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Achieve Wealth Through Value Add Real Estate Investing Podcast

Jan 21, 2020

James: Hi, audience and listeners. This is James Kandasamy from Achieve Wealth at Real Estate Investing podcasts. Last week, we had Jake and Gino from Wheelbarrow Profits. You know, Jake and Gino have tons and tons of deals on their own and you know, recently have moved into syndication space as well. And their story is just very interesting in terms of knowing how did they get started, how did they refinance their first deal to launch their multifamily investing career.


Today I have Rich Fishman from Dallas, and Rich has almost 8,000 units right now across 23 complexes and he has been buying in Texas, Tennessee, Indiana, Pennsylvania, Ohio, Mississippi, and South Carolina. So Rich is going to be giving us a lot of valuable insights into how he had bought so many apartment units. And imagine half of that 8,000 units is fundamentally owned by Rich itself and the other half of it is more of a partnership and syndication. Hey Rich, welcome to the show.


Rich: Well, thank you, James. Glad to be here.


James: Good, good. So, Rich, it's going to be a very interesting podcast because, and I'm going to be learning so much from you and I'm sure my listeners is going to be learning so much from you. How did you get started? I mean, you have like 8,000 units right now. You started almost 20 years ago. So walk back, how did you get started in multifamily immediately when you get started in real estate?


Rich: Well, actually, I was the owner of a mortgage company in the San Francisco Bay area in Berkeley, California and I financed mostly half homes, but I also financed apartment complexes. And I had a deal to finance, it was a six-plex in Alameda, California, and it was a foreclosure. Back then, there were a lot of foreclosures and the realtor gave me the deal, I got the loan, and then the buyer fell out of escrow; they didn't like the deal. And then there was another buyer; same thing happens. And I said to the realtor, I said, “What's wrong with this deal? It looks like it makes money.”

 And she says “Nothing's wrong with the deal.”

 And I said, “Well, I don't know how to manage anything like this.”

 She says, “Well, I know management company, don't worry about it.”

So I went to the property, then I dragged my wife there.


And it's a funny story because my wife is from Scandinavia and they don't do very well there. And so we went to the property and we had one of those, you know those long screwdrivers that the termite guys have because we are poking around, seeing if it was well-built. And the screwdriver went right through the wood into the drywall. And my wife says, "No, I can't buy this with you.”

 I said, "No, we're buying this.”

 And she looked at me and she said, “Okay.”

 And so we bought this six-plex. And the six-plex was the beginning of us starting to buy real estate in earnest. So that's the story is we cut aside. There was a sidebar from the mortgage business.


James: Got it, got it, yeah. I always wonder, like whenever I meet brokers, mortgage brokers, and even brokers, I always ask them, why not you guys buy these deals, right? Why are you just doing transaction? And a lot of times, I mean not a lot of times I think once I talk to someone who went from a mortgage broker to become an investor. I'm sure you know him; it's like Michael Becker, right? Yeah. I think he's a big buyer in Dallas. I asked him this question because he used to be working in Wells Fargo and he told me not everybody likes to take risks like a business owner.


Rich: It's not only about the risk. The main reason that people get into the investment side is because, when you're doing transactions as a broker, you're making income and you're only as good as your last deal. You have to keep churning and closing deals to make a living, and every broker is off to the next listing, or the mortgage person is off the next loan and you'd live and die by the transaction. So eventually, most people either say, I've got to own this stuff; build wealth rather than income. Or I'm not interested; I really don't want to own anything. It takes the risk and the responsibility of owning property. So that's the thing, I had to make a decision to own it, take care of it, use my free time because I was still a mortgage broker. I had to use my weekends to run the real estate with my wife. We want to get started because we couldn't just go into multifamily; we needed the income from the mortgages. So it takes a lot of sacrifice for the first couple of years to get into something like this.


James: Got it, got it. So you must know the industry; working as well in the mortgage and to really successfully become owner and take advantage of that knowledge as well. So after how many years or after how many unit count that you, you said, okay, I'm going to give up this mortgage business, I'm going to be just a fulltime, a real estate investor?


Rich: I think we hit about a thousand apartments. And at that point, I let go of my duties in the mortgage company and concentrated on just buying and selling apartments.


James: Got it, got it. So, 20 years ago you started buying the six-plex, when did you see your fastest acceleration of purchase or acquisitions?


Rich: Well, we hit about 4,000 units and then the recession came 2009 to 14, 12, 13 as on the area of the country, and that was really hard. So we didn't really grow during that period. We were selling off as fast as we were buying, just kind of trying to keep our head above water. We got to about 5,000 units, about two or three years ago, and then we've grown a lot more. I could probably have 50,000 apartments today if I wanted them. I would have to basically align myself with someone on Wall Street or some investment banking for like a Goldman Sachs or something like that. And they would be happy to raise the money and give me all that money and I could then own five or 10% or 15% or whatever it is that is bought, BUT I'm not that going to ho for that strategy.


So the growth at this point is really about organic growth for me and our company, and also quality of life because when you have institutional mining, you have to take care of it in a way that suits the institutions. And they have requirements that family and friends and other people don't have. For example, they might want audited books every year. That doesn't sound like a lot because we don't; we have books [inaudible 08:46] and everything, but that just takes a lot of time to get an audit done. And if you multiply that by 15 or 20 EO, now you have to have a whole audit department, and CPAs work who for you and things like that. So it's been really about opportunity and raising money mostly from either my own, resources or family and friends and other methods.


James: Got it, got it. So, Rich, I think you bring a really good perspective in terms of economic cycle because you have went through, I mean, you started 20 years ago, you went through that 2008 and everybody said 2008 multi-family, you know, fat better than any other asset classes, they are very, very low. What you call, you know, who went into a receivership or bankruptcy; multifamily, so is that true?


Rich: That's not true at all. Most of the people who are in multifamily today, we're not even involved in the business.


James: Exactly, that's what I'm asking because everyone is sort of newbies--


Rich: A lot of people were wiped out in that recession and a lot of other people were underwater. I mean, there were thousands of apartment complexes that were foreclosed on. Now was it as bad as office buildings or retail? Maybe not, I really don't know, but it was bad. Now they say anybody who lasted eight years, they could come out the other side feeling good. But most people don't have the capital to take five or six or seven years of losses, and large losses. If you're not making debt coverage, if you're not able to pay your loan and you're coming out of pocket, that might be okay for one deal. But if you have 20 deals like that, yeah, that's a whole different story. So it's quite a different thing than when people say. Now, the multifamily was hitting extremely hard, and I think the default ratio was up to about 8%.


James: 8%. Okay.


Rich: Yeah, I think so. Yeah. That doesn't sound that bad compared to student loans. But if you think about it 8% is, you know, you're talking about housing that touches the lives of millions of people.


James: Got it. Yeah. It's very interesting data because you are giving me true data. I mean, sometimes we read in the news and they say low delinquency rate and it was not a hard hit and we don't have real, true story. Right, because a lot of it depends on the sub-marker, depends on which class we are talking about, and you know, depends on the operator as well. So how did you survive the 2008 crash?


Rich: Well, I have some properties that cash barge really well and I had others that really couldn't survive and I got rid of them. I sold them off or actually, I had you cut my portfolio down in order to survive and retrench a little bit, but I only had a few deals that were like that, the rest, I didn't have the leverage. If you were totally leveraged up in a bad market, then you cannot save yourself because, and if you're a partnership, you can't save yourself either. Because, if you own 10 or 20% of the deal and the loan is negative, then you would actually have to make a capital call every month on your partners in order to make those payments, and if you raise money. You know that there are two words that should never be spoken ‘capital costs’.


James: Exactly.


Rich: And so it's hard to really get money out of people to feed something that's losing money. So, there are a lot of people who gave; I know one fellow in the Houston market, he had property all over Houston, Atlanta, I think he gave up about 40 yields back. And there were other people like that who had just a tremendous amount of deals that they gave back to the banks.


James: So was this deal when they give back did Fannie and Freddie was giving non-recourse loan at that time?


Rich: Yeah, non-recourse loans, they just won't; if you give them deals back, they don't want to lend to you again unless you pay a heavy penalty to offset their losses because they take losses, themselves or the service or takes the loss. And in Fannie Mae's case, the loan originator slash servicer usually takes about five to 10% of the risk of the loan. So, you know, that could be pretty substantial too, to them because they're usually own companies by either large wealthy individuals or by banks. They don't like taking losses at all.


James: Got it, so they--


Rich: Hopefully we won't be there again.


James: Yeah, absolutely, we didn't want to be there again. So it was non-recourse and the owners were able to just give up their property, they lose their equity and the service that takes some loss and they gave it back to Fannie Mae and that's it.


Rich: Fanny Mae never own; one of the problems with the way the system was set up, is that Fannie may never really own the loan. People don't realize this, but Fannie Mae is just a broker.


James: Really? Okay.


Rich: There's really like nobody, you know, there's not like someone in Mumbai who owns or in Shanghai who owns all these loans. I mean, they basically securitize the loans and they sell the loan as a bond in the world financial markets. And so there's a special servicer who represents the interests of the bondholders and that person is delegated decision making, but they're not able to cut deals on Fannie Mae loan. So, they don't generally go and say, we see that you're negative, and why don't we go from 5% to 3% and you can owe us the money later? Things like that; they're not flexible. So, actually, Freddie Mac is, is more flexible, they act more like a bank, and so they can do workouts in a much better way than Fannie Mae can. It's just one of the things people don't know.


James: Got it. Wow, that's interesting. That's a lot of information out there. Yeah, I mean, Fannie Mae does a, securitize the loan and they sell it to the investor who buys it as a bond and they get certain percentage out of it. And in the middle there's servicer, there's Fannie Mae, everybody makes a few percent like this one [inaudible 15:59].


Rich: Everybody is making money, and at the end, the only people who generally lose money are the bondholders.


James: Okay, are the bondholders. But if the deal is given back, I mean the equity holder, whoever, the owner also lose the money as well, right? So there are two people, the buyer, and the seller, right?


Rich: The borrower absolutely loses a whole lot of their entire investment. And then the lender, if the lender can't be made whole by the sale of the real estate, they may lose money too. Things can get pretty bad in that cycle, that the value of the property often sunk below the outstanding balance of the loan. There're a lot of negative things to talk about, but let's talk about more positive things.


James: Got it. So you talked about people who are highly leveraged, right? So let's say you're buying a deal at 75% leverage. Do you think that's high level, I mean, can you define highly leverage? What is the highest leverage that you think?


Rich: Well, in today's world, you can leverage up to, Oh, even 90% for the first and second or preferred equity. And that's not necessarily a bad thing. It's just that you don't want to leverage that high on a stabilized property. It's one thing if you buy a property that's a value add and that you're going to add value and renovate a property, increased rents, increased value, and you're looking on a stabilized basis that okay, you went high leverage, but within a year or two you're going to be catching up and the leverage point will be at 60%, 65 or 75% or something. But if you're basically highly leveraged in stabilized properties without any value add then. If the rents go down five or 10%, then you're underwater, you want to have some protection; you want to certainly have 20% or debt coverage or something like that.


James: Yeah, that's a good point. I mean, that's the reason where I'm going with the question because we buy deals, we buy deals or value at deals even at 80% leverage, but in one to two years, that 80% leverage is going to be, 70 to 65% leveraged. So basically it's not leveraged at the start of the loan, it's basically, where are you going to be once you're stabilized; that's the more important thing. Sometimes people get confused that you shouldn't be highly leveraged? Why highly leverage and you don't understand that we are looking for buffer for DSCR? We want to be as further up from the debt service coverage ratio. That's the fundamental discussion about what highly leverage and costing higher risk.


Rich: Right, leverage is your friend, if you're using the leverage to invest capital, if you're using leverage to service debt or to pay out dividends, then you're making a huge mistake.


James: Okay, absolute point, that's an awesome point. That's well-said. I couldn't have said it better. So what about the guys who have done breach loans at that time in 2008 what happened to them and what would you give advice to that kind of people who are doing--


Rich: You mean the answer 2007 or 2008 with a value add deal, and then they had a bridge situation. While those people probably suffered, I mean they didn't execute. If they executed, that's fine. It was hard to push rents back then, everything is based on increase in rent. Fundamental multifamily strategy is how can I increase the rent? What value can I give the tenant so they'll pay more? Now, between 2008 and 2012, the only value add strategy that I know that worked was the fixed deferred maintenance to make sure you kept the lights on, for the most part. So beyond that, I didn't see people putting granite countertops in and all this other stuff because everyone was just trying to supply.


So those people, many of those people who got in at the cycle; at the end of the cycle, didn't make money unless they stayed all the way through 2015-16, so there were about seven years. But you would have to stay in that deal in order to make it. Now I did buy a property in the Midwest that I bought for about 15,000 units. You can get things that way back then. And I bought it in 2006 and I did do really well on it, but it was unusual because I got it so cheap; my basis lever was very high. But at the time it seemed like I had really jumped the shark as they say because the economy wasn't very good, and it wasn't easy to rent up any apartments for a while.


James: So coming back to Midwest, which I believe is MAVA secondary or tertiary market, right? So like right now in 2019 right now, market is so hard and people can't buy in the hot cities like Dallas, Houston, San Antonio, Austin, people are, I mean, I'm just looking at Texas, right? I mean, we're in Florida, we have Orlando, Tampa, and what Jacksonville, and I mean a lot of people have started going to other States and tertiary market or States which is like supposedly supposed to be upcoming. So, what would you give advice to them?


Rich: Well, I think my advice on the States like South Carolina or those kinds of places, is that to study the local market and make sure that it's vibrant, that there are good jobs there. There are a lot of great secondary and tertiary markets. Huntsville, Alabama or Hoover, Alabama or you know, Greenville, Columbia, South Carolina, I mean there's just, you know, Asheville, North Carolina, there's a lot of great secondary markets. I think the biggest problem that people have in these markets, one is they think they can increase rents more than they can. Because if you go to some of these markets and you think you can get $200 for putting in a new kitchen, you might find out you can only get $35 and 20 cents because there's a limit to what a lot of these people were willing to pay in these markets.


And if you go too high, they just want [inaudible 22:56], but there are still some markets that are small that people are really surprised at. I mean if you've been to Indiana and you know, there is Columbus, Indiana, well that sounds like a real nothing place, but Commons is located there, it's a very large company, and it's a pristine town with really high rents. Bloomington is also a great town in Indiana; it's got the college there. So there's a lot of college towns and there are capitals and there are places where there's a lot of manufacturing that's particularly in the Southeast that they didn't have manufacturing before. Some of these places have become very desirable for retirement and for our businesses like Charleston, South Carolina, nothing was going on there except history about 20 years ago. If you've been they are now, they are building homes like crazy. People are moving there to retire. There's a huge tourism business, I think ranked the number one wedding venue one year recently. And then they have they're making small planes there; just tremendous amount of activity going on.


James: What happened to this kind of tertiary market? I'm sure you had similar tertiary market during 2008 where you thought, okay, this is really good to go in and invest in. Looking at some of the cities that you're looking at it right now, what happened to that kind of market in 2008 how did they do compared to the major cities that are well known for--?


Rich: I own the property, and the answer is different. Every tertiary market was different, just like every major market. For example, if you look at the major markets or the secondary major markets take Tucson. Tucson was wiped out in the recession, now people say it's a good investment. Phoenix was wiped out, Vegas was wiped out, Reno was wiped out. Today Reno; people think Reno is part of California. It's hard to buy something under 150 a door in Reno now. So back then it was 50 a thousand a door was a great retirement exit. So I own property in Sierra Vista, Arizona, and there is an army base there. Now, I will never buy another property next to an army base. I don't care what the numbers look like because the politics of the army base are things that I cannot control.


And they decided that army base that they didn't need hardly anymore. So they cut the enrollment at the army base there by about half. And it was the town that depended upon the army base almost completely, not just the army people, but the people who were feeding and the vendors, and everybody else. And so the town really; rents went down about 30-40% in the town, but then there are other locations. I owned a property in Davenport, Iowa and it got hit, but it didn't get hit that bad. And agriculture, which was a real feeder for Iowa, stayed pretty good. And you know, they had the ethanol and that was pretty good. We never got below in general 90% occupancy in the properties that we own there, so it just really depends, you've got to do your research. Just how you can't make a blanket and say tertiary market, secondary market; core markets; it wasn't long ago that people considered Baltimore to be almost a core market.


Because of its proximity to DC on the Amtrak corroder from New York, the new Harbor that they had built there with the aquarium and today, a lot of people don't think of Baltimore as a core market and back then people didn't see DC as a core market. They thought it was crime, wedding blah, blah, blah, you know, stay away from DC. And now today, I mean, you're talking about very expensive real estate all over DC.


James: Awesome, awesome. That is a lot of insights there. So Rich, which market have you been focusing on, I mean, you bought in a lot of markets before these and you probably own some of it over there, but what has your strategy has been at this hot--?


Rich: Right now my strategy is really to buy more in DFW.


James: Okay.


Rich: Our office is here. This is probably the best multifamily market in the country. The cranes are all over the skyline. The jobs are coming in like crazy every day or week there is another multinational company that's relocating from California generally to Dallas Fort worth. There's a lot of vibrancy here. Rents keep tricking up. I like DFW. I've liked Houston a lot in the past; Houston is very squatty though, and there's a lot, I can't just tell you that Houston's going to do well because every part of Houston is so different and there's no zoning, so it doesn't have a character. Neighborhoods don't have as much character that they do here. But Houston is great Austin is great, it's just the real question, isn't what do I like, the real question is, is there an upside? Where is the upside in multifamily today?


And the answer is that there isn't the kind of upside today that there was until a couple of years ago because we were still basically catching up from the recession; a lack of housing, deferred maintenance and household formation. During the people said to me, "aren't there going to be more renters?" Because people were foreclosed, I don't know if you remember that. They will say, "You're in a great business". All these foreclosures, they have to rent now. No, they didn't have to rent. They moved in with their families, they hold up; whatever they had to do. People are much more flexible and adaptable than statisticians and university professors. So people didn't create households, kids stayed in the basement, and so here we are 2012 wondering where are all the renters? Well, it turns out that they were hiding out.


So when the economy got good and they got jobs, they all came out and that created a lot of household formation, a lot more renters. And that created a boom in multifamily. So, either more and more people who need rental housing, absolutely, and particularly in areas like Dallas, Fort Worth where they're coming in for the jobs, they need housing; Austin, they need housing. That puts pressure on rents and they usually start building a lot more too. The areas that have a declining population, I wouldn't invest.


So if a deal's in a city that has a declining population, I automatically say no, I'm not interested in, even if I could fix it up and make some money, to me that's; I'm going against the tide. I'm just one guy, I can't make an ocean. I have to get in my little boat, and I have to have the-- I want the ocean to work for me and not against me. I don't want to fight that. Same or crime; if I'm in an area that has just tremendous amount of crime, it's still, crime is [inaudible31:42], but if it has a lot of crime, I don't want to own it because I can't do all the things necessary to stop crime in my neighbor. I'm not a police department. I'm just one person owning one complex or two in a neighborhood and I've got to have an ability to deliver safe housing to the people who rent from us.


James: Got it, got it. Just want to add one thing to the listeners and audience. If you want to find a city where there's declining on appreciating one free resource, which is very quick to check, it is called Bestplaces.Net, and you can go and enter the city information and you can go to a household. I believe it's a real estate statistics and it shows you whether there's a declining population or increasing population. I mean in general, I think Texas is increasing in general. Everybody's moving to Texas and I believe Florida as well, so--


Rich: I mean, if you're looking in Texas and you say, well, why don't I buy in Amarillo or Abilene or these kinds of places, I don't have anything to say. I don't know those markets, but those are not vibrant places generally.


James: It makes sense; vibrant. Okay, got it. But I think the major cities in Texas are pretty vibrant.


Rich: The major cities are really San Antonio, Austin, Houston, and Dallas. Then you have cities like El Paso, Lubbock, Tyler, you know, places like that that are in the second tier. Corpus Christi is another one that is in between the second and third-tier cities. Aon, actually in Corpus Christi real estate, and that's on a lot of people's radar because they are putting along money to the ports and the petroleum industry, but it's not as vibrant as it San Antonio or Austin.


James: Got it. Got it, got it, very interesting. So but Dallas, I mean, I know you're focusing on Dallas, but Dallas prices have appreciated from what 50,000 a door. I mean, I think all over Texas it's like this, right? For the past five years, $50,000 a door to almost a hundred thousand a dollar for a C-class property. So how are you planning to buy deals? I mean since, don't you think at some point the price per door is just going to be limited by the rent wage growth of the--?


Rich: Well, I think that it's a mistake to really focus on price per door. I think it's a better thing to focus on cap rates.


James: Cap rates, okay.


Rich: And if you could buy something over a five cap rate and put loan on it for under 4%, then you have positive arbitrage, and you're going to make money. So a lot of properties are expensive, but property in San Francisco is 350,000 a door. Now, I was a mortgage broker there when they were going for 100,000 a door, and I thought people were crazy. Who would ever pay that? So, we can't let a number and you shouldn't let a number per door impact your buying decision. What your buying decision should be based on is what return on your investment you're going to get. Now, it's true that you want to make sure there's an exit there, meaning that there's somebody else who would buy a property at more per door if that's a problem.


Now there are some markets where maybe that is an issue still, but they're generally very depressed; places like Detroit or things like that or Cleveland. But even those places are not any more per door oriented. So I've seen deals recently that are 120,130 a door. They were bought for 80 a door just three, four years ago. And before that, they had one for 55 a door. And I don't really care what people bought them for in the past, I just care what can I do? What's my return going to be? If I could hit my numbers and I don't really care. Now the question is, can I hit my numbers? Am I chasing a dream that's-- is the ship already sailed? Is there really any more room in this property to enhance value? And the answer has to be yes. And a lot of the areas in Dallas are improving. The income levels are going up in some of these places. The number of jobs in the area is going up, so they're not static environments. Today, a suburb of Dallas is not the same place as it was 20 years ago because now there are four times as many people living in the area, shopping in the area, working in the area, and those people are all competing for housing.


James: Wow, that's interesting. Okay, so how do you underwrite your deals? I mean I'm sure you're looking for upside, right? That's what you talk about in any deals and whether you can make a return on your investment, right?


Rich: I'll tell you my tricks of the trade, which is nothing unusual; first of all, we go into the numbers and make sure we understand the expenses. And we also increase the property taxes based on what we think the assessor will increase the taxes too. Yeah, that's a really big thing; people don't realize they come from out of the outside Texas that your property is assessed every year a new bag. So you can't look at a tax that your seller's paying and think that you're going to have the same tax. So we get the real expenses, and then if we're going to do a value add, we want to find a property that's very similar, same vintage and everything that's already done the value add and see what rent they're achieving, what they've done, and we're not going to go past that.


In other words, I'm not going to be a pioneer and decide that I need golden faucets or Berber carpets or whatever it is; I'm going to make a nice value-add, the same as everybody else. Maybe you are a little better, but I'm not going to a guest that I can get more rent, so that's where I get my revenue, just estimating how many of this was going to renovate? What rents can we get today, today in the marketplace, not tomorrow? And then use those numbers, and if those numbers show that I can get a great return based on what it costs and what the money we put into the property, then it's a go. If the numbers, there's nothing here, I can't get a return from doing this or the rents are tapped out, that kind of thing. Then I pass. And we use a model. I think we use the CRM model. We bought the model because it got too complicated for Excel for us. And so we use a model that we bought to program the IRR and all that stuff.


James: What about the rent growth assumption? How do you usually predict that?


Rich: We don't put more than two or 3% a year in there? We're not looking to create false expectations. 5% rent growth sounds nice, but that doesn't happen all the time. In fact studies in Houston show that there's been virtually no rent growth in two or three years in Houston. And every year they say that they had four or 5% rent growth. And I asked the realtors, is the four or 5% rent growth that these reports say? And nobody seems to know where the data's coming from.


James: Yeah, absolutely. But do you think we can get that 3% rank growth moving forward from now on the next five years? I mean, do you think it's real estate?


Rich: I think we can get the two to 3% rent growth just by doing nothing; if you're in a market that is strong.


James: So it depends on the market as well.


Rich: It all depends on one thing and one thing only, which is wage growth in the market you own.


James: Correct.


Rich: I own a lot of property in San Antonio and there was virtually no wage growth in San Antonio. And I have property that I've owned there now six years, seven years. And the last two or three years there's been virtually no increase in wage growth or rents in none of these markets. The cap rates keep going down, so people keep paying more for these properties. They expect wage growth and rent growth, so everyone has a different expectation.


James: Got it, got it. So what about the, I mean, you mentioned that I mean, you did this for 20 years, own like 8,000 units, you could have multiplied 10 X your holdings by going with private equity money which some people have done. And some people have gone to private equity and came back to be a [inaudible41:31]. Some people are trying to get into working with private equity because it's easier to rent and raising money from retail investors which is like family and friends. I know you mentioned some perspective, but can you give a full perspective on why you didn't choose that route at all?


Rich: Well, we do have family and friends, and private equity, and some family offices in our deals. I have three deals that I have is tuition in, and I just prefer the flexibility that-- I prefer working with individuals and with people I know because multifamily is not a straight line. You buy something a lot of times prizes after you close, you don't know, some problems that you run into. Sometimes you have to replace staff. A lot of times you have a staffing issue. It could take a year or two longer to execute your business plan. And still, it's very good. When you execute your business plan, you make a lot of money, but instead of taking one or two years, it could take five years or four years. And when you have institutional money, they're not very patient and they are very willing after; if you don't make your numbers for one to two years, they're very willing to take the management away or threaten you with your cramming, taking away your investment. Actually, you're cramming down; they call it crammed down; to make the return.


It can be pretty nasty, so that's one of the reasons. It's getting easier to raise money from family offices privately. There are a number of crowd-sourcing platforms; we've done some crowd-sourcing rising for a couple million dollars as infill, you know, to fill in a partnership after a family or friends invest, and we still have a couple million left. Well, we've been successful at raising that money there. We've also used preferred equity, which is kind of a hybrid deal. It's not secondary financing, like mezzanine financing, but it's similar. What they do is there is a pay, they want a pay rate of around four to 6%, and then they want a complete return of let's say nine to 11% or 12%. They'll take the difference when you sell the property well when you refinance. So, it gives you more leverage, you might say, but it's not partnership money, so it reduces the money that you have to raise as a partnership.


James: Got it, got it. And what would you give advice to people who are saying that you know, when the market turns, I mean, they will not be any more private investors anymore, I mean, you have to go back to private equity? Do you think that's the true case?


Rich: You mean institutional equity? You have to go back to-- that's all private equity. I think the reality is when the market turns, everyone goes back into their little clamshell, so what you call it and money is money. And if people don't feel that they can make a return, then they won't invest. Now, what happens is that if the market turns and people are not making return, some deals will go south and will go sour, and then you'll start a new cycle of this trust real estate. And then there'll be opportunity funds or vulture capital guys who are trying to invest in those deals and they'll be looking to invest. So every part of the cycle has a different kind of investor. Right now the profile of the average investor is looking to clip coupons. Most people know that the glory days of making two, 300% on their money is over and they're very happy with what they'd done and now they really don't want to lose their principal. There have gotten more conservative as wealthier people do, and then they say, well, can I get a seven or an 8% or 6% coupon clip every month when you send me a check? And there are a lot more of those people today. There is virtually none of those people in 2008, nine, 10, 11, 12. Yeah, but today, most people have the profile as investors of wanting to have lower risk and are willing to take less reward.


James: So what you're saying is in 2008, everybody disappeared; nobody invests retail, right? And then after that, there is some vulture capital and then now people are looking more into stabilized assets with lower risk.


Rich: The people who appeared in 2008 were the people who worked at Goldman Sachs or Blackstone or these other Carlisle group and these other large accumulators of capital. And what they saw is a tremendous amount of blood on the street as they say. They saw just a lot of financial suffering and they were looking at enabling because of their massive amounts of capital to scoop up troubled assets for pennies on the dollar. So a lot of the mortgages that went bad were sold off for 20, 30, 50% of their mortgage value to these conglomerate; these large companies. And then they went through the process of foreclosing on individual assets. Some of them actually created management companies themselves, and they got the properties back. A bunch of then they put them back on the market and made a lot of money. So there was a lot of business, a lot of wealth created in that time frame, but it wasn't created by people like you and I, it was created in Goldman Sachs, and in Blackstone, and these kinds of places.


James: Got it, got it. So where do you think we are heading in the next two or three years or five years? Are we going to have a slowdown bump or it's going to be a crash into like 2008 or there is just going to be a coupon rolling in multifamily?


Rich: I don't think that we're going to have a crash. I see it more that it's just a steady market and I just think it's going to go up and down a little bit here and there, and I don't see much change from where we are for a couple of more years. I can't see out too far into the future. Sometimes politics and things like that intercede, and we don't know if someone politically comes in and starts changing the tax code like they did in 1986 or something like that. But the way I see it is that America is fundamentally becoming a retro society. People are living a lot longer, and the longer people live the less they want to own a house. A lot of people will own houses and raise families there, but they will exit houses more and more frequently to live in places like central cities or small main street America so they can be near services and doctors and entertainment and [inaudible 49:41].


And I don't think that we're going to go back to the white picket fence for everybody's environment. Now, that doesn't mean people won't buy houses, but when people are not raising children, they will prefer generally to live in smaller environments, more like Europeans do, and I think that pertains, well, for multifamily. There are so many good trends that are feeding into the multifamily trough that I can't imagine right now that in general, multifamily would have a crash.


James: Got it, got it. And so we're coming almost to the end of the show. Can you give us one advice to people who are thinking of becoming like you owning thousands of units and they're just getting started?


Rich: Sure. So this is my main piece of advice is that if you want to be in this realm, then you must make it a full-time job. This is not an investment, multifamily is not a stock that you-- it's not putting money on Microsoft and watching it go up and down. It's an active business, and if we're going to try to be somebody who owns several apartment complexes, then you just really can't buy the complexes and hand away the keys to the management company and expect great results. You have to be very actively involved, visit your properties, know the rents in the market, walk vacant apartments, and make sure you hire good people. It really is a business, and if you're not prepared because of your lifestyle, your other job or something like that to devote most of your time to this business, then my recommendation is become a limited partner in a deal or two, try to make money that way. But don't think that you could become a principal and own five or 10,000 apartments that way, no, it's not going to happen.


James: Got it. I mean, this is one of the requests from our listeners. Is there anyone advice that you want to give to a passive investor who is investing in this deal? What they should look for [inaudible 52:14]?


Rich: Well, the big issue for passive investors is that they should really understand what they're investing in, like any other investment, and not take the offering that they get from the company or the operator at its face value because it could be too optimistic. You want to make sure you agree with the assumptions. So you would probably at the very least get on the computer and look at how much are units really renting for in that area. If they're going to renovate, well, what does a renovated unit look for? Is this an achievable rent that they're projecting and are their expenses realistic? Are they in line with what expenses really shouldn't be? So do a little homework; that's my main thing, and don't just trust that, just because somebody sent you something that said that there's a 30% return, that that's a real thing.


James: Yeah, I have many, many times some passive investors just look at the final return numbers and decide whether they want to invest or not, but they forgot that we are making thousands of assumptions in that spreadsheet. So you rather check the assumptions rather than just the final numbers.


Rich: Absolutely.


James: Right, so Rich we're really happy to have you here. How can the listeners and audience reach out to you?


Rich: Well, they could, we have a website, and they can send me an email through there. If they want to know about our upcoming deals, we'd be happy to put them on their list and work with them, talk to them, and see if we can do some business together.


James: Awesome, awesome. Thank you very much Rich for coming onto the show.


Rich: Thanks James, been a pleasure.


James: Pleasure to have you. Thank you.