on top of what they’re doing. Because during these calls, these are going to be weekly performance calls, where you’re talking to at least the onsite manager. Ideally, if you’re working with a third party, the regional manager is on this call as well, and it’s going to be, as it implies, going over the performance of the apartment over the past week. You’re going to most likely be reviewing various property reports and them any key performance indicators or KPIs that you like to track.

Which brings us into number two, which is what are these reports? What types of reports do you want to get from your property management company in order to manage them adequately and to make sure they’re doing what they’re supposed to be doing?

The main reports that your investors are going to see are not going to be the same as the reports that you are going to want to see. So like I said, for every single report that you get your management company to your investors, the best practice would be a T12 and a rent-roll. But I’m just going to go through some examples of reports that you might want to consider getting from your management company and reviewing during these weekly performance calls.

The first would be the box score; this is a summary — it might be called something different, but box score is the common jargon. It’s a summary of the leasing activity. It will include how many people moved in that week? How many moved out? What’s the occupancy status for the unit? How many are vacant, but already leased? How many are vacant but not leased? How many are vacant and not least but they’re ready to be leased? How many notices have you received [unintelligible [09:00] notice but no lease? Model units, down, other use… So just a breakdown of how all the units are being used. That’s going to be the box score.

Next, you’re going to see the occupancy reports. So this would be the physical occupancy, as well as the economic occupancy. Ideally, those are broken apart, so you know what’s the rate of occupied units, and also the rate of paying tenants of those occupied units. So collection rate, basically.

Occupancy forecasts, so what’s the projected occupancy based off of the future occupancy statuses. So in that box score, you’ll see these vacant units, but they’re also already leased. So they’re vacant now, but 30 days from now, we expect them to be leased. So our future occupancy is higher than our occupancy now. So you want to know that as well.

Then there’s a delinquency report. So this will be a list of all the residents who are delinquent on their rent, and what the amount of the delinquency is. This is probably something that is super important right now, going through the pandemic and eviction moratorium to people not paying rents.

The leasing reports – this is a summary of any leasing activity. How much traffic did they get to the property? How that traffic turned into leases. Any concessions given on those leases? How much money has been spent on marketing?

The next would be accounts payable. This would be a summary of the money that you still owe to vendors. This is going to include the money owed to the management company. This is important because there’s another report that says “Here’s how much money we brought in this month”, but doesn’t actually show all the money that still needs to go out. So that might be a misrepresentation of how the operations are performing at the property.

There’s a cash on hand report, so how much money is actually in these accounts. We have income and expense statements. This is your T12 breakdown of the income and expenses, and then compared to the projections, ideally. So ideally, they’ll add at the end of this report — so it would be each month broken down if you’ve owned the property for a year. So it’ll be a 12-month breakdown, 12 columns and then the 13th column will be the total, and ideally, the 14th column would have the projections, and then the last column would be the projections minus the actuals. That way you can see exactly how the property is performing, compared to what your projections were.

A couple of other reports – deposits, a summary of the security deposit information. You’ve got a general ledger, a summary of all financial transactions. Your balance sheet, which is a summary of assets, liabilities, and capital. Trial balance, a summary of all debts and credits. Rent roll – we’ve talked about that in this episode; this is one of the things we send to your investors. The exploration report – this is a summary of all the expiring leases. And then maintenance reports – a summary of maintenance issues and cost.

So these are things that we’re going to want to go over; maybe don’t look at the cash-on-hand report every single week, but the box score, occupancy, delinquency – a lot of things are important to know right away. Because if something were to be off, if you’re not in constant communication with your management company, constantly reviewing the reports, then you’re not going to catch the issue until a couple of weeks after it started. So that’s income lost, and then you might need to identify what is actually the problem. Maybe it involves firing people, bringing on new people… So the earlier you can catch these issues, the better. What’s even better is to catch them before they even happen. To do so, you want to make sure that you’re in constant communication with your management company and constantly reviewing the relevant reports with your management company.

Before you do any of that, you need to make sure you’re setting proper expectations with your management company, before you actually bring them on to manage your asset. Because if they’re not willing or able to provide you with these reports, not willing to get on the phone with you and talk through the reports with you, then you might actually be in trouble. It doesn’t mean the deal is automatically going to fail, but you’re not necessarily setting yourself up for success.

The third thing to think about is how do you actually get these reports. There are really two approaches. Number one, that the management company has a software. When you’re working with big unit numbers, most likely that management company you’re working with is going to have software that can pull these custom reports for you, to say, “Hey, I want a box score, I want to see the rent roll, and the T 12. A list of all the deposits, the balance sheet, lease reports,” and those reports that you want. “Can you email those to me once a week? I want these ones weekly, and these ones every two weeks, and these every month.” Then they will set that up in their system so that it automatically generates a report for you once the information has been input. When the week comes, you’d have the report in your email.

Another approach would be to actually have access to their management software; that way, not only can you pull these reports yourself, you don’t have to wait on the management company but you can also look at them whenever you want. So if you want to look at them every day, then you can look at them every single day, or probably even twice a day, three times a day. If you have access to their software, then you can very easily do that and see the metrics or data immediately after it’s been inputted.

Now, if you’re not working with a management company that has this software or if you don’t like the way the reports look, then you can create your own custom spreadsheet, and then send that to your management company upfront and say, “Hey, each week can you fill this out and send this back to me?” We’ve got an example spreadsheet that we’ve provided for free on this show before. It’s the weekly performance review tracker. I’ll make sure that I include that link to download that file in the show notes of this episode as well.

The fourth thing to think about is what metrics should I be looking at? I’ve got all these different reports, those will be analyzed every week. So a natural question will be which reports are the most important or which metrics are the most important? I’ve already mentioned one, and that would be the T12. So how the cash flow, how the income, how the expenses, the net operating income – how does that compare to your pro forma when you originally underwrote the deal and presented a deal to your investors? So you’re going to want to look at that.

So basically, just go down that variance column and any massive variance between what you projected and what’s happening needs to be looked at and focused on. So when you’re having these conversations with your management company, “Okay, let’s bring up the T12. Oh, it looks like our maintenance expenses are way higher this month than any other month. What happened? Is this a one-off event, or it is something that is more habitual that we need to address?” So just kind of focus on anything that has a really high variance.

Something else to think about, especially for value-add business plans, are going to be any renovation-related metric. The number of units that have been renovated relative to your forecasted timeline. If you’ve got 100 units and you expected to renovate all 100 units in 10 months, then you’ll need to be doing 10 units a month. If you’re halfway home, and it’s been five months, and you’ve only renovated 10 units, obviously, there is a problem.

Also, what rental premiums are being demanded based off of those newly renovated units? How does that compared to your projections? If you projected a $100 rental premium, and you’re only getting a $50 annual premium, what’s happening? Is it the management company’s fault? Was it your fault for making too high of an assumption? Did something happen in the market? Maybe marketing’s not right. But the whole point is identifying the problem and then working with your management company to understand what’s causing this problem and then what the solution is going to be.

Other metrics like leasing metrics, cap-ex costs, total income – these may vary from your projections during the first portion of your business plan. For example, the total income may be lower than forecasted after owning the asset for three months, because a lot of people move out once you buy the property and they see that “Oh, they’re making improvements. My rents are going to go up, so I’m going to get out of here now while I still have the chance.”

Or maybe you spend a larger amount of your cap-ex budget upfront because you’re ahead of schedule. Some of these metrics during the value-add portion of the business plan are going to be different than the forecasts. So upfront, these metrics of rental premiums, how fast you’re renovating, are more important than later on in the business plan, these leasing metrics, total income, and things like that. Those are more important than renovations, because renovations are already done.

Other metrics to think about and track that may be the cause of a high variance would be your turnover rate, so how quickly are people leaving. Economic occupancy, average days to lease is a good one, revenue growth, traffic, evictions, leasing ratios, and other metrics from the report that I’ve outlined below. So basically say, “Okay, the most important thing is that I’m hitting my projections. So what metrics should I be looking at that will result in a high variance between my projected and actual income and expenses?” So overall, pick the best strategies to track the variance on the income and expense reports, and then strategize with your management company to figure out any causes of high variance, and then come up with the solutions.

The last thing to think about would be what are some other things that really good asset managers do. First and foremost, I would say it’s looking at the management company as your partner. Since they are your partner, screen them as if they were a partner. Don’t screen them like you’re hiring someone to fix your toilet. They’re not necessarily like a vendor. They might be a third party, but you need to think of them as a partner. So ask the questions like, are they someone that I would want to work with for a long time? Does their track record speak for itself? What are the tenants saying about them? And how professional are they when they’re speaking with tenants? A way to find this out is to roleplay. Find out what other properties they’re managing in the area, go there, and act like you are wanting to lease a unit and see how they treat you. Are they willing to change if needed? Are they saying “I’m only going to do this. If you need me to do something else, I’m not going to do it.” Do the employees like working for the company? Are they engaged in social media? What is their web presence? Things like that.

Think of them as a partner. The best asset managers always look ahead. This kind of comes back to thinking of a management company as your partner. Don’t think about how good they’re going to be today, or in a month from now, or maybe in a year from now, but it is someone that I would want to work with indefinitely? If not, maybe I won’t consider working with them. And even though they are your partner, make sure you’re watching them like a hawk. This is one of the reasons why we do the weekly reviews, to make sure you’re always on top of what they’re doing.

A lot of people, especially on podcasts and stuff, focus on the frontend activities, the sexy activities like finding deals, sourcing capital. A lot of people focus on whether to create an LLC or not. But less people focus on the backend activities, what do you do once the deal is actually closed on, which is the longest part of the business plan, which is asset management.

A lot of the success of your company can be based off of how well you’re able to manage your assets and scale. A lot of this is going to be dependent on the property management company and their staff. So make sure you’re on top of them, make sure you’re watching them and paying attention to them like the success and the health of your business depends on it, because it really does. Obviously, if things don’t work out, don’t be afraid to fire them. I think we’ll focus on that on the next Syndication School episode, “When do I fire my management company and how do I do that?”

Another best practice to make sure you’re staying on top of your management company is to go to the property. You can see their reports, but management companies lie sometimes, or a certain staff member might be misrepresenting a report, and the site manager doesn’t even know about it. So you might think that the property is doing really well and occupancy is great, but when you go to the property you realize that that’s not the case. So trust, but verify; go to the property at least once a month. If you’re investing out of state, find someone local to go around with a GoPro on their head, on their car, and drive the property, or just invest the money and make a trip and go out there yourself. Meet with the team, meet with a few residents, drive the property, make sure everything’s operating properly.

Overall, how to manage a property management company – set up frequent calls with your management company, starting with at least weekly calls. Request the proper weekly and monthly reports to see how well or poorly the property management company is implementing your business plan. Track the most relevant KPIs like cashflow variance, number of units renovated, rent premiums, anything that would impact that cash flow variance. Make sure you properly screen the management company upfront, thinking of them as a partner and continuously evaluate their performance, and then make sure you visit the property in person to make sure that the reports match the reality, or trust but verify.

That concludes this episode. Thank you for tuning in. Make sure you check out some of the other Syndication School episodes, as well as download some of the free documents we have available. Those are at syndicationschool.com. Thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

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JF2389: Is Multifamily in a Bubble? | Actively Passive Investing Show with Theo Hicks & Travis Watts

Today, Theo Hicks and Travis Watts will be answering the question, “Is Multifamily in a Bubble?” and sharing their insights about whether you should be investing right now? Or should we wait for the bubble to pop and take advantage of opportunities? Moreover, what should we be doing? They will also tackle the question, “Is now a good time to get started in Multifamily?” We get to know who we are potentially selling to, what the buying pool and the demand will look like, and the importance of an exit strategy.

Click here for more info on groundbreaker.co

 

We also have a Syndication School series about the “How To’s” of apartment syndications, and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome back to another episode of the Actively Passive Investing Show. As always, I’m Theo Hicks, and joining me is Travis Watts. Travis, how are you doing today?

Travis Watts: Thrilled to be here Theo. Thanks.

Theo Hicks: Today, as you can tell by the title, we’ll be answering the question “Is multifamily in a bubble?” We’ve talked about something similar in the past, we’ve gone over some market reports, some forecasting reports to see where multifamily has been in the past year or so with the pandemic, where the experts project multifamily going in the future… So we’ll be bringing that information back again and then using it to again answer this question “Are we in a bubble? Should we be investing right now? Should we be waiting for the bubble to pop and then take advantage of opportunities? What should we be doing?” Before we begin, as always, Travis will explain –although I kind of already did– why we’ll be talking about this topic today.

Travis Watts: Sure. Just to add to that, a couple of things came to mind here recently, which is why I felt this was appropriate now… The word bubble gets thrown out constantly, all the news headlines, CNBC, it’s always “The stock market’s in a bubble,” and then tomorrow it collapses, and then you’re unsure at that point. But real estate is a lot more slow-moving. I wrote a blog last year in 2020, “Is now a good time to get started in multifamily?” So that’s what originally kind of prompted this topic, to your point. We’ve discussed it in different ways.

I just had a call the other day with an investor and he’s saying  “It’s just my luck. I’m always late to the game and everything” and he was comparing multifamily to cryptocurrency. I thought, whoa, whoa, whoa, whoa, this is a lot bigger conversation to be had. It’s really not comparable in that type of way. So I really wanted to address why that is; and not to say that things aren’t in a bubble or that they are, but to define what that means, so that you can decide for yourself if you think that anything’s in a bubble. But today’s topic of courses is multifamily.

A lot of concern over the virus, obviously, that’s been the last 12 months in everyone’s focus. Cap rates continuing to compress; that was happening pre-COVID, and that was a big topic about multifamily. Lots of people jumping in the sector, I’ve pointed that out. I got started in 2015 as a limited partner in syndications, a lot more training, boot camps, books, conferences, podcasts… This just really exploded. But does that mean that we’re in a bubble? So that’s what we’re diving into.

I’ll get started with just what I initially brought up, which is “Is 2021 a good time to get started?” Something that I only briefly touched on a couple of episodes ago is what is your exit strategy? I still think this is so important that it bears repeating. What I mean is when you’re buying an asset, I don’t care if we’re talking about a single-family home, a mobile home park, multifamily, who are you potentially selling to? And then what does that buying pool look like? What does that demand look like?

So you really have three broad categories. You have institutional players, REITs, mutual funds, pension funds, and all this kind of stuff. You have syndicators, private groups, usually putting deals together, structuring it that way; then you have individual owners or maybe joint venture partnerships, family offices, things like that.

With institutional, I just want to reiterate this from a couple of episodes ago – you think about, “Hey, you’re a big insurance company, you’re a big pension fund. Okay, what do you need to pay out people their monthly retirement and their pensions?” Well, you need yield, you need cash flow, you need dividends, you need interest, it’s what you need. So when you have deep pockets, there are only so many asset classes to look at where you can go park 100 million dollars in capital and get a consistent type of return. You can’t be trading penny stocks, for example. So the way they’re looking at the landscape is US Treasury yield is around 1%. It might be a little higher today, but it’s hovering around 1%. It was below that recently as well. 2% yield on triple-A bonds, which are the highest-rated bonds. You’ve probably got 3% triple-B bonds; now you’re starting to get a little more risk into the mix. You’ve got an S&P 500 index that has a dividend yield of 1.5%. So you take all that into consideration – it’s all very, very low yield. I think we all know that we’re in a very low yield and low interest rate environment.

Then to speak a little bit about syndicators, JVs, individual buyers, etc. – they’re looking at the same stuff, of course, but additionally, things like certificates of deposit at the bank. I just looked that up the other day – they’re paying half a percent annually to lock up your money for six to 12 months, sometimes longer. Additionally, pretty much we’ll just stay zero in the bank as far as checking, savings accounts, money market accounts. It’s so close to zero, it’s not really worth even mentioning. 2% on annuities for folks looking to retire on a fixed income… So here’s the point that I’m trying to make – we’re all looking for yield; institutional, Main Street, you and I and everyone wants cash flow yield, dividends, and interests. So that makes for a lot of demand on something that is producing that. So what produces that? Well, multifamily does, and we talked about before, cap rates.

The cap rate, again, quickly, if you just paid all cash for a property, paid the operating expenses on it, the cap rate is basically your yield. Nationwide, we have approximately 5% cap rates across the US. So you get approximately a 5% return having no leverage, no debt, no mortgage on the property. So that’s a pretty conservative approach to investing in multifamily, especially for institutions who may have that 100 million dollar to go put to work. Clip a 5% coupon, it sure beats all the alternatives that we just discussed.

To that point, there’s a healthy demand, there’s a necessary demand for yield. So I think that we’ve still got some room to go, as crazy as it may sound… Historically cap rates were more like 8%, and now we’re at five; that seems extreme and chaotic, but the same thing with interest rates. It’s just the environment that we’re in today.

The last thing I’ll say on this intro topic is it really depends on what markets you’re in. We talked a lot about is it a good time to get started? Maybe not in San Francisco, maybe not in Manhattan… Maybe, I don’t know. But you’ve got to look at the macro-level trends, where people are moving to, where taxes are the highest, landlord/tenant laws, etc. So there are definitely markets that are going to be less lucrative right now compared to others, like Albuquerque, New Mexico, for example; cap rates are 6.5%. So it really depends… Compared to a San Francisco, where there’s 2.75 caps, something like that. So it’s pretty extreme. That’s a drastic difference.

So we talk about Texas, Florida, the Carolinas, Georgia, Arizona, Idaho – we did an episode on that, top 10 markets based on a lot of different research, a lot of different metrics. So pay attention to your markets, look at where jobs and people are moving to. It’s a good, I think, intro to this segment. I’ll turn it over to you, Theo. That was kind of long-winded on just kind of your thoughts there and anything that you want to add to that.

Theo Hicks: No, that was all amazing. It kind of brings me back to the point we’ve talked about a few times, which is very key and related to that exit strategy. That’s people are going to invest in something. So when you look at an absolute cap rate of 5%, you say, “Hey, I want to make more than 5% return on my money. Because five years ago, I was making 10% easy.” So that means that real estate isn’t a bubble; I should invest because the return is going to be half what it was before. But you’ve got to look at it relative to everything else. As Travis mentioned, keeping it in the bank is basically zero, no point to even talk about that return percentage is. He gave all other examples; so it’s the institutional players, syndicators, individual owners – if you are going to invest your money in something, your money is going to be somewhere. So just because the return is not going to be as high as it was, say five years ago — now, it might be. But even if it isn’t, it’s more a relative comparison as opposed to absolute numbers. I think that is something that’s also super important, and it definitely relates to the exit strategy.

Something you mentioned in the beginning is a blog post you wrote that we did a show on, about is now the right time to invest in real estate? One of the key things we talked about in that episode would be your risk tolerance. So as you mentioned, it kind of depends on what you want, how much risk you’re willing to take. But at the same time, keeping in mind that you have to put your money somewhere. And so just because you might think that it’s a little bit of a more risky time to invest in real estate, what’s the risk of doing nothing and is living in the bank, as Travis mentioned. Everyone says, “I wish we would have gotten in 5 years ago, 10 years ago.” There is always some time frame where they wish they would have gotten in. So five years from now, people are probably saying the same things about now.

And the third thing, because Travis was talking about the markets to invest in… It depends. You can exceed this 5% cap rate –that is just a national average– in certain places; you gave the New Mexico example.

Something else to keep in mind too is that the person or the group you’re investing with is also super important. Travis and I have a three-part episode on the three major risk points of apartment investment in particular. That would be the team managing the investment, the business plan/deal, and then the market. So you could invest in one of these amazing markets, but the business plan doesn’t fit to that market, or the team doesn’t know what they’re doing, and it’s not going to perform very well. You can invest in a really, really bad market on paper, but if the team knows what they’re doing, they’ve found some very niche business plan that works really well in this “bad market”, and they can perform very well. So it’s kind of balancing all three of those factors and knowing that people have been successful in real estate during all times since real estate has been a thing. So it’s just understanding what works and what doesn’t work depending on what part of the market cycle we’re in.

All these stats are very important, but also at the end of the day, you could be investing in a place that has the lowest vacancy rate, the most rent growth, but then the team doesn’t know what they’re doing, or it’s the wrong business plan, they’re still not going to perform very well.

On that same note, I’ve got a couple of other statistics that we’ll bring in, that I think are very fascinating, when it comes to how multifamily performed during the pandemic. Compared to all the other asset classes – retail, office, hospitality, industrial… Only industrial outperformed multifamily. Multifamily basically outperformed every other asset class, except for industrial, during the pandemic. Obviously, it was doing really well beforehand, but during this past 12 month period, it still performed really well. More specifically, vacancy rates dropped slightly, and now they’re, in a sense, basically back to what they were pre-2019. But we’re still talking about in the 4% range, which is still historically very, very low; the lowest it has ever been. Because for the book we’re working on, I did a very big deep-dive in the last five recessions, starting in the 1980s, and vacancies have just consistently been decreasing and slight little ticks up on the way, but overall going down.

Similarly, rent growth overall was negative over the past 12 months, but again, it dipped and then started of recovering. Loan origination is something else that we’ve talked about on the show before; those slowed down a lot in 2020. Volume is down 20%, but now the projections are that it’s going to rebound and be at just below the 2019 levels. So again, 2019 – a great year for multifamily. If 2021 is supposed to be from a vacancy, rent growth, or loan origination perspective, very similar to 2019, then it seems like we’ve bounced back.

One more thing that I want to mention quickly that maybe Travis had mentioned is that his article that these were based off of, these forecasts and projections, weren’t taking additional economic stimulus into account. It’s just saying if there’s no more economic stimulus, here’s what we think is going to happen. So that’s something else to keep in mind.

Travis Watts: Absolutely. That’s Freddie Mac, by the way. We can put a link somewhere or you can reach out to us for that link. But yes, it’s a Freddie Mac survey; very knowledgeable folks in the space. So just to piggyback off of those topics… In my mind, I’m trying to look at the pros and cons here. I don’t want this to be just a totally bullish “multifamily is the best, yadda yadda.” So let’s look at some of those cons in fairness. The unemployment rate is still high.

So when you’re investing in multifamily, it’s all about your tenants, it’s all about your renters and their ability to pay rent. People losing jobs is not a good thing; the government pulling away unemployment benefits – not a good thing, etc. These eviction moratoriums are still in place. There are still some negative elements to all of this. The unemployment rate, I believe, last I checked is still around 7%, which is still a little bit high. It did spike up drastically in early 2020 when lockdowns first happened, but it kind of flattened the curve, so to speak, at this point.

Rents in a lot of the largest markets are expected to remain depressed during this year. So it’s something to think about as a limited partner. If you’re doing these syndication investments, always look for conservative underwriting. If you’re looking at projections that we’re going to take written from 1,000 to 1,300 overnight, that’s probably not realistic. So just read through the lines there.

And then vacancy rate is expected to increase slightly on a national scale. But to Theo’s point, it really depends on the market that you’re in whether or not that’s going to happen, and that is just a slight increment. To the pros, more markets are expected to see rent increases versus not; that’s just looking forward. That’s through a bunch of different sources, not just Freddie Mac; that’s CBRE, Marcus and Millichap, on and on.

I just did a speaking event at the Best Ever conference and I tried to pull as many sources as I could from all different outlets just to paint the picture of what everybody “is thinking as far as forecasts go.” That would be very true in that case.

So the rolling out of vaccines, additional stimulus… By the time you’re listening to this, that probably would have passed, this 1.9 trillion stimulus package. We’re still kind of in the works on that at the moment. Long-term fundamentals of multifamily are still on solid ground as far as just supply and demand, the amount of renters we have, how expensive it is to build new products, how much time that takes versus what’s available now… All your fundamentals are there.

And yes, cap rates have compressed, but as we talked about, there’s still a margin there that still looks pretty lucrative to a lot of institutional buyers. So think ahead and think of who you’re going to potentially be selling your properties to. Yes, it’s a crowded space. We talked about that. I did mention Albuquerque and other examples. Kansas City, Missouri – they have higher cap rates out there as compared to… Even internationally too, you look at Toronto in Canada. We’ve got a lot of investors that are Canadian that I speak with, and there are like three caps out there in Toronto. So a lot of those folks are shifting over to bordering US to start looking into US multifamily, and single-family for that matter. So just something to keep in mind – London, Singapore, so many examples of lower cap rates than what we’re seeing stateside, especially in certain markets.

With all that, we’ve had a lot of disruption in 2020, we all know that. To your point, Theo, multifamily really held up well, at least thus far; we’re not completely out of the woods. But industrial did outperform, but most other asset classes didn’t. I’m continuing to invest, on a personal note… I did a lot of deals in 2020 myself in the multifamily space. I’m still very bullish, and no, I don’t think that we’re in a bubble per see, but I’ll leave it to you, the listeners, to decide for yourself if that’s a bubble, and perhaps there’s a strategy or an asset class you’re more familiar with that potentially has a higher yield with lower risk, etc. Then maybe that’s the right fit for you. But the way that I look at it from the complete landscape I see, this is still a great asset class, both for Main Street and Wall Street investing.

Theo Hicks: I appreciate you doing the cons as well as the pros, because I get very inspired… [unintelligible [00:15:49].21] “Oh, that’s great. Let’s invest.” So I appreciate you bringing those up.

I do want to bring up one thing I did forget – it was the moratoriums. We’ve got the eviction moratoriums… Because historically, when I did my recession analysis, when the recession hit, more people start to rent, because it’s traditionally cheaper to rent than to own. But I wonder, since the previous recession didn’t have the eviction or the foreclosure moratorium, that did have an impact on why some of the metrics during this time around were different than other recessions. I think that’d be something interesting to look at… Because recession happens, you lose your job, you’re not going to go homeless; you just downgrade to a smaller apartment or something. So the demand for multifamily goes up, and usually rents go up as well. Whereas now it seems [unintelligible [16:31] rents went down, and I wonder if it has to do with the fact that people didn’t have to leave their homes or their apartment. I think they have some sort of declaration.

So it sounds like, as Travis mentioned, when you listen to this, more stimulus is happening. That should continue to hold up and support multifamily, and then hopefully that continues until people can get back to work and pay their rent. Then once it goes away, things go back to normal.

You mentioned something too that I think would be good – people can definitely reach out to us. Email me, theo@joefairless.com, what your thoughts are on what we’re talking about today. This is kind of all speculative, we’re basing it off of different expert reports and forecasts… But again, none of this stuff is going to be perfect. They even say it in the report, these are all just averages and projections based off of certain assumptions and scenarios. So let us know what your thoughts are as well. If you think that a certain asset classes will perform better, if there are specific opportunities you see that you’re focused on, we’d love to hear that. If it’s a lot of info, maybe Travis and I can have a quick talk about it on the show or turn it into a 60-second question segment. Travis, is there anything else you want to mention before we sign off?

Travis Watts: No, I think we covered it. Appreciate it.

Theo Hicks: Perfect. Well, Best Ever listeners, thank you so much for tuning in today. Make sure that, as I mentioned, if you want us to answer a question on the show, we’re going to answer a fast question on our 60-second segment. Email me, theo@joefairless.com, with those question or questions. Thank you so much for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Travis Watts: Thanks, Theo. Thanks, everybody.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2388: Why and When to bring apartment property management in-house | Syndication School With Theo Hicks

In today’s Syndication School episode, Theo Hicks talks about why and when to bring apartment property management in-house. He will be basing this episode on the presentation given by the founder of Ashcroft capital Frank Roessler at the Best Ever Conference 2021.

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening!

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome to The Best Real Estate Investing Advice Ever Show. I’m Theo Hicks, and today is Syndication School, where we focus on the how-to’s of apartment syndication. This episode will be focusing on in-house property management; more specifically, as the title implies, why and when to bring apartment property management in-house. This episode we based on the presentation given by the founder of Ashcroft Capital, Frank Roessler, at the Best Ever conference 2021. I really liked his presentation and the information he provided, and I thought it’d be very relevant to our listeners. We will be going over his points today. Of course, I will be adding my thoughts to those as well.

We’ve done a lot of episodes in the past on property management – how to find them, how to qualify them, when to fire them, how to manage them, and that is usually focusing on third-party property management. A company that is completely separate from your apartments syndication business. Maybe it’s just a couple of people, or maybe it’s a national organization with tens of thousands of employees. But either way, the distinguishing factor of third-party management is that it’s third-party. It’s not you, it’s not anyone that is in your actual company, or it’s not your company that you own; it is completely separate and run by someone else.

Whereas the other option would be in-house property management, which as the name implies, is a property management company that you own, that you are in charge of, that works for your apartment syndication company. Today we’re going to talk about, as I mentioned, why would you want to transition from third-party management to in-house property management, or why would you want to use in-house property management over third-party property management from the get-go? So that will be the why. And then the when would be, well, two different times – right away, or once you achieve scale. We’ll talk about the pros and cons of the timing of bringing property management in-house.

One thing that Frank said that I really liked – he said, “I can say this and then I can probably end my presentation here. The only reason why you’re going to bring property management in-house is to improve the performance of your apartment portfolio.” You’re not bringing property management in-house in order to make money, to generate a profit, to save money on a property management fee. That’s not the main reason why you do it. It is also possible that bringing property management in-house will result in a loss. The property management company itself operating at a loss.

So again, the purpose of bringing property management in-house is to improve the overall performance of the apartments that you own. The reason why is because by using an in-house property management company as opposed to a third-party can result in higher quality service to both you, your residents, marketing; they will do faster unit turnovers, more training opportunities for your staff, you can attract top talent… There are all these potential benefits that can come from it being your company. But the keyword here is that these are potential benefits, so you have to make sure that by bringing property management in-house, you can do all these things better than a third-party. If you can’t, then there’s no reason to use in-house property management, because in that sense, you’re going to get a worse service, which is not going to allow you to maximize profits.

One distinction before we move on to the next point is that the property management company itself might potentially operate at a loss; it’s not always going to operate a loss. It might not be a massive loss, and it might break even. However, other aspects of the performance of the apartments are going to improve. So overall you’re going to make more money, it’s just that the property management company itself is not going to be a cash cow for you. The money is going to come from the improvements in the operations of the asset. That’s something important to keep in mind.

So of course, you’re going to be making more money by bringing management in-house, but the actual company itself is not going to be making money. So again, that’s the main reason or probably the only reason why you bring management in-house, it works better.

Now, one of the main reasons why it works better is because there’s a greater alignment of interests between you and the in-house property management. Just think about how a traditional third-party property manager makes money. It’s either $1 per unit per year, which is not really standard; what’s more standard would be the percentage of the collected revenue, also known as fee-based management. There’s a better alignment of interests with fee-based management compared to a per unit per year management, because at least with fee-based management if the revenue goes to zero, then they make no money at all. However, there is still a lacking in alignment of interests, and a third-party property management company is not really incentivized to maximize revenue.

Here’s a perfect example to illustrate that. Let’s say you’ve got a property management company that charges the 3% property management fee, and you have a property that generates $100,000 per month in total revenue. 30% of that goes to the management company, so the management company will make $3,000 per month. Now, let’s say that you asked the product management company to increase the revenue by 25%. So they work really hard over the next year to increase revenue by 25%. The revenue increases to $125,000 per month, which is a massive increase in the value of the property, and a massive increase in the returns to you and your investors. However, there’s not really a massive increase to the property management company, because they only make another $750 per month. So again, that increase of 25% is a lot more impactful to your company than it is to the property management company. So if it is your company that is the property management company, they’re way more incentivized to actually increase the revenue by, say, 25% in this example, because you are their top priority. Whereas for property management companies that are third-party, the way that it works is they just want to manage a bunch of properties. They don’t usescale to make money. So if they lose you, if you ask them, “Hey, can you increase my revenue at 25%?” Like, “No, I don’t think so. We’ll drop you.” Well, they lose three grand a month; they probably work with 100 other operators. Whereas if it’s your in-house brand management company, you better believe that they’re going to focus on doing what you ask them to do, because you own them, you’re in charge of them. So that’s one of the reasons why it could result in improvement in the performance of the property.

The third reason why you’d bring property management in-house is because it improves communication. So what this means is that traditionally, when you’re working with a third-party property management company, or really any property management company, you want to be tracking the important metrics or the KPIs, key performance indicators, of the property. We’ve done an episode in the past on those KPIs, and we talked about how to be the Best Ever asset manager. Now, this is going to be just one example, but let’s say you want to receive KPIs every single day from your product management company. Well, if it’s a third-party management company, they might have their standard SOP for how they deal with KPIs; maybe they only send them once a week, or maybe they only send them every two weeks or every month. Whereas if you have your in-house property management company, from the get-go you say “Hey, we want daily reports at the end of the day.” “No problem.” Whereas again, the third-party management company might not be able to do that.

Something else that’s also going to be good here is that you’ll get more up-to-date, more speedily communications from your property management company. Because again, they are yours; you are their sole priority, as opposed to the third-party property management company which is working with a lot of different operators.

Let’s say you’re working on your emails to your investors, rather than the property management company maybe sending you a snapshot of the data you need once a month, that is out of date by a couple of weeks by the time they send you emails, you can work with your management company to get the information for occupancy collections that exact day.

Also, the improvement in communications allows you to check the status of your business plan a lot faster, which means you are able to catch any problems or any variances a lot faster, as well as make adjustments to the business plan when those challenges actually arise. So those are the three reasons why you bring property management in-house.

Now, when do you do this? As I mentioned at the beginning of this episode, the two times that you can bring property management in house is day one. The second you close on that apartment community, the property management company that takes over is an in-house management company. Or you can wait until you achieve scale and have thousands of units. There are pros and cons to each of these.

Let’s start with the pros of bringing property management in-house on day one. The biggest benefit is that there are no disruptions. So transitioning from a third-party property management to in-house property management is a pretty big process. I mean, transitioning from one third-party property management company to another is a big deal on the property itself. Transitioning over all the new people, terminating contracts, having them take over, any sort of relationship tensions between the new and the old management company… There are lots of problems just taking over the property in general, when it’s already up and running.  It’s kind of similar to transitioning from the old property management company from the old owner to the new owner… But there’s also big disruption with you and your business, because you have to create the company before you actually have a deal.

So in this case, when you don’t have a property yet, you can create your property management company and then transition over to this new property… Whereas when you have a scale already, you’ve got this massive portfolio you’re working on. At the same time, you’re working on creating a brand new business at the exact same time, so that might impact the way that you are able to focus on your current portfolio. Of course, there’s a major disruption to the residence as well, maybe operations within the new management company taking over a large portfolio, whereas again, no property exists yet, and so there’s no operation or residence to really disrupt.

The other pro or other benefit would be a smaller overhead. When you don’t have a property yet, the team you’re creating is not very big; it might just be you and a site manager, and then that’s it, and then leasing staff, which is not going to be that expensive. Whereas when you’re building out an entire property management company that needs to be able to manage thousands of units, you’re gonna need actual executives, directors, presidents, and managers that are going to probably be making low six figures. And you need to create all this infrastructure before the property management company is even making any money, before it actually takes over the portfolio. Whereas again, from day one it’s just you and maybe a couple of other people, really small overhead, not that expensive and not that time-consuming.

Going back to the disruption, by creating a full-fledged property management company that’s going to be able to manage thousands of units – it is going to take some time, as well as money. So those are really the two benefits of bringing property management in-house on day one – zero disruptions and smaller overhead.

Now, however, I think (whatever I’m going to say next) that the benefits of bringing in property management in-house when you have to scale far outweighs the potential drawbacks of the disruption. Because again, the disruption kind of happens anyway when you buy a property, and your new property management company takes over, which is usually why operations are known to not perform as well in the first few months after operations because of the new management. And of course, the smaller overhead is a money issue. But again, you’re not doing this for money, you’re doing this for an increase in performance.

This brings us to the first major pro of bringing property management in-house when you achieve scale, and that is the ability to attract top talent. If you don’t have a property, then that one site manager and a couple of leasing staff people that you’re going to attract, to use in-house management day one – they’re not going to be the best of the best. Whereas if you have a portfolio that’s a billion dollars or a hundred million dollars, the top management professionals and even business professionals are going to be proactively reaching out to you to work with your company to create a brand new company that will manage thousands of units. They can’t wait to be involved in creating a business plan and then implementing that business plan when they’ve worked for a massive corporation and just kind of had to follow the SOP of that company for the longest time.

So you’re going to  have a lot more difficulty attracting the best of the best when you only have one property for your management company to manage. And then with attracting top talent will come the ability for you to implement the best practices starting from day one after you’ve achieved scale and brought management in-house. Because you have that top talent who has years of experience managing apartments for the best property management institutions in the country, they’ll have a lot of knowledge on the market, hopefully… And because of all of this, they’re going to bring their expertise to your portfolio, which will allow you to implement the best practices immediately in order to improve operations… As opposed to bringing them in-house on day one, not really having the best talent, and having to train them yourself or having them learn on your dime. So you really need that track record and have that large portfolio of properties in order to attract that top talent; and once you attract that top talent, then you will, by default, have the best property management practices implemented at your property.

Now the other benefit, as I kind of mentioned earlier, of bringing it in-house, after your achieve scale, is that there is a possibility that you generate a profit, or at least you break even. Whereas if you only have one apartment, there’s zero chance you’re going to be able to cover the costs of a full-time site manager, a full-time property manager, or regional manager, a full-time team member with one apartment. You’re going to operate at a loss for a while until you achieve scale. So again, why not just wait until you scale in order to bring management in-house. This is something I’m kind of biased towards in-house, but I wanted to present to you the different benefits of each, bringing it in immediately or bring it in once you’ve achieved scale.

So overall, the main reason why you bring property management in-house is to improve the operations of your apartment portfolio. The other benefit is that it will increase the alignment of interests, because you’re the top priority, and it will improve the communications between you and your management company.

The two options of when to bring management house would be day one, or once you have achieved scale. We mentioned that the benefits of bringing them in on day one would be no disruptions and smaller overhead… Whereas the benefits of bringing them in once you’ve achieved scale is your ability to attract that top talent, which in turn allows you to implement the best practices, which in turn may allow you to start with a profit margin.

But either way, the main thing you should be thinking about is “Should I bring property management in-house? When I should I bring property management in-house? Will this allow me to improve operations at my property? Can I do property management better than a third-party manager at this particular time?” If the answer is no, then don’t bring it in-house. If the answer is yes, then bring it in-house, whether it’s immediately, or when you’ve achieved scale.

That will conclude this episode of the why and when to bring apartment property management in-house. Make sure you check out our other Syndication School episodes. We also provide a lot of free documents with Syndication School, those are at syndicationschool.com. Thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2375: 3 Immutable Laws Of Real Estate Investment | Actively Passive Investing Show With Theo Hicks & Travis Watts

Today Theo and Travis are talking about three things that allow people to succeed in the real estate business. While many people focus on the markets, demographics, projections, and other specifics of the business plan, some fundamental things should be right about the deal for it to work. Occasionally, real estate investors get lucky and make a decent return even when some of these laws are bypassed. However, those are exceptions, not the rule.

We also have a Syndication School series about the “How To’s” of apartment syndications, and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to another episode of the Actively Passive Investing Show. As always,  I am your co-host, with Travis Watts. Travis, how’s it going?

Travis Watts: Hey, thrilled to be here.

Theo Hicks: Yeah, thanks for joining us, again. Thank you also Best Ever listeners for joining us. And today, we are going to talk about the Three Immutable Laws of Real Estate Investing. So Travis just told me beforehand that he just came across this article, and it’s something that’s been up on our website for – gosh, since 2016, probably, in the middle of the economic expansion. And we’ve kind of reiterated these points throughout the past five or so years, after the different elections and after the COVID pandemic hits… But right now, since we’re, I guess, technically, maybe still in a recession, we thought this would be a really good topic to bring up. And we also haven’t talked about it from the perspective of passive investors either; we were mostly focused on it from an active perspective.

So we’re going to go over these three immutable laws of real estate investing are, but first, as always, Travis is going to let us know why we are covering this and then I’ll kind of also go into a quick little myth that people have when they think about investing in real estate.

Travis Watts: Yeah, I appreciate it. Well, I think you did a good job covering why we’re covering it. But yeah, that’s my confession, is that this has been out there for years and years. And I’ve read so many of the blogs, and of course, the books. I’m sure I’ve skimmed across this, but it really just sunk in for some reason this week. I came across it, written years ago, and I thought, “This is really a foundational concept that everybody needs to be aware of, active or passive really”, but it was looking at it through the lens of being a passive investor. I really want to share and reiterate even if you’re listening today and you’ve heard this before in some other fashion, we’re going to dive a little bit deeper into it. I wanted to pick and share a few stories of how this has been true for me in my own experience.

If I’m not mistaken, Theo, you know better than I, but I believe this is really comprised of Joe interviewing thousands of different investors and putting together the most successful three points, basically, to investing in real estate. So for any regard, these are the things I followed myself, these things I firmly believe in, and they’re just laws or rules to follow, if you will, and good for both sides of the coin. So that’s it, what’s the myth that you want to cover?

Theo Hicks: So from the perspective of the active syndicator, one goal is always to make money for you. But the overall goal is at all times is to not lose your money; at the very least to conserve that initial capital, so that if something happens to the deal or to the market, at the very least, you’ll still get your equity back. That’s the number one rule of investing. I think that’s like Warren Buffett’s number one rule for investing, is capital preservation, right?

And so in order to do that, the syndicators focus on the different things that could happen to the investment that will result in you losing your money. So in apartment syndications, the three main risk points are going to be the business plan, the market, and then the team. So the team could mess up and lose your money, it could be a bad market and you could lose your money, or it could be the wrong business plan or the business plan fails and you can lose your money. And so the focus has to be on “Well, what are they doing in order to minimize risks in those three areas?”

Now, when it comes to the market, that is probably the least risky point. When I say market, I mean the  actual location, because you can make money investing in any market… People have invested in New York or in the middle of nowhere in Iowa, and they made money investing in real estate… As long as it obviously has some of the right metrics, and Travis and I have talked about this on the show before, how to evaluate each market, so I’m going to focus on that one as much. Obviously, there’s the team investing with the right GP, we also talked about that, and the other one is going to be the business plan.

So why is it that one apartment syndication deal can do really well in the exact same market, following the exact same business plan, and maybe by the exact same team, and the other one doesn’t do very well?  It comes down to, as Travis said, these three points we’re going to go over it. So these three points are things that Joe has learned from his experience and from interviewing people, that allowed people to be successful regardless of where they invest, regardless of what they invest in, or if they didn’t do well, here are the things that they realized that they should have done differently.

And so at the end of the day, there’s this idea, the myth of it’s all about the location, it’s all about investing in the perfect markets. It’s helpful, it’s beneficial, but at the end of the day, any operator following any business plan is not going to be successful just because they invest in some market that the rents are supposed to grow by 10%. There’s other factors involved, and the one we’re going to focus on today is going to be the actual business plan.

Travis Watts: Exactly. And I’ve shared that story before on our show, Theo, of where I was an LP in a deal with a syndicator early on, bought a really good deal, good price, good market, etc. but unfortunately, this particular operator couldn’t execute their business plan, made a lot of mistakes in regard to that… And it was just one of those situations where, yeah, the market definitely helped boost the rents, helped boost the equity, but it really was to no avail of the operator. So we exited early. It was kind of an unfortunate situation. But yeah, markets are important, location was important, but at the end of the day, none of us got our projected returns or what we hoped to get out of that deal. So – great points.

So the first law that we’re going to cover from Joe is buy for cash flow. This is obviously my biggest message to the world; any podcast, I’m a guest on, any blog I ever do, it’s always about cash flow. That’s my passion. That’s what’s made the biggest impact in life, which is why I resonate so much, especially with this particular law. So it’s the opposite of what most people think of when you say, investing or “I’m an investor.”

In fact, I remember when I worked in the oil industry, there was this guy that came up to me, somehow he found out that I was buying single-family rentals… And he goes, “You’re an investor, right?” A very intense guy. I said, “Well, yeah, I buy real estate, I buy rental.” He goes, “Yeah, I get it.” He goes, “Buy low, sell high. It’s pretty simple.” And he walks away, and I thought, “Well, not exactly.” In my opinion, that’s pretty much just wrong… Because yeah, you can make money doing that, but I wasn’t trying to buy low and sell high. I had buy-and-hold rentals at that time and I was doing vacation rental stuff and things like this.

So it’s just kind of funny that – think of it as the opposite of appreciation. Natural appreciation is going to come from that story I just shared with that LP deal, where people are moving to an area and inflation is growing, expanding employment, wages – that’s going to lift values naturally. But that’s pretty risky, because mostly that’s out of our control. We can’t really control what the Fed’s going to do, when interest rates are going to do. Think about Texas right now; everyone’s moving to Texas, right? Well, what if Texas, this year, comes out and says, “You know what, we’re implementing a 10% state income tax.” Well, that’s pretty much going to change a lot of stuff over there about why people are moving there.

So things can evolve, things can change out of your control. That’s why I’m a big fan of forced appreciation, which is value-add investing, where you’re buying something that’s outdated, that needs fixing up, and you’re forcing the value back into it, therefore, you can justify lifting the rents etc, in terms of that.

So another quick story about cash flow is when I used to buy single-family rentals. I intended to do a flip one time – this was one of my first flips – and I was into the budget initially, and what I thought would cost me maybe 10 grand was already at 16 grand, and I thought, “This isn’t going to work out. The numbers aren’t going to work. By the time I sell, and I pay the commissions, I pay taxes, etc. I’m not even going to make a return.” And the only thing that saved me was cash flow. I pivoted my business plan. I said, “You know what, I’m going to make it a rental. And that’s going to give me time to start collecting money, so that I can build back the cash reserves that I wasn’t going to get.” So that was really a life-saver and a game-changer for me to realize how impactful cash flow really could be.

So at the end of the day, buy for cash flow. As long as you’ve got a supply of people willing to rent, you don’t really have to care too much about what the market is doing; the market’s really hot, the market’s declining, the market’s stagnant… Hey, man, if you got monthly income rolling in, at the end of the day, like we talked about on our last podcast, just to use simple numbers. I take 25K and put it into a deal; that deal produces 25K in cash flow. I take that 25K and do another deal. I’m reducing my risk as I go along that daisy chain, because my real risk is in that first investment. As long as that’s stabilized and cash-flowing, I really have little to worry about. So kind of my long-winded rant there, but that’s law number one, buy for cash flow.

Theo Hicks: Yep. And your last example is the perfect reason why. So if you buy for cash flow, but you can still have a potential value-add play or a potential market-driven appreciation play. But that’s more of like a cherry on top, so to speak. It’s cash-flowing, that’s the cake. And then if you’re able to force appreciation or if the market were to increase the value of the property or the rents naturally, then that’s great, you make even more money. But if it doesn’t happen, you’re still going to hit your projections, you’re still going to make money, and even if the market tanks, you are still not going to lose your money, as long as you’re following law number two.

So all these laws, they all come together. You can’t just do one, you have to do all three, I forgot I mention in the beginning. All three of these come together; because Travis said, “Well, as long as there’s a steady supply of renters”, then you buy for cash flow and it’s okay, because you don’t really care what the markets doing, because you’re not going be forced to sell… As long as you also follow law number two, which is making sure you’re securing long-term debt. So whenever you’re investing in a syndication deal – unless you’re an institution or you’re a hedge fund – you’re going to get financing on the property. You’re going to get Freddie Mac agency debt in order to fund the majority of the project costs. Usually, the syndicators are going to raise 20% to 30% of the project cost from limited partners, and then the rest of the money comes from a bank.

Now, the law here is to secure debt that’s at least twice as long as the business plan. So let’s take a value-add business plan as an example. Let’s say the plan is to renovate 100% of the interiors over a 24 month period, and increase the rents by $100 per unit. So the business plan is two years; it takes two years to renovate all the units. So when the syndicators are going out and securing debt, they’ve got a couple of options.

One option is they can just find a two-year bridge loan that’s going to include all those renovation costs, which allows them to raise less money. But the problem is, well, what happens if they aren’t able to complete the renovations in two years? What happens if they complete the renovations, but they overestimated their rental premiums? What happens if, you know, let’s say a pandemic hits or something, two years in, and they are unable to hit those rental premiums?

Well, if they secure a two-year bridge loan, then they have no choice but to sell or refinance. And if they can’t refinance into agency loan because the deal isn’t stabilized, and they can’t refinance into a bridge loan because of what happened with the COVID pandemic, bridge lenders stopped lending – well, then they have to sell, and well, what if they can’t find a seller? They’re going to sell for a loss and can’t get all their money back, or they’re going to be foreclosed and they’re not going to get any of their money back.

So in order to avoid all those potential situations, the law says secure debt that’s twice as long as whenever the plan is to do any sort of refinance or sell or something. So in that example, you either secure a loan that’s at least four years, so that if something happens in year one or year two and you don’t hit their projections, then they can just wait, keep collecting the cash flow they’re making, make partial payments or no payments, but not be forced to do anything with the property or the loan. As I said, refinance— [unintelligible [00:15:31].16] or get foreclosed on. So at least two years is ideal. Some syndicators you will see that they’ll have a 5 year loan or a 7 year loan or a 10 year loan or a 12 year loan or even a 30 year loan.

And then the other option would be a bridge loan. Well, maybe they have to get a bridge loan for some reason. Well, if that’s the case, then they need to have the ability to extend that loan out to, again, that 2x period. So traditionally, bridge loans are about three years, but you can get multiple one year extensions. So ideally, they have a 3/1.1. So three, with the ability to have two one-year extensions to hit that 5 year mark, and that’s two times the business plan.

Travis Watts: Exactly. And what we’re really talking about, Theo, in all of this. I’m just zooming out, as you were speaking… I’m thinking, all this really is is reducing risk and being conservative. And that’s the foundation to me anyway of investing. Like you pointed out, Warren Buffett’s first rule “Don’t lose money”. Well, yeah, it makes sense, right? It’s pretty obvious. Who wants to lose money? So all of this is helping folks, active or passive, not lose money. That’s all we’re really talking about.

And so to that point, law number three is have adequate cash reserves. Sometimes I like to draw parallels, either to stocks or the stock market. In this case, what I think about is this personal finance. You hear all the time from the Dave Ramseys of the world, or the Suze Ormans or whatever, have six to 12 months of cash reserves on hand in case you lose your job, etc, so you don’t have to lose your house or not make your mortgage or rent, and these types of things.

Same concept here – when you’re underwriting or if you’re buying a property, I don’t care if we’re talking about single-family, multifamily, have cash reserves on-hand to cover the unexpected expenses, which are going to happen. I just used that example of my fix and flip earlier, where I budgeted 10, but it took 16. Well, fortunately, I had the extra six sitting around because I thought, “Yeah, that’s a possibility. I’m going to need some extra cash for something.” I did. What if I hadn’t had it? I could have been in a really bad situation.

So when you can’t cover your unexpected expenses – speaking to syndications, the theme of our show – you’re either going to have to do a capital call, which is collecting more money from your investors; that’s never a good thing. First of all, you don’t want that on your track record as a GP. Second, what investor wants to have to fork up money unexpectedly for a deal that they shouldn’t have had to do that for? That’s not a good thing. Or if you don’t do that, you might have to, to your point earlier, sell that property at a loss. No one wants that either. You don’t want that on your track record, and LPs certainly don’t want that; or you may have to just give the property back to the bank, whether that’s in a short sale, or a foreclosure, whatever. It’s not going to be good. These are not good options. So what saves you? Having adequate cash reserves.

So let’s get specific with it. I think Joe points out a couple things… And maybe this has changed, because this is a 2016 article; I don’t know if he’s got a different view on it. But still, the concept remains the same; have $250 per unit in cash reserves per year. That’s one thing. Additionally, you might want to have an upfront operating account of 1% to 5% of what the purchase price is.

So none of these things have to be exact; you might have a different take, a different opinion, a different percentage, a different dollar amount. The fact is, have adequate cash reserves. Don’t think optimistically, best-case scenario, “We shouldn’t have things pop up, there’s not going to be a kitchen fire, we probably aren’t in a flood zone, so that won’t happen. Tornadoes never come through this area…” Just expect that all of that is going to happen, and have adequate reserves to cover it.

And I’ll share with you one other story… I was actually in a syndication deal that we had to do a capital call unfortunately, for all of these reasons that we’re talking about… And it was unfortunate. It ended up being – I think, it was 10% of what we had originally put in. So you think, okay, I put in 100 grand or whatever—I don’t know what I put into that deal. I can’t remember. But let’s just say for simplicity, that’s what I did.

So all of a sudden, you get this email or this phone call, “We need you to put up 10k ASAP. Can you do it this week?” That’s never a good call. Even if you have the 10k, that’s not what I wanted to do with it. Maybe I had other plans for that money. So it does happen. It really does. So it’s something to think about, and pretty simple in concept; adequate cash reserves, pretty self-explanatory.

Theo Hicks: Yeah. So now, the only real change, at least as we’re recording this, would be that the syndicator is probably going to be on the higher end of the upfront reserves number, towards the 5%, because of the additional reserves that lenders are requiring right now. For some loans, it is up to 18 months of principal and interest, which is a lot. Usually, it’s 3-6 months. So as Travis said – and I like the way you said that – all these rules are to save you and save the syndicator if something happens. So buy for cash flow, making sure that you’re not forced to do anything, and making sure that there’s no capital calls… All the rules are just very, very conservative ways to make sure that you don’t lose your money.

And one last note on the adequate cash reserves is that if you don’t use this stuff, then you get it back. So if it’s not used, it’s not like the money just disappears, or the bank just keeps it. Because a lot of the things are acquired by lenders to be staying in the account for a certain number of months, and then it can be distributed or used for something else.

But yeah, all of these things are just ways to reduce risk. And by risk, I mean, losing your money. So just to quickly summarize – one, buy for cash flow; not market-driven or natural appreciation. Two, secure long-term debts. You are not forced to do anything. And then three is to have those adequate cash reserves, both upfront and then on an ongoing basis.  Travis, is there anything else that you wanted to mention before we sign off?

Travis Watts: Just to iterate how these three points came to be one more time, because I think it’s important and it’s a strategy I’ve used for years and years and years. And Theo, we talked about this – God, like, when we first started this podcast, one of the first episodes.

When I’m learning something new – let me give you an example unrelated to this. Let’s say something I don’t know much about, that I’m certainly not an expert in and that I want to learn. So let’s say interior decorating; it’s not really my thing. So if I were to want to know what to do with a house or a room or something, what I would do is I would hire, not one person and get one opinion, I’d probably hire three people and get three opinions, and I would do my own homework and due diligence and whatnot. I would end up with maybe let’s say 10 different ideas, and then I would find the commonalities. So let’s say out of 10 different opinions on a living room, seven people said, “You really ought of paint this wall a lighter color. Maybe a neutral gray or something.” I’m going to take that and hone in on that. That’s what these three points are, are interviews with thousands of real estate investors and finding the commonalities; how many people say, “Buy for cash flow. Be conservative in your underwriting. Have adequate cash reserves. That’s what these are. This isn’t just one person’s opinion, “Here’s what I think about real estate.” That doesn’t really matter. I think what matters is a survey of many successful people. And that’s something to keep in mind and why we did this show.

Other than that, anyone listening, if you guys have an idea for topics or any questions, please email theo@joefairless.com and we’re happy to implement that onto one of our shows.

Theo Hicks: Yep. And then also kind of on a similar note, we’re doing something even more specific, which is our 60-second question. The same – email us topics or questions you have, and then we’ll kind of decide if it makes sense to do it on this show, or if we’ll do it on a 60-second question episode, which we have on the YouTube channel.

Travis, thanks again for joining us. I’m glad we got to dive deep into the three immutable laws of real estate investing. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Travis Watts: Thanks, Theo. Thanks, everybody.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

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Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

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JF2374: Four Steps To Build A Lasting Apartment Syndication Team | Syndication School With Theo Hicks

In today’s Syndication School episode, Theo Hicks talks about building a team that lasts. As we’ve mentioned in the previous episodes, your team is one of the risk points of your deal-making process. Nobody wants the hassle of working with people that are not right for your business, and you don’t want to lose credibility by having a high team turnover rate. Theo gives a step-by-step process of putting together a team that lasts and shares some ways of presenting it the right way to your prospective investors.

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening!

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TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome back to another episode of The Syndication School series, a free resource focused on the how-to’s of apartment syndications. As always, I’m your host, Theo Hicks.

Each week we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. And well, for a lot of these past episodes, we’ve given away some free resources – free PDF how-to guides, free PowerPoint presentation templates, free Excel calculator templates, things to help you along your apartment syndication journey. So make sure you check out those free documents, as well as our past syndication school series at https://www.syndicationschool.com/. And as I mentioned last week, or if you’re listening to this way in the future, the episode about seven episodes before this one, we just had the Best Ever Conference, virtual, for 2021. But nonetheless, still some amazing content.

And what I plan on doing for the next couple of weeks is going over some of my favorite speakers, what they talked about, and then my spin on that and how we can apply that to apartment indications.

So the first speaker presentation we’re going to talk about today was from Liz Faircloth of Real Estate Investher, and she gave us four steps to build a team that lasts. And obviously, your team, as we’ve talked about many times on this show, is one of the three major risk points in apartments indications. So there’s the team, that’s you, and the GP side, your company, but also the property management company managing the deal, your CPA, your lawyer, etc.

And then the other two risk points, of course, are the deal/the business plan and the market. So your goal whenever you are presenting yourself or a deal to your passive investors, is to explain how you are minimizing those three risks. So what are you doing to minimize the chance that your team does something wrong to lose their money, that something happened to the market that makes them lose their money, or something happens in the business plan that makes them lose their money.

So we’ve got plenty of episodes, we’ll go into details on some of the questions that passive investors might ask about your team, things that you can do to present your team properly to your investors, making sure you have a track record, you’re bringing on mentors, things like that. But Liz gave us some very tactical advice, a step-by-step process of how you should approach putting your team together in the first place.

I’ve interviewed so many people on the show, whose best ever advice always involves making sure you find the right partner, especially when it comes to apartment indications, where it takes a long time to get the ball rolling before you even do your first deal. And then once you do your first deal, it still takes time to do your second deal and to scale to a large company. This is like a multi-year process. And if you end up partnering with the wrong person upfront, and you stay with that person or you hire the wrong team members upfront, they’re going to be with you for a while before you start to realize that maybe they weren’t the right fit. And at that point, they might do something that makes your investors lose credibility for you in their eyes.

And so one of the most important things that we stress on this show is the fact that you need to have a team before you start to engage with investors and brokers in looking for deals. Practically, obviously, you’re going to get a property management company to help you look at deals in the first place, but you don’t want to be putting together your team while you’re in the process of talking to investors, while you’re doing deals. Do that all upfront, make sure that you’ve got the right team members, that way you’re setting yourself up for success, you’ll be able to answer those questions that investors and brokers and other property management companies would ask you, and you’ll avoid going through this process for years with bad team members or no team members and losing credibility in the eyes of your investors. But how do you actually do this? How do you build the right team? How do you find team members who will not only be with you for a couple of months or a couple of years, but long-term, will be with you throughout the lifecycle of your company, ideally for forever.

And so Liz gives us a four-step process. It is not rocket science, but it’s something that will take some time, will take some thinking… But as I mentioned before, this will help set you up for success in the long run. Invest time now to avoid headaches later.

So step one is going to be to map out where you want to actually go. So why do you want to be an apartment syndicator? Where do you actually see yourself from an asset under management size of company in the short-term, so by the end of the year, and then more long-term, 3-5 years and further out… Because there’s a huge difference between wanting to have a couple of apartment communities, maybe $10 million under asset, as opposed to having a billion dollars under management, right? The types of people you’re going to need on your team, and the number of people you’re going to need on your team are going to be different. And so you want to create a map of where you see yourself, where you see your company going, and that will define your overall vision for the company. The vision for the company is to have $1 billion under management in 5 years across the country, or in DFW or in the southeast or something.

So once you have your short-term, your long-term goals defined as well as that vision, the next step is to say, “Okay, so this is where I want to go… So which parts of this can I do myself?” So taking a personal inventory. So literally, spend a full day, half a day, on a Saturday, go to a coffee shop—now, I guess, get in your office, and think about all the different things that you personally bring to the table. This is going to be a money and a financial perspective. So what type of assets do you have, but also what are some potential liabilities you have? Do you have any high debts or anything like that? What do you bring to the table from a time perspective? How much time do you have to spend on this business? Do you work a 9-5 and you’re single, so once you’re done with work you can spend all your time in a business, or do you already have a family, and you can only dedicate late hours or early morning? How much time do you have to dedicate to the business? What type of experience do you have that’s relevant to apartment syndications, relevant to what you’re trying to do?

So as we’ve talked about on the show, the two relevant experiences would be your business background and your real estate background. So what’s your real estate investing background? Even it’s something as simple as having bought a house before; that gives you more experience than having done nothing before. Having invested in single families? Have you passively invested? In my business perspective, we’re talking more like high-level, director-level and above, starting your own business, getting promoted.

What about skills? What are your skill sets? What are you good at? Are you a good networker, or are you better at being in front of the computer crunching numbers? What’s your personality like? So this can involve taking a personality test, and figuring out what your personality is like. The personality test that Liz talked about in hers was ranking you on dominance, extraversion, patience and formality.

And then leadership perspective; what is your leadership philosophy? What do you think makes a good leader? Things like that. So basically, you want to create this document that explains what you bring to the table from a money perspective, from a time perspective, from an experience perspective, from a skill perspective, from a personality perspective and from a leadership perspective. And then once you have that, as well as your map, you need to figure out, “Okay, so based off of my map, where I want to go, what can I do? What am I able to do? How can I help this process? What should I focus on?”

And then the flip side of that is, “Okay, what aren’t I good at? What don’t I like doing? Which aspects of this map do I need to bring someone else on for?” And that’s where you determine who you need to meet your goals and your vision. So based off of, again, your vision and what you bring to the table, you’re going to need to find other people who complement your money, your time, your experience, your skills, your personality and your leadership perspective.

So something I really liked from, not 2021 Conference, but 2020 Conference, is once you have this map of where you want to go, “I want to have a billion-dollar apartment syndication company,” then you create an actual corporate structure flowchart of all the different employees that you would need in order to run that side of a business; from Asset Management Director, Acquisitions Director, GPs, say you do an in-house property management company, CPAs, lawyers, things like that; just create a whole flowchart of the company. And obviously, when you first start out, you’re going to be doing a lot of those things, especially on the GP side. But when you have that structure, you can see and envision the different types of people that you will eventually need to hire. So when you first start off, right, you’re doing everything. But then, based off of your personal inventory and maybe spending time underwriting deals, you realize, “Well, I don’t think acquisition is going to be my focus. I don’t think asset management is going to be my focus. I’m better at networking and working with investors. And so the first thing that I need to hire out is an acquisitions manager and an asset management manager.” So I really like that exercise of creating that corporate structure flowchart immediately. That way, you’re always on the lookout for the types of roles that you need to fill.

So at this point, you have your vision, you know what you’re good at and what you’re not good at. And you’ve created this corporate structure flowchart to determine, “Okay, well, in the future, when I have this billion-dollar company, here are roles I’m going to play and here are the other roles I’m not going to play. These are [the people] who I need to bring on.” Now, either day one, as well as on an ongoing basis, you start to bring people and hire people for those positions.

And the two characteristics that Liz says you need to focus on is alignment and diversity. So she said the biggest mistakes that people make when building a team is the lack of alignment and a lack of diversity.  From an alignment perspective, she’s talking about your vision, obviously… So if you’re hiring someone who doesn’t want to work for a billion-dollar company, but your goal is to have a billion-dollar company, things aren’t going to work out for your long-term goals, but also your values. That’s something that you probably defined in your personal inventory, but also expectations.

And then another big one, too… She said that— it didn’t surprise me, because I definitely thought of this before, but never really articulated it out loud, which was the entrepreneurial spirit. So especially when you’re first starting out, people get really excited about real estate, the prospect of leaving their job, and just having a full-time company. And I’ve seen—I’ve been in this for about five years now… You’ll see people get really enthusiastic at first, and then they kind of fall off and disappear. It takes a very special person to continue after that zealous phase ends. So making sure that you find a team member who is not going to “gas out” in a sense, or get really excited at first and then after a few months disappear, and not really have that same spirit as you, it’s huge. That’s got to be one of the biggest problems I’d imagine with partnerships, is both partners are very zealous at first, and then the one keeps grinding through once that initial enthusiasm dissipates, whereas the other person kind of disappears and no longer does anything, and no longer wants to be involved. And then the one team member wasted six months of working with this person, and they need to find someone else. So making sure that you have alignment on the values, the goals, expectation, entrepreneurial spirit, I think will save you a lot of time.

And then the other one was the lack of diversity. Do you remember you took your personal inventory, so what you bring to the table, and Liz says, “Of course, it’s okay to work with people who are similar to you.” But if every single person at the company is the exact same as you, every single person in the company only likes underwriting deals, but aren’t very personable and don’t have good networking skills, then of course, the business is going to collapse.

So rather than bring on people that are similar to you, you want to bring people on who have different personalities, different risk tolerances, different skill sets, different experiences; essentially, the people that complement your skills and your gaps. So if you really like underwriting, and you really like crunching the numbers, then don’t hire a bunch of number crunchers. Hire someone who doesn’t like crunching numbers at all, hates underwriting, but really enjoys talking to investors, or really enjoys managing property management companies, or things like that. So they must align with you from a values, goals, expectations, entrepreneurial spirit perspective, but they also shouldn’t align with you when it comes to things like personality, the skill set and experience.

So there’s certain things that you want to be aligned on, but there’s also certain things that you want to be a lot different on. And understanding how to differentiate between those two is very important to making sure you find the right people. And from there, again, you kind of just continuously hire people and fill in the roles of that flow chart as you expand and grow.

We’ve done a couple of episodes on how to know when it’s the right time to find new team members; it really comes down to that dollar per hour activity. So once you have the ability to focus more time on those high dollar per hour activities, then it’s time to outsource those lower dollar per hour activities to other people.

What I really like about this process overall is that it’s a good way to find business partners, and it’s also a really good way to find employees or people to bring on your team that aren’t necessarily going to be your business partners.

So to summarize, step one is to map out where you want to go. Determine your short-term goals, as well as your long-term goals, and use those to define an overall vision for the company. Step two is to take a personal inventory, to literally spend a day or full day figuring out what you bring to the table, and then determine who you need to bring on to achieve your goals based off of what you bring to the table. And then once you know who you need to bring on, go out and start finding people, and making sure that there’s an alignment, that they align with your goals, your vision, your expectations, your entrepreneurial spirit, with those intangibles… But make sure that they also have a diverse personality, risk tolerance maybe, skill set, experience; someone who complements you on your skills and your gaps.

So that concludes this episode. Again, that was from Liz Faircloth of the Real Estate Investher network. And then I think next week, I will be having a conversation with the new Best Ever host, Ash Patel, and then after that, we will transition back into talking about my favorite takeaways from the Best Ever Conference.

So thank you so much for tuning in today. Make sure you check out the other Syndication School episodes so that you can download all of the free resources we have. That’s at https://www.syndicationschool.com/. And until next week, have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

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JF2368: The Case For Multifamily Real Estate in 2021 | Actively Passive Investing Show With Theo Hicks & Travis Watts

Today Theo and Travis will be making a case for multifamily real estate as an asset class. This episode builds on previous episodes of the Actively Passive podcast that covered various industry reports and showcased in-depth information about the multifamily market.

This time, Theo and Travis are explaining why multifamily real estate is a great choice for passive investment in 2021. And while there are many nuances for each market and specific deals, some common indicators show how profitable and secure the multifamily asset class investments can currently be.

We also have a Syndication School series about the “How To’s” of apartment syndications, and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening!

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TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome back to another edition of the Actively Passive Investing Show. As always, I’m your co-host, Theo Hicks, with Travis Watts. Travis, how are you doing?

Travis Watts: Hey, Theo, doing great.

Theo Hicks: Well, thank you again for joining us today. Best Ever listeners, thank you for joining us as well. Today we’re going to give you a Case For Multifamily Real Estate in 2021. There is a question mark in the title, but for me it’s an exclamation point. The Case For Multifamily Real Estate in 2021.

Travis and I have done a few Actively Passive Investing Shows in the past on very detailed, in-depth, well-researched multifamily reports, commercial real estate reports, going over a lot of stats and data on specifically why there is a strong demand for multifamily; some of the forecasts for commercial real estate in general, but also multifamily for 2021 and beyond. So based off of our backgrounds, as well as our reading of those reports, we kind of threw together a list of different points that support investing in multifamily, specifically in 2021 and beyond. A lot of these metrics will kind of give you an idea of what types of metrics indicate a demand for multifamily, what types of metrics show that a certain asset class is going to be strong; how do you know that a certain asset class is going to be strong. So those are the things we’re going to talk about today.  We’re gonna be keeping it pretty high level. If you want to check out some more detailed analysis, again, check out some of our other Active Passive Investing Shows. There are also lots of different really solid real estate reports out there that you can find as well.

Travis Watts: Absolutely, Theo. I think for me anyway, the purpose of this particular show episode is that, to your point, we’re hugely going really in-depth on something very specific. What are the top 10 markets for 2021, or how does a cap rate work, or whatever it is… The way I envisioned this is I’m sitting at a table, I’m introduced to somebody I don’t know, they say, “What do you do?” and I say “I invest in apartments” and they say, “Oh, really? Tell me more. Why would you do that?” So this is just kind of that high level, I’m kind of making the case for why I do what I do. So it’s just kind of some general thoughts.

I’ll kick it off with something that we talked about several episodes back, I can’t remember which one it was, but it’s about cash flow strategies. I’m such a huge advocate for investing in things that produce passive income, or cash flow, or dividends, or interest… And personally, part of my criteria is on a monthly frequency. And the reason is because when I have a whole portfolio stacked up with monthly-paying, cashflow-producing assets, yes, I’m living on a portion of it, but then anything I’m not using, I’m able to quickly reinvest into other assets that produce even more cash flow. Therefore, what’s important about that, that little circle of life right there, is the way I see it, I’m reducing my risk.

So let’s say I have to go out there in the world and I have to earn an income, and I pay my taxes, and I’m left with my net amount of cash. Well, I take that cash and I initially put it into some real estate, let’s say. So that in my mind is where I’m taking the most risk. In fact, all the risk, that first investment. But as that investment starts kicking off more cash flow and more income, and I take that and then buy another asset over here, then I’m taking significantly less risk. Because even if that new investment that I just made over here falls apart or goes to zero, or whatever happens, I still have my initial piece of real estate. So I still, in my mind anyway – I’m sure some people probably don’t agree with this – but it’s almost like I’ve taken no risk on the last investment that I made, because I still have everything that I started with, hopefully, and then some.

So that’s the primary reason. We’re going to get into a lot more in this episode, reasons for multifamily, and apartments, etc. But at the top of my list, it’s all about cash flow and passive income. I’ll leave it at that.

Theo Hicks: Yes. Like all transactions, it’s all about supply and demand. So for real estate, for multifamily, I like looking at supply as two different things – it’s the people, and then the properties. People need to live somewhere, every person needs a place to live, so how many units are there for people to live in? So as the number of people goes up, if the units stay the same, then demand for those units is going to go up. If the people stay the same, but the units go up, then the demand for those units is going to go down. When the demand goes up or down, that impacts the amount of rent that can be charged. It’s kind of a simple calculation.

When it comes to determining where supply is at, there are places you can see the number of units constructed. Those are kind of good to understand compared to the previous year, but I really like the absorption rate, because that basically tells you over a certain period of time, there are this many available units; what percentage of those units have been occupied? That doesn’t really tell you how many years are being constructed, but it kind of shows you what the demand is for the units.

So obviously, an increasing absorption rate indicates that there are less units than there are people. If it’s going down, then there are more units than there are people. [unintelligible [00:08:28].11] real estate reports – you’ve probably heard this before, it’s the affordable housing crisis. There’s a very limited supply of affordable housing because of the costs to make multifamily, and the amount of rents you can get. All the new construction is going to be A class, because it costs a lot to develop the property, so you need to get a lot of rent in order to cover all those costs. So it doesn’t financially make a lot of sense to do new development for C class or B class properties. It’s usually going to be an A class range in really nice markets.

Since the supply of B class, C class, affordable housing isn’t really going up  –it might even be going down, because they’re getting fixed up and brought to a higher level– but the number of people that need that housing, especially now because of the current recession that we’re in, that is a big plus for multifamily, from a supply and demand perspective. This is kind of reflected in the rent growth.

I just did a blog post a few weeks ago about the rent growth forecast. The 10 markets where rents are going to grow the most in 2021. What you realize when you read these things is that these are all, again, forecasts, and it could be higher, it could be lower… But when you look at 2020 rent growth, and then 2021 forecasted rent growth, they’re not in these massive, big markets.

The market that grew the most in 2020 was Boise, Idaho, of all places. So they’re not these A class markets, they’re these secondary and tertiary markets. On the one hand, you can see that okay, there’s a lack of affordable housing, and then in these areas, the rents are going up. So if you are a passive investor, you might want to consider looking at, again, these value-add type plays, where they’re buying the C class, B class properties, in areas that have experienced rent growth, that has beaten the national averages over the past five years, and is projected to continue to beat the national average over the next five to 10 years, and investing in those places. You can still do well investing in new development deals and things like that, but at minimum, you’re always going to have this demand for these affordable housing until something changes where it becomes really cheap to build again.

Travis Watts: Absolutely, Theo, great points. Two other things I was just thinking about is — I want to give a different kind of spin on what everybody’s pretty familiar with, which is the appreciation aspect of real estate, and the depreciation aspect. But I want to take it a step further and paint a different picture.

A lot of people think of appreciation in the sense that, “Oh, I’m going to buy this property – whatever the property is, single-family, multifamily, etc. – and I’m going to sit on it for numerous years. Hopefully, the market is just going to lift the value, and (to your point) supply and demand, and one day, it’s going to be worth more.” As we all know, our grandparents and what they paid for their single-family homes way back when, $20,000 for a house that today is $500,000. Well, that’s certainly one way to look at appreciation. The problem with that is markets don’t always just go straight up. As you know, what about 2008, ’09 and ’10? Sometimes markets go down. So solely relying on just market conditions for appreciation, I think, is a mistake. This is why I invest in value-add properties, because we are forcing the appreciation. We are buying something that’s already at a discount because it has some problems; we’re fixing those problems, we are raising the rents.

The whole name of the game in multifamily is net operating income. We either have to increase revenues and/or cut expenses. And then your NOI (net operating income) goes up, and then your property is more valuable. A lot of single-family investors don’t necessarily think about it that way, because NOI really is almost irrelevant in the single-family space; it’s more based around the comps in your area.

So that’s one thing to think about with appreciation. The good thing about real estate, generally speaking, is that it’s kind of an inflation hedge. So if you believe the Fed and their projections that inflation is 2%, then theoretically your property is going up approximately 2%. Either you can raise your rents 2%, or the cost of materials to build goes up 2% a year… So yeah, in theory, over time, the property’s worth more. But guess what? It’s gotten eaten up too with inflation, so maybe it’s really not worth anything more.

So something to think about there is, think about it like buying a stock. If you could find a really solid company that, for whatever reason, just had a big dip, because the whole market went down, like we saw last year in March and April… If you’re able to pick that stock up at a 30% discount and it recovers, now you have a 30% buffer. So the market could collapse again 30%, but you still wouldn’t be losing any money. You’d be at breakeven at that point. That’s just how I like to invest, and a different way to think about appreciation.

Now for depreciation, this is where we get into taxes, and Theo and I certainly aren’t CPAs or tax professionals, so certainly seek out your own licensed advice on this… But real estate has some tremendous tax advantages with bonus depreciation, with cost segregation studies that you can do, mostly applicable in the multifamily space… But the bottom line is, to the point of my first topic when I was talking about reinvesting cash flow and then lowering risk – well, if I’m not having to pay 35 plus percent in taxes on my cash flow each year, because I have more depreciation than I have cash flow, then I’m able to reinvest that cash flow over and over again, where otherwise I wouldn’t be able to.

If you ever look at these compound interest charts – I’m sure most of us nerds out there, myself definitely included, are always running these calculations of the phenomenon of compounding. But if you ever throw in the equation of, assume that you paid 35% tax, it’s incredible. We’re talking over time, millions and millions of millions of dollars in difference, just because you were paying taxes along the way. It’s certainly a killer of returns, hands down.

So another reason I invest in real estate in general, single-family, multifamily syndications, etc, is the tax advantages and the fact that I can keep rolling that forward, and that they’re tax-favored. If I’m holding a property, let’s say longer than 12 months, now it becomes a long-term capital gain, which is tax-favored, as compared to just getting interest in the bank, for example, something like that, which goes into your ordinary bracket up to 40% plus, that kind of thing. So those are two more high-level thoughts I just thought of.

Theo Hicks: A quick follow-up on the appreciation. I think I brought this up a few times on the show, but I really liked his thought process… It’s from the first webinar that we did for the Best Ever conference. They’re talking about should you buy or should you sell, or should you hold in 2021. It was a tax specialist, and she was saying something changes in the tax code. It’s going to, in a sense, impact all investments very similarly. Some might be impacted, more or less; everyone’s going to be in the same boat. So are you just going to stop investing period, or are you just going to find the best investment for the time being?

I think we’ve talked about this [unintelligible [00:15:41].26] maybe you don’t get 10% returns, but you’ll get 5% returns when everything else is going to be zero or negative. So when you’re talking about appreciation, it kind of triggers my thought process… Because like, look, even if that cap rate part of the equation makes it so that values go down — and it’s not just real estate value is going to go down and everything else is going to be completely [unintelligible [00:15:57].28] The stock market is probably going to go down too, other investments are going to go down too.

So when you have that other metric of the forced appreciation, you can offset and maybe even completely overcome any dips in the market by forcing that appreciation up. And then it’s even better if you’re investing with a company that is very conservative with their underwriting and even assume that in five years from now we’re expecting the market to be worse than it is now, so that if it’s not, then the value is appreciated even more.

We’re talking about the case for multifamily, and when you’re investing in these value-add force appreciation type deals, and the markets doing really well, then you’re going to do even better, if the market is not doing very well, then you’re really better than what you do if you’re investing in something else that was completely reliant on the market that’s not doing very well.

We have other points, too – the back-end buyers. Last week we talked a lot about the exit strategy. Who’s going to buy multifamily? Right now, I know Travis has talked about this a lot, but the returns on other investments are either really low or not very stable. A lot of these big hedge funds are buying real estate, they’re buying stabilized, turnkey, low headache real estate in order to get that 5% consistent return that they can’t really get anywhere else. So when you are investing, again, with value-add, or really investing with anyone who plans on stabilizing the property, which I don’t know why they wouldn’t stabilize the property, then you can have confidence that on the back end an institution is going to buy this property from them.

Travis Watts: I was just going to caveat one thing that you mentioned that’s critical for everybody listening to understand – when you’re saying a 5% return, we’re talking about an unlevered return. We’re talking about institutional capital, buying an apartment community with no debt, no leverage. That’s what a cap rate is, essentially, when you’re buying at a five cap. So these institutional players, just to clarify your point Theo, are looking around and saying, “Treasuries are paying 1%, and bonds are paying 2%. So hey, 5% sounds pretty good.” And if you’re not using any leverage or debt, you’re taking a lot less risk, therefore this may be pretty comparable to buying a bond or a treasury, at least in my opinion. So that’s kind of their perspective from an institutional standpoint. This is a pretty high-yielding asset without taking on a lot of risks, if we’re not going to lever it up with debt.

Theo Hicks: Thanks for clarifying that. So because of a demand from these institutions for that type of real estate, then not only can you benefit from what we talked about already – the cash flow, the appreciation, the tax benefits, the cash and the rent growth, the demand and the supply – we can also have confidence that once they sell this thing, someone’s going to buy it. They might say, “Oh, well, who’s going to buy this thing on the back end if the market is not doing very well, the market takes a dip?” If it’s going to perform better and be a lower risk than other investments, institutions aren’t just going to do nothing and just sit with their money; they’re going to invest in something. And this is going to be one of their better options, especially now.

And then from your perspective, to even reduce your risk even more – because whenever you do research on some of these real estate reports, you’ll see the national average for everything. Some things are better than the national average, some are less than the national average, and then if you get to look at, say, 2019 data forecasts and then what actually happened in 2020, maybe some that were supposed to be the national average didn’t, maybe ones that were not supposed to beat the national average did it… It’s kind of hard to be perfect, especially in 2020, especially. So a good way to minimize risk even more, is to diversify across multiple markets. So possibly invest in some primary markets, but then also do some tertiary markets and some secondary markets. That way, they might not necessarily do as well if you had put all your eggs in one basket and we’re right, but you aren’t going to do as bad if you put all your eggs in one basket and we’re wrong. Diversifying across these different types of markets that have different pros and cons can help you participate in the national average, and hopefully outperform that. But since you’re in multiple places, then if something happens to not perform how it’s opposed to, then the ones that did pull you back up and make sure that you’re keeping your capital, and it’s growing, and you’re making that cash flow.

Travis Watts: As part of the beauty of being a limited partner, I highly value diversification. It’s a lot of the reason why I left doing single-family investing, where I had a portfolio of single-family homes, into multifamily, is so I could pull that equity out and I could redistribute it in smaller amounts nationwide, in markets where I was kind of placing a bet on, with operators who, quite frankly, are doing things a lot better than I was. So I’m huge on that, absolutely. We covered the top 10 markets, as you pointed out, a couple of episodes ago. So in theory I was able to liquidate those single-family homes and go put 25K here, and 50K here, and 75K there, and spread that across those top 10 markets, give or take. So great points, Theo.

Another thing, since we’re talking about single-family and multifamily, is the safety of your capital. So this is something I got really uncomfortable with. Let’s take an example of a single-family house rental and multifamily asset, both leveraged, meaning that we have mortgages or debt on apples to apples that way.

So with a single-family homes, the ones that I used to own, when I had a renter in them, and I was getting the rent payments on time and in full, I may have been a few 100 bucks cashflow-positive every month. But anytime a tenant moved out or didn’t pay me rent, not only did I not get the few 100 bucks, I went severely negative, because I still had property tax, insurance, and HOAs in my mortgage payment. So I might have been $1,000 underwater. So that 300, 300, 300, 300 just goes away if in month number five I don’t collect a rent payment, for whatever reason… In addition to all the maintenance issues that pop up with roofs, and HVAC systems, etc. A lot of times my cash flow was wiped out for the entire year, just because of an unforeseen whatever, that kind of thing.

So I got to thinking about risk, and I thought, “Man, if I had five properties, and even three of those I wasn’t getting rent for whatever reason – maybe a flood, tornado, or just a coincidence – I might be in pretty bad shape.” I don’t have thousands of dollars per month to cover in expenses. and I certainly didn’t have enough cash flow from my other properties to cover that.

So in multifamily, let’s use a 100 unit apartment building just as an example. A lot of times you can find these and underwrite these properties at, let’s call it, a 60% breakeven occupancy, just to use simple numbers again. That means out of my 100 units, I could have 40 tenants not paying rent or not occupying the units, and I’m still at a break-even. I’m not losing money, I’m at break-even on the property in terms of cash flow. So to me, that’s really about safety and risk reduction, and it’s a big reason I really like multifamily, which is obviously the topic that we’re covering here.

In addition to the last thing – I know I already covered it a little bit, but the inflation hedge of “We can bump rents based on what the inflation rate is”, the materials get more expensive to build these types of products, therefore our product becomes more valuable… So it’s a huge topic right now, Theo, and everybody listening, if you haven’t been tuning in, the Fed is just pumping trillions of dollars into the system. We’re going to see inflation. I don’t know what percentage, I’m not that smart, I don’t know how that’s really going to pan out…And hopefully, it doesn’t end up as hyperinflation, like we’ve seen in Venezuela, or back in Germany in the 20s and 30s, or Zimbabwe… But I do think this 2% inflation is perhaps a little bit of a joke, looking forward to the next decade.

So you want to be in something, in my opinion, that’s an inflation hedge. And if you’re leveraging, like we’re talking about, if you have a mortgage and debt, you are locking in today’s dollars in that debt, and then paying them off with cheaper dollars. The more we inflate and the purchasing power goes down, the more money we have to pay off that pre-existing debt. So all in all, big fan of real estate in general, but multifamily, for those reasons.

Theo Hicks: Yes. And then to kind of  close and summarize… The thing to think about here isn’t, “Is me passive investing in multifamily going to help me double my money in a certain amount of years, or get 15% annualized return?” I think the better approach is to compare it to everything else.

I’ve kind of said this multiple times in the show, but unless you’re just going to keep your money in the bank or under your mattress, you’re going to invest it in something. So what is the best vehicle to invest in? What is the ideal vehicle to invest in when the market is doing well, or when the market is not doing really well, or when you think the market is not doing very well, or you think it’s doing very well… The point of all these things is to say “Hey, look. These are all the different things that multifamily has going for it that allow it to obviously perform really well when the markets doing well, but most things do well. But what happens when it’s not performing well?” What happens if there’s a dip, or as we talked about inflation, or a recession, the stock market crashes, or whatever… People are going to need a place to live, and you’re going to need a place to invest your money. So those two things being true, real estate is a very good place to park your money.

We’ve also kind of went specifically why we think that multifamily is one of the best places in real estate to park your money, especially when it comes to single-family, especially if you’re passively investing. Actively investing is a different story. We’re talking about passively investing, what should you passively invest in… And Travis kind of went over specifically his story about single-family homes versus multifamily. There are a lot more advantages to that as well. We do have a couple of blog posts comparing single-family and multifamily at joefairless.com; just type in SFR versus multifamily on there and that will come up. But that’s how I approached this, is “Look, you’ve got to invest in something. What should you invest in? Multifamily, and here’s why.”

Travis Watts: I’m glad that you brought that up. Again, you brought up looking at the surrounding options. I did an episode on our show a few episodes back, just solo, about what kinds of things in our market today are yielding approximately a 2% return, or a four, or a six, or an eight, or a 10. Just giving examples to think about. Not suggesting all of these will always produce this kind of cash flow, but it’s something to think about. I’m still bullish on multifamily, for the reasons we talked about. Mostly because institutional capital is looking around saying, “Well, 1% over here,” “2% over there,” or “Oh, 5% over here.”

So think about this – a lot of people have trouble wrapping their heads around where cap rates are today in real estate in general. Let’s say nationwide they’re around 5%, on average. Let’s say that they go to 2%. Your immediate thought might be “Oh, well, I’m out. If it’s a two cap, that’s crazy. I’m not investing in real estate.” What if you look around and the bank is at negative interest rates, you’re having to pay the bank to store your money, and bonds are negative, and what if there’s no such thing as yield, except for real estate that yields a 2% return? That’s probably going to be your best option then. You’re going to want to make any kind of return whatsoever. You always have to be matching it up against the surrounding options.

In another scenario, let’s say that cap rates are 2% on multifamily, but municipal bonds are 4%, which would be a crazy world. But if that were the case, maybe that’s a better option to place your capital, because you might get a tax-free yield at a higher interest rate, and these kinds of things.

So you always have to be kind of looking at the landscape and understanding what Main Street investors are looking for and chasing, and institutional, and from our last episode, understanding what the exit strategy is, who are you likely going to be selling to. Anyway, with single-family, that’s going to be individuals. That’s going to be Main Street people. With a 500 unit apartment building, that’s probably going to be an institutional buyer more than likely. So things to think about, those are my final thoughts

Theo Hicks: I like that, looking at what are these big institutions doing, and then assuming that they know what they’re doing; they have some information that they’re basing the decisions on when they’re investing hundreds and billions of dollars. It kind of reminded me of something we talked about a while back when we were talking about how to analyze the GPs market; something else that you do as well, like, “Okay, if a Fortune 500 company is moving to this market, they have a big team who’s analyzing the entire country to say where should we move our corporate headquarters, based off of a variety of metrics.” So if you’ve got a bunch of Fortune 500 companies going somewhere, or you’ve got some big Fortune 500 company buying a bunch of real estate somewhere, they’re probably onto something. You can use that as a guide, where to invest market-wise.

Same thing here – what are the institutions doing? Are they investing in multifamily? Are they investing in bonds? Are they investing in the stock market? What are they doing? Then figuring out why they’re making that decision. They’re not just randomly investing in multifamily; they’re doing it for a specific reason. So that’s another way to guide you to where to test things out. Anything else you want to mention, Travis, before we sign off?

Travis Watts: No, I think that’s it. All in all, to conclude, I’m still bullish on multifamily for 2021, and looking forward, I’m still investing. I did more deals personally in 2020 than I’ve ever done in any given year, and we’ll see how this year pans out. That’s my opinion on it, for what that’s worth… That’s all I got.

Theo Hicks: Perfect. Thank you as always, Travis, for joining us today. Best Ever listeners, thank you for tuning in. One last thing to mention before we sign off – we are doing a new shorter segment on YouTube. We’re calling it the 60 Second Question. So you submit your Actively Passive Investing questions if you’re watching on YouTube in the comment section below. If you’re listening to the podcast, you can just email me directly at theo@joefairless.com, and Travis and I will read your question and your name, and then we’ll answer it in 60 seconds or less. We’ve got a couple of videos already up on our YouTube channel, so make sure you check that out. If you want to have your question featured, again, email me at theo@joefairless.com.

Again, thank you for tuning in. Best Ever listeners have a Best Ever day and we’ll talk to you tomorrow.

Travis Watts: Thanks, Theo. Thanks, everybody.

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JF2367: Maximize Profits With These Three Money Raising Tips | Syndication School With Theo Hicks

In today’s Syndication School episode, Theo Hicks shares three valuable tips that will help you maximize your profits and build trust with potential investors. These tips were originally used specifically for the crowdfunding environment. However, they can be easily adapted for raising capital in other ways.

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening!

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndications. As always, I’m your host, Theo Hicks.

Each week we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. For a lot of these episodes we’ve given away some free resources – these are PowerPoint presentation templates, Excel calculator templates, sometimes PDF how-to guides, something to help you along your apartment syndication journey… So make sure you download those free documents. Also take a look at some of our past episodes. All of that is available at SyndicationSchool.com.

I think this might be the first time I’ve talked about crowdfunding on this show. Most people listening probably know what crowdfunding is. It’s one of the many ways to raise capital to fund your deals. And for the crowdfunding strategy, you basically create a platform or you go to a crowdfunding platforms already in existence, you will post your deal on this platform, and then investors from all over the world can look at it and invest in some cases very low minimum investment amounts. So this is different than the typical approach that people will use, especially when they’re first starting out, when they’re raising money from family and friends, and then they expand to referrals from family and friends, and eventually maybe expand out to, say, larger family offices, institutions, or they might go the crowdfunding route.

I wanted to talk about not necessarily what crowdfunding is, or the advantage of doing crowdfunding; maybe I’ll talk about that a different time. But what sparked this was a conversation I had with someone who does crowdfunding. She had three interesting points that she made about what made her successful. And not only do these lessons apply to someone who’s raising money with crowdfunding, but these lessons could also be applied to your syndication business just in general. Because at the end of the day, the idea is how is she able to legally raise money from more people. And we’ve talked about this many times on this show, but the main reason why people invest is through trust… So how can you legally get people to trust you and invest in your deals is really the question… And she had three really interesting responses. Again, none of this is complete rocket science, but what she said really resonated with me, and I wanted to share it with everyone listening today. Again, these are specifically talked about in the context of raising money on a crowdfunding platform, so I’m gonna tweak it just a little bit to apply it to people who aren’t at the point yet where they have the credibility or the track record to post their deal on a crowdfunding website and attract investors.

So the first one is investing your own money. From what I remember, this investor would post her deals on crowdfunding websites, and one of the items listed in the description to attract people to this deal was that her business invested at least 50% of the capital into the deal. So if it’s that million-dollar raise, her company would invest at least 500k. If it was a ten million dollar raise, her company would invest at least five million dollars. You get the idea.

Now, you don’t necessarily have to invest half the money. You might not have half the money to actually invest, especially when you’re first starting out… But this is one of the best ways to create alignment of interests with your passive investors. And when you have alignment of interests, you gain more trust. And when you gain more trust, you’re gonna attract more passive investors.

Basically, what alignment of interests means is that the interests of the investors and the interests of the GPs are the same. Or at least similar, overlapping. Obviously, when you’re investing your own capital into your deals, you are in the same position as your LPs, who are also investing their own capital in the deals. Basically you are an LP. And in this case, this investor was half the LP. So when you go to investors and you tell them that “I’m so confident in this deal, and my team, and my business plan, and the market, that we’re gonna front half the funds”, that’s a lot more attractive that someone who puts no money into the deal.

So at least putting some of your own money into the deal is important, but this individual went above and beyond that, and actually invested half the funds. So a massive amount of alignment of interests, and especially in a market that might be saturated with sponsors and crowdfunders. That’s one really good way to set yourself apart from other syndicators. That might be the differentiating factor that makes one person choose to invest with  you over someone else. “They’re investing  half their money, or a quarter of the LP capital, I’m gonna go with them. They’re really confident in their deal, and they’re more likely to be successful, because if they fail – well, they lose all their money.”

So that was number one. Number two – and again, this is in the context of crowdfunding, but this individual also created their own crowdfunding platform. So rather than going on an existing platform, they’ve created their own crowdfunding portal. So the theme here is taking things in-house, as opposed to using other people’s systems. The more things that you have in-house, the more economies of scale you’re gonna have, first of all. Well, assuming you have economies of scale, is when you can start doing this. And I’m actually gonna do a show probably the next few weeks about bringing the property management company in-house, and the advantages and the disadvantages of that. But for this individual, I’m pretty sure she immediately created a crowdfunding portal.

Most of the time people start by using all third-party, because they don’t really have the economies of scale or the capital to invest in building their own property management company, or building their own crowdfunding portal… But I’m pretty sure she just went straight to that because of the advantages of it. So she hired a web developer, the web developer set everything up, and immediately just started raising capital for their deals, through crowdfunding, on their own portal.

And really, at the end of the day, the two main advantages of this is 1) the future cost savings. As an upfront investment, just like anything, there’s a return on investment, because they don’t  have to worry about paying all the fees of the other crowdfunding platforms, and they can set it up however they want, as opposed to not really having any control… But it also makes you a lot more professional than someone who does not have their own portal, or have everything in-house. So if you have your own in-house asset management team and own in-house property management team, and your own in-house acquisitions team, and you’ve got brokers, and you’ve got lawyers, and they’re all not third-party, working for someone else, but working for you full-time – assuming you have the deal flow and the number of deals – that is a lot more professional-looking and a lot more attractive than someone who’s hiring everything out to someone else, or using someone else’s software.

So from this perspective, for crowdfunding, when she’s talking to individuals or marketing her company, she can say “We have our won custom-made professional crowdfunding platform”, with all the bells and whistles that she has on there, as opposed to saying “Hey, go to this other company’s website to take a look at our deals.

So how can this apply to you? Well, maybe consider getting an investor portal, and maybe consider making your own investor portal, instead of using someone else’s investor portal from a third-party, making your own. Again, “We have your own custom investment portal, and we’ve talked to thousands of investors, and here are some of their main concerns, so here’s how we address those in our own custom portal.”

Again, you  don’t necessarily have to make your own investor portal, because I’m not really sure what the ROI on that would be, but the whole concept here is to have things in-house to save money, and to be more professional-looking.

I’m pretty sure for her crowdfunding platform she incorporate a lot of education, she has memberships, you have to be a member to see the deals, so there’s revenue flow from that… But overall, it just takes hiring a web developer and letting them do their thing.

Now, the last thing she said – and again, this definitely applies to all apartment syndications  – is hiring a legal team. So having a legal team on retainer at all times, as opposed to one-off, by-the-hour projects.

When they obviously initially launched their company, they needed to work with lawyers a lot, and then they also needed to work with lawyers on an ongoing basis as they did more deals, and SEC regulations changed… And again, this is one of the main things that allowed them to be successful, because they didn’t have to consistently worry about paying all this money to lawyers, or the lawyers not having time to get to them, or them not having the right lawyer at the right time for the legal issues that they needed… Or if a legal issue comes up, there’s a long period of time before the lawyer is able to respond… And all those problems she said were solved by having a legal team on a retainer.

So when you’re initially starting a syndication career, you should be definitely working with securities attorneys and real estate attorneys; you need to do that for every single deal. But eventually, if you get big enough, things might start coming up more frequently than just “Hey, we’ve got a deal and we need a PPM a month from now, or a couple of weeks from now.”

So having a legal team on a retainer could save you a lot of time, a lot of money, as well as give you some peace of mind whenever something were to come up. This comes down to just having your team members either in-house, or making sure that your contract or your relationship with these team members – you’re doing it the right way, basically. So those were the three fascinating facts that she talked about, that allowed her to be successful for crowdfunding. I think those obviously apply to crowdfunding; if you’re a crowdfunder, this will be helpful… But also for really any syndicator, investing your own money and creating that alignment of interests, creating in this case for her her own crowdfunding portal, for you just kind of bringing as many things in-house as possible. That makes sense.

Then also making sure that you have a legal team that specializes in what you’re doing on a retainer, to make sure that you’re setting yourself up for success and you’re not gonna run into any legal issues in the future.

So that concludes this episode. When this goes live, we will have completed the Best Ever Conference 2021, so over at least the next two weeks I’m going to be doing some episodes going over some of the best advice provided during that, and then we’ll get back to our regular Syndication School episodes once I’ve exhausted all of those tidbits of advice.

Thank you for tuning in. Again, make sure you check out SyndicationSchool.com for those free documents, as well as past episodes. Until next week, have a best ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2354: 5 Risk Profiles In Multifamily Real Estate | Actively Passive Investing Show With Theo Hicks & Travis Watts

Today Theo and Travis will be sharing a list of 5 risk profiles in real estate. And while these risk profiles are the same for any real estate, the hosts will be focusing specifically on multifamily properties.

The list ranges from A-list properties located in the country’s top markets that are considered to be cash flow properties to buildings that are considered to be high-risk investments.

And while it’s important to invest within your risk tolerance, having the property be flagged as “high risk” may not mean that it’s a bad investment. Theo and Travis share their thoughts on what can make a risky investment attractive to a limited partner.

We also have a Syndication School series about the “How To’s” of apartment syndications, and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening! 

Click here for more info on groundbreaker.co

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JF2353: 25 Markets Expected To Have The Highest Rent Growth In 2021| Syndication School With Theo Hicks

In today’s Syndication School episode, Theo Hicks shares a list of markets that experienced the highest rent growth in 2020. These markets performed well because of the migration trends we discussed several episodes ago. Due to Coronavirus and the increased possibilities that remote work allows nowadays, many young professionals are moving from expensive big cities to smaller towns and suburban areas that allow a lower cost of living.

Theo also shares a list of 25 markets that are projected to have the highest rent growth in 2021. This list is based on the 2021 Multifamily National Report prepared by Yardi Matrix

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome back to another edition of the Syndication School Series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host Theo Hicks. Each week we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. And for a lot of these episodes, especially the earlier episodes, we give away free resources, free documents. These are Excel template calculators, these are PowerPoint presentation templates, PDF how-to guides, something to help you along your apartment syndication journey. So make sure you check out the past Syndication School episodes so you can listen to those, but also to collect those free documents. All those are available at syndicationschool.com.

And today, we are going to talk about rents, or specifically, we’re going to talk about some of the markets that are expected to see the greatest increase in rents in 2021. So we’ve talked in the past about similar topics, about trends going in 2020 and beyond, as well as analysis of what happened to multi-family and what’s continuing to happen to multi-family due to the onset of the pandemic. And one of the things that’s relevant today is going to be migration trends. We did do an episode a few weeks ago about 2020 migration trends, but something that was occurring before the pandemic was a lot of people, specifically the millennial generation, who were beginning to start families, started to transition from the major urban high-cost gateway markets –the San Francisco’s, the New York’s– into secondary, tertiary markets, as well as the suburbs. And this is one of the trends that has accelerated since the onset of the pandemic.

We did do another episode on that, specifically about the number of people who left the urban areas for the suburbs. And one of the main drivers of this, obviously, is Coronavirus, but more specifically, is that people are working from home more. So rather than being stuck in a tiny urban apartment in the city, with everything closed around you… I think they’re opening up back now, but during 2020 things were closed, you couldn’t go to work, you probably didn’t have a car, because you live in the city… So you’re stuck in your tiny apartment, paying a bunch of rent. And these people would much rather move out of the cities to the suburban areas, or at least move to smaller cities in order to have more space, for less money. That way, they could have more space to work, maybe they move closer to family… So those are some of the reasons why this trend occurred. We kind of went into more detail on that in that urban to suburban episode.

Now, the reason why this is relevant is because whenever people are moving to an area that quickly, in a year’s span, the supply in that market is not going to increase in the same proportion. Typically, the supply is going to lag. So when a bunch of them move to a market, then investors say, “Oh, wow. A lot of people moved to this market this year, let’s go there and invest and build.” But until that happens, rents are going to start going up and up and up. And so a lot of these suburban and tertiary markets benefited from this quick migration trend during 2020 due to the pandemic. It’s a lot of really random cities, that no one really predicted, performed really well in 2020.

Some of the cities at the top of this list, some of them are obviously well known – this is just for 2020 – was Sacramento, at 6.1% growth in rent. The Inland Empire, which is also in California, at 7.3%. Phoenix at 4.6%. Tampa, 3.9%. And  Las Vegas at 3.8%. And then the ones that no one predicted, I would say, would be Boise, which was the highest, at almost 10% rent growth, and then Scranton in Pennsylvania at 7.8%.

So now that we’re in 2021, what are the experts predicting for rent and growth? What cities are expected to grow the most in 2021, based off of a year’s worth of data collected on how real estate is being impacted by the pandemic? So I wanted to go over the list with you guys today, and go over the top 10 cities where rents will rise the most in 2021. And then maybe I’ll go into some honorable mentions that are on the top 25 or so. Now, this data comes from Yardi Matrix, which is kind of like CoStar. They have a massive database of commercial real estate transactions and sales. So based off of their massive database of historical data, they come up with these predictions.

Now, the reason why this is important is because, first of all, when you’re underwriting deals in one of these markets, you don’t want to assume that “Okay, well, Theo said that Boise grew by 9.5% in 2020, so I’m going to underwrite a deal in Boise due to the 9.5% market-driven rent growth.” So you still want to be conservative with your rent growth assumptions, and you still want to make sure that you are basing any rental premiums you’re going to demand if you’re doing a value-add play on your rental comp analysis. So make sure you check out our episode on how to perform your own rental comp analysis – we have a blog post on it as well – to make sure that you’re not falling into the trap of assuming that rents are just going to continue to naturally appreciate.

We need to be able to focus on value add appreciation, which means that we go in there and forcefully increase the rents by doing some sort of renovations. But it is good to invest in a market that is far exceeding the national average for rent growth.

In 2020, rents actually went down nationally by -0.8%. So ideally, you beat that. And in 2021 the national assumption forecast is 2%. So when you’re underwriting deals, you want to do your traditional 2% to 3%, probably closer to 2% now, since rent growth has slowed down. But just because you’re in a market that is forecasted to grow by more than 2%, you still want to keep that 2%. So you find that market that performs really well, and then anything above that 2% is just icing on the cake for you. Whereas if it doesn’t happen, if rents were to decrease like they did in 2020, you’re impacted much less.

Let’s say you bought a deal in 2019 and you assumed rents were going to naturally increase by 7%. And we talk about this all the time in this podcast; it’s actually interesting that what we talked about actually came to fruition. So we talked about how you want to make sure you’re making these 2% to 3% conservative annual revenue increases, even if the experts claim that rent growth is going to be 5%, 6%, 7%, 8% in 2020, even if the previous five years rents have grown by 10% each year. That doesn’t matter because, at some point in the future, rents are not going to continue to grow at those crazy rates. So the higher your assumption when you’re underwriting the deal, the more you’re going to pay. And then once the music stops, in a sense, and rents are no longer growing at that rate like it did in 2020, they went down 0.8%, obviously everyone was impacted by that, because no one predicted –at least not that I’m aware of– a negative rate and growth in 2020. But the closer you were to zero, basically, the less trouble you face. So the person who had that 7%, 8%, 9%, 10% assumption was in a different situation during the last 12 months than a person who did the 2%, or the 3%, or even the 1% revenue growth.

So that’s really a long way of saying that unless you’re forecasting less than 2%, then why are you investing there. But if you look at one of these markets I’ve talked about today, and you say “I’m going to invest in Boise because of the rent growth”, make sure that you’re still being conservative. And that’s just like a selling point, or as I said, the icing on the cake with a cherry on top, that “Okay, I’m assuming 2%, but the experts are saying it’s going to grow 8% in 2021.” So we’re being super conservative, and that way, if it doesn’t come to fruition, we’re still fine. But if it does grow that much, here’s how much more the property is going to be in value, or here’s how much more cash flow you’re going to make. Here’s a best-case scenario, baseline scenario, worst-case scenario, sensitivity analysis.

So that point is very, very important… And it might not have been as obvious when I said this a year ago, but now obviously it makes a lot more sense, since rents decrease nationally in 2020. Obviously, some are way worse according to this Yardi Matrix report. I think they said that rents dropped by 13.7% in San Jose, 9.4% in San Francisco, and then 3% in Los Angeles. Whereas on the flip side, Boise is in 9%.

So what are the top markets for 2021? We’re going to go through the list of 10 or so, and then maybe mention some honorable mentions. So coming in at number 10, Cincinnati, Ohio. So the prediction here is 3.3% rent growth. Now, what’s interesting here is that these rent growth assumptions that they’re coming up with are very, very conservative. I’m not sure exactly what it was for the past five years, but 3% compared to some of the places – 5%, 6%, 7%, being the top 10 at 3.3% is kind of showing you that rents overall are slowing down. But Cincinnati, 3.3% in 2021, compared to 2.2% in 2020.

Number nine is Sacramento, which I mentioned earlier, had a really big jump in rent in 2020, of 6.1%. And Yardi Matrix is predicting a conservative 3.4% in 2021. Birmingham, Alabama, which is one of the most interesting ones in the top 10. Coming in at number eight, they’re predicting that rents will grow by 3.4% in 2021, compared to 2.8% in 2020. Next on the list is New Orleans, which I don’t think I’ve seen in a top list before. It’s probably the biggest city on this list that I’ve not seen in a top market list, at least in the past few years. Rents grew by only 0.6% in 2020, but Yardi Matrix is predicting a 3.5% rent growth in 2021.

Another small location on this list is number six, Winston Salem. I think it’s in North Carolina, actually. I remember saying, “Oh, is that in Pennsylvania? Salem, Pennsylvania?” No, I think this is actually in North Carolina. And that’s number six, at 3.6% rent growth predicted in 2021, because of the 6.6% rent growth in 2020.

These next ones are pretty obvious, but I think Winston Salem, New Orleans, Birmingham, Sacramento, and Cincinnati – those were interesting to me. But the top five are [unintelligible [00:14:54] of course. Number five is Phoenix, 3.7% in 2021, 4.6% in 2020. Number four is Indianapolis at 3.9% in 2021, 3.5% in 2020. Number three is Austin, Texas, 3.9% in 2021, -3.6% this year, which I’d be curious to see how they got that prediction, because that’s number three with a pretty big reduction in rents. But they’re predicting a big turnaround in Austin this year. So that’s another highlight of this list. Number two is Salt Lake City, 4.3% in 2021, compared to 3.8% in 2020. The number one on the list is Las Vegas. So rents in Las Vegas grew by 3.8% in 2020, and that prediction is 4.8% in 2021.

So the reason why I kind of say these are conservative because there’s probably going to be a market in 2020 that grows by more than 4.8%; being the highest, I’m sure some market will grow by 6% or 7%. What that market is, I don’t know. Will it be Las Vegas? Will it be another one on this top 10 list? Will it be one that Yardi Matrix predicted as a negative. It’s impossible to tell. That’s why it’s important to also reiterate that forecasts are never perfect. No one, I would imagine, predicted that the market that would experience the greatest rent growth in 2020 would be Boise, Idaho at nearly 10%. I know Boise is slowing down now, which is why it’s not on this top list, but it had a really big jump in rent starting in April through, I believe, the fall, August, October, November timeframe; I can’t remember exactly when it was. But huge jump. No one could have predicted that. So that’s why you don’t want to rely only on rent growth forecast data to select your target market. You don’t want to listen to this podcast and if I say that “They’re predicting 4.8% rent growth in Las Vegas, so I’m going to go buy in Las Vegas this year.” And then just blindly start doing deals in Las Vegas. Obviously, you have to be more sophisticated than that.

But the point here is how do you use this type of information? What’s the purpose of this? On the one end, you don’t want to completely ignore it and say “They’re forecasting a -5% rent growth, but I’ll figure it out.” You also don’t want to go on the other end of the spectrum, which is “Oh, they’re predicting a 5% rent growth, so I’m going to invest here.” You need to look at these types of reports as guides. So if you’re already investing in a market, then it could reinforce your reason for investing. If you’re on the search for a new market, then you can use these types of lists to say “Okay, well they claim that rents are supposed to grow by 5% in 2021, so let’s do some more digging on this market. Let’s take a look at some other economic data. Let’s take a look at supply data, unemployment data, population growth data, job diversity data.” All the things we talked about on this show about how to analyze the market. And then we can decide based off of that whether or not we want to invest.

Then once we make a decision, we want to do a more detailed, submarket, neighborhood-level analysis, to see, of the market average, which one’s going to perform above the average? Because it’s an average. Some places – Las Vegas, for example, is going to grow less than 4.8%. Some places are going to grow more than 4.8% in 2021, assuming that this forecast is accurate. So these are just guides. These are just guides, they’re reinforcing something you already know, another data point that you can add to your stack of data that shows this is a good market or a bad market. And then you also want to make sure you’re performing that deeper-dive analysis.

So before we wrap up, let’s go over some of the other ones for 2021. So all these are basically between 0.5% – so I’m not going to read the percentage points – all the way to the top is 3.3%. The bottom is 2.8%. We’ve got Atlanta, and then Columbus, Louisville, Raleigh, Richmond, Memphis, Tuscan, Nashville, Tampa, and Houston. So those are 11 through 20. And then, I guess we’ll add in the last five, which is Tacoma, Charlotte, Denver, Detroit, and Philadelphia, which are all either 2.8% and 2.7% rent growth.

So what are the big takeaways? Number one, when you’re assuming revenue growth this year, you’re probably going to want to be closer to 2%, maybe even 1%, and maybe assuming rents aren’t going to grow at all in 2021 when you are buying deals. That way it’s just a cherry on the top. Because the average nationally for the forecast is 2.0%. The highest is 4.3%. And Tuscan and Nashville are the last ones at 3%, which are in the top 20. So they’re assuming that only 20 markets or so are going to grow by more than 3%. So when you’re underwriting deals, making a 3% revenue  assumption probably is not the best idea.

If you want more data – because this is just one of one snapshot, one page of the Yardie Matrix report… The US multifamily outlook winter 2021 pandemic prompts rise and rent concessions – ou can check that out; we’ll put a link in the show notes of this episode.

So that’s all I have for today. I hope this was helpful. Let me know if you like these episodes where we dive into timely market data. Just email me theo@joefairless.com and say, “Yeah, Theo I love this.” Or “Hey Theo, I don’t like this. Let’s do something else.” We always appreciate your feedback. Make sure you check out some of the other Syndication School episodes we have, as well as those free documents, at syndicationschool.com.

Until next time. Have a Best Ever day and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

 

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JF2340: Top 10 Markets To Buy Multifamily in 2021 | Actively Passive Investing Show With Theo Hicks & Travis Watts

Today Theo and Travis are talking about the current Top 10 markets for investment in multifamily property. This list is based on the annual “Emerging Trends in Real Estate” report prepared by PwC and Urban Land Institute. Travis and Theo also highlight additional takeaways from the report. This information will be helpful for both passive and active investors looking to expand their portfolio in 2021.

https://joefairless.com/top-10-markets-to-buy-multifamily-in-2021/

We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome to another edition of the Actively Passive Investing Show. As always, I am your co-host, along with Travis Watts. Travis, how are you doing today?

Travis Watts: Theo, doing great. Thrilled to be here.

Theo Hicks: Yeah, thanks for joining me, as always. And we’re going to talk about markets today. So we’re going to talk about, as you can see by the title, we’re going to talk about a blog post that we wrote called the Top 10 Markets To Buy Multifamily In In 2021. And if you’re watching this on YouTube, we’ve got Vanna White over there giving us a presentation of a beautiful map, the infographic we have that highlights those top 10 markets.

So this is going to be based off of a PwC and Urban Land Institute report. We’ll have a link to that in the blog post we’re referencing and also in the show notes of this episode. And we’re going to highlight some of the other takeaways from this report today. So before we dive into that, Travis, do you have anything else you want to say about why what we’re going to talk about is relevant to someone who’s a passive investor?

Travis Watts: Yeah. I think this topic is relevant to active and passive investors. It is titled Top 10 Multifamily Markets, but real estate markets are real estate markets, right? No matter what asset type you’re in, or whether you’re active or passive, it all goes hand in hand. And as we talked about a couple of episodes ago, a lot of these episodes that we do, especially this year in 2021, come from questions that I get asked frequently by investors when I’m on calls week after week as part of my investor relations role. Which market should I be looking at? Which reports are good? Which ones are bad? That’s why we’re showing you guys this; it’s a very popular and common topic that I think everyone can benefit from.

Theo Hicks: Yeah. So in that blog post – and if you’re watching this on YouTube, which we highly recommend – Travis has an image behind him that shows the top 10 markets. We’re not necessarily going to list those out today in full. As I mentioned, this is a very long report. We’re going to go into some of the takeaways from this report. And obviously, this has been a show focus on passive investing, and we’re going to talk about why each of these takeaways are relevant to you as a passive investor. So Travis, you could start off by talking about some of the issues that were highlighted in this report.

Travis Watts: Yeah. And one thing before I get rolling here… As you pointed out, Theo, this is like a hundred-page report, again.

Theo Hicks: A big one.

Travis Watts: PwC and the Urban Land Institute, it’s kind of a combination of the two. Very, very much in-depth, in detail. We could literally talk for hours on this report. We’re just going to skim it, hit some high-level topics and things to think about. Check out the blog post, because there’s a link to the actual PDF that I’m referencing, and I’ll point out what pages I’m on too if you want to kind of follow along and if that blog post is something that you want to take a look at.

So to your point, let’s get started. So what these are, are the issues that could potentially arise this year, and then how much importance is weighted on those particular issues. So I’m on pages four and five of this report. And I’ll just kind of start from the top; I’m not going to go over all of them, there’s 10 in every category. But as far as economic and financial issues that could potentially have an impact on multifamily and real estate in general, at the very top is job and income growth. As we all know, we’re in the midst of COVID, everyone’s concern is jobs and unemployment. And you get into these deals as an investor, and you’re looking at these projections of ‘We’re going to be raising rents $200 a door per month over a few years”, well, it’s really dependent on your renters and the fact that they have a job, number one, and then number two, that their income can support those rent hikes. So you’re trying to kind of read between the lines, and we need an economy that’s stabilized to support that. It’s a one to five scale, if you’re not following along, on the chart. So they ranked that as number five, meaning the most important.

And I’ll scale quickly to the bottom. They’ve got inflation and currency strength as still very important in the top 10, but the least of the top 10 of importance. There’s a lot of talk with all this money printing that we’re doing, with the Fed coming out with this proposed $2 trillion stimulus package possibly around the corner… My gosh, it’s crazy. So you’ll see a lot of headlines about inflation, and are we going to see it, and is it going to go into hyperinflation, or are we going to collapse the value of the US dollar? I personally would rank those a little higher on the list myself. That’s a concern to me. But they’ve got them there at the bottom, so take it as you will. Those are the economic and financial potential issues.

Moving on to social and political at the top of the list of most importance. They’ve got epidemics and pandemics in a category; obviously, in the midst of COVID. That makes a lot of sense. That’s still a concern of most people, especially this year. The political landscape – as Theo and I pointed out several episodes ago on the proposed Biden tax plan… If you haven’t checked out that episode, I would. It’s getting more outdated by the day, so stay up with the news. But the political landscape – we just had the inauguration, but now what Biden’s essentially proposed is to repeal the Trump tax reform that was set forth in 2017, which was the Tax Cuts and Jobs Act of 2017. And it’s not a political statement, whether you’re pro Biden or Trump, it’s just that that particular policy was really to the advantage of real estate investors. So if that gets repealed, that’s obviously of most importance.

At the bottom of this list on social and political is terrorism and rising education costs. So obviously, terrorism is hard to predict and determine. That’s kind of an unknown factor that’s always there. And then rising education costs – yeah, obviously, of importance, but may not affect the majority of our tenants and our renters. So it’s up there, but at the bottom of the list.

Last but not least, real estate and development. This is more about new construction in multi-family. The top two being the labor costs and the cost of materials being of utmost importance. At the bottom of the list being the risk of extreme weather, which is global warming and climate change and things like this, and environmental sustainability requirements. A lot of talk about this Green New Deal, and everyone’s going solar, and electric cars… Well, what if some policies come forth that says, “All multifamily units have to be solar by 2030” or something crazy like that. It could happen; perhaps unlikely, but who knows? So that’s why it’s at the bottom of the list, but it could happen as we go into this new change of hands here under the Biden administration.

So I’ll cut it there; take a look on page four and five of the report if you have it. There’s a lot more detail, I just highlighted and skimmed that. But those are some of the issues that could potentially have factors here in 2021.

Theo Hicks: And the key to keep in mind here is that these are based off of surveys of people who are real estate investors. So they’re asking them how do they think these things are going to affect real estate in particular. So these aren’t what they think high-level, but just specifically to real estate, right? And these are based off of surveys. So yeah, all of these different things we’re going to be talking about, you can see how these active real estate professionals replied. So they are people who are actually doing it, and what they think is going to happen based off of their experience and their research.

The next thing that we’re going to talk about is going to be the statistics for working from home. So don’t need to spend much time here; it’s pretty obvious that a lot more people are working from home now. So the question is, as it relates to real estate, is this going to continue? Or is this going to end? And when it does end, is it going to go back to normal, or are more people going to work from home? And so the question that was asked was, in the future, more companies will choose to allow employees to work remotely, at least part of the time. Do you agree, strongly agree, or disagree? The majority of people strongly agree, and then another 42% agree. So basically, every single person either agrees or strongly agrees that this trend of working from home is going to continue in the future. So as a passive investor, that’s obviously going to impact the locations where multi-family is going to be in demand, which I’ll talk about in just a second… But also the type of multifamily that’s going to be in demand. If people are working from home, they’re going to want a different type of experience than if they’re not working from home.

So we actually have a blog post on our website about the top amenities for multi-family for 2020 or 2021 as it relates to COVID. We kind of go through, okay, if people continue to work from home, what types of things are going to be in demand? What size of units? What are the opportunities in the units? What type of amenities at the property are going to be in demand? So definitely check that out. And then the second thing is going to be the locations that are in demand, right? So U-Haul has a really good report…  We actually have a blog post that posted — it’ll be live when this goes live; it’s called 10 States With The Most Net Migration in 2020. So U-Haul tracks all their one-way trips to see where people are renting vehicles and going one-way, with the assumption that they did it to move to that location. So they rank the markets with the greatest positive net migration, and then the markets that have the most people leaving them.

So the South, in general — there are obviously exceptions, but the South, in general, are full of in-migration markets. You’ve got Texas, Florida, Georgia, the Carolinas, and Tennessee. And then you’ve also got some of the mountain areas, so Idaho, Utah, and Arizona. Whereas you’ve got the coasts, specifically the West Coast is in general, as well as the Northeast, people are moving out of those places. So this report is just based off of the states. But in addition to this, you’ve got to keep in mind that within each of these states it doesn’t mean that every single investment you see in Florida and Texas is going to be great. Or every single market in Texas and Florida is going to be great. Again, because of this move, which Travis is going to talk about here in a second, there has been a large movement out of the large urban areas to suburban and even rural areas, which is kind of what Travis will be talking about next. So a natural transition.

Travis Watts: Yeah, that’s a great point, Theo. Actually, I probably should have brought that up at the beginning of this. Just because we’re showing you this map, just because PwC and the Urban Land Institute have come out with this data and this particular survey, there’s going to be differing opinions, whether you tune into CBRE, Marcus & Millichap, CoStar… There are different data sources out there, there are different economists, there are different opinions. Just because you live in Ada, Oklahoma, it doesn’t mean you shouldn’t do a deal there. If your neighbor is short selling their home or there’s a foreclosure in your town, maybe that’s a good opportunity for you. So it’s not to suggest these are the only markets to look at. And again, it’s titled Top 10 Multi-family Markets, but it’s just real estate in general, right? We’re really talking about migration trends, which is what we talk about a lot on this show.

So to your point Theo, my topic here is the age migration and what’s happening. I thought this was really interesting. I’m on page 10 of the report, anybody following along… And what they’re looking at is the forecast from 2020 to 2030. So they’re looking at a full decade of all different age groups and what’s likely going to happen as a progression here. So start out with folks in their 20s – this demographic is shrinking in size, number one, and these groups tend to live a more urban lifestyle. So obviously your studios, your one-bedrooms, your downtown stuff, the city life. Keep in mind, as they point out, this is a shrinking group. So urban will be shrinking, basically, is what they’re saying.

So groups in the family formation years, maybe your latter half of the millennials, folks in their 30s, and maybe up to age 40 – I don’t know exactly where the cutoff is there… But these groups are tending to look for a more suburban lifestyle. And this is a growing group. So this is going to be a big migration here that’s happening to support the suburban lifestyle.

The next one over is empty nesters. So parents where their kids have gone off to school and kind of moved [unintelligible [00:15:39].29] from the house. They’re actually – this was a surprise to me – looking at going more urban. But again, this is a group that is shrinking in size. So it’s not going to be a huge migration here. But that one kind of surprised me, that empty nesters are looking for a more urban setting and lifestyle.

And last but not least, as we all know, the retirement age groups are going to surge. We all know about the silver tsunami. I hope that’s not offensive to anybody. But they’re looking for more of the suburban lifestyle, which kind of surprises me in a sense… But yet, I really think about reality, and folks in my family and just my own parents, and that’s true. They really like the suburban lifestyle, at least in my bubble of the world. So I guess, overall, in general, to your point, Theo, it’s looking like suburban is likely going to take a wind here for the next 10 years as far as the forecast goes, as far as this source of data suggests, and the urban perhaps could be shrinking in popularity. So that’s that on page 10 of the report.

Theo Hicks: Yeah. And it is definitely tied to the working from home statistics too, right? Because most of the people that live in the city live there because it’s so hard to get to work. For example, my wife works in a big company and a lot of people that live in the city have moved out to their parents or moved back home out of the country because they don’t need to be downtown. And so if you don’t need to be downtown and it’s cheaper to live further out in the suburbs… It’s cheaper, it’s safer, you get more space… So all these things are definitely connected.

I remember reading an article right when COVID started, about how many people left New York City for the suburbs and also places like Connecticut, and stuff. It was a crazy amount of people. In addition to people have been leaving these urban areas for a while now, and so it has only been expedited. So again, the point here is that if you’re looking at deals in the large urban areas, take a look at what the explanation is for why they’re doing it. Are they getting a really, really good deal? Or are they claiming that making predictions about “Oh, well, this is not going to last forever. Eventually, they’ll come back.” Sure, maybe that’s the case. But again, there’s additional risk when it comes to that.

So the next thing which I think is really fascinating is going to be about the debt and equity underwriting standards. So as a passive investor, most likely you’re not going to have a highly custom multi-tab Excel underwriting calculator where you pull the P&Ls, and you make all these predictions yourself, underwrite the deal, right? You’re gonna be relying a lot on the information that’s provided by the sponsor who did their own underwriting.

Now, obviously, it’s important to trust that person. We’ve talked about that before, how to qualify the GP. But another really good way to gauge how aggressive or conservative their underwriting is is how banks and then these large equity firms are also underwriting deals. So when we talk about debt, we’re talking about Fannie and Freddie Mac, their traditional fancy banks, commercial banks, insurance companies, debt funds, things like that. When it comes to equity, we’re talking about, obviously, private investors, but these big public equity REITs, hedge funds, private REITs, pension funds, things like that.

So how are they underwriting deals right now, compared to previous years? There’s actually a huge difference. So this is 2021 data, and they asked them – so for debt and equity, how do you expect the underwriting standards to be? And the options were less rigorous, or remain the same as the previous year, or more rigorous. And so historically, since 2014, basically most people said it would remain the same, especially from 2017 and on. A very small percentage of people said that it would be less rigorous or more rigorous. But bring us  to 2021 and 73% of the respondents think that the debt underwriting standards are going to get more rigorous. The previous high was 47% in 2017, and then last year was 34%. So double, basically. And it’s the same trend for equity – 67% said that the underwriting standards are getting more rigorous, and again, the previous high was in 2017, at 34%.  I’m assuming that’s because that was after the election, but still double what has been every year since 2014, with this graph.

So if you’re coming across deals that are underwriting the exact same as they did in the past few years, then that’s something to think about. That is definitely a red flag. And Travis kind of already mentioned this – the rent growth assumptions, we’re talking about just the revenue growth assumptions in general, maybe how quickly they’re going to accomplish these value-add renovations or the renovations they’re doing… Essentially, anything that’s changing from how it’s currently being operated to how it’s going to be operated after them should be very conservative, and not be super aggressive.

Travis Watts: Yup. 100%. This next section really piggybacks off of that, which is great. This is the one I was actually most excited to share with folks, because I would say probably – let me put it in top three category of questions that I get asked by investors always… Is it the right time to start investing in multifamily or continue investing in multifamily? Something to this nature. So I think this kind of sums it up. And this is a great graph I’m going to be sharing with people, because this is a great data to have, as far as a survey goes.

So what this is, is the availability of capital for real estate, 2020 versus 2021. So there are two categories – there’s lending, so getting financing for your deals, and then there’s the equity, which is people wanting to buy and own equity in this real estate. So on the lending, to your point Theo, about more rigorous underwriting and lending… So naturally, there’s a slight pullback; it’s not a major shift, but there is a slight negative impact on lending from non-bank financial institutions, government-sponsored enterprises, debt funds, insurance companies, REITs, banks, collateralized mortgage-backed securities, all that good stuff, has a slight pullback. So a little more conservative approach. But this is the part that really paints the picture. There’s a massive increase in demand from publicly-traded REITs, from private local investors like myself, private equity, hedge funds, pension funds, REITs, foreign investors… Actually, foreign investors has a slight pullback. But everything else has a large margin of more demand through 2021. And I think that really says a lot.

And here are my final thoughts on this, as a conclusion to wrap that up. I’ve talked about this before, maybe on this show, maybe on other podcasts, but right now there is a huge demand for yield. We’re not finding yield, cash flow, and interest and dividends in bonds, and CDs, and money markets, and treasuries. So both Main Street investors and Wall Street are needing and wanting yield. And the biggest margin here is REITs that are increasing exposure here. Obviously real estate investment trust. But this is huge. I hear this all the time about “Well, what do you think about cap rates?” Or “I don’t know about buying something out in Texas at a five cap. That seems crazy.” Well, think about it like this, if an institution’s coming in to buy that asset, and they’re going to pay all cash, they’re not even going to use lending or debt, they’re still getting a five cap, a 5% yield off that property. Well, how much risk are they really taking with no debt and no leverage, compared to bonds and other things that are paying 2% or 1%? So that’s still a very healthy yield for an institution to have by using no leverage and no debt.

So I still think if you’re in the space, this is again, part of my personal criteria that I’ll share. But I like investing as a limited partner in these syndications, in the unit size of 200 to 600 units. To me, that’s kind of a good sweet spot. Because as we go to the exit, we’re often going to exit to institutional capital, who’s needing this type of yield. We could also sell to another syndication group, we could also sell to wealthy individuals, family offices, stuff like that. But it gives us a lot of exit potential strategies to use.

So at the end of the day, I think the demand is for yield, and I think that people have seen through this pandemic, that B and C class value-add products have really held up. Yes, it’s been impacted, I’m not trying to sugarcoat it, but it’s not been to the effect of office, retail, other asset types in real estate. So that’s my final thought on it. And I know we’re getting short on time.

Theo Hicks: Yeah. We actually have the Best Ever conference coming up in about a month, and the first webinar they did, I think it was somewhere along the lines of should you buy or should you sell in 2021, and one of the speakers was a tax expert. And, as we mentioned before, about the impacts of the new tax plan, I kind of really like what she said, and it kind of goes along the line of what you’re talking about. It’s like, look, [unintelligible [00:24:37].20] he taxes, sure, it might impact other industries more than others, but it’s going to be an across the board thing, right? It’s going to affect everything, more or less equally.

The same thing with the pandemic, or any kind [unintelligible [00:24:48].27] in the economy, it’s going to affect things more or less equally. So when you’re thinking about whether to invest or not, or what to invest in, you can’t really compare it to the yields that you were getting five years ago, or these massive IRRs and cash and cash returns. It’s more of like, what are your options right now? What’s your best option in investing right now? You have to do something with your money, so what are you going to do with it? Are you going to keep it in your savings account? Or are you going to invest it in something? And if you invest it in something, what are you going to invest it in that has the least risk with the highest returns? Which are more important to you?

So that’s why all these equity sources are so interested in real estate; it’s not necessarily because they’re going to make the most money they never made before, its’ because this is the best option right now. So that’s what I thought about when you were talking about yields. It’s not the best yield ever, but if the best yield of the options right now.

Travis Watts: Yup, a hundred percent. Times change. Before the 2008, 2009 collapse, you could have bought US bonds at 6%, relatively taking no risk. So that would be a hell of an option today, if you could…

Theo Hicks: Exactly.

Travis Watts: But instead, you’re getting half a percent or something, or one percent. So to your point, you’ve gotta go with the current environment. And a lot of folks hang on to the old ideals of things, and where that phrase was hot in multifamily, you have, “Double your money in five years.” Well, perhaps it’s still possible in some aspects, but maybe don’t count on that in today’s environment. But yes, it’s put a lot of pressure, this low yield environment we’re in with interest rates, and everything else – it put a lot of pressure on the stock market, which is why we’ve seen these huge crazy rallies in the midst of a pandemic. And then also onto real estate. So just like you said, you’ve got to make the choice for you. Where are you going to park your money? Clip a 0% coupon in the bank, or go into some kind of asset with a moderate yield?

Theo Hicks: Exactly. All right Travis. Well, thanks again for joining us. I really enjoy these conversations and getting your perspective on these things. You’re deep in the trenches every day looking at this information. And Best Ever listeners, as always, we appreciate you for tuning in.

As we mentioned in the beginning, this is going to be based off of the blog post called Top 10 markets To Buy Multifamily In In 2020, so check that out to actually get the top 10 markets. We also have a link to this 100 plus page report. But if you just want to read the report yourself, we’ll have that in the show notes as well.

So again, thank you for joining me, Travis. Best Ever listeners, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Travis Watts: Thanks, Theo. Thanks, everybody.

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JF2339: Where Did Most People Move in 2020?| Syndication School with Theo Hicks

In today’s Syndication School episode, Theo Hicks shares a list of places where most people moved to in 2020. The list is based on the U-Haul report that shows which destinations had the highest net gain of one-way trips made by people who rented U-Haul trucks. Listen to this episode. And while this information doesn’t reflect the full picture of migration happening within the USA, it still gives us a pretty clear idea of which markets are growing and which ones are declining.

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To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome back to another edition of the Syndication School series, a free resource where we focus on the how-to’s of apartment syndication. As always, I’m your host Theo Hicks. Each week, we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. And for a lot of these episodes, we’ve given away free documents, so make sure you check out those previous episodes, as well as those free documents at syndicationschool.com.

Took a little break last week. I was feeling under the weather and decided not to record because I would have been coughing into the microphone and didn’t want to do that to our editor. But we’re back at it this week, feeling much better. I didn’t have to lose my sense of smell or taste. It was just, as my wife calls it, a man flu. But feeling good. Glad to be back and talking about apartment syndication.

So specifically, as you can tell by the title, we’re going to talk about something timely today and related to markets. So each year U-Haul, of all places, releases an annual report where they rank each state in the US, minus Hawaii, since they don’t as of yet create a car to boat a U-Haul truck… But they do include Alaska, and then they run off the 50. They added in Washington DC as a separate location. So they rank all 49 states, minus Hawaii, plus Washington DC, based off of the net gain of one-way U-Haul trucks that are entering the state, versus leaving the states, based on all of their U-haul transactions.

So whenever someone gets a U-Haul for a one-way trip, they log the destination as well as where they’re leaving from. So for each of the states, they’ll list up all of the people that were going to that market one-way, and all the people that were leaving the market. And then if it was a net gain, that means that more people booked a one-way trip to that market. If it was a net loss, it means that more people booked one-way trips out of that market.

So a little disclaimer that they have on their website, or on this post, they say that “U-Haul migration trends do not correlate directly to population or economic growth. The company’s growth data is an effective gauge of how well cities and states are attracting and maintaining residents.” So of course, they don’t track every single person who is moving out of the state or moving into the state. People might not take a U-Haul, or they might use some other service, they might fly.  For example, when we moved recently, we used a third-party company that the company my wife works [unintelligible [00:06:28].02] to move. So it’s not logging every single person that’s moving. But it can give you a general idea, at least relatively speaking, where people are going, where people aren’t going, since it’s using that same data across all the markets.

And then as multifamily investors, we care a lot about the population trends when we are selecting a target market, when we are analyzing the target market we’re currently in to make sure that it is still a strong market… So you don’t want to just analyze the market once and then assume it’s always going to be good. You want to constantly be looking at it on a yearly basis.  Or if you’re ready to move or expand to other markets, you want to look at population trends. And so you want to see, obviously, a market where the migration is net positive and not net negative. Meaning more people are moving there than are moving out… Because – and this applies to all real estate, but more specifically to multi-family – the people are your supply, in a sense, right? So you’ve got, on the one hand, the amount of real estate available, on the other hand, the number of people.

Obviously, each year, usually in most places, especially the big markets, the amount of real estate available is going up, or the number of units are going up. And then hopefully the number of people are going up at a faster rate, meaning that there are more people than there are actual units. So these locations with really high migration are going to have a greater demand for real estate, which means your vacancies are going to be lower, and you’ll be able to demand a higher rent.

So that’s why I think these U-Haul reports are very powerful. And again, it can help you confirm that you’re in the right market, or help you determine if you need to leave your market, or to expand to another market. Now one last thing before I actually get into the numbers is that these are statewide. Just because your state is at the bottom of the list, or at the top of the list, it doesn’t mean that you should, on the one hand, leave, if it was at the bottom of the list, or on the other hand, stay or go there if it’s at the top of the list. Because it’s still going to be very dependent on the MSA. And then within that MSA it’s going to be dependent on the neighborhood. It can depend on you following the three immutable laws of real estate investing, you having the right team, underwriting the deal properly… You guys kind of get the drill.

So the whole point here is to give you guidance and some markets to maybe investigate further. But this still doesn’t mean that you can throw everything else we’ve talked about out the window and just say, “Oh, well. In this case, Tennessee is number one. So I’m going to sell all my properties and then move to some random rural area in Tennessee, because Theo told me at Syndication School that most people are moving to this area.” So obviously you guys know that, but you always have to remind the people, just in case we’ve got some newer people who are zealous and excited to get started.

So one of the biggest changes, I kind of just mentioned, would be the state that topped the list. So for the first time since 2015, which I believe is when they started tracking this data, a non-Florida non-Texas State had the greatest gain in one way U-Haul trucks entering their state. And of all places, it was Tennessee, which is very surprising to me. Obviously, we’ve got Nashville probably leading the way in that. So the one-way my trips were up 12% year over year, which resulted in Tennessee jumping to the number one spot from the 12th spot in 2019. So a pretty big jump.

Texas, who used to hold the number one spot from 2016 to 2018, so three years in a row, they fell to second place in 2019 and remained in second place in 2020… While Florida took over Texas at the number one spot in 2019, and then dropped to number three in 2020. So top three would be number one, Tennessee, number two, Texas, and number three, Florida.

Now some other markets that had some pretty big jumps in the rankings would be Arizona. In 2019, Arizona ranked 20th, whereas in 2020 they are ranked 5th. The biggest jump was Colorado. So Colorado was ranked all the way in the 40s, in 2019. They were even at 42nd, so essentially almost the last in 2019. But they jumped all the way to 6th place in 2020.

And then another area with a big jump would be Nevada who was 24th in 2019 and then 8th in 2020. So again, it seems here that Texas and Florida are still strong, still a lot of people moving there. But Tennessee, Arizona, Colorado, and Nevada might be four states to investigate further and figure out where in those states people are moving. Most likely, Nashville, Phoenix, Denver, and then… For Nevada, I’m not necessarily sure where that would be. I can’t remember; that must be Reno where all the people are moving. I don’t think it’s actually Las Vegas. But you’ll back check me on that.

Now, what about the opposite end of the spectrum? What about some of the states that lost people based off of, again, U-Hauls one-way trip data? So the states that had the most net loss of one-way U-Haul trips. Not surprisingly, California was ranked 50th, the absolute worst. And that was followed by Illinois, in 49th place. So a lot of one-way U-Haul trips out of California, a lot of one-way trips out of Illinois. Again, going to places like Arizona, Colorado, Nevada, Tennessee, and the other ones in the top 10. I’ll get to it in a second.

So California, nothing new here. They have ranked 48th, 49th or 50th, since 2016. And then Illinois has basically been dead last or second to dead last since 2015. And again, this is when they started tracking this data, 2015. So maybe even longer than that California and Illinois have been at the bottom of the list. Again it doesn’t mean that every single real estate investment in Illinois and California is bad, but just overall people are leaving those states.

Other markets that had some pretty large drops in the rankings… First will be North Carolina. So North Carolina was still in the top 10, but they were third in 2018 and dropped to 9th in 2020. So not that big of a drop, but still 3rd and 9th. I wanted to highlight that. And then their neighbor, South Carolina was 4th in 2019 and then they dropped to 15th and 2020. We’ve got Utah who dropped from 8th to 17th. Alabama had a pretty big drop from 6th all the way to 22nd. Another place with a big drop would be Vermont from, 10th to 26th. Idaho from 11th to 30th, which is interesting because the rents in Boise, Idaho have been exploding this year during the COVID pandemic. And then the biggest drop would be the state of Washington, which went from 5th in 2019, all the way to 36th in 2020.

So basically the markets that did really well are Tennessee, Arizona, Colorado, and Nevada. Texas and Florida remain strong. And then California, Illinois stayed bad. And then some other markets that you might want to keep an eye on if you’re in there would be North Carolina, South Carolina, Utah, Alabama, Vermont, Idaho, and Washington. South Carolina and Utah are still in the top 20, so not that big of a deal. But Alabama dropped from the top 10 to the 20s. Same with Vermont, Idaho 11th to the  30th, and then Washington, a huge drop from 5th to 36th in 2020.

So if you want to check out the full list of 50, you can go to Google and type in just 2020 migration trends U-Haul, and it should pop up. But I’m going to go over the top 10 right now with you guys and girls, and then we will wrap up the show. So we’re going to go to the top 10, plus the ranking in 2019.

So number 10, the state of Georgia who was ranked 16th in 2019. Number nine, as I’ve already mentioned, North Carolina dropped in 9th place from 3rd. Nevada, a huge jump from 24th to 8th. Next is Missouri in 7th place, which is kind of interesting, from 13th in 2019. As I already mentioned Colorado, the biggest jump of all, 42nd place (crazy) in 2019, all the way to 6th in 2020. Another part was the big jump of Arizona, 5th place in 2020, from 20th in 2019.

And then you’ve kind of got the ones that have always been strong, which would be Ohio at 4th (they were 7th last year), Florida 3rd; as I mentioned it was 1st last year. Texas 2nd, still. And then number one, Tennessee, at 12th in 2019. So kind of all over the place.

You’ve got the South with Georgia. Maybe you consider North Carolina, South, I don’t know. And then Florida, Texas, Tennessee. We had the Midwest with Ohio. I don’t think Missouri is considered Midwest. So Missouri is kind of like an outlier. And then we’ve got the mountain, Nevada, Colorado, Arizona. Really nothing in the North-East and nothing in the West. We’ve got kind of South, and then Midwest mountain areas with the coast. I guess the East Coast, the West Coast, not really on this list.

So check out that list of all the 50, and again, this is a report done by U-Haul every single year. So that will conclude this episode. Thanks for tuning in. Make sure you check out some of our other episodes on the how-to’s of apartment syndication. Make sure you check out those free documents as well. That is at syndicationschool.com Thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

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The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2333: How Much Do You Need To Have Invested In Order To Achieve A Retirement Goal | Actively Passive Investing Show With Theo Hicks & Travis Watts

Today Travis will be sharing an infographic that will help you understand how much you need to invest in order to achieve your retirement goal. Obviously, everyone has a different number in mind, but this information will help you simplify the calculations. Travis uses $100,000 a year as a goal since that is one of the most common numbers people tend to name when asked about retirement.

We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

Travis Watts: Hello and welcome Best Ever listeners. I am your host, Travis Watts, on the Actively Passive Show here today. Theo Hicks is unable to join us for this particular episode. He’s on a personal day; he is well and good, he will be back next week with us. But today, since it’s only me, I promise I will do a fun, entertaining, straight and to the point, shorter episode than what we usually do, so hopefully there’s a lot of value in this for you.

And today’s topic comes from a question that I have been asked for years and years and years by prospective investors, by friends, family, colleagues, you name it… I used to ask the same question myself, for many years. The question is, “How much do I need to have invested to achieve my outcome of X, Y, and Z?”, whether that’s your retirement goal, whether that’s your early retirement goal, whether it’s just a goal for whatever it is, right?  Everybody’s going to be different. And ironically, what’s so funny about this is what I hear all the time, is “I would love to have $10,000 a month in passive income.” “I would love to have $100,000 a year in passive income.” It’s like we all have the same goals circulating in our heads. I don’t know where that comes from.

But today, I just want to show you an infographic that I have created for you that can help simplify this for you. I’m not a financial planner, I’m not a financial advisor, I’m not licensed in these capacities, so please seek licensed professional advice when you’re actually going to do your investing. This episode is for educational purposes, to help enlighten you to the possibilities out there, what they mean, how they work… So, without further adieu, I will just pull up this infographic, and I will say this, for anybody who’s listening on audio… First of all, I think these get released first on audio, and then they go to YouTube on video. So it may not even be available right now on video, but if you’re watching on video, pretty straightforward, here it is. If you’re listening on audio, I will do my very best to walk you through what this infographic is all about. Sorry, let me just minimize this real quick. And there we go. Perfect.

Alright, so here’s the infographic. How much do I need to invest to receive $100,000 a year from cash flow? Two things I want to point out, right off the top; why $100,000 a year? Well, just the most common thing that I hear when people ask me this question or bring this topic up about their goals. Use your own numbers, right? Maybe it’s 80, maybe it’s 300; you plug in your own formula.

Cash flow. Why cash flow? I’m using the word cash flow as a general definition to describe yield, like dividends, or interest, or cash flow from real estate, you name it. I’m putting that all under the umbrella of cash flow, because this is the Actively Passive Show, and we are primarily real estate focused, so I use the real estate term. No other meaning but that.

So here is the infographic. I’m going to walk you through it first, again, for those that can’t see it, and then we’re going to dive into each of these categories, and what types of investments might fall into these particular categories to help you identify what makes the most sense for you. Or you can work with your advisors too to figure that out.

So the first one is, if you had a 2% annualized return – talking about yield, dividends, interest, cash flow – then you would need $5 million invested to get an outcome of $100,000 per year. Now, obviously, that’s going to be a conservative approach. We’ll get into it in a minute of what would fall into that category, but just so you know, I’m using a scale from two to 10%, because it’s where most people are going to land. Yes, it’s possible to get less than 2%, as it is more than 10%.

4% – it would take two and a half million invested; obviously, that’d be half, so 2.5 to get 100 grand a year. 6% would be 1.675, so almost one in three-quarters of a million invested. 8% would be 1.25 million, just over… And 10% year as a return would mean 1 million invested with that type of return, to get $100,000 per year.

So let’s dive into each category and I’ll share with you some things that come to mind. I’m not going to name any specific investments, or stock names, or real estate operators. I’m just going to give you categories. And again, highly opinionated, but hey, it’s based on the research, too. So 2% would be, let’s call it, government bonds, treasuries, interest from the bank… These things, they ebb and flow, right? But this is a more conservative approach. Maybe appropriate, possibly, for older folks or someone with lots and lots of equity to put to work. This is just more of a conservative aspect of the portfolio.

In the 4% range, you bump up to annuities, which is a very common retirement product that a lot of people buy into. Life insurance policies are very closely tied to that, whether we’re talking whole life, or things like that, where they have a — I don’t know if they use the word guarantee, but they kind of have a baseline return of sorts. It’s usually around 4% the last time I looked into them, which wasn’t that long ago. And CDs, possibly; you’d have to find a very high yield CD, and maybe a longer-term CD. It just depends on the bank and interest rate environment.

6% – we bump up into some types of real estate, possibly. It could be high-end, luxury real estate, it might be a conservative year one underwriting approach due to COVID, or trying to turn around the properties, so maybe have a little bit lower yield in the beginning. It could be corporate bonds, public companies, even private companies raising capital, that kind of stuff… Dividend stocks, blue-chip dividend stocks sometimes are in this range. Again, I’m not going to name specifics, but if you go look up some blue-chip dividend players online, you’ll find what I’m talking about.

8% – this is what comes to mind when I hear 8%. First and foremost, real estate. I don’t care if we’re talking about single-family, multi-family, whatever. In 2015, those that know my story, I switched from investing in single-family homes into passively investing in multi-family syndications. And for me at that time, I made what I call the 8% rule, which is just a personal thing… But I thought conservatively speaking, I could clip an 8% annualized cash flow coupon from these types of deals. Some are going to do better, some may do worse, so I’m going to kind of take the average or eight and live off the income, which we’ll get to in a few minutes. So that’s the first thing, it’s real estate, in any form.

REITs – real estate investment trusts are usually publically-traded; they could be private, but they’re just basically a real estate investment fund that has to distribute, I don’t know if it’s 90% or 90% plus of their earnings to investors. So it’s usually a higher yield, compared to like the blue-chip companies I mentioned in the 6% category. Notes, diversified pools of notes; I’m in a couple of funds like that. Tax liens might fit into this category; again, that could be higher or lower depending on the state, the rules, and the outcome.

10% – first thing that comes to mind there is hard money lending. So someone’s going to borrow your money for doing a fix and flip, or a construction project, or whatever, but they only need your money for, let’s call it six months. So they’re willing to pay a 10% annualized yield, because they know it’s not going to be a 30-year type situation, right?

Or even a 10 year, it’s going to be very short-term. So that’s hard money lending; you might get in those yields, possibly higher, possibly lower.

Professional real estate investments, specifically private placements that I mentioned – a lot of these could be in the 10% cash flow yield range; again it just depends on the deal, the operator, when you’re listening to this episode… There are so many factors, but I’m trying to give you some general categories to think about. So it gets a little more professional, starting at 10%, talking about specifically yield, and then going higher above and beyond that.

So that’s two through 10%. The point of this infographic is just simply, again, educational purposes to get your mind thinking, to think “What’s my risk tolerance? What makes sense to me, and what do I know and best understand? Where am I at? In my 30s, 40s, 50s, 60s?” And maybe this is just the beginning of you starting to plan your retirement. Or maybe you’re in retirement, thinking “I’ve got this 401k with a million bucks in it. What do I do now?”

This might be something to think about. So that’s really what I have for you today. I know that was a little bit high level, but hopefully, it was also impactful and educational for you. Again, we’ll have Theo Hicks back next week, my co-host. But for now, I appreciate you guys tuning in. Thank you so much, have a Best Ever day. Thank you, guys. We’ll see you next time.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2326: Highlights From 401(k)aos by Andy Tanner | Actively Passive Investing Show With Theo Hicks & Travis Watts

 

 

Today Theo and Travis will be sharing their opinion of the 401(k)aos book written by Andy Tanner, as well as their personal experience with 401k retirement investments.

For Travis, this book was one of the defining moments that helped him determine what kind of investor he’d like to be. Travis shares five bullet points made by Andy Tanner in the book and his personal takeaways.

We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to another edition of the Actively Passive Investing Show. I am Theo Hicks and as always, I am back with Travis Watts.

Travis, how are you doing?

Travis Watts: Theo, really excited to be back. We took a few weeks off, so I’m really excited about this topic and good to be here.

Theo Hicks: Yeah, so this is Travis and I’s first time recording in the new year, even though this will air a little bit later… But yeah, it’s great to be back, and we’ve got a fun topic today about the 401(k)aos. It is actually a book written by Andy Tanner; it’s a play on words – a 401(k) is an investment vehicle that is probably one of the most well-known investment vehicles, at least for people who’ve worked in corporate jobs before, because it’s kind of constantly getting pushed down your throat to do the 401(k) plan.

And I remember back when I was working in the corporate world, everyone invested in the 401(k), right? It was the best thing ever. It was free money, right? All these different things that I’m sure Andy talks about in his book. But Travis read the book, has some highlights he wants to go over today. Of course before we get into that, Travis or me are not tax professionals, we are not financial advisors. This is all just our opinions on our experiences with 401(k)’s, and obviously Travis reading this book. So this is just strictly for educational purposes, but I’m really excited to talk about it.

So Travis, do you want to jump into the takeaways or going to kind of go over maybe the background of the book, why you picked this topic and kind of what we usually do to start the show?

Travis Watts: Yeah, a couple of reasons I really wanted to highlight this book – we’ve done other books of Tom Wheelwright and Kiyosaki books and whatnot… But really, these are the books that stood out to me early on as kind of those foundational books that helped me decide what path to go down as an investor. And I think that, to your point, the 401(k) is widely known in the US, and a lot of folks that work for companies have 401(k)’s, and I think that it’s a worthy conversation to be had. I’m not the professional myself, but do check out this book if you want to dive deeper into it.

My intention here is to give everyone kind of the spark notes so to speak, just the high level of a couple things to think about. That way, maybe you don’t get too far along the path before you decide that maybe this isn’t an account that I really want to have, or what’s the best strategy to use this type of account in my portfolio. Again, not being a financial advisor, but a couple relevant points.

I read this book early in my 20s, and at the time I had a 401(k), but I had a pretty low balance. I had a Roth, a traditional, I had all these retirement accounts. This goes beyond the 401(k), this book; it helps explain how these things came to be, why they’re in existence, how the tax code works in relation to them… And the more I researched and read, the more I just started deciding that, “I don’t want to make these types of accounts part of my personal strategy.” I’ll go into that a little bit later.

And what prompted me to make this episode more than anything is thinking back years ago – I was with my wife, we were at one of her work conferences; I’d just read the book, and of course, I like to give her the rundown after everything I read, though she probably doesn’t care about most of it… So she had told a co-worker, I guess, that I had read this book, and this lady walks up to me, who I hadn’t met, and she goes, “Hey, your wife says, you know a lot about 401(k)’s,” and she said, “My husband and I, we max out our 401(k)’s,” and she goes, “What’s wrong with doing that?” And she was like, calling me out, and I thought, “Oh my god.”

And long story short, we didn’t really have a conversation over it, because I didn’t want to take that standpoint of trying to defend myself or something… But later, I thought I could have added value to her though by just sharing a few things objectively; not saying you should or shouldn’t do something, just saying, “This is what I researched and learned, and that’s why I feel the way that I do.”

So that’s what this episode is; that was kind of a long intro. So what I want to do, Theo, is do what I believe to be the five main takeaways from the book that Andy’s trying to get across to folks, and then I’ll give you kind of my personal takeaways and where that lead.

Theo Hicks: Yeah. Perfect. Start with those five major takeaways from the book.

Travis Watts: Okay, cool. So the bullet points that I made – I had to go back and kind of refresh myself last week, but it’s that first and foremost, a 401(k) builds net worth, it doesn’t build cash flow. So if you’re interested in the whole basis of our podcast, the Actively Passive Show, we talk all the time about passive income and cash flow and real estate. Well, if that’s kind of your niche and your thing, this is certainly not an account that’s going to help you with that. This is treated almost like a savings account; you’re going to dump money in it, cash, and then when you’re in your 60s, you’re going to pull that cash out, whatever you’ve made over the years. So that’s what it is. I think these things came out in the late 70s, and initially, these were intended to be just one supplemental account in the big picture of having the average American retire. This was not to say, “Here is the retirement account”, like a lot of people treat it today. “Oh, my 401(k) will bail me out one day when I’m in retirement.” Not at all. You’re supposed to basically have your pension, Social Security, Roth IRAs, traditional IRAs, brokerage accounts, personal investments and a 401(k). This was just one little tiny piece of the puzzle. The tragedy and the chaos of it that Andy points out is that we’ve made this the centralized vehicle for retirement, and in most cases, statistically, it’s just not going to be enough for the average person to retire on. So that’s number one.

Number two is that mutual funds, which is notoriously what’s in a 401(k) as far as an investment option, is not going to protect you against a systematic decline in the market. When you read the headlines and the S&P and the Dow Jones are down 5%, really good chance that your 401(k) is down roughly 5% too, right? Because it’s all just tied into the same Wall Street system. So there’s not a lot of downside protection like you would have in a brokerage account, where you could do a stop loss or something like that, and if things start declining, you’re out. Can’t do that in a 401(k). So it’s a bit riskier in that sense.

Number three is that 401(k)’s really, at the end of the day, if you read the research on why these were even created in the late 70s, it was to help fund Wall Street. It was because Wall Street wanted more of a prop up obviously, right? They wanted more fees, obviously, right? So this was a way to get virtually a ton of Americans, I would probably say, the majority (I don’t know the real numbers) to participate in the stock market. It would be your choice, but it’s not that you really want to be investing in the stock market privately, but you’re kind of forced to every time you get a paycheck, you’re contributing to Wall Street. So that was really the main purpose, just to recognize what this was. It wasn’t so much about Americans individually benefiting, it was about Wall Street benefiting.

Number four – this is just a foundational Rich Dad philosophy, but investing should be a life skill. And I’ve always believed that philosophy anyway; there’s your professional education, and college, and high school, and degrees and all this, and that’s great… But also, everybody should take little emphasis on learning the investing world to a point, just so that you are aware of what this stuff is and how it works and how the taxes work.

Number five that Andy makes is that 401(k)s create an artificial demand on the stock market. So as you’re looking at these historic graphs and the stock market, you hear it said all the time, “The market always recovers, it always goes up.” Well, yeah, because you’ve got all these people contributing every two weeks through their paycheck, sometimes more frequently, into the market. So that creates – I don’t want to call it a bubble, but artificial demand on the markets is the way that he coins it.

So I’ll stop there for Andy’s takeaways, what I believe them to be. He doesn’t lay them out exactly like that, that was just after reading the book. Any thoughts, Theo, on that?

Theo Hicks: Yeah, just really what I’d like to add based on what you said, as I understand all the things. Two things; number two, you talked about the lack of protection against systemic risk. I remember I went to college at the beginning of the crash of 2008, and I got out, and then I got my first job and I made some friends who had started working maybe a little bit before 2008 or something; I can’t remember exactly what it was. I just remember that they’d gone all-in with the 401(k), right? They put as much as they possibly could, they got the employee match, and it went up, it did really well. And the crash happened and they heard their 401(k) got cut in half, and it took them 5+ years for it to even go back to what it was before the crash even happened.

I remember the same thing for the underlying mutual funds. I remember when the crash happened, the college fund my parents were saving up for us for 18 years got cut in half overnight. And I think a few years ago, my sister’s finally got back to what it was pre-2008. So when you were talking about that, it kind of brought up those memories.

And then number three, when you were talking about the lump sums of cash for institutions, it reminds me of that TV show “Billions”. Have you seen that show “Billions” before?

Travis Watts: I have not. No.

Theo Hicks: It follows this guy in Wall Street who has this big hedge fund. And one of the plotlines is, he’s trying to get a police pension fund, because he wants to have all that cash and make all those massive fees off of handling all that cash. And so that’s what came to mind when you talked about the conception of the 401(k). And I didn’t know exactly why they started it, but kind of what you said totally makes sense.

Travis Watts: Yeah, one of the guys that actually helped make this thing possible and launch it initially has since, in recent news, I think in the last 5-10 years, come out to say basically the same thing Andy Tanner is saying, “This has become chaos. This was not what we intended for this to be. This is not supposed to be your one retirement account.”

And as you know, Theo and anybody listening, pensions have virtually gone away at this point, and Social Security is taking hits, so you’re likely going to get less in the future than past recipients. And too many people are just relying on the 401(k) as the only other substitute here, and that’s a very scary thing.

One other point, to your story, Theo, about your friend who said his 401(k) went down 50% – think about this; you’ve got a 401(k), it goes down 50%, so now what do you have to earn on the 401(k) to get it back to where it was? 100%. That’s just nuts; that’s a mind trip to me. You actually have to double your money just to get back to where you were, just because you lost 50%. So it’s just kind of a weird thought process.

But anyway, I’ll go into my three takeaways back when, that made me decide to pursue other options, including real estate and making my own retirement account, so to speak.

So number one was, as many of you know, the 401(k) is intended for you to use in your 60s and 70s and beyond. So if you’re the type of individual that wants to retire early, or use cash flow or investments to help you out in life now or in the near future – obviously not a good account, right? Because you’re going to be penalized 10% penalty if you pull out the money early, on top of not a very advantaged tax situation, which I’ll go into I guess now.

Think of it this way – as I mentioned earlier, most of your investment options in a 401(k) are going to be mutual funds.  So if I go to a brokerage firm, like a Fidelity Investments, Charles Schwab, Janus, whatever, and I buy a mutual fund in a non-retirement brokerage account, and I buy today, it’s 10 bucks a share, it goes up to 12. I sell it more than a year later, I have a long term capital gain, and that has a tax advantage to it. For most people, you’re going to pay a 15% tax on that, and it gets capped. For really high-income earners, you might pay 20% and it’s capped. And for low-income earners, you might pay 0%, according to our current tax plan. Not a CPA, not a tax professional, just pointing out from a high level, that’s how it works.

So if I made that same investment, that same mutual fund, virtually speaking – usually institutional class and individual class or whatever, but same thing, S&P index or whatever – in my 401(k) and I held it more than one year and I sell it, same game, same increase, and then I pull out those gains, assuming I’m over 59 ½, I’ll pay up to 37% in tax if I’m a high-income earner, with a proposal outright now from the Biden folks that it could go up to where it was before, which is 39.6%.

So essentially, the takeaway here for anyone that lost me in that conversation is, why would you want to pay double the tax on the same investment you could make privately? Essentially, you’re just paying more in taxes. And to that point, the 401(k), when you pull out the money – it’s not until you pull out the money, but whenever that comes, you’re paying ordinary earned income tax rates. So you’re taking something that otherwise would have a tax advantage, and you’re eliminating it and saying, “No, I’d rather pay the highest taxes on that.”

So Andy asked the question, he said, “When you retire, do you intend to make more income than what you make now, or less income?” And that’s a fair question, because people are going to have different responses to that. But for me personally, it was, “I hope I’m making more money as an investor” right? You’re compounding and you’re making more investments, and so if that’s true, then why do you want to take a tax advantage today, defer the taxes, to pay higher taxes in the future? Why would you want to do that? So that was one of those foundational things. That was number two of my three takeaways.

And the last thing is this – quite simply, anyone who’s got a 401(k) knows this – very much a lack of investment options. I think the MarketWatch put out an article recently about the average 401(k) plan in America has 12 investment options… Twelve. Compared to, again, a brokerage account, where you have 1000s of options. And then outside brokerage accounts, 1000s more of options; you can invest in private companies, and like you and I invest in real estate privately… We have so many things we can put our money in, not 12 options.

So it’s just simply that — when I used to work for a brokerage firm… It didn’t last very long, but I used to do that. This was one of the primary reasons why I left the firm, is because they try to teach everybody – or they do teach everybody – that we’ve got A, B, C, D, E, F, G mutual funds, and those should be right for everybody in one capacity or another. If you’re old, it’s this one. If you’re young, it’s that one. And it just didn’t make sense to me. I thought, “No, there’s so much more to it than just that.”

So those were my three takeaways. I was fortunate to read that book early, and not have a lot in my 401(k). So I paid the penalty and I just got out of it. I started opening my own LLCs and trust and whatnot, and I just did my own private thing, and brokerage accounts as well. So with that, any thoughts, Theo?

Theo Hicks: What you said about the taxes is — when I found that out, I was instantly turned off from the idea of the 401(k). I was like, “This doesn’t make any sense.” I didn’t [unintelligible [00:18:36].07] point of it at that point. The way you presented it, it was really nice, about how you just take that money that you would have put in the 401(k) and invest in basically the exact same thing, and pay half the taxes.

And I think another question you mentioned – the one question was, do you expect to make more money or less money when you retire? Another question that I thought about is, do I think taxes are going to be higher now or when I retire? Again, who knows? But it seems like they’re trending higher; and we can look at like back in the day taxes were like 70%, 80%, or something crazy like that; like, how 30% is kind of low historically. They’re probably going to go up, so why would I forego the most likely lower tax rate now, pull all my money out and do whatever I want to with it, as opposed to having it be used before taxes for these investments? And I pull it out and it’s taxed at 70% in 20-30 years from now. When you think about the taxes, that’s probably the biggest thing.

And I remember all the different packets they gave me for the 401(k), and the corporate world never talked about any of that stuff. They just talked about how great it was, the historical increases of the underlying funds, and something we’re going to talk about here in a second, which is the employee match, and things like that… But never talked about, “Hey, if the stock market crashes, you’re kind of screwed.”

Travis Watts: Yeah, the whole tax situation right now is very parallel to the conversation around interest rates, right? We’ve seen crazy interest rates in the 70s and 80s, same as taxes back then, and now we’re pretty near zero. So it’s kind of like taking a bet on that. What do you think’s going to happen in the future? We could go negative interest rates, I guess, but we’re not going to go negative tax rates, where the government’s paying us. So yeah, something to definitely plan for and think about.

And to your point, I don’t want to make this whole episode seem like we’re bashing 401(k)’s; I’m sure a lot of people are thinking this in their head, if they haven’t already put a comment on here, but what about the match? Isn’t it free money? Isn’t that a great idea? Again, I’m not giving anybody advice, but I’ll tell you this – if and when I was working for a corporation that offered me a 401(k) and they offered a good match; 4%, 5%, 6% or 7%, meaning I put in 100 bucks, they put in 100 bucks, I would always contribute up to the match. When you start going beyond that, that’s a whole different conversation about taxes and risks, and what-if’s, and this and that and the other… But I personally always did the match; my wife still has a 401(k), she does the match, but she stops right there, and she fully intends on taking this 401(k) out when she leaves her employer.

So again, everybody’s different on that. But it is, I guess, you could say, free money; just take it or leave it. They’re either going to give it to you or you’re going to forfeit it; it’s like 100% return on investment without really taking any risk, because you put in 100, they give you 100. That’s a pretty good investment.

So they’re not all bad. I don’t want to paint the picture that way. But that’s definitely a way to look at it, we’ll say. And as they were originally intended, this could be a diversification strategy. There is some asset protection to a point inside of a 401(k), you do have that company match option… This could just be one of your assets, basically; think of it that way. That’s just one investment that I have. The average millionaire has 7+ income streams. It’s not really an income stream, but it’s an asset that you could turn into an income stream in retirement. So that’s the way I would look at that.

And man, I just couldn’t agree more with Andy Tanner that investing needs to be a life skill. You don’t have to be an expert in all this; you don’t even have to read his book, but you just need to understand from a macro level, the tax code, the history of some of this stuff, the pros and the cons of these different accounts, because it really is a tragedy when folks finally get it, but they’re in their 50s or what have you, and it’s, “Ah, shoulda/coulda/woulda”, and “I wish I never would have done that. I should have done (whatever it is) whole life insurance when I was 18” and all these things. It’s better to try to get on the ball early, get to understand how these work so you’re not in that situation, trying to live off a menial social security and a 401(k) that’s not really going to bail you out for more than 10 years or something like that. So those are my closing thoughts on it. Anything else you’ve got, Theo?

Theo Hicks: Yeah, there’s one other benefit that we didn’t talk about – the fact that you are able to, at least last time I looked into 401(k), which was a while ago, but I’d imagine it still exists, is their ability to take a loan against your 401(k). I can’t remember exactly what the interest rate is; maybe it’s like 5% or something. And you obviously had to pay it back. I’m not even exactly sure what the requirements are and what that money is used for. I don’t know if you can just take it out and go on vacation or something, I don’t know what it is. The same buddy whose 401(k) halved, I think he took the maximum loan at the time, which was $50,000, to invest in real estate. So obviously, you need to figure out what the requirements are for paying that back. But it kind of reminds me of like the whole life insurance strategy where you can take a loan against it, use that money to maybe do like a BRRRR strategy, or a shorter-term passive investment strategy. And once you get that money back, hopefully, like doubled or increased by 50%, you put the original 50K back in there and then you use the profit plus another $50,000 loan, and keep repeating that process over and over again. That’s a way to leverage the money that’s in there, but it still doesn’t take away everything else we talked about, about the 401(k). But you are able to take a loan against it.

Travis Watts: Yeah, great point, Theo. Every 401(k) plan is going to be slightly different, so interest rates might vary. Some people may not have the ability to take the loan out, others may. Sometimes it’s 50% of your vested balance, sometimes it’s 100%… So check with your employer HR your plan, if you have one.

But I think just from a high level, the takeaway here is that – is it right for you to have a 401(k)? Is it right to max out your 401(k)? Is it maybe the right strategy just to do the match on your 401(k)? These kinds of things. And ultimately, I think it could be a good diversification strategy as I pointed out earlier, if nothing else, if you have the option to do it. If your employer is not going to match you and circumstances are different, you’re not going to stick with that job very long, maybe it’s not the right thing for you.

But anyway, those are some of the things. The book is 401(k)aos, Andy Tanner. It’s a good read if you want to dig a little deeper into it.

Theo Hicks: Perfect. I guess one more maybe closing thought for me that I thought of is that – it’s kind of one of those things where it’s like if you already have your 401(k) or you’ve been maxing it out, it’s not the end of the world. But the question you need to ask yourself is, now that you have this information, what’s the next step? So if you’re a high schooler or you’re in college and you haven’t started working yet and you plan on maybe doing a corporate gig, but you also want to invest on the side, you’re going to be presented with information on a 401(k), and you’re going to have to ask yourself, “Is this something I want to start doing?” If you already have a 401(k), then ask yourself, “Do I want to continually invest the same amount of money in that 401(k)? Do I want to stop and maybe start taking loans out against it? Or do I want to pull that money out, take the penalty and then apply that to something else?”

So as Travis said, I guess the idea wasn’t just to completely bash on 401(k)’s. The idea is to present information on the 401(k), and you decide what to do moving forward… Not to say, “Hey, you’ve invested in a 401(k). That’s a horrible idea.” It’s like, “No, here’s information.” This might be a great idea for you, but most likely if you’re listening to this and you’re an investor, it’s probably not. This is more for people who aren’t investing, and it’s better than doing nothing. But the main point is that, “Okay, I have this information. Now what am I going to do?” as opposed to maybe thinking back  “Over the past 20 years I’ve invested my 401(k) – was that wrong, was that bad?” That’s over. Now, what are you going to do?

I’m really glad we got to talk about 401(k)’s today. That’s definitely an interesting topic, and I definitely learned something from this, specifically about why the 401(k) started. I always wondered, I was like—another thing I want to know is, why do the companies match? Why do they give you free money? I’d be curious to know what’s behind that.

But anyway, Travis, as always, thanks for joining me today. Best Ever listeners, as always, thank you for listening, happy belated New Year, and we’ll talk to you next week.

Travis Watts: Thanks, Theo. Thanks, everybody. Take care.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

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JF2325: 20 Markets to Buy Multifamily in 2021| Syndication School with Theo Hicks

 

In today’s Syndication School episode, Theo Hick discusses the best 20 markets to buy multifamily properties. He also shares the 3 rules that will keep your investments safe and sound no matter the current state of the economy. As long as you’re buying right, your deals will be well-maintained even during the time of economic uncertainty.

Theo based his list of 20 trending markets on the annual report put together by PWC and the Urban Land Institute. Over 3000 real estate professionals have been interviewed in order to put together an in-depth report.

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome back to another episode of The Syndication School series, a free resource focused on the how-to’s of apartment syndication. Although this will be released in about mid-January, this is my first time recording in the new year, so happy new year’s, happy 2021, and thank you for tuning in.

Today we’re going to pick up right where we left off in 2020 by talking about the how-tos have apartment syndications. Make sure you go and check out some of the older syndication school episodes that we released in 2020, and also in 2019, and maybe even 2018. I’m not sure how long I’ve been doing this for now, but lots of valuable information, as well as lots of valuable free resources to download. These are PowerPoint presentations, how-to guides, Excel template calculators, things that will help you along your apartment syndication journey.

Being the new year, I thought it’d be great to kick it off with an episode that talks about some of the markets to look into 2021. So 2020 has been a pretty crazy year. We talked about the impacts of COVID19 in real estate in general, and some of the projected changes. We did talk about some of the information on particular markets, but today I want to go through a list of some of the top markets to buy multifamily in in 2021.

Now, one of the things that we talked about a lot on Syndication School are these three immutable laws of real estate investing. And the entire concept behind these three laws, which as a refresher, are 1) buy for cash flow, not appreciation, 2) secure long term debt, and 3) to have adequate cash reserves. Now, the idea behind all these rules is that no matter what the condition of the overall real estate market is, you’re still able to maintain your existing portfolio, and then based off of the three rules, being involved with buying allows you to buy new deals. And so follow these rules all the time; you can buy deals during a recession, which we’re technically in right now, and the deals you bought prior to the recession we’ll at least maintain and not be completely destroyed during a recession. And again, when you think about these three laws, the whole point is that you can still buy real estate, you can still buy multi-family, you can still invest during these downturns, during these periods of uncertainty, as long as you’re buying right.

And what I’m going to talk about today is evidence of that point, that you can continue to buy during recessions, downturns, whatever you want to call it right now; we’ll call economic uncertainty. Periods of economic uncertainty. So this is based off of a very lengthy report, that’s over 100 pages long; I highly recommend reviewing it, and I’ll link to it in the show notes of this episode. It’s called The 2021 Emerging Trends in Real Estate. This is an annual report put together by PWC and the Urban Land Institute.

I really like this idea… They essentially interview a bunch of real estate professionals, and then the ones that they don’t interview, they’ll send surveys to. And they do this for over nearly 3,000 individuals. So they say that they interview 1,350 individuals, and then they surveyed another 1,600 individuals. These are people who own commercial real estate, or develop commercial real estate, work for some sort of advisory firm… They are passive investors in commercial real estate, they’re like investment managers, advisors, banks, lenders, homebuilders, land developers, REIT companies… It’s incredibly a broad spectrum of commercial real estate. And they ask them a bunch of questions on what they think is kind of going on, and then based off of the 3,000 or so responses they get, they put together this really detailed report. They also obviously pull data from the Bureau of Economic Analysis, US Department of Commerce, some of the big commercial real estate reporting firms out there, and they put together a really nice report.

And the one thing I wanted to focus on today, as I mentioned in the beginning, are what are some of the markets that we should be looking at in 2021? More specifically, what they did is they asked all of the respondents to let them know, “Okay, so based off of all these major metropolitan statistical areas, MSAs, would you recommend that people either A, buy, B, hold, or C, sell their properties?” And so for all the markets, they compiled all these responses. So out of 100, what percentage said that you should buy real estate in this market? What percentage said “Well, you shouldn’t buy. If you have an existing property, you should probably hold and not sell.” And then “No, if you hold property, you need to sell and get out of this market.”

So these are the markets that all these different active real estate professionals think and recommend that people buy in in 2021. So I’m going to go over those today. This is specifically for multi-family. They have a breakdown of the same survey for other commercial real estate niches, like office, and retail, which – for retail, obviously, not a lot of buy here; a lot of sell actually. They have the top 20 here for retail, and number 20 is 0% buy. And the most is Orlando, which is 28%  buy; it’s kind of interesting.

Same thing for hotel, and then they have other rankings for markets. But again, I want to focus on the buying multi-family. So according to these experts, what are the top 20 markets that experts are recommending that you buy in? And of these top 20, more than 50% of the respondents said you should buy multi-family. And to put that in perspective, for office, for retail, and for hotel – I think they have one other one on here, which is industrial. But for office, for retail, and for hotel, the number one market to buy in, for all three of those, is less than 50%. So office is 45% in Salt Lake City, Orlando, 28% for retail. And then for hotel, it was 23% at Fort Lauderdale.

And so the number one market to buy in for those three asset classes, so less than the top, say, 15 multi-family markets to buy in, with industrial obviously being kind of, in a sense, better and more attractive, and more recommended than multi-family. We’ve talked about it on the show in the past before. So without further adieu, let’s jump into these actual markets. But the whole point of that is just introducing the fact that hey, multi-family is doing a lot better than these other asset classes. And these experts are predicting that it’s still going to do well in 2021.

So number one is going to be Raleigh, Durham, North Carolina. 72% of the respondents recommended buying multi-family in Raleigh, Durham. 20% said you should hold, and 9% said to sell. So that’s the number one market.

The next two are tied for second. Still very high recommendation, at 67%, buy in Tampa, St Petersburg, and Salt Lake City. For Tampa, St. Petersburg, 30% recommended to hold, and 2% recommended to sell. For Salt Lake you have 27% hold, and 6% sell.

In fourth place is going to be Austin at 63% buy, 28% hold, and here we see a pretty high sell of 12%, relative to some of the other ones on this list. Only a few of them have a double-digit sell recommendation. But still the majority think that Austin is a good market to buy in.

This one kind of surprised me, but Boston comes at number five. Boston, Massachusetts at 60% buy, 32% hold, and 9% sell. Now, for some of these, they actually don’t add up to exactly 100%, right? 72 plus 20, plus nine is 101%. I think they rounded these without a decimal point. So they’re all within one percentage point of 100%.

Number six is going to be Boise, Idaho. Now, if you remember from some of the rent analyses that we did in late 2020, Boise, Idaho experienced the greatest rent growth out of any major market since the onset of the COVID-19. I’m pretty sure it’s a double-digit rent growth percentage. So clearly, Boise is going to be on this top list of places to buy, with 59% recommending to buy, 34% recommending to hold, and 6% recommending to sell.

Next we have Nashville, Tennessee, 59% buy, 37% hold, 4% sell.

Next, coming in at number eight we have a repeat in North Carolina this time, it is Charlotte, North Carolina at 56% buy 36% hold, and 8% to sell. Number nine, we’ve got our first repeat for Texas, which is San Antonio, which is 55% buy, 35% hold, and 10% – so another double-digit, but still relatively low to sell.

And then rounding off the top 10, which is one of the only places on this list where no one recommended that you sell – it was a 55% buy, 45% hold, Columbus Ohio. So no one recommended that you sell in Columbus, Ohio. So that is the top 10. Again there’s Raleigh, Tampa, Salt Lake City, Austin, Boston, Boise, Nashville, Charlotte, San Antonio, and Columbus.

So kind of really all over the country. A lot of southern states, but also you’ve got Boston which is Northeast, you’ve got Boise which is in the West, and then you got Columbus in the Midwest. So really kind of all over the place. It’s not necessarily focused on one particular section of the country.

So I’m going to quickly go through the next 10 to round off the top 20. So at number 11, Washington DC at 54% buy, 43% hold, 3% sell. 12, Fort Lauderdale – 53% buy… I’m just talking about the buy here. I want to do all this. So, Fort Lauderdale, it was 53% buy, 39% hold, 8% sell. Atlanta 53% buy, 33% hold, 14% sell. Phoenix 52% buy, 30% hold, 15% sell.

And then the last location that the majority of respondents recommending to buy would be the Inland Empire, which is parts of California, 51% buy, 42% hold, 7% sell. Now the last one, Phoenix – that actually has the highest of these top ones, highest percentage of sale; but obviously, they’re only featuring the top 20. A lot of these markets are going to have a pretty high sell, but they  don’t include those ones on the list. So of the top 20, 17% recommending selling in Phoenix; that’s the highest one.

Next we got Long Island at number 16, which is 46% buy, 54% hold, and then another 0% here for selling. So Columbus, also Long Island – they’re not recommending that you sell. Either buy or you hold. 17 is Cape Coral, Fort Myers, Naples, so third is Florida on the list, in addition to Tampa, St. Petersburg and Fort Lauderdale. It’s 44% buy, 50% hold, 6% sell.

Back to the Midwest in Indianapolis at 44% buy, 56% hold, and the third one on our list where no one says to sell, also in the Midwest (I guess Wisconsin is technically Midwest), Madison, Wisconsin, at 43% buy, 57% hold, another 0% sell. And then lastly, number 20 is Virginia Beach, Norfolk at 33% buy, 56% hold, and 11% sell. So those are the top 20 markets to [unintelligible [00:16:57].21] real estate, but multi-family in 2021.

Now kind of going full circle back to the beginning, back to those three unbeatable laws of real estate investing… Just because 72% of people say you should buy in Raleigh, Durham, it doesn’t mean you should buy every deal in Raleigh, Durham, right? You still need to do your market analysis that we’ve talked about before, and you still need to buy right, you still need to underwrite, you still need to follow the Best Ever practices we’ve talked about on this show. But at the same time, you want to set yourself up for success by buying in a solid market. So these are forecasts, right? These are recommendations from experts. These aren’t, again, guaranteed. Raleigh, Durham is not guaranteed to be the best market. It’s not like — in Columbus they say no one should sell, but then if you own a property in Columbus it doesn’t mean you shouldn’t sell, right? It all kind of depends on where you’re at in your business plan, and things like that. But at the end of the day, the idea behind all this is “Okay, here are some of the top-rated markets.” So if you’re in them, great. If you’re focused on them, great. If you’re not focused on them, you might want to consider looking into these.

I might do some future episodes going more in-depth on this report, because there’s a lot of solid information on here; it’s really long, and I don’t expect every single person listening to this to read all 112 pages. So maybe I’ll do that for you, and we can dive into this on future Syndication School episodes as it makes sense.

So yeah, thanks for tuning in. Make sure you download this report and at least go to the multi-family section of this report, or at least read the key highlights of the executive summary to get an idea of where we’re at as it relates to real estate in general… And more particularly commercial real estate, and even more particularly, multi-family real estate. This link will be in the show notes.

Until next week, make sure you check out some of the other Syndication School podcast episodes, download all those free documents that we have available as well at syndicationschool.com. Thank you for listening, as always have a Best Ever day, and we will talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

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JF2319: 10 Time Freedom Questions For 2021 | Actively Passive Investing Show With Theo Hicks & Travis Watts

Today Theo and Travis will be answering 10 questions about time freedom. Everyone wants to have more time and freedom to spend it however they like; that’s why most people get into investing, active or passive, to begin with.

When asked to list their biggest regrets about life, most people in retirement homes state lack of time spent with friends and family, as well as not going after their dreams and aspirations. With the help of 10 questions, Theo and Travis hope to give you ideas on how to go after the life you want in 2021. No more waiting for retirement!

We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to another edition of the Actively Passive Investing Show. I am Theo Hicks. As always, Travis Watts. Travis, how are you doing today?

Travis Watts: Theo, doing great! Happy new year! Happy holidays!

Theo Hicks: Yeah, happy new year to you as well. I think this will air a couple of days before new year’s or after new year’s, but regardless, the theme of today’s episode is going to be the new year’s. It’s a tradition for most people to set new year’s resolutions… So since this is the Actively Passive Investing Show, and something we focus on here a lot for our passive investors is the idea of time freedom, Travis and I thought it would be a good idea to do something similar to what we did a few months ago, in the episode where we went through a list of questions from Tim Ferriss’ book Tribe of Mentors. Travis and I are gonna alternatively answer those questions ourselves.

Today we create a list of time freedom themed questions for 2021. In a sense, it’s a list of New Year’s resolutions, with the purpose of having more time freedom. Travis, I know you wanna talk a little bit more about time freedom and our show before we jump into answering these questions.

Travis Watts: Sure. I just thought this would be a really good way to close out the year to the theme of our Actively Passive Show. This show is obviously for active and passive investors, and I thought we all want to get to this point in our lives sooner or later, where we’re hands off and we have this time freedom; we have the ability to retire, spend time with family, travel, whatever it is we’re passionate about… So I thought maybe these ten questions can give our listeners a few things to think about if you’re gonna set some new year’s resolution goals, instead of just saying “I’m gonna work out for 20 minutes a day all year long”, and all the traditional stuff. “I’m gonna lose 30 pounds.” Maybe it’s something to think about now, how are you gonna start creating this time freedom in your life.

I’ll be brief with this story. I know I’ve shared this before on your show, but it’s just such an impactful story, the story of the nurse  Bronnie Ware, 2009, working in a terminally ill patient care unit; kind of like a hospice, folks living out their final days in life… And Bronnie surveying basically her patients; just being friendly, and talking… She came across a lot of folks who would tell her, essentially, their life regrets. “I wish I would have done this, and I wish I hadn’t done that…” She decided that that was impactful, so she made a huge blog out of this, ‘The  Top Regrets of the Dying’, that later became a book. Now she’s a speaker on and on… But the thing I wanna point out about that story is that the top two regrets are “I never pursued my dreams and aspirations” and “I didn’t spend enough time with my friends and family.”

So knowing those are top of mind to folks at the end of life as we know it, I just felt time freedom makes a lot of sense to talk about. And maybe instead of thinking about how you’re gonna get there, what you’re gonna do with your time when you’re 60, 70, 80, 90, maybe we start thinking about it now, and we start planning for that, and hopefully, we can get there a whole lot sooner, and not have those same regrets.

So that’s the back-story behind the ten questions, and that’s really why I pieced it together that way.

Theo Hicks: Perfect. Well, let’s jump into these questions. I think the last time I went first and you went second, so let’s reverse the order this time. I’m gonna ask you the question first, and then you can ask me the question second. Best Ever listeners who are listening, maybe keep out a pen and pencil, or on your computer or on your phone, and you can type up these ten questions as well, and answer them to see — I enjoyed this exercise, and it helped me reflect on this year, and then also helped me come up with some things I can start doing in the next year. So I think it’d be helpful to you listening to do the same thing.

First question is “What time waster are you willing to let go of in 2021?”

Travis Watts: This is a great question, because to the point of time freedom, we want to free up our time, we don’t want to squander our time… And life is so short, as we all know. So for me – gosh, I could probably think of 20 different things here that are potential time wasters. The one I thought of though – I’m such a big advocate for self-education, and reading, and books, and things like this, and just self-learning… However, there’s a caveat to that that I’ve spoke about before, and that’s I went way too hard, too fast, hardcore in 2015, when I just read a ton of books, and it was almost analysis paralysis. Your brain can’t do all of that. So you need to really be choosy with what you’re gonna read and what you’re gonna study, and what mentors you’re gonna put in your life, and what information you’re gonna tune into.

To that point, I am grateful that I am invited to so many different Facebook real estate groups, and LinkedIn groups, and real estate meetup groups… I’m in more groups than I even know about, and that becomes a problem, because you start spreading yourself too thin; we’ve got our podcast, I speak with investors, I do a lot of things actively, and trying to keep up with all these different groups online. It’s just something I really need to cut back on. I need to find the one or two groups that I have the biggest impact on to help people, and just focus my time there, and not try to be in 30 or 40 different real estate meetup groups.

So for me, it’s really going through that in early 2021 and just cutting back on unfortunately being part of too many things.

Theo Hicks: Yeah, you said you’re grateful for that being a problem. Mine is I’m reading too much and I’m doing too much real estate stuff. Mine’s a little bit different. For me, I was reflecting on 2020, and I would say that the positive side for me – I have cut out a lot of time-wasters. I think I’ve mentioned this before, but I’d play video games all the time, I’d watch TV shows until 2-3 in the morning… And then kind of similar to maybe what you were talking about with reading the books, I used to consume educational content on YouTube. But then you  go down the YouTube rabbit hole where you’re video after video after video, and you’re spending hours and hours doing it, and at that point you’re hearing the same information over and over again… And are you really applying it to your life? So I have been able to minimize most of those in 2020.

The other big one that saves a lot of time is social media, because you go through that same kind of rabbit hole idea; everyone knows that – you scroll, and you scroll, and you scroll, and you can’t stop… In 2021, the one thing I want to eliminate for good would be going on Amazon Prime and watching TV shows and movies. I’ve gotta minimize it, because again, I stay pretty late to watch them. I’ve minimized it to the point now where it’s manageable, but I would like to eliminate that entirely in 2021.

Travis Watts: Yup, I’m with you man. I’ve subscribed to YouTube Premium, and Amazon Prime, and sometimes that’s a bad thing. There’s all this free content, and it’s like “Should I even be paying attention to this content?”

Theo Hicks: Exactly.

Travis Watts: That’s a great one.

Theo Hicks: Question number two, Travis – if you had one more hour during the day, what would you do with it?”

Travis Watts: Wow… That’s another tough one, because again, I could have ten answers to that. But ultimately, I think what I would do is I would read more. And I know that that maybe sounds hypocritical to my last answer, but if you’re being very choosy with what you’re reading and it really has a direct purpose, I would love to squeeze in one additional hour per day. Unfortunately, that usually gets put to the back-burner, and then of course things come up, and dinner, and a call, and then you’re in bed. So for me it’s reading.

Theo Hicks: For me, I would wanna work out for that hour. So if my hour is 25 hours a day and I had an extra hour at like noon, let’s say, instead of going from noon  to 13, or something, I’d work out during that hour… Because that’s something that’s really difficult to squeeze in every day.

There’s some other question we have later on that also hits on this, but I like this question because it’s — okay, the first question was “What’s one time-waster I wanna get rid of?” So if that one thing you’re doing is taking up an hour of your time per day, then question number two can be what you use to fill that slot. Maybe at first it could be 15 minutes of the new thing, and then 45 minutes of the old thing, and then ultimately getting it shorter and shorter till it’s maybe 45 minutes the new things, 15 minutes the old thing, and then the full hour is used on the new thing, and not the old thing.

Okay, question number three. This is a fun one… What have you been procrastinating on that you would like to complete in 2021?

Travis Watts: You know, really, I’m not that big of a procrastinator, thank goodness. That’s never been part of my life. But, that being said, of course, everybody procrastinates on something, and I guess playing off of your last answer, for me I guess that is the gym. I’m way more into working out my mind than working out my body… Which isn’t always a great thing. So I let something suffer to enhance something else… And we’ve talked about this before, I think, on the celery juice episode… You were talking so much more about the physical workouts, and I was talking about just doing like one diet change… [laughs] But still leaving out the physical part.

So for me, that’s the gym, I guess. If I procrastinate anything, it’s that.

Theo Hicks: One thing that I’m trying to do on this note – and I came up with this a few weeks ago, because my wife always asks me to do these menial tasks around the house… And I always say “Oh, I’ll do it tomorrow. Oh, I’ll do it this weekend”, and it never gets done, and the stack of empty Amazon boxes gets higher and higher in the front room, and the garage is still dirty… So one thing that I’ve tried to do – within reason, obviously – is whenever she tells me to do something, I just do it; I drop everything I’m doing and I just do it in that moment. Because if I don’t, I’ll procrastinate and I won’t do it.

One example of this would be our garage. We’ve got a bunch of big boxes in our garage, we’ve got furniture in our garage, and cobwebs, mud and dirt in our garage, and it seems like it might be something super-simple, but whenever I go in there to drive anywhere, I see it and I think about it, and it stresses me out and I feel guilty about it. And I know one person that some people listening to this show might have heard of before… I know Joe went and saw him speak, which is Jordan Peterson… And one of his rules is “Clean your room.” It’s a very simple thing, and the whole concept is that your external environment is a reflection of your internal environment… So if your office and your room is a mess, then your mind is probably also a complete mess. So if you start by cleaning your room, you can reduce that anxiety and stress that comes from just stuff being scattered everywhere. So I get that from the garage big time.

But then on a larger scale, boxes or other things that need to be picked up from the store, things that I know I procrastinate on all the time – just doing them immediately, or saying “I’ll do them by the end of the day.” I’ve been doing this for a few weeks, and it definitely helps. I don’t think about all that stuff I haven’t done as much.

Travis Watts: That’s a great one, I love it.

Theo Hicks: Okay. Number four – what is your favorite thing to do, and how can you make more time to do it?

Travis Watts: So I’ve talked about this a ton, but my wife and I – we love to travel. And unfortunately, 2020, Covid – it is what it is; we like international travel, but haven’t been able to do a whole lot of that. We snuck in Belize earlier this year, so we’re grateful for that… But the whole reason — well, I shouldn’t say the whole reason. A big reason why I chose a passive approach to real estate eventually is because of this; because I didn’t like having so much active real estate that held me down to a particular area, geographic location… I always had to attend a closing, or turn a unit, or deal with something… So that’s kind of how we have made more time to travel, is by investing in real estate private placements, and things like that.

Additionally, even though it’s an older book, I love Tim Ferriss’ 4-Hour Workweek, because it gives you a lot of great ideas on how to automate your life in a very digital way. So I utilize things like the Calendly link, and Zoom calls, and things like this to speak with investors or anyone wanting to reach out… And you can do that from anywhere. I love that.

In some ways, 2020 has been a blessing in that sense, in that we’ve all been forced to work from home, and haven’t had these old-school face-to-face events to attend… And it’s helped me get more creative on my outreach with people. So again, we could be traveling, and everything’s done digitally in my world. So yeah, that’s what I love, and that’s how we do it.

Theo Hicks: Perfect. Mine is very simple – my favorite thing to do right now is read. And how to make more time to do it – some of my ideas was 1) waking up a little bit earlier in the morning, which is something I talk about in the next question, when we’ll be talking about morning routines… But the other one – and I’m pretty sure I’ve said this before, but reading is something that I enjoy doing while I’m doing it… But when I think about doing it sometimes, I’m just like, “Oh, I’ll do it tomorrow”, and I’ll put it off again; going back to procrastination. Or I didn’t finish my reading for the day, and it’s ten o’clock at night, and I’m  tired… I’ll just go to bed, and I’ll stack it to tomorrow. And then the next thing you know it’s a week and I’ve got all this reading to do.

So one thing that’s helped me was to recognize some of those time-wasters I used to do late in to the night… And then I tell myself “Well, okay, if I could do that”, which was really no positive benefit whatsoever past the immediate gratification, as opposed to doing this thing that I enjoy doing, and that does have a positive impact further than the immediate moment, then I could do that. I could stay as late as I need to to get that done, because I used to waste all this time staying up till three in the morning, doing something that was completely meaningless.

So the what is reading, the how is waking up earlier, and then reminding myself all that time, all those late nights I spent doing things that were completely useless.

Travis Watts: Perfect.

Theo Hicks: Okay, number five – I’m looking forward to hearing your answer on this one… So how can you redesign your mornings? Or best morning routine ideas for 2021.

Travis Watts: Playing off of your last response there, waking up earlier is so underestimated how much you can accomplish. It really doesn’t matter, in my opinion, what you do with the time, as long as that’s productive. You might meditate, you might do your emails, you might work out, it might give you just extra time to make a healthier meal, instead of running out the door and grabbing something on the go, or whatever it is you do… I think that’s key.

Now, when I say “Wake up earlier”, there’s extreme cases of this. Dwayne Johnson, The Rock – he wakes up at like 3 in the morning to get all this stuff done; I don’t know about that. If your body can handle that consistently, maybe. But for me, I look at “When do I have to wake up?” If I have a call at 9 AM, I have to be up at the very latest at [8:30]. But I don’t like to push it, because then I’m running around, I’m trying to get stuff done and I’m frantic when I’m on the call. So I’ll set my alarm for 7. That gives me plenty of time to wake up, to stretch, to check emails, to make sure I’m up with the news and what’s happening… And that’s the approach I like – not to feel rushed. So generally speaking, wake up early.

Theo Hicks: Yeah, I have the same answer, actually. Attempting to slowly, not make it dramatic, waking up at 7 instead of waking up at 3 o’clock… But slowly pushing it back.

One of the things that helps me is whenever you’re forced to get up early for, say, your traveling; you have a 7 AM flight. You get up at 4: 30 in the morning to get to the airport at 5, to get there on time… And then think about how you’re doing all this stuff that you usually don’t do; going through the time change, I’m constantly talking to people all day long when I’m usually in my office, just writing or whatever… And then obviously I get tired; but then night comes, and I go to bed at 10 o’clock, or whatever, I usually go to bed. And I survived, I didn’t die, I didn’t hurt anyone, nothing bad happened; I was totally fine.

So as you mentioned, maybe that early is not sustainable, but if you can see that as possible to do, then when you wake up and your alarm goes off at 6 AM and you wanna hit that snooze button for another 15 minutes or half an hour, try to bring up something at a time in your past where everything ended up fine; you might be a little tired… Have a coffee, it’ll be okay. So that’s one thing to help – maybe wake up early.

And then two things I do in the morning to make sure I get my morning routine done is 1) I try not to open my email at all until I’ve got my routine done… Because you get sucked into that. I guess anything that can potentially suck you in and take away time from completing that routine, I try not to do.

Another thing too is once I’m done with my entire routine, the first thing I do is I open my email and then I set my agenda for the day. So I say “Okay, here are all the tasks I need to  complete by the end of the day.” So those are some of my best morning routine ideas.

Number six, how can you add 15 minutes of gratitude to each day?

Travis Watts: This is kind of derived from Tony Robbins. We’ve talked a lot about Tony Robbins, and my wife and I have attended a lot of his seminars, programs, audiobooks, all that kind of stuff. But this simple thing, if you take nothing else from any work he’s ever done – it’s probably the most impactful. And for anyone that knows what I’m talking about, when you go to a Tony Robbins event, he walks you through a 15-minute gratitude exercise. And what’s interesting is he starts by saying “Think of something that bothers you, or upsets you, or a problem in your life, or something that you feel is bringing you down, or angers you…” So you start that way. And to your point, of flipping out of bed, opening up the news and reading a bunch of negativity… Same concept – all of a sudden, your mind starts going “What the hell is going on?!”

So this gratitude exercise puts you in a different mindset first thing in the morning, is what I’ve found is best… And you start to get perspective; you start to realize what’s really important… Like we talked about, Bronnie Ware, and life in general, and it’s almost like you’re looking down from a bird’s eye perspective.

So what’s most important is love and connection and family, and that you’re healthy, and happy; we live in a modern world today, we have all these conveniences… So you start getting in this mindset, being grateful for what you have… Then you can transition, throughout the day, into the news and the negativity, and surprisingly, it just diminishes the magnitude of that negativity. And that to me is the biggest thing right there, and why I still do this every day.

So really, that’s kind of why, and that’s how; it’s simple. You can write it down, you can just think about it, you can meditate on it, you can get Tony Robbins to walk you through it, whatever works for you. But it’s just putting yourself in a mindset of the greater perspective, basically.

Theo Hicks: Yeah. And then for me just to add to that – as you said, you find it best to do it in the morning. Again, this is something that — I’m really bad at this. [unintelligible [00:21:17].17] really bad at, and this is one of them… And one of the things that I struggled with, in a sense, is that I’ll do it in the morning, and the goal would be to set the foundation, so that you filter everything that you see throughout the day through that perspective, to kind of remind yourself every  morning… And then I forget, right away; I’m in the world and I completely forget. So one thing that I try to do, that’s helpful for me, is express gratitude, however you wanna do that. Obviously, at night, but then also transitioning from one activity to another.

So in the morning, you sit in your office, you open a book, and you’re grateful for the fact that you have the book, and that there’s paper that can be printed on… Back in the day they had to handwrite everything, and people couldn’t even read… And then once I’m done with that, you get up and you make your coffee, you’re grateful for the coffee and the people who picked the beans and ground the coffee for me, and transported it over to America, and then put it in the bag… I get to go to the coffee shop, I drive my car there to pick it up…

So just doing that — and of course, I forget all the time. I probably do it maybe 2-3 times a day, but over time, just like everything, you kind of gradually pick up momentum, you begin to remember it more and more and more, until the goal would be your entire day you’re doing this. At least that’s my goal. And then making sure that, in the beginning, if you do want to attempt to do this and you only do it once per day, at the end of the day don’t beat yourself up and feel bad and be mad at yourself because you weren’t grateful for every transition that you did throughout the day, because that’s not gonna happen. It might be zero times.

But I think the foundations you mentioned in the beginning of the day is great, and then I’d add at the end, and then as many times in the middle as possible.

Travis Watts: Yup, love it.

Theo Hicks: Okay, number seven – how can you redesign your evenings to bring more rest to your night? So on the flip side of the morning routines, evening routines, so that you get rest.

Travis Watts: I’ll give a real short one to this; I know we’re running out of time here, but… Simply put – to me anyway  – it’s about unwinding your mind. The worst thing I could do to reverse-engineer this is to read a financial book, or to start working on my personal finance stuff, because then my mind gets going. “I could do this… And what about that? etc.” And then I can’t sleep.

So it’s like, no phone, no internet, no computer, at least 30 minutes before bed; ideally, longer. Setting an alarm early, so I don’t have to think about it last-minute, and just unwinding, relaxing, possibly meditating (I do that sometimes) and not engaging in anything that’s gonna make my mind start running… And really, that’s it.

Theo Hicks: Yeah, I cannot agree more with that last part. I’ll unwind with something that’s not very demanding, that’s gonna get me laying in bed, staring at the ceiling, thinking. It doesn’t have to be fiction; it could still be non-fiction, maybe more biographical, but not very engaging.

And then something else, too – smaller meals at dinner, so not completely stuffing my face until my stomach hurts, and I’m laying in bed, sick… Everyone knows that feeling. So smaller meals at dinner, so that I’m not feeling bad in bed.

We’ve got a few more minutes, and we’ve three questions left. If it’s okay with you, I’d love to skip to the last one and talk about how can you give back more in 2021. Then if we have more time, maybe we can go back to question number nine about what we would do with more passive income. So how can you give back more in 2021?

Travis Watts: That’s a great question, and I’ve always thought of this kind of thing anytime I’ve ever heard the words “give back” as a child and growing up – I always thought about money; how are you gonna give, where do you donate money, all these things. And really, it doesn’t have to be about that. Actually, it was Joe Fairless that kind of opened my mind even more to this concept, that you have to have enough of something, kind of an overflow of something, to be able to adequately give back that same thing. So if you have a lot of money, you have money to give back. If you don’t have any money, you can’t give money. For me, it’s time.

I was  able to free up a bunch of time to the types of investing I do, and a change of lifestyle and work that I choose to work on… And now that I have that abundance of time, I give back my time. I do that weekly, I do that daily, to people – mostly through my calendar link, where I set up 15-minute calls, with both investors and just anybody in the real estate space that wants to connect… And I give that back. So to me, I will continue that. I’ve done it all year this year, and for the last several years, and in 2021 – same focus.

Theo Hicks: That’s a great point… Because you’ve gotta think about this. This is one reason why we stress – at least on the active side; I know Travis does this as well, the concept of having a thought leadership platform. Obviously, there’s benefits if a person has a thought leadership platform, but at the same time, Travis is writing these blog posts of all this knowledge that he’s gained over at least the past five years, since he’s started investing. All the different mistakes that he made, all the lessons that he learned… He writes that up in a blog post and then he gives the information away for free.

On our blog, we’ve got — I don’t even know how many blog posts we have now. We have hundreds of blog posts about actively investing, about passively investing, about lifestyle, you name it; anything related to business or real estate. So by trying to focus on the podcast, interviewing people, you’re helping them and their business, getting their name out there…

Obviously, there’s financial things that I do as well, but to keep on the concept of time freedom, doing this podcast and helping people have more time… And one thing that Joe talks about — I’m not sure he still has this on the website or not; I think he does, but… If you read his bio, it talks about what his mission is, what his vision is, and why he does what he does… And he does active syndications, so that people can passively invest, they can achieve financial freedom, they can achieve time freedom, so that they have more time to spend on things… And when they have more time to spend on things, they’ll ultimately do more good, and so there’ll be more good done in the world as a result of him helping people achieve those goals. I always thought that was very interesting, and applying that to what you’re doing.

If you’re not giving away tens of thousands of dollars every single year, or every single day, or whatever – that’s okay, as long as you’re focused on the time. So it’s kind of balancing both of those.

Travis Watts: Yup, couldn’t agree more.

Theo Hicks: I’m gonna quickly, at the end here, go through these questions in a list, so that people listening can write them down, and then we’ll wrap up.

So number one was “What time waster are you willing to let go of?” Number two is “If you had one more hour during the day, what would you do with it?” Three, “What have you been procrastinating on that you would like to complete?” Four, “What is your favorite thing to do, and how can you make more time to do it?” Five, “How can you redesign your mornings?” Six, “How can you add 15 minutes of gratitude to each day?” Seven, “How can you redesign your evenings to bring more rest to your nights?” Eight – this is one we skipped – “Do you set goals, and how?” Nine – which we skipped – if you had $20,000 in passive income a month, what is one thing you would do?” And then the last one, number ten, is “How can you give back more in 2021?”

Travis, anything else you want to leave us with before we wrap up?

Travis Watts: No, but I really do encourage everybody listening to write those down, and to make note of them, and really start planning and thinking through — I’m big into  envisioning your future; so the ones that we skipped, like the $20,000 a month, that exercise is just to get your mind thinking in that direction, so that you can set your goals, so that you can reverse engineer and get there.

Theo Hicks: Perfect. Alright, Travis, thanks again for joining us today. Best Ever listeners, as always, thank you for listening. Have a best ever day, and we’ll talk to you tomorrow.

Travis Watts: Happy holidays, happy new year! Thanks for tuning in.

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