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Achieve Wealth Through Value Add Real Estate Investing Podcast

Mar 24, 2020

James: Hi audience and listeners, this is James Kandasamy from Achieve Wealth Through Value-add Real Estate Investing. Last week, we had Ivan Barratt, who owns almost 3000 units, almost $300 million assets and he's doing a lot of deals in the Midwest cities and the States. So today we have Reed Goossens from Wildhorn Capital. Reed owns with his partner Andrew Campbell, who's also a friend. They own like almost 1800 units valued at $250 million and they've been it doing almost four and a half years. Hey Reed, welcome to the show. 

Reed: Good day, James, thanks for having me, man. 

James: Thanks for coming. I mean I was on your show like a few years back. And you know, it's great to have you back here and I know you guys are doing a lot of deals in central Texas, like where my backyard is. I also do Austin and San Antonio, so it's going to be a good discussion on what do we see in the market, right? 

Reed: Exactly, exactly. 

James: So did I miss out on something in your introduction?

Reed: No, not at all. You've hit the nail on the head. I'm sure a lot of people have heard my story. An Australian guy, moved to the United States back in 2012. My background is in instructional engineering. I moved here to be an expat and just to live in New York City and you know, all these years, seven, eight years later, I have found financial freedom through investing in US real estate and I moved here with little funds, no established network. And my whole shtick is that if I can move here halfway across the world and make it happen, then so can the average American sitting, you know, get off the fence and start investing in real estate because it truly is the, you know, in terms of the Western countries, it's the premium in terms of Western countries for yield and commercial real estate. And we can get into that in a minute. But yeah, that's really my background.

James: Yeah, it's very interesting. I think sometimes people who have never lived outside of the US knows how much you can achieve in the US. Your own sweat equity, right? You can really work hard and come up and live and they have to really go outside and see how difficult is it to come up. And you can work day in, day out and you can work 24/7 you know, for seven days. There's always a limit your progress. Right?

Reed: Exactly. Exactly. No, 100%.

James: So let's go back to the market that you guys are focusing, right? Austin and San Antonio, right? So why did you choose these two markets?

Reed: Yeah, so historically, originally back in four and a half years ago, we chose central Texas. I chose central Texas, it had moderate cap rates compared to, I live in Los Angeles, California. I live on the coast, very compressed cap rates, looking for something with a little bit more moderate cap rates. At the time, I was, you know, Koji paid a couple of deals with some preexisting partners. I had my systems from underwriting to deal sourcing. I sort of had that down pat. But what I didn't have down pat was a business partner, boots on the ground and that's where I met Andrew Campbell and we formed a partnership. I was getting involved in underwriting deals in Dallas and San Antonio, not in Austin as yet, you know, that will morph into that in a little bit, but in the beginning, it was just like underwriting small deals, you know, between 50 and 100 units.

But what I was missing was the boots on the ground, the broker relationships. And so, what I needed was a partner like Andrew who was there, who was in the thick of it, who could go and you know, hang around the hoop and bug brokers while I sort of underwrote deals and did sort of the more the back end operational stuff. And we found a partnership back in 2007-15 I think it is. And yeah, the rest is sort of history.

 We underwrote a lot of deals in the beginning, people took a bet on us in terms of, you know, brokers taking a bet on us and then we got their first deal done. And that morphed too quickly in the second deal and now going on nine deals. So it really came, it stemmed from the fact that I was needing to get a business partner who could take some of the workload off me and do something that I had a skill set that I didn't have, which was boots on the ground, access to brokers, access to deals and walking assets and I really focused on the operational side on the backend. So yeah.

James: So can you give some advice to our listeners on, I mean, I know you say you needed boots on the ground, so you looked at the market and, I mean, I'm trying to help some of our listeners who are trying to do like what you're trying to do, right? You are in California, you have a partner here in Austin, Texas. And how did the discovery of that partners and boots on the ground, because it's not like I find a guy in Austin and I'm good with it. There must be some qualities in him. 

Reed: Yes. 

James: And how did you assess that? 

Reed: Let's just rewind the clock. I'd been doing deals prior to meeting Andrew when I was living in New York City, when I first moved to LA, when I first moved to the United States. I flipped a few houses in Philadelphia and I had a business partner on that and it was sort of a JV more than a business partnership. I had people tell me that that particular person not to be named, wasn't the best partner to work with. You know, he was unorganized and blah, blah, blah. And looking back on it, he kind of was and it didn't go that great. Well, I'm no longer in business with that gentleman, but it was, I tell you that story because it's a learning curve, right? My first flip deal in Philadelphia didn't go very well. But between him and I, the old business partner, we were able to get the deal over the line.

We didn't lose any investors money. And you know, we then parted ways after that because we just realized we wanted different things in life. But I say that because when you're looking for a partner, you need to understand that there's going to be some times you're going to get into partnerships that may not necessarily jive because you're hungry to get deals done and you're hungry to get the business off the ground. But when you first get started, the thing that attracted me to Andrew and what he attracted to me was we had skill sets that complemented each other. And I think that's the most important thing is the skill sets to complement each other. Because if you don't have those skill sets, then what's the point? And actually, you don't wanna be working on the same thing.

So, I saw in him that he had a skill set that I didn't have and he saw in me a skillset that he didn't have; complementary skill sets are really, really important. Also, just the fact that both of us wanted to grind. We were not afraid to roll up the sleeves and work hard. At the time when I met Andrew, he was working a full-time job, I was working a full-time job and we were hustling on the weekends. He had kids, I don't have kids as yet, but you know, he had all these other external factors and so did I, in terms of, my mom was sick in Australia. All this stuff was happening and really, but we still knew that our North star was to get financially free and create a business.

And years later, we've achieved that, which is awesome. But when it boils down to it is we are business partners first and friends second. I view Andrew's one of my better friends now, but that's because we came through business partnership, right? Andrew also runs a different crowd than I do. He's very much in the, you know, play golf and all this stuff where I'm more of the go surfing. If you're watching this video, go surfboard in the background. You know, I'm very, very different. Ying to his yang and we did a presentation last week at the best ever conference in Denver, my sorry, in Keystone, Colorado. And what we were talking about where was that real estate is the art and science, right? Real estate form is an art and there's a science of it.

Andrew is very much the art and I'm the science behind it. So it's the marriage of two different polar opposites that can really make a successful business and partnership work. So all that type of stuff is like you have to assess what you're good at, right? You have to assess your pros and what you're bad at and do what you don't want to do. But you have to also realize that being in this game of real estate investment, you know, whatever size you do, whether it be from flipping houses all the way through to doing large commercial multi-families like what we do, James, you and I, you have to realize that you need a team. And having someone, a copilot, a co-captain sitting right next to you, bearing taking some of the responsibilities and taking some of the pressure off you as an entrepreneur and business owner, it's so vital.

It's paramount to the growth because you will grow by bringing on a partner that works and is harmonious with. Then, you know, looking back, I wouldn't be sitting here today talking about 1800 units and a quarter billion dollars worth of assets under management if I didn't go out and find Andrew, vice versa. He wouldn't also be sitting in the same position if he didn't find me. So it's a combination of seeing what you're good at, what you lack at and seeing if you can find someone that can meet you halfway in the middle and that you can get on and you have those similar goals and visions, but you also can work hard to achieve a goal.

James: Got it, got it. So I mean when you guys, I mean, I'm trying to go into this partnership because I think a lot of people are trying to get a partner to partner with them and they just need to know how does a successful partner look like when you were like, cause you guys are very successful in partnering up. So how was that discussion? I mean somebody brought up, okay, let's find out, we partner up. Right? So, and what was the other person saying? Because sometimes people say, Oh, well, I'm not sure yet. Right? So there's not going to be like, let's partner up and everybody's going to be partnering. 

Reed: Look, let's not beat around the bush here, it is like dating. If anyone's been out in the dating world, same fricking thing. [09:46crosstalk] a few times. I guess

Reed: Exactly. [09:48crosstalk] a few people before you get into bed with someone and skews the crass. But you know, it's an interpersonal relationship. It's a feeling you get from the other person that, Hey, this person could work. Now, it could've gone badly, but it's the same, you know, when you do go out on a date, you get an energy from that person, you can feel that they want the same thing that you want. You have conversations, you get to know one another. It wasn't just like, Hey, let's partner. It was over a period of, you know, three to six months that Andrew flew out to LA with his wife. He got to meet my wife. I flew out to Austin, I met his kids. It was a courtship, you know, similar to how you would date someone.

And through that, we were able to have candid conversations about where we're headed, the goals and really align with, you know, he'd lost his mom through cancer, I'd lost my mum through cancer. So we had some very much some things that aligned. Plus also the fact that we could hustle and we could grind and graft hard. You know, that was a plus. And we had complementary skill sets. It sort of was ticking a lot of boxes. But at the end of the day, the first couple of deals, we were very much Reed and Andrew. It was RSN, which was my old company and Wildhorn and we took down this first couple of deals, really as individuals but you know, using our entities to partner in case something did go wrong and we can just, okay, look, we'll sell the deals and we'll go our separate ways.

 Over time, that morphs into one banner, one marketing arm and that's where RSN falls away and we went with Wildhorn because he was based in Texas and we became more of a partnership. And look, I'll tell you here today James is that partnerships also don't last forever. You know, Andrew and I have had conversations. I'm from Australia originally. I know that in 10 years' time when I'm 43 years of age, I want to have some investments back in Australia. Andrew might not be involved in those deals but for right now, we're looking to double the portfolio in the next three to five years and we're looking to make some successful exits. And that's all I can promise, right?

I don't know what's going to happen in 10 years. The biggest thing for me, James, is that I picked up the book Rich Dad, Poor Dad back in 2009 and, you know, we just finished 2019. So a decade later, I'm sitting on a podcast with you telling you about my assets under management. I had no fricking idea that I would be doing that 10 years later. And so what the message is, don't plan your 10 years ahead, work right now. What's in front of you. See what doors open, which is, you know, Andrew and I are having a really successful partnership and relationship and we're going to double our portfolio next three to five years and just be okay with that. And don't worry, the future will figure itself out from there. You know what I mean?

Because you can overestimate what you can achieve in a year, but you can underestimate what you can achieve in a decade. And so my whole story, my main message to people out there is when you do look at partnerships, understand that they morph over time. They may come together for five, 10 years and they might go apart and that's okay. That's how businesses evolve. That's how entrepreneurs evolve as human beings. And you have to also, not sacrifice but surrender to that and understand that that might change in the future and that's okay. Right? Because as you know, multifamily isn't very hot right now. It's everyone, every man and their dog is in there so you might have to pivot and change different business structures.

James: I mean, absolutely. That's really good conversation there. But some of the key nuggets I want to recap, right? I mean, a lot of people talk about a partnership is always complementary skills, but it's not that, right? I mean, that's one thing, that's just one part of it but there's a lot of core values. I mean, you and your partner have a lot of core values similarity and take time to discover that, right? I mean, based on your family stories and based on your goal because you can find a partner with complementary skills, but who may not want to hustle. He may not have the goal that you want. I mean, there are certain aspirations that anyone who's hungry for achievement want and you know, he expected the same on this partner and I'm sure you guys found that.

 So let's go back to the market that you have chosen in central Texas and I'm sure people have learned it's not only a compromise, it's a lot more than that and you guys have to discover it. And one more thing I want to recap on the partnership is the way that you guys set up your company, right? Two of you guys, I remember the RSN Capital Group, if I'm not mistaken and Andrew has his own and you guys kept it separate, which is really good. That's how I would recommend to anybody who wants to do a partnership. Keep the entity separate, put it into one LLC and buy a deal and in case something doesn't work out, you can always fade it out. Right. So yeah, I've seen a lot of people where on day one itself, create one LLC and hold partners on one LLC and they can never split up when something happens. Right. So, awesome. So let's go to the market. You chose central Texas, you found your first deal. Did you find the deal first or did you analyze the submarket first?

Reed: All of the above. I was looking in Dallas, I was looking in San Antonio. I was just really seeing what... I was underwriting a lot of deals. Before that first deal came to me back in 2000...sorry, leading up to that point was when Andrew and I met then we went and underwrite like a hundred deals before we go that first deal under contract. But if I look at the why behind central Texas, you also gotta understand where I come from and I made this speech last Thursday night at the best ever conference, I come from a country in Australia and you have to put it in context, right? Because part of my special power, part of my superhero, part of my special sauce that I bring to Wildhorn Capital is my international perspective.

And the reason that is so special is though I can look at things through a different lens. So what do I mean by that? Well, I compare just to Australia and America, right? Australia and America, the land of mass, I'm talking about excluding, let's ignore Alaska for a second, but just those two landmasses, they're roughly the same size, give or take. However, in Australia, we can only inhabit about 18 to 19% of our land because the rest is a desert. And so everything is full. Everyone is forced into major cities. Everyone's forced to the coast. And so we have a small population, we only have 24 million people. Unlike here in America where you can inhabit North to South, East to West and you have 300 million people so we don't even have 1/10th.

 The reason I'm bringing all this up is because I grew up in an area where we have a high demand but low supply environment, right? What does that mean when you have high demand, low supply environment? You have low cap rates. In major markets in Australia, in major markets in other Western countries, commercial real estate cap rates are sub 3%. I'm going to spout off some big names, but you look at London, you look at Sydney, you look at Hong Kong, you look at Singapore, office space and then there's probably the only thing that is a common thread between all of them. Office space in those markets are sub 3% maybe even 2%; where you can buy office space in New York City or LA or now even Austin for full cap. 

And so when you've got these international perspectives of like, wow, I've come from a market where historically there's been low cap rates for decades because of supply and demand and I see the same thing happening in central Texas where the GDP of all of Texas is greater than that of all of Australia. I'm doubling down on that and that market, because a place like Austin, Texas has now transitioned from a boom-bust town into a tier-one market like Los Angeles, like Sydney, like Singapore, like London. Where dirt is trading for as much or even more as the coastal market. So when you have high demand like you do in Austin, low supply coupled with a very high barrier to entry for new product, which means buying dirt, getting an approved construction, doubling down on existing assets in a market like Austin means that coming to the recession in the next couple of years, you'll be able to ride that out because you have a high demand and a low supply. 

I also come from a country where we have not had a recession in over 27 years because of, obviously physical policy, the way in which we invest our pension funds is a lot deeper than that. But again, I say this all to give you the lens that I look through when I'm looking at different assets. One other thing that not many people know, multifamily does not exist in Australia because of the lack of financing vehicles. We only have 25 million people. We have four or five major banks. Those four or five major banks do not lend money on a new apartment construction unless you've pre-sold X amount of units, which is a combo market. So they lend on a build to sell, not a build to own. Right? And so when you don't have those sophisticated financing vehicles as you do here in these States, you know, Freddie Mac, Fannie Mae interest only for 10 years, Ameritrade over 30 years, the fact that multifamily doesn't even exist in Australia when I first moved here coupled with population GDP growth, seeing markets transition from a boom-bust into a high demand, low supply environment, seeing markets transition into, it's a high barrier to entry for new product, all those things add to why I would double down in a market like that into help me ride out the next 10 years. 

Because remember James, the last 10 years that we've had just had, since 2009, has been the best 10 years for multifamily, probably in history, right? We're not going to see the next 10 years are not going to be the same. And so as an investor, as an operator, you need to look for markets where there's true growth. Now, you compare Austin to New York and San Francisco and LA, money is still being invested in those markets because of the demand. So people still invest in these coastal markets because of the longterm gains that they are going to make. And a lot of people have made a lot of money in a short term period over the last 10 years and I think that's going to be the same trend moving forward. And that isn't completely incorrect. And if you think that's going to happen, you need to go invest in something else, in my opinion,

James: It's crazy on how much the tide has gone up or the past 10 years and everybody thinks multifamily is the same, right? It's a commodity now, but it's not. I mean, at some point the wage growth is going to hit some limitation and you're going to have a problem, right? So you have to be really ready as when you say; that's really awesome. And the other thing about Austin though, other than coastal cities, a lot of coastal cities are getting rent control, whereas Austin, I don't think that we'll ever get a rent control. Even those20:30unclear] city, but it's in there.

Reed: Yeah. Even if that was to happen, people still make a lot of money in places like LA, New York, San Francisco, they're making a lot of money and it's because of the value of the dirt. And everyone's got to realize you buy real estate for the value and now that is what is intrinsically is going to grow over time. The fact that when I first moved to this country, I noticed that land, at least in LA, in New York and San Francisco, land is key. You're right, it's what holds the value that, the asset depreciates over time, but in central Texas, the asset is more valuable than the land, that's slowly starting to change, right? As demographics changes, people move as population grows, as GDP grows, all that sort of stuff in terms of supply and demand; that then means that dirt is worth more, right? Dirt is where the value is. And if you hold it for a long period of time, I'm talking seven to 10 years, you're going to do just fine.

James: I was happy to know that. You know, I'm not sure whether you'd known, Tim Ferris moved to Austin like a few months ago, a few years ago. I need to find out why. I mean, I listen to his podcast and his podcast is awesome, right? So, let's go to underwriting. So let's say you get a deal today, right? What are the things, what are the sniff test that you do before you look into the second level details?

Reed: Yeah, look, stiff test, it's a hard thing for a sniff test these days because there's so much more to this story. It goes back to the art and the science of underwriting. Back in the day, five, six years ago, yeah, you can do back of the napkin and  does it make sense? Yes. Does it not make sense? No, because you had so much, you had a cap rate that was moderate and you had an interest rate that, you know, was a Delta of maybe 200 basis points you could get cash flow. Today, it's not like that; that spread between interest rates and cap rates have compressed, right? Its cash flow becomes harder to achieve, thus you need to understand the story and that's where the art comes into it, not necessarily the science. So I still look for a spread between going in cap rate or a stabilized cap rate and interest rates. I want to make sure there's at least a hundred basis points in there and that's growing over time and when I model it out over five or seven years, that continues to grow.

But I also want to see now, I'm looking at deals where there's other opportunities. So, we are about to buy a deal south of the river in Austin, Texas. It's the lowest cash flowing deal we've ever put out. And we're oversubscribed to that deal because of the location. Now what you don't know, if you looked at just at the numbers on that thing, you think, Oh God, it's a really low cap rate, but you don't realize that if you don't know the story behind what's happening in that area, 600 units are going to be completely demolished and taken offline in the next 24 months. So do you think that's going to have an impact on our rents and the occupancy? Of course, it is. But how do you underwrite to that? You can't, you've got to underwrite it if it's a value add multifamily.

 This is where the story comes in and where you need to go bigger than the sniff test because this is what market we're in. Also, we know that this land that we're buying, we're buying 12 acres where the density could be doubled on this plot of land. It can go from 294 units, we could go and put 500 units on it. Now whether you go and execute on that as a different thing, but that could be an exit option for someone in the future for a developer to buy if all these investments in the South of the river there near the Oracle is to come to fruition. Then again, I'm seeing very similar trends as if I'm looking at an ally or a New York market.

So these are all the things that I look at now and you have to go deeper. You have to do more than just a sniff test because we're not in those days anymore. We're in a different market and we have to spend time. I have four analysts that work for me and they spend a minimum of three to four hours on any one deal. Andrew is the guy that makes sure he feels out the deals that we see but if he thinks that there's a bit of a something a little bit more to sniff out and he's got a little bit more an art to it, than the science, then we will dive deep into it and we'll spend three or four hours underwriting it. And it still might not work at that point, but we've gone and exhausted all avenues to make sure that it isn't a deal that works for us.

James: So, what you're saying is you have stopped looking for the normal cash flowing value-add deal. You're looking more for the path of progress and you know the story behind the deal as the future appreciation I would say, future potential in that deal., I guess.

Reed: Future potential because your whole podcast name is called increasing your wealth through adding value, right? You may add value by entitling the land to have a bigger a density on it. That is adding value. 

James: Absolutely. Absolutely. 

Reed: Any way you add value but historically it's been all, we'll put lipstick on a pig and hopefully it looks good. So that's gone, right? There are still those markets out there. There's still these deals out there. You can still find them and don't get me wrong, but when you become more sophisticated when you become more advanced in your underwriting when you become more experienced, you start seeing different trends and why the big guys, and let's not beat around the bush here, I've worked for big developers in LA, in New York, and they don't have podcasts, they don't have books, but they own half of Beverly Hills. The reason the way the big dogs are, they're still buying these pieces of dirt, they're still buying these trophy assets and putting it in. They're still selling to rates, they're still selling to insurance companies and making a lot of money and you've never heard of their names. So I've come from that background and that is where exactly how my mindset has now shifted to start understanding the pennies dropped, ah, and now I know why those guys do what they do is because of the value which the supply and demand curve, we go back to that a lot, that demand is high and supply is low.

James:  I mean it's very interesting, look at things differently. And I met someone the other day who was buying land on a, it's called a submerge land, land under the Lake. And she was saying, Oh, I sell that. I say, how do you sell that? So it's a very interesting story on when a boat comes, you know, you need to dock on your land, even though it's under the water, but they can still sell it. Mixed with different kinds of people, go out of this, the normal value add, I would . To see those kinds of things. So yeah, it's absolutely, you know, it makes sense to do creative stuff as long as you're doing it in the right market.

Reed: It does all come down to market and it does all come down to just reacting to the market. Right? You got to react and you go to, as entrepreneurs, we're riding the wave, the wave of change is ever-evolving. And so we have to be ready to look at things through a different lens to not be ignorant of other options that you can do to your property. Because you know, it's about being creative, just be creative with the piece of land and you can figure out many different ways in which you can make money from it. So it's just understanding that rather than just plugging, implying and you know, buying at a six cap and getting interest rates at a full cap and having all this cashflow and yada, yada, yada. There are still those deals out there, they're a lot harder to find and thus you need to be a little bit more educated in terms of the value that you bring to your asset now coming into, you know, a new economy that we're in.

James: So do you see some of the investors who are used to getting cashflow and doing value add on the rent and all that, do you see some of the investors dropped out? I mean they don't buy into the idea or you think a lot more people buy into the idea or you just finding different people buying into the ideas?

Reed: Last year we rolled out and we were the first ones in the industry to do it in the multifamily industry, at least in our little circle, the AB structure, we brought that to market first. We closed on a deal first. The way we do that is by offering 25% of the equity has 10% preferred return paid current. And that means that you can satisfy those cashflow customers or investors with that class A bucket. Class B bucket that they have an accruing pref but they get all the back end. They get 70% of the backend so they're looking for the equity multiple and we then divide it out the investor group into two pots. We can now see who wants what but what it does mean is that if we buy a deal that cashflow is 2% out of the gate, which is pretty much a lot of deals only cash flow very little out of the gate, you can pay that 10% pref straight up to 25% of the equity. 

If you have 25% of the equity not participating in the backend, then that juices the IRR to the class B. All these things we are doing in terms of structure because we are reacting to the market and because we're not just blindly going along and not getting any deals done because, oh, it doesn't work like it used to work. Well, we're changing the way in which we structure ideas. We're changing the way in which we underwrite ideals to back into making sure we're appeasing our investors that have some cashflow, a bucket but we've also got the equity appreciation bucket and having honest, candid conversations with our investors that, hi, if you give me 100,000 bucks, does it really matter if I give you seven grand every year? Is that going to change your life or does it more matter that you give me $100,000 and in five or six years' time, I'll give you back $250,000? Is that more valuable to you? 

When you have those conversations with those investors, they start thinking differently. And people that they think, Oh, the pref isn't being met, oh, that means it's a bad deal. No, it just means that the deal is getting out of the gate into different velocities where another deal is. And so looking at the longterm play, real estate, James, is a longterm play, not a get rich quick. And that's why I say a lot of people have done so well with their money in the last 10 years. They've doubled, triple their money in three to five years and I think that's still the norm. Well it's not and that's where you have to readjust your expectations. And that's where, again, my international perspective where I've come from a country where if you double your money in 10 years, you're doing just fine. The longterm play is what real estate is and people sometimes lose that vision of what longterm means and they think long term is three years.

James: Yeah, that's true. Sometimes people are just so used to what they make in the past 2012 to 2017/18, keep on looking for the same yield and you know, that kind of deal is no more existing. 

Reed: And investors appreciate being candid. Investors appreciate having those open and honest conversations. And why would you take a lower return? You're taking a lower turn because it's risk-adjusted. You're not investing in a tertiary market or a secondary market where it may get really rattled if they have another recession, you're investing in lower risk, and thus you have to adjust your expectations when you go and invest in a market like Austin with lower risk, low margins.

James: Yeah, yeah, yeah. Risk-adjusted return is something that a lot of people don't understand. I mean if you're making 6% in an awesome market compared to you're making a projected 8% I would think is projection in the beginning, maybe before you invest, everything's projection, right? Someone tells you they're going to give you a 20% IRR in a tertiary market compared to someone's going to give you a 10% IRR in a solid market. That 10% is actually much better than the 20%  because the risk is lower. 

Reed: The risk is lower. But also you look at like if you want no risk, go put your money in a treasury, the 10 year treasury and that's what 1.32% if you want zero risk, go do that. And if I'm offering you six or 7% return, I think I'd rather place my money. So backed by physical real estate where you can have all the tax depreciation, no other investment holds up. So obviously the stock market is doing very, very well, but you have to also combat apples to apples and that is, you know, one is risk, two is volatility, three is tax depreciation and four is access to capital. And so all those things play into effect when you think about real estate versus other ways in which you can make money in this world. So yeah.

James: Yeah. I think I saw the way you guys structure the class A and B, where you have one person class A is like flat 10% or in a certain percentage, I can't remember the number.

Reed: It's flat 10% but the class side does not participate in the back end and then you've got class B that has an accruing 7% pref and you catch up upon sale but they get 70% of the back end. And those investors are more focused on the equity multiple rather than the cash flow. And thus, you're splitting the bucket but you still offer them both. The investors can still have some in A and some in B, but you limit the cost A to 25% of the equity. So it helps, you know, juice the IRR.

James: And does the class A, the 10%, get paid from day one itself? 

Reed: Correct. 

James: Okay. Okay.

Reed: You can do the math, right? So if you have $1 million of equity, 25% of $1 million of equity is $250,000. 10% of $250,000 is 25 grand, a year. Now, $1 million in equity, that's probably going to buy a $4 million property. You think a $4 million property could cashflow in any one year, 25 grand? I think it could. Yeah. So that's where the special souls comes in because you're paying 10% on 25% of the equity. So thus your cashflow out of the gate can be lower and you can still hit that 10% preferable.

James: Yeah. So do you see...we trying to get filled up fast. I know one has a smaller pool, the other one's bigger, right? 

Reed: So, we also have a higher barrier to entry on the class A so we have $100,000 minimum. And we have a lot of people wanting class A. The thing is we tend to see costs, on the first deal, it got filled up really quickly. On the second deal, it was a little bit more equal, you know? So, but here's the other thing, class A investor is if my deal, I'm not hiding anyone from it and it's the truth, they get paid first, right? So if I go and refi and I hold it for five years and I decided I'm not going to sell, I'm actually going to refi, well, I can refi it and pay all my investors costs I owe their money and they're out of the deal. And I can replace class A with cheaper, cheaper debt, right? 

Cause if I'm paying them 10% of their money and I can get debt at full percent, then I've just essentially, you know, taking them out of the deal. Now there's a risk there that they're out, right? And I have investors saying, well you could just come along and do that. It's like yes I can. That's part of, you know, real estate and debt stacks. Right. I can just replace as the value of the asset grows, I can replace the debt and I could potentially have a debt number that could take you all out of the deal. They've gotta be okay with that.

But they sit in a safer position, they sit just behind the debt. They don't sit in class B, they sit in class A side.  

James: Got it. Got it. So it looks like if you look at class A and you are saying is much more attractive. A lot of people compared it to class B [inaudible] right. Can you hold on, let me just fix my staff cause I didn't want this to be half. Okay, good. So forget about it. So let's start again. So class A has a lot more attractiveness to it and compared to class B because class A people get 10% flat, I guess, right? 

Reed: Well, yes and no, there's pros and cons for both. I just explained the class A that yes, I sit at and I have a 10% pref, but their cap did it at a certain return. They cannot earn any more than 10%. 

James: And you can buy them out at a refi?

Reed:  I can buy them out at any stage and if we smack the deal out of the park and 20% IRRs, they share none of that because they want to sit in a safer position. And that's where class B, yes, you're sitting behind class A, but you get all the profits, you know, we split all the profits, profit sharing at the end. And so again, you have to understand capital stacks and you have to understand risk in relationship, just capital stacks in order to really grasp your mind around the AB structure. It's pretty simple once explained. And I can show you a diagram if for any investors who might be interested in it, but again, it's just a different way of looking at it and I come from the ground up construction world. I've built a lot of ground up multi-family. This is exactly how multi-families constructed a finance. Your debt, you have a mez equity piece, you have equity, and then you have the GP and it's just capital stack and math. So it's very basic, once you get your head wrapped around it. And probably a lot of people scratching their heads thinking, Oh my God, what's he talking about?

James: No, no, for me, it's pretty simple. I mean, I think it makes sense. I mean there's risk in both classes and you take that risk. I mean, even in my book about, you know, different investors want different things. Some people just want cashflow, 10% flat cash flow. Some people really want the equity. I mean, it depends on their life cycle, where they are in your life cycle.

Reed: And so as an operator, I've got to continue offering that. And the way I've offered it in terms of how deals and now underwriting is, that's how I've split the baby from the bathwater as they say. You know, I've split it and made sure that I can serve as both the type of investors who one wants cash flow, the other one wants longterm appreciation.

James: Got it. Got it, got it. So, Reed, let's go to more personal stuff. I mean, can you name like top three things that you think is your secret sauce to success?

Reed: That's a hard one. Look, there are no secrets. Hard work is...let's talk about secrets. Hard work is so underestimated. I moved to this country. I didn't have a job. I was an engineer. I literally dawned on a suit and I knocked on 50 different engineering joints and engineering companies until I found a person to say yes. I'm not afraid of hard work. Am I lucky? Have I got a bit of luck in this? Sure. I'm lucky that I was born into a really awesome family that, you know, I come from a blue-collar working background, I've got blue-collar work ethic. I'm not afraid to roll up the sleeves and get my hands dirty. I'm also not afraid to back myself. I think that's another key to success is like you've got to learn and you've got to be okay with betting on yourself.

And I remember when I first took that plane from Australia, I quit my job, my well paying job in Australia and I moved to the United States to give it a crack. As I say, you know, I was betting on myself. I was betting that I can figure this out. I might not have had the answers at that point, but I knew that I was resourceful enough to figure it out and I have. And so those two things, there's a little bit of luck in there, but it's also hard work and learning to back yourself; are really too important skill sets, life skill sets that that people need to learn. And I've developed that through going and backpacking around the world with, you know, $2,000 in my pocket, you know, understanding the value of a dollar and stretching a dollar. You know, people ask me all the time, well, what advice could you give to a 20-year-old?

Go backpacking, go to a third world country, go backpacking for two years, come back and then you go find yourself, you go in the university of life, figure it out, go understand a little bit of the street ways and then come back and you'll get started. I think going out and widening your horizon, taking off the blinkers and experiencing other cultures, otherwise how people live their lives is all parts of learning and why I that I've been very lucky that I was able to travel and I paid for my own travel. I've saved my own money. I was able to go out and do it and experience different cultures, take on their advice, take on the wisdom and internalize it and spit it out and say this is what I want to do with my life. So a couple of pieces of advice of success there.

James: Yeah, absolutely. Now I realize why people go backpacking and never really understand, but you made it very clear, right? Cause you really like on the street with a shoestring budget and you're talking to different people, you're talking to normal people.

Reed: You get a skill.  I'll tell you a story. I was in South America, this is 10 years ago and I had a rule. I was backpacking by myself. The most invigorating thing I've ever done in my entire life, James i,s to backpack by myself. I had no one to answer to, I would meet someone at a hostel or a group of people and say, this is awesome, let's go. But you get really bloody good at determining if you're going to be, you know, you only have 30 seconds to make an impression and I'm going to either have to have a beer with you or I'm not gonna have a beer with you. And it was very quick, that skill became very, very quick. I had a rule that when I was backpacking by myself, you know, if I go into a bar and I hadn't met someone within three drinks, I'll move to another bar. I never left that first bar because it was always about putting yourself out there, being vulnerable, talking to other backpackers and getting that interpersonal skills really sharpened and really honed in. And that's part of what you learned from backpacking. 

James: That's very interesting. That's the perspective that you get when you go backpacking. Let's go to another one more aspect of your life. Is there a proud moment in your life that you can never forget until the end? One proud moment that you're really, really proud that you think, I'm really proud of myself.

Reed: I think getting that first job in New York City, getting that first job, getting that visa, I was proud that that was, I did it. Like that was the coming to America story. In order to stay, I needed a visa, I needed a job. And so that proud mate, if I got that job, it meant that that was, you know, talk about doors opening. That was the first door that I could unlock. And that then meant that there's a bunch of other doors behind it. But that meant I could stay and I could figure it out. And that was the first proud moment that I think, it was, you know, again, I was literally walking the pavements, knocking on doors because in 2012 you know, putting your resume out into the or whatever just was useless. I needed to go knock on doors and say, Hey, here's my resume. I'm more looking for a job. And a lot of people said no, but it takes that one, yes. And that one yes can change your life. So that one yes for the job that meant that I could stay in the United States. It meant I can continue the journey. 

James: Got it. Got it. So one other question from one of the passive investors is like, is there any advice that you would give to passive investors that are investing in a syndicated commercial real estate?

Reed: Yeah, I think the biggest thing is you have to have an alignment of interest, trust, and transparency but do you get on with the operator? Because the number one thing that passive investors want to invest in is they don't actually invest in the deal, the deal is sort of second secondary, right? The first thing is the person. Who re you investing with, who is your partner that you're going to go into this deal with, who is the operator who's going to take control of this asset? And if you don't like them or you don't have that energy that I spoke about earlier, then don't invest with them. And it's very easy to figure out who you like and who you don't like. And again, this is a world, of  life is short and you want to do business with people who you like and you want to be with, right? That's the whole point of why we do this business. And it goes both ways, both from the operation point of view, my point of view, and also from the passive investor point of view, we're all in this business to make money. Let's do it with people that we like. So I think that's the short of it.

James: So Reed, why don't you tell our audience and listeners how to get hold of you and how to

Reed: Yeah, sure. So I've got for those listeners who like to read, I've got two books. I've got the Investing in the US which is on Amazon. It was a bestseller last year. You can find that and I've also got 10,000 Miles to the American Dream, a story of financial freedom. So those two books are on my website or on Amazon. You can go to, that's Everything's up there. My podcasts are up there, my blogs are up there. If you have any questions, you can click on little links and stuff. And I always offer people or listeners, if they're coming through LA and they want to meet up for a beer or lunch, I'm always interested to meet up and talk shop. You just got to email me at and just give me enough heads up and let me know when you come through town.

James: Awesome. Great. Welcome. And thanks for coming into the show and I'm sure you added tons of value.

Reed: Thank you very much, mate. 

James: Alright, bye.