Build Lasting Wealth with Discipline and Undying Courage with Rob Beardsley

[0:00] Welcome back to the REI agent. My guest today is Rob Beardsley, a multifamily syndicator, financial modeling expert, and author who has built a reputation for teaching investors how to underwrite apartment deals with precision and discipline. Rob is known for cutting through the noise in multifamily investing and helping both new and experienced investors understand what the numbers actually mean before they commit capital. In a market where pro foremost can be be wildly optimistic and interest rate assumptions have shifted everything. His framework for rigorous deal analysis has never been more relevant. Rob, welcome to the REI agent podcast. Thanks for having me. Yeah, Rob. It’s been a bit of a difficult season the past couple of years for the multifamily space.

[0:45] Certainly. Yeah. I mean, we’re going through a classic cycle. They don’t all look the same, but the ramifications are all a similar challenge dealing with a lack of quality fundamentals, levels at the property level, which is what obviously you want to see. You want to see your revenue growing. You want to see the income of the property going up over time, which increases the value of the property over time. And then at the same time that you don’t have those things happening, you also are typically in a downturn hit with the negative sides associated with the capital markets. So interest rates going up, cap rates going up, underwriting standards from a lender perspective, increasing. And so people are struggling, specifically those who bought in sub prime locations and used more debt than they probably wish that they did today.

[1:34] Yeah. So things like bridge loans and that kind of stuff to kind of see their deal come to fruition. And then all of a sudden, they’re kind of stuck holding these higher interest rates they’re expecting, right? Yeah. And, you know, a lot of people anticipated, let’s say something like a V-shaped recovery or interest rates coming back down quickly. And so it was like in 2023, 24, people were saying, well, it’s survived to 25. And then it’s, well, you know, 25 didn’t save the day. So then maybe it’s heaven in 27. And, you know, we’ll see if that actually comes to pass because this is not a V-shaped recovery. This is a long, prolonged reset where interest rates and cap rates are, you know, fundamentally just higher. And that’s not to say that they won’t ever go down again, they will. It’s a cycle, right? So it doesn’t only move in one direction. But it’s funny because wherever we are, like you said, the season, you kind of think that it’s only that way, right? When the market’s going up and up in 2021, for example, people couldn’t fathom that the market could go down. And then at the same time, people probably are having a hard time fathoming the

[2:39] market going up. They become allergic to good news. It’s true. You got to understand the fundamental concept of investing with the tulip craze, right? I mean, what’s the madness of crowds or delusions of, I can’t remember the exact title of that book, but where basically when everybody is fearful is the time to try to get greedy. And it’s really, you have to push your own brain to think that way, right? Because it’s not natural. And then when everybody’s greedy, it’s time to be more risk adverse. What is the single most important financial concept a new multifamily investor needs to truly understand before they sit down to analyze their first deal? And why do so many people get it wrong? Yeah, this is a very big topic. And it’s kind of intimidating to approach because when you are new, you kind of, well, rightfully so, you don’t really have the expertise to opine on certain assumptions and business plans, you know, you just don’t have the expertise, right? If I got under the hood of a car or whatever, however a car works these days, I’m not an expert enough to say, well, you know, this is wrong or this needs to be fixed or we can improve this. It’s the same thing with someone who’s

[3:46] a new real estate investor looking at a business plan or a potential acquisition. They don’t have the context. So really the biggest thing that would serve a new investor is building that context. And the way that you do that is through getting some reps and getting exposure to different people in different deals. Because if you only have experience looking at one deal, then that’s your frame of reference. So if you are investing passively into syndication and you’ve only ever looked at one company’s deals, you might not know whether those fees are normal, high, low, whether the alignment of interests is adequate, inadequate, you know, or simply above average, below average. So getting context is the biggest thing. But it’s hard because, well, it’s hard for various reasons, right? It takes time. You have to build a network. You kind of have to put in the effort. But the other thing too, is that new investors, myself included, when I got started, you have a lot of energy. You have a lot of excitement. You just want to put that first check out. You want to own real estate. You want to get

[4:47] there as fast as possible. So you have to fight that urge and channel that excitement into, you know, productively building out your context. Sure. So let’s say that me and you get on an elevator and I ask you what you do. You’re like, I’m in real estate. It’s like, oh, I’m a realtor. What do you, are you a realtor? What do you do? And you explain that you run syndications. Is that accurate? I should clarify first, I assume so. Yeah, yeah. I would say something like, oh, I’m a, you know, my company invests in multifamily properties. And then I would follow it up potentially with my one liner. I’d say we deliver monthly cashflow and peace of mind through tax advantaged multifamily investments. There you go. I was going to say, what’s the elevator pitch that would help somebody who doesn’t really understand what syndications are get it. And that makes a ton of sense.

[5:33] Can you explain a little bit why for a realtor in specific, the syndication of this kind of structure would make a lot of sense or could make a lot of sense? Yeah, well, it definitely makes a lot of sense, I would, I would say for everybody. But when we zoom into a realtor, it becomes even more poignant because realtors, number one, are in the game already, already have exposure to real estate, already understand the fundamentals. So that context gap or bridging that barrier is much lower. And so that’s number one. Number two is the potential opportunity to claim real estate professional status. So I’m not a CPA, I’m not giving advice, obviously. But if a realtor is able to take advantage or anyone, finds themselves in a situation where they’re able to claim real estate professional status, that just supercharges your post tax returns in real estate, and makes it very difficult to justify investing anywhere else. Now, of course, there’s a million places to invest and a million philosophies about diversification and this and that. But when you just break it down simply and say, okay, sure,

[6:35] stocks and real estate kind of have similar returns. But then you look at the post tax results, especially as a real estate professional, real estate pulls out way ahead. And so we can dive into the details about bonus depreciation and how you can use that in different contexts, as well as marrying that with a 1031 exchange. You know, these are probably things that if you’re a realtor listening to this, you get it, like you’ve heard of a 1031 exchange, you maybe have done one or have helped a client do one. So these are things that scale naturally, you know, you can do I have a friend who’s doing a 1031 exchange on a rental their family has owned for a ton of years, and it’s million dollar exchange. We’ve also helped some of our investors do, you know, many million dollar exchanges, 2030 million dollar exchanges into deals with us in institutional quality assets. So the same principles apply. That’s the beauty of real estate is you can cut your teeth, you can be a realtor in single family, and then you can apply those same concepts to doing 100 million dollar deals.

[7:31] Yeah, well, let’s break down what that would look like, like let’s maybe use a hypothetical deal to kind of actually parse out how somebody, yeah, like this agent, they’ll say they’re doing really well making $400,000 a year. And they are not they’re so busy with their sales, they don’t really want to get into a single family rental or a townhouse or a condo. But they do want to put their money into real estate. Ideally, let’s do a hypothetical type of deal that you guys would take on and how what that would look like for them. Yeah, so the deals that we typically do. So you know, we’re based here in New York, but we have a portfolio about 6000 apartment homes across Texas, we’re vertically integrated with property management, construction management and asset management in house. So this really is the opposite of what it would look like if you wanted to do like a side gig or you know, everyone thinks that if they buy a rental, and they kind of just manage on the side, it’s something passive, but that’s the furthest thing from passive, you know, as soon as you dip your toe in that you’re going to be dealing with the classic tenants, toilets and

[8:38] termites. And so, you know, that’s what we dedicate our lives to. So we’re, you know, we’re over 200 people strong committed to just this. So that’s a fundamental difference that truly allows the realtor investor to be passive. And so that that I think is key, because time is money, and realtors understand that. And for them, it’s way more valuable to allocate your time on figuring out how to get your next listing, you know, get your next buyer than it is to try to save some money on some management fees to go and, you know, unclog toilets yourself or, you know, whatever it is, the headache of the day, right. And so that’s a tough thing for people to understand. But it’s a fundamental concept of delegation. And it is a form of delegation, right? We don’t you know, if you if you have if you have $400,000 income, you know, you probably don’t clean your own house, because your time is worth more than the dollars per hour that it costs for that service. So it’s the same concept of delegation. And so what we do is we target institutional quality assets in the suburbs that have some sort of supply mode, because supply is

[9:41] one of the big things that killed results in this latest wave. And if you look throughout history, supply is often the culprit when performance really goes down. And so what we had is a 50 year boom, 50 year record breaking peak in construction of apartments in this country. And that massively affected the supply and demand across, particularly the Sunbelt. So we’re talking about Arizona, Texas, the Carolinas, Florida. And so what you see is when there’s a bunch of new apartments developed, rents go down, there’s more competition, there’s concessions where the new lease up deals are offering two, three months free, and that trickles down and affects every other property in the market. So like I said, a big thing that we focus on are supply constraints. So we’re looking to invest where there is not a lot of supply growth, where there’s a moat where it’s difficult to develop because of the economics, the politics, the geography. So that for us sets the stage for a great medium to long term investment where we feel confident that we’re going to get growing cash flow over time. And so what that looks like is typically when we acquire property in the first year, we’ll start out to

[10:50] distribute monthly distributions for investors at around 5%. And then that will grow over time to hopefully 6, 7, 8% as we continue to hold the deal. The kinds of deals that we like are the ones that get better with age, rather than the ones that actually decay with time, which I would call those things like hot potatoes. And so that would be something like, you know, a really older property that, you know, maybe marketed to you as a value add deal and say, Hey, this is, you know, it’s another way of saying this is a junkie property that we’re going to try to put lipstick on. And so yes, there is a time and place for value add, but far too often you see essentially just bad quality real estate marketed to you as a value add. So we generally avoid that we want to buy a high quality location first. And then if the, you know, the quality of the real estate is secondary to us, which I think realtors can definitely appreciate that. It’s the classic ugly house on the nice block.

[11:43] No, that makes sense. Yeah. And, and so with when coming into a deal like this, so we would have maybe a minimum of an investment that somebody could provide, you know, let’s say that’s a hundred thousand dollars. Is that in the ballpark? Yeah. Our minimum, our minimum is a hundred thousand today. So that’s, that’s pretty standard in our industry. And, and we’re looking at what kind of deal is it like? So like, so first of all, a limited partner, when you’re coming in and investing that money, like as this agent would be they have the ability to analyze the deal at the beginning, you’re going to provide them some documentation. You’re going to give an overview of the, of the market, the deal, et cetera. But then after they like commit that money, what, what jobs do they have? What, what does that look like to them? Yeah. So that’s the best part. There really is no responsibility beyond the initial contribution and what we provide. So like you said, before the deal closes, you know, we do, while we’re under contract, we provide the pitch deck, the PPM, which is a private placement memorandum, which really has all the disclosures and risk factors.

[12:52] And then there’s also the operating agreement, which governs the partnership. And we typically will also host a live webinar, invite all our investors to join. We’ll answer all their questions. And that kind of kicks off our fundraising efforts. We typically raise somewhere between 20 to $30 million on a deal. And we typically do about four deals per year. At least fingers crossed. Hopefully we find a new good deal soon. It’s not always easy just to go out there and find a great deal. Right. So we, I guess I’ll share one of my golden nuggets from later that I thought of, but you know, the best deal you do is the one that you actually don’t do the one that you walk away from. Right. So that’s something just to be wary of is, you know, some of our competitors, we see them operate like on a conveyor belt where there’s just a new deal every month and you just have to call into question, well, what does that mean? You know, what sort of quality control is that? And, and so on and so forth. So that’s just kind of a little bit step two of getting to know your sponsor and understanding how they operate. But once we actually close the deal,

[13:52] all right, so we raise all the funds, funding is closed, we close the deal, then after about a full month of ownership, we’ll commence monthly distributions. And so what we provide investors is a monthly ACH distribution to their bank account, in conjunction with a monthly update, which contains the full financial package as well. And so the full financial package is the trailing 12 month profit and loss statement, the rent roll, the balance sheet, the cash flow statement. And so that’s, you know, full accounting essentially. And then also we provide just quick kind of snapshot updates like, oh, hey, we, you know, as part of our business plan, for example, a deal that we acquired in December, it was a great opportunity because the property had a lot of townhomes, which is awesome for families, and it just creates stickier tenants. And that’s just a great demographic that we target. And some of the townhomes had private yards. But on the other side of the street, for whatever reason, the property did not have private yards. So it was part of our business plan to add private yards, which is very simple, right? You just throw up a yard and extend it back. And

[14:55] that increases the rent, or we’re able to increase the rent by about $120 per month. So the ROI on that is tremendous, because we’re talking about spending a few thousand dollars to put up the private fencing. And then now we’re collecting an extra 100 plus dollars per month. And so just the most recent monthly update for that deal was, hey, we fully completed all of the private yardage, which I think there was about 40 of them to do. So that’s just an example of, you know, the narrative, the qualitative of what’s actually going on on the ground, coupled with the numbers like, hey, we’re going to be refinancing soon, we’re going to be increasing distributions, unfortunately, we’re going to be pausing distributions because of troubles. So those are the types of communications that you as a passive investor should expect from your sponsor. But nothing is really required of you in that, which is great, and which I think is really valuable. Because even if you’re a passive investor, and you don’t read every single report, which obviously, you don’t want to have to write, you want to be passive, but you want to actually feel the comfort that that information flow is

[15:57] happening every single month. Sure. Yeah, yeah, no, I definitely haven’t read everything. What’s invested in? But I’m sure, if anything, like there is a pause, I’m sure that’s when a lot of people are going to want to make sure that there’s information about that. For example, how has a deal underwriting changed since interest rates rose? What specific assumptions are you stress testing differently today compared to a few years ago? And what does a conservative model actually look like right now? Yeah, so that’s a great question. The the fundamental change, I would say from let’s say the pre interest rate increase period, the top of the market, if you will, was people back then were taking value add plans. And and I’ll explain what that is in more detail, as well as just market organic rent growth for granted. So because the market was going up and up, people were assuming that if they bought that value add deal, like I said, the, you know, sub institutional, the older rundown property, they’d be able to throw some renovations on it, you know, upgrade the kitchen, upgrade the bathrooms, new paint, new flooring, and they would be able to increase rents by $100,

[17:09] $200, whatever was necessary to justify the cost, and then some. And the reason why people assume that is because it was true. It was happening, it was working, and people were seeing a lot of success. So when trying to replicate that success, people would go on to the next deal, and they’d be looking to project the same business plan again. And then what we found out was, not only did interest rates go up, but we had a few massive changes happen in the country. One, like I mentioned before, we had the supply change, that was a big thing. And then another thing that’s maybe slightly less talked about is we did, in fact, close the borders, right? We didn’t, you know, do mass deportations, but we did close the borders. So there was a stoppage of this massive influx of immigrants, which was obviously putting pressure on housing and increasing demand. So basically, we curb demand, massively increase supply. And then we also increase the cost of capital through interest rates.

[18:00] So now you have this new environment where you can’t take value add for granted, you can’t take rent increases for granted. And so I think people were a little bit slow to that, because a lot of people got very comfortable and, and happy with the results of their renovations and rent increases. And they thought it was they were kind of forcing it and still pushing for it, even though the result was no longer there. And you’re spending the same money, if not more money, because costs are up. So you’re spending more money on the renovation. But at the same time, you’re not getting the rent increase that you need to justify the cost. If anything, rents have been going down the last three years. So when the rents are going against you, and there’s a bunch of competition, instead of renovations, you should be looking at how to conserve capital, how to actually lower your rents and stay profitable, how to actually increase your renewal rate, because your renewal rates the best way to better cash flow. And what a renewal rate in multifamily is basically the percentage of tenants of which have their leases expiring actually choose to stay and renew their lease for another 12 month

[19:01] term. That’s the holy grail of cash flow, because you basically just earned their business for the next 12 months for a cost of what could be $0, because you didn’t have to go in and turn over the unit and fix it up for the next tenant or make renovations. You didn’t have to offer marketing incentives to your team or leasing concessions, moving incentives to the tenant. So a renewal is the holy grail for cash flow. And the best operators have really focused on that rather than on how much can I raise rent? How much, you know, if I spend the money 10 $20,000, how much can I raise the rent? And my last point on this, I’ll say is the people that have been, I would say, if you want to say stubborn in trying to make this work, you can see it in their rent role, because you actually look, let’s say they have 100 unit property, you can see that if they renovated 50% of the units, and the property is, let’s say 90% occupied, that 10% vacancy is clustered in the renovated units. That’s often what we find. And then the unrenovated units that are consequently cheaper, you actually see that those are the higher percent occupied of the property. So you’re just seeing that there’s a

[20:09] flight to affordability. And the renovations are just not generating an ROI. Yeah, it’s really interesting. Definitely true from what I’ve seen on just my single family portfolio, for sure. I mean, I think I, I kind of caught a lot of that, you know, doing a lot of burrs and that kind of thing. As we were seeing, it seemed like it could throw out any number almost to get the rent, you know, to hire and to make the numbers work, etc. And then definitely feels a lot different now. Single family, you know, increasing rent, that kind of stuff that that probably makes a lot more sense to most people if they’re not as familiar with like, syndications and cap rates and that kind of stuff. Can you explain a little bit about how drastic, good and bad, how cap rates impact valuation, how like, you know, having those vacancy rates higher or having, you know, you know, the rent go up by $25 or down by $50, how big that can make a difference in, in these kind of deals and why people should really pay attention to these kind of details.

[21:15] Yeah, this is the, you know, the fundamental math of commercial real estate, obviously includes the cap rate, right. And so cap rate, if you flip it around is essentially a an earnings multiple, right, if you’re looking at like businesses valuations. And so for example, a five cap, if you flip it around is essentially a property being worth 20 times its income. And then similarly, a four cap or a 4% cap rate is a property being worth 25 times its income. So you can see that although it’s just a change from four to five, it’s actually a pretty big jump in the valuation metric. So even without touching the income of a property, if you get a move in the cap rate at which the property is valued, you can have dramatic consequences in the positive or the negative. So we’ll start with the negative because that’s kind of the recent thing that happened. And so the negative is that the market was going up and up. So because of this exuberance, and because of the low interest rates, people were willing to pay very low cap rates, even less than 4% for what they felt was growth, real estate growth, multifamily.

[22:24] And then what we found is some of that very same property today is valued at closer to 6%. So that’s a massive drop from 25 times to about 16 and a half times the property’s value of income. So when you have that, you’re basically just trying to you got to grow your income a lot just to tread water just to be worth the same as what you were before. And that’s very difficult. But it does happen. Obviously, rents do go up over time. And then that trickles down into the income of the property. And then of course, that can help increase the value of the property, even if the cap rate is now at a higher cap rate where the value multiplier is lower. But now let’s talk about the inverse. Because like you mentioned, be fearful when others are greedy and greedy when others are fearful, right on the backs or on the heels of what I just described, people are going to be more fearful. And so that’s where we’re at today. In fact, consumer sentiment actually is at an all time low, which is a really crazy statistic, because we’re not in a great financial crisis. We’re not during COVID. Yet our consumer sentiment across the country

[23:29] is weaker than those periods, which is truly something very, very odd, very weird. But that tells you that speaks to the mind of the consumer. And it also has a bit I know the consumer and the investor aren’t the same exact thing, but it kind of just paints a picture of where we are today. Sure. And another another thing that paints the picture today is if you just look at cap rates, right? If you can buy something today at a six cap that was worth four, I’m not saying it’s going to go back to four. And I’m not saying it’s going to get there overnight, but is going to go lower. And that is a very powerful driver of wealth, you know, of growing your wealth over time when you actually buy when cap rates are higher, and then they come down because you could see a property without even the rents going up, you could see it go going from $20 million in value to $30 million in value rather quickly. And if you couple that with buying in an area where rents do actually go up, now you’re talking about the property going from $20 million in value to potentially $40 million in value, because the cap rate move did half the hard work to get you to 30.

[24:28] And then income going up got you the other 10 million to 40. So that’s just obviously oversimplified. But an example of how these can be very big moves off of what you said, kind of small numbers, like, hey, we’re getting $25 of rent increase per year, but you stack that five years in a row, that’s where we’re in my opinion, I think that’s where we’re headed over the next five years. Yeah. And also, like if you know, every single door has a $25 increase in rent, and you have 1000 doors, that obviously adds up a lot as well. And then if you factor that in with the cap rates, the amount of value that creates is huge as well. But that’s that is a really good point about the changing of the cap rates, which I don’t think many people have talked on the show about. So that was really interesting. Thank you for explaining that. What makes it means kind of speaking of this, what makes a syndicator’s pro forma credible versus unrealistic? And what are the specific red flags and underwriting that should make a passive investor stop and ask hard questions before writing a check?

[25:33] I would say this is the hardest part, because like I said before, there’s an asymmetrical knowledge relationship here where I’m the sponsor of the investment. This is what I do full time. I know this better than you. I’m not saying you specifically, I’m just saying kind of in general, right, the passive investor. And so the way that that that makes it difficult, because if I tell you, hey, this is what the number should be, it’s hard, because you are, you know, the passive investor is not really in a position to quote, disagree, or, you know, claim that they know more. But that’s kind of exactly what they need to be able to do in order to safely invest in passive syndications. So this is the least passive part of passive investing. It’s actually the work up front in vetting the person and the deal, and then therefore the numbers. And so like I said, the number one thing that you can do is context. And like I, like I said, that is not passive, it does take time, it does take work.

[26:32] But what I would encourage is just to start somewhere and to focus on the basics and ask questions on the basics. So the first basics thing I would ask is rent comparables. And this is something that realtors can understand pretty readily with, you know, whether it’s rentals or sales comparables, right, you can, you, we all understand that a property 10 miles away is not as good of a comp or isn’t even a comp at all, compared to a property that is only one mile away, or even less. So that’s obviously very basic. But then you just keep stacking on more comparables analysis type things like, okay, well, you know, yes, this is a one bedroom unit. And that’s a one bedroom unit as well. But one of them is much larger or smaller, or, you know, might be school district differences and things like that.

[27:17] So I would just ask for the for the comps and to see kind of how they’re being presented. And are they cherry picked, like they’re ignoring, you know, a certain property that has lower rents or something, and they’re just picking a property that’s kind of in a slightly better location. That will just give you some insight into what the plan is. Because with comps, you also want to understand where are we taking the property. Because if the plan is to, let’s say, renovate the property, then you want to see the justification, you can’t take a build it and they will come mentality, you can’t just say, well, we’re going to spend $15,000 on the unit, and therefore, it’s going to get higher rent, because the tenants don’t care, the tenants will pay what the market rate is. So yeah, I would say definitely focus on comps, because that will give you a great insight into the viability of the business plan. I think this is where, you know, being a realtor, kind of like you said, like, it’s easy to understand, like the comps thing is, you know, obviously, what we do day in and day out.

[28:14] And I mean, if you compare it to investing in stocks, like, you know, this is like a business that you’re investing in, you’re but you’re investing in a specific deal, like we’re not investing in your whole company, right? Like if we’re buying this, we’re buying a complex or whatever with you. And if you think about it, like Warren Buffett sits around and just reads all day, right? He reads about businesses. I mean, that’s what I’ve heard, at least. And, you know, then he is able to truly understand that business well enough to make a huge investment, right? I think for a realtor, it seems obvious that we would be interested in investing in something like this, because we understand it. And I think how if you invest in S&P 500, for example, like you’d certainly don’t have a great understanding of all those businesses you’re investing in. And if you’re if you’re doing something a little bit more trendy, trying to get a solo stock like an Nvidia or whatever, you may have a basic understanding, but you’re certainly not going to really understand that space. Most people probably won’t understand that space like they would a simple real estate deal

[29:13] where, you know, you do have comps, you have things that, you know, are within your wheelhouse, even if it’s not your area that you can fall back on to understand the fundamentals of and make an informed decision on. So I think that’s, you know, something as you were mentioning, it just kind of stuck out to me because, yeah, I’m not saying that nobody should invest in stocks at all. But this often I’ve thought of syndications as being kind of like a realtor’s 401k plant, they can, you know, they can take advantage of right away, if you often syndications will, you know, there’ll be a cash out refinance or sale where your money will either be returned to you, ideally, or, and you still have ownership in the, in the property, or you will maybe, maybe they’ll sell for a profit, you’ll get, you know, X amount above what you invested. If you start investing in these, you could just, you know, roll those into the next one, et cetera. And essentially it can be like, you know, a retirement plan where you are really able to, as long as you’re vetting it well at the beginning and have good operators, et cetera, you are able to, to, you know, kind of set it and forget it.

[30:19] Yeah, absolutely. I think that’s a really good point. I love that realtors kind of have that, not cheat code, but just way ahead of the game when it comes to understanding this. And that makes it so much more realistic to actually develop the expertise. Whereas if someone is not even in real estate to begin with, and you’re asking them to, Hey, do the, you know, do the comps, right? That’s going to be a really tough ask. And it may be paralysis by analysis to where they actually don’t even get started on their real estate investing journey at all. Yeah. And, and by the way, I don’t, I wouldn’t say syndications are the obvious thing for everybody always. And I think there is great value to also building up your own portfolio. We didn’t really touch as to loft in times, how you need to be an accredited investor to invest in syndications.

[31:07] And that’s a million dollars in net worth outside of your primary residency or earning, what is it? 200,000 solo, 250, I think you’re 50 and then 300 joint. If you’re married, something like that. And, and so, you know, investing in real estate along the way, if you, if you, you know, house hack, for example, and you just kind of build up a rental portfolio, that’s a great way to turn, you know, just your basic need for housing into something that can be turned into bigger investments like this, even if you never meet the income requirements of an accredited investor. And, you know, there, there could be some deals where depending on your risk tolerance, you might take a home equity line of credit out and invest in a syndication instead of selling or using your savings. So anyway, that’s, it’s a, it’s a really important thing that I don’t think a ton of people know about. And if you’re in residential real estate, so I think it’s a really great thing for people to learn. With that, do you have some golden nuggets for our listeners?

[32:07] Yeah, I’m actually going to audible and switch out one of my golden nuggets because of what you mentioned there. And I think it’s, it’s an important point. I was actually talking with a friend over the weekend about this as well. It’s, if you are new to investing, we’ll just keep it to the topic of syndications. And you hear about, let’s say, for example, for us, a great deal is a 15% IRR, let’s say, which is pretty, you know, very standard. And to equate that to real numbers, let’s just call it a two X equity multiple in five years. So if you invest a hundred thousand dollars with us today, across a five year period, ideally we can through monthly distributions and the profits upon sale, we can actually two X your capital. So if you count the distributions along the way, plus the profit upon sale, you should be looking at a total of 200,000 after the five year period.

[32:56] So, so if you break that down, right, that’s about 20% per year, which is really good. That’s amazing. And that’s on a hundred thousand, that’s actually $20,000. That’s a meaningful amount, but that’s number one, that’s a good deal. Number two, that’s not cashflow. The cashflow is more like 5%, 6%, 7%, right? So on a hundred thousand, that’s $5,000 a year, right? That’s really, we’re talking about hundreds of dollars a month. It’s not life-changing money. So I would really encourage people to think through this and, and really kind of come to terms and understand what investing like this means, because it’s not going to make you rich. It’s not going to all of a sudden change your lifestyle. If anything, it’s going to make your lifestyle poorer because you could have taken that a hundred grand and bought some fancy stuff and, you know, felt great. Right. And instead you’re kind of making yourself poor because you just traded away a hundred grand of today money to, you know, 600 bucks a month money, right? So it’s really playing the long game. It’s really thinking about things from a wealth preservation and growth over time model. And the money that you can make in,

[34:06] let’s say syndications or really most types of investing like this is not going to compete with the money that you can make from your business. So if you’re a realtor and you’re treating your job like a business, which is amazing, then your business is going to give you the highest ROI, right? If, if you can spend the money to, I’m not a realtor, so I’m just kind of makes making stuff up here. Right. But if that can empower you to open up a location or get another agent involved or whatever, you know, scale up your business or spend more money on marketing so that you can get more potential listings, that’s going to be a way higher ROI than syndication. So I would just say that you cannot compare the two. You can’t say, well, if I put a hundred grand in marketing, I’m going to get millions of dollars in listing fees, right? Good. Do that. Right. That’s, that’s your get rich money.

[34:53] But over here in the syndication space, this is your stay rich money. So you don’t want to approach it with the wrong mindset because you are going to be let down. Yeah, that’s a really good point. Really good perspective. You know, the ideal that I teach is if, if you can, so I, you wrote a book, we can talk about that here in a second. But I wrote, I’m in the process of getting a book out and, you know, kind of talking about it from like, you know, the young hustling person who wants to get into real estate investing, they’re excited about investing and excited about sales, all of it. How can they kind of build up their business? And I think building up both can make a lot of sense. And being a hundred percent passive, if you will, is, is one area that would be amazing. So you could start off with like a house hack where you have the rooms rented out and you’re not having expenses from your housing because your rooms are rented out and paying for the mortgage. And then you can save up for another one and, you know, rinse and repeat, et cetera, to the point where, you know, soon your,

[35:56] your other bills, your, your whatever, car insurance, your insurance, your, is all being covered by rentals as well. And so, you know, if you can build up your lifestyle that way, that’s where you can, and again, this is ideal. This is like probably most people cannot, will not do this, but if you can build up your lifestyle this way, you’ll never be worried about, you know, getting, getting that lifestyle creep, like, cause you’re basically living off of the wealth, the long-term gains that you’re, you’re building. And syndications is definitely one of the ways to do it. Um, you said 600 bucks or whatever a month isn’t that much. It’s not get rich money, but if people are honest about what their, you know, single family rentals bring in $600 would be pretty good. Um, so, you know, it’s like you said, it is, uh, not, uh, yeah, get rich quick scheme.

[36:50] And I’ve, I would say, be careful of most of those get rich quick schemes. Exactly. Right. Yeah. If you have this mentality and I’ll segue this into my next nugget, if you have this mentality of, of not, this is not my get rich vehicle, this is my stay rich vehicle. And you know, I have the right expectations. That’s going to protect you from those get rich quick schemes. It’s the people that are desperate and acting out in desperation for whatever reason it might be that, that leads them more often than not into trouble because they’re going to fall prey to someone who is promising them. Yeah, we can double your money in two years and we’ll give it, you know, you get it right back right away and all that sort of stuff. See the, the most successful, the most, most wealthy real estate investors that I know, they don’t want the deal to return capital back in three years, right? They invested the money and they, that was the purpose, right? The purpose is to put the money out, not to get the money back. So they have a fundamentally different mindset. They want long, long-term holds, you know, they disdain selling. They obviously utilize 1031 exchanges to compound

[37:52] their wealth pre-tax. So yeah, that’s, that’s a big thing. So rolling, and that rolls into my nugget of the projected return on the spreadsheet is actually the least important number because one, that number could be whatever the sponsor wants it to be, right? You can just plug in numbers and make it work. But the, the reality is what, and I’m going to kind of talk my own book here and get on my soapbox a little bit because what we do is we project a little bit lower returns than I would say many of our competitors. So the most common objection that we hear when we talk to potential investors is they say our returns are too low and, or, or I, to be more specific, our projected returns for the deal that they’re considering are too low, right? We’re projecting, let’s say 15%, but someone down the street is offering them 20% and the deals look similar. So it’s like, well, fall things are equal. Why don’t I go for the 20%? And what I, what I would say here is that it’s not that we are lazy or less talented or whatever the case is. And therefore our returns are projected as lower. It’s, it’s not because the

[38:55] deal is any different. It’s actually because we are approaching the deal from two fundamentally different ways. One, we are targeting properties that are in better locations, which are naturally going to be lower returns, right? I think like single family or realtors can understand that, that if you buy a property in the best location, it may not even cashflow at all. Right. And, but you know, the appreciation is going to be there. So we want that. That’s what we want to skew towards rather than buying a deal that there’s more cashflow, but maybe no appreciation. And then the other thing is the use of debt. That’s something that we didn’t probably talk about enough. But in our space, less is more in a big, big way. So we use, let’s say something closer to like 50% leverage or 65%, which if you flip that around, that’s basically like one part equity, one part debt, or maybe like, you know, uh, at the most one part equity, two parts debt, I’d say more like 1.5, right on average. And that’s very different than someone who’s using, let’s say 75% leverage or 80% leverage, which is actually like one part debt or one part equity, three parts debt, or even,

[40:06] you know, one to four ratio, right? You’re four X levered. Anything goes wrong and poof, your whole investment is gone. And so, yeah, in a situation like that, your returns should be projected as higher because you should be compensated for that risk. And so that’s a trade that savvy investors over time, one way or another realize it’s not worth making. I would rather trade away what the number looks like on the spreadsheet for what performance is going to be like in reality. And, you know, I’ve learned that the hard way and I’m sure the majority of people that have ended up in this situation have learned it the hard way where they use too much debt and they did not get the results that they were hoping for, right? Cause they were hoping for that 20% and instead now they’re struggling with the zero or with even losing capital, right? So that is not what you want.

[40:50] What you want is something that is built for the longterm quality location, quality product, and less debt, the better. And that is what’s going to put you in a position for longterm success. Because like you said, this is not get rich quick. How long are you, are you all typically, are you mostly buy and hold then? And then are you mostly, uh, like, you know, fairly long holds or do you do, um, sell after five years sometimes, et cetera? Yeah, I would say five, uh, I’d say five to seven years is kind of what we target. Got it. Cool. Um, sorry. Do you have another gold nugget? Um, well, I kind of, kind of merged a couple of nuggets there. And then I also, I also teased one of my nuggets from earlier. I said, no deal is better than a bad one, right? The best deal you ever do is walking away from the wrong deal. And that’s something that is critically important, especially when you’re getting started. That’s a really hard thing to do, I think for a lot. And, and then you, you factor in, and this is something that, um, is, is a bit of the, the dark side of the syndication space that people need to be aware of is that there is, um, there are like fees for, uh, putting the deal

[41:52] together. And there are operators that have been accused of, uh, doing deals just to, to get that income, um, on, on the deal being completed. Um, and, and that helps them keep the lights on and that forces them sometimes to buy deals that maybe aren’t as good. Is that fair? Yeah, it’s super fair. I mean, I think we all can appreciate that everyone needs to, you know, make a living and they need income. So like Charlie Munger says, show me the incentives and I’ll show you the outcome, right? So that is, uh, you got to put your money where your mouth is. And so one thing that I think is a telling, uh, a telling indicator, it’s not the end all be all. And it’s also nuanced, but a telling indicator is figuring out how much is the sponsor investing into the deal themselves, right? Like if I’m asking you to put a hundred thousand dollars into the deal, well, am I myself putting a hundred thousand dollars into the deal, right? That’s, and, and then also a hundred thousand dollars, depending on who’s listening may or may not be a lot of money to someone. Right. And you want to, you want to know, like, I know this sounds a little invasive,

[42:57] but like you want to know how rich is the sponsor? Because if the sponsor is worth a hundred million and they’re putting a hundred thousand dollars into the deal, that’s meaningless to them. Right. Especially if they stand to make a million dollar fee, then it’s like, okay, you know, you’re kind of just paying lip service and you’re just appeasing me. Right. Um, so it’s really powerful. Like I remember, for example, on our, on our second deal, we were really blessed to partner with a family office. Um, they were like a hybrid family office, private equity firm, very sophisticated and like old school, just really interesting experience to work with them. And I learned a lot with them. And I just remember that they didn’t flinch when I said that I was investing a hundred thousand into the deal, which I was worried would be a concern because a lot of big investors, private equity firms, they want to see the sponsor put in 10% of the equity. Well, 10% of the equity could be hundreds of thousands or even millions of dollars depending on the deal size. And so, but they, they understood that, yeah, this is essentially a broke kid doing his second deal

[43:59] and he’s putting a hundred grand in like, and they said it themselves. We know that, or we have experienced that when someone new is putting, you know, essentially their life savings into the deal, it’s a hundred grand. They’re going to do everything to make that deal work out. Whereas the guy who’s already done 10, 20 deals and he’s made it and he’s putting in whatever, it’s just not as meaningful, right? That’s a platform already. So, and, and fortunately they were right. And we did knock it out of the park for them and they got an amazing outcome on that deal. Nice. Yeah. Otherwise it’s kind of like the, that rich person in the old movies where they like throw a little bag of change. Exactly. Yeah. It’s a rounding error. They forgot about it already.

[44:37] No, but yeah, like that. Yeah. Having, you know, I think it is very common to just to put in the fee when you’re in this space, like, like that you, you’re, you’re acquiring a fee, you can choose just to reinvest it instead of putting your own capital in. But I think, you know, as you were saying that, you know, I was thinking like, I would be curious and maybe a really good question is like, what’s the most you’ve ever invested in, into a syndication you’ve, you know, you’ve been a GP in. And, you know, like, yeah, like just kind of getting an idea of how much they’re investing now compared to other ones. And then to your point, like how much of the, of their world is what they’re putting in, how much risk are they really taking? Pretty interesting. Rob, you, I want to ask you about your book and then I want to hear about your favorite book. You, you, so interested you were an author. So you wrote a book as well. What’s that?

[45:28] Yes. So I published two books. The first one was called the definitive guide to underwriting multifamily acquisitions. So that, you know, today we didn’t really talk about numbers, brass tacks. That book is exactly that. There’s no fluff. It’s just literally step-by-step straightforward. How do you crunch every single number that goes into the deal? And then I followed that up with my second book, which is called structuring and raising debt and equity for real estate, which really goes to step two in terms of, okay, you’ve crunched the numbers, but now how do you actually close? Right. And so the formula for closing from a capital perspective is, is debt and equity. So you need to be able to structure it. Right. And you need to be able to actually raise it. You need to be able to go to the lender, get the loan. You need to be able to go investors and get the money. So that’s what book number two is about. Okay. Very good. And what about a fundamental book that you think everybody should read or just one that you’re currently enjoying?

[46:17] Yeah. So this has been one of my top books for a very long time. It’s called getting more by Professor Stuart Diamond. This is a very practical negotiation book. And I know a lot of people hear negotiation. They think like, okay, you know, me versus you and like hard line type stuff, like art of war or whatever, or 48 laws of power. But this is not that this is a much more, I would say like practical and useful on a day-to-day basis, whether you’re negotiating for a candy bar, I guess funny, I’m because I’m rereading this book right now. And I’ll explain actually why I’m rereading it in one second. But because I’m in the midst of reading it, it would basically what he one of the things he recommends is like, try to negotiate everything in your life. And so my wife and I, we were leaving the UFC fights in New Jersey over the weekend. And it was a madhouse trying to get an Uber or a taxi or whatever. And so it could have been, it could have been an hour wait for an Uber. But instead, there was a taxi that was taking someone and they wanted to take another group so that they could make twice the money on one taxi ride. And so he was kind of negotiating. And like, you

[47:22] know, the taxi cost doesn’t really matter to me. But I made a point to negotiate it just because of this book. And that’s like, well, let me test my strengths. It’s like, well, you know, if I pay cash, can I get this price? Like, he’s like, No, it’s like, Okay, fine, then I’ll pay card. And then, you know, and so then we ended up settling on a deal. And I got home nice and safe and sound. So this, like I said, this book is very practical from negotiating a taxi ride to billion dollar deals. And the reason why I’m reading it is actually because we have Professor Stuart Diamond himself, who’s a Wharton professor, coming to our annual LSCRE summit, which is something that we host here at the office at the One World Trade Center in New York, where we invite our top investors, partners and other leaders in the industry to come for a networking event, we do some workshops and this will be the headline workshop will be a negotiation workshop held by Professor Stuart Diamond himself. And for those that register, they get a signed copy mailed to them so they can come prepared. Nice. If people want more information about that about you following you on social media,

[48:25] etc. Where can they go? Yeah, you can find more information about our LSCRE summit and all things to do with us at lscre.com. On the website, you can download our underwriting model for free. That’s been downloaded over 30,000 times. So we use that model every single day to analyze our acquisitions. You can also find links to the books and also get more information on the summit if you want to go ahead and apply. Awesome. Well, Rob, thank you so much for being on the show. It’s a lot of fun talking to you. Likewise. Thanks for having me. Thanks for listening to the REI agent. If you enjoyed this episode, hit subscribe to catch new shows every week. Visit REI agent.com for more content. Until next time, keep building the life you want. All content in the show is not investment advice or mental health therapy. It is intended for entertainment purposes only.