Darrin: [00:00:07] What do you see is the biggest risk that you face or that investors face. [00:00:13][5.3]
Neal: [00:00:14] OK I'm going to take that as a real estate question not necessarily as a you know overall macro question that would be another show. It's an. So firstly it's not interest rates. Read what our new Fed chairman is talking about. Read what all of the different governments governors are talking about. At this point, The Fed has turned very dovish. They think we're close to equilibrium. And recently they've started talking about also slowing down quantitative tightening which is the withdrawal of those four point three trillion dollars that they've dumped into the market after the Great Recession. So I don't think at this point interest rates are a risk or significant risks by rate caps. Keep doing what you're doing. I think I don't think that the next recession is a massive risk because I think it's a recession. Understand that either 2020 or 2021 is a recession year. You're probably not going to provide cash flow to your investors. You're probably going to suffer. You should have some operational money in your in your bank and be very careful. I would urge you that if you start seeing the economy turning. Stop giving money to your investors stop giving them cash flow and add money to your operating budget. That's all really that you have to do because it's not possible from a financial perspective for the next one to be the big one. I still think there's a big crash coming but I don't think we're there yet. I think that what we are what what is about to happen in the next recession is a normal vanilla U.S. recession two to four quarters. You get some pain. You see some decrease in occupancy, your profits dropped for a year and then life goes on beyond that point. Right. I'd much rather be in multi-family at that point than being let's say hotels which get hit a lot harder in those kinds of vanilla recessions. So I don't think that those two interest rate and the next recession are two things to worry about. The biggest thing that I'm seeing to worry about in the marketplace is one that I've never heard anybody talk about as a systemic risk. Right. So what happened in 2006 systemic risk was created by lending to people that shouldn't have loans. Correct. And I led not just to a U.S. real estate crash but a worldwide financial crash. We are now creating new systemic risk through something known as Opportunity Zones. Opportunity Zones are where part of the new Trump law trump bill the new tax reform bill. Where hundreds of billions of dollars of stock market profits are being pumped into real estate. Into distressed no growth or low growth areas around the United States, just in the name of tax benefits. What we're doing there is incredibly dangerous. We are basically here's what we're doing. You and I have been talking about how difficult the market is right now for new construction. Right now we're compounding it by saying not only am I going to do new construction instead of doing it in downtown San Jose or downtown San Francisco I'm going to go to this distressed area where there's all these low end tenants that don't have much money and I'm going to build classic buildings. And by the way instead of building a few million or tens of millions of dollars worth I'm going to build one hundred billion dollars worth every year for the next five years. That is a system crash waiting to happen. You cannot build this kind of inventory into distressed areas. In simply 2020 2021 and 2022 and not expect to have a crash related to that. I haven't heard anybody talk about this but I think to me it's obvious that the vast majority of opportunities on projects will fail. [00:00:14][0.0]
Darrin: [00:00:09] What do you see as the biggest risk that people face. [00:00:12][3.1]
Ross: [00:00:14] Well first of all there are many risks. But if I had to boil it down; look if something has gone wrong let's say it that way because not everything goes 100 percent the way you want it to. This is, there's no guarantees in investing in real estate but it almost always comes back to people. We touched on property management earlier that's certainly a key part of it. So, I would feel like if you want to avoid that risk you've you've got to be involved with a group. A Tribe as I call it, because there's protection in a tribe. Let's, let's say that somebody brings an opportunity to that group and not any malfeasance. But it just turns out the day they're in over their head. They don't know what they're doing and they lose somebodies money. How many times you think you're going to come to that tribe again with something and it's going to work? Never that they're done. Okay. So there's a little bit of protection there. I would also suggest that don't start with anything that's too big. I like the idea that we start with single family homes. Although I'm not doing that anymore because it's not fatal. If you have a single family home that doesn't go well for most investors an ideal mostly with accredited investors so I know I'm dealing a little different pool of people nest maybe. But, that's not going to hurt them that much. And they're still going to learn a lot from that. So I would say don't jump in too deep into the pool and I would say make sure you're playing with the right people. That that those are keys for me. But there's other things. But those are pretty pretty big takeaways for me. [00:00:14][0.0]
Darrin: [00:00:08] Can you. Can you speak to what will you see as the BIGGEST RISK investors face. [00:00:12][4.0]
Matt: [00:00:13] Absolutely I would say a big one is especially for a lot of newer investors and they just get this deal fever. They finally won the negotiations. They had the property under contract and you know not doing under full due diligence i s one. You know things with the cast down drain lines. A lot of sellers they'll say oh it's the cast iron has been replaced. Usually it's only been replaced from the building to the road. They're still cast iron on the slab. So they might skip a camera inspection you know to save a few bucks. You know I think that can cause a risk for them. And then another one I would say would be like in this climate that we're in. You know not stress testing the properties. You know I would stress test the rent. Like a lease 10 percent from what they are now in case you know we do get a pullback. So I would say not doing their full due diligence inspection wise and then underwriting, not stress testing and the rents. [00:00:13][0.0]
Q: Is there an area of risk or uncertainty, not necessarily with an insurance answer, but is there anything that you you feel is a risk that you are constantly aware of that you're that you work, to deal with?
A: I would say, the risk in the syndication world is the SEC.
SEC rules and regulations require that you have a transparent operation. That is the key. Making sure that we do the legal paperwork right. We have the investors; accredited, non-accredited or sophisticated investors to fill out the paper correctly.
The other thing is to have pre-existing relationship, that's huge! A lot of people are advertising without keeping in mind what can it do if, people looked into their operation. So I would say it's better to really be on a cautious side and make sure that when you're doing 506B that you have pre-existing relationships with the investors and making sure that they are not spending every dime they own into your investment because there are a lot of restrictions in that. A lot of people somehow, you know oversee that.
The other thing I would like to say is that you want to have the interest of the investors money foremost. Even if I lose my portion and we have done it by the way in and some properties if the quarter did not go well, we wipe out our management fee or we don't take our portion of the cash flow.
We want to give the investors their portion. So those things are very very important.
The risks can also be that I'm on the loan on non-recourse and recourse debt. But the investors are never on the loan. So in a syndication, the most an investor can lose in an LLC is their investment in that one LLC. I don't believe in series LLC. I don't believe in land contracts. I only like limited liability corporations. So that one property does not. Hurt the other property.
Multifamily Syndication in Phoenix is Ben Leybovich’s focus.
A classically trained musician, Ben was encouraged to seek an alternative means for generating income after he was diagnosed with MS. In his search for an alternative to his planned career as a musician, he found real estate.
Since he was located in, Cincinnati, OH, he started investing locally in single family & smaller multiple units. For ten years, he built a real estate portfolio in Ohio, then he moved his family to Arizona for the health benefits. This is when he began his educational journey into multifamily investing.
His original real estate investment mentor encouraged Ben to continuously grow. Once you master single family, get a duplex. After the duplex, get a 4 plex, etc.
He realized managing properties was not his interest. However, his experience with his smaller properties, gave him valuable hands on experience that provides Ben with a unique perspective on the market, he would not otherwise have.
The dictionary definition of to syndicate is “to pool together”.
Together, investors can do more than they can on their own. For multifamily investing, it means pooling investor funds for the purpose of buying a single property.
As such, Ben and his partner Sam Grooms focus on finding multifamily value add opportunities in Phoenix, AZ where they pull together investors to invest in a large multifamily properties.
Syndication is essentially a partnership, pulled together investors. But it is not a democracy. The partners do not have equal say in the decisions. Instead, there is a division amongst the partners; Limited Partners and General Partners.
The Limited Partners are able to invest with an expectation of return on their investment, but have no say in how the investment is managed.
The decision makers are referred to as the General Partners. All the management and operation decisions for the property is their responsibility of the General Partners. It is their job to find the property and present it to potential investors following all of the SEC guidelines regarding securities.
This “pooling together” of Limited Partners with the General Partners forms the Syndication.
Why did Ben get into Multifamily?
The answer is multi faceted. When Ben asked his real estate mentor, “How do I know if I am moving in the right direction?” The mentor answered, “Make sure each step is slightly bigger than your last. Doing this, will assure that your continued growth.” So the natural progression is towards multiple units.
The experience of building his portfolio gave Ben an education on how people, markets and assets behave as the market goes through its cycle. As he moved through the cycle, he was able to ask questions, “why did this happen?” His answers were available from the rearview mirror perspective. Ben attributes eighty percent of his real estate investing education from this rearview perspective, being invested in the market. The balance he learned from reading books.
The experience gained from over 10 years as an investor gives his syndication business a real sense of what is likely to happen as opposed to a theoretical view from just reading.
Plus, from a mathematical perspective, larger multifamily properties just make more sense especially when comparing the expenses of operating smaller properties.
Ben & Sam are very methodical about their underwriting. Given the market cycles, they always underwrite for a 10 year hold. This is not because they want to hold for 10 years, but because this length of time, allows them to safely ride out any down turn in the market. At this point in the market, if they did not do this, they could get stuck with the need to sell or refinance when the market is not favorable to do so.
Today’s cash flow is tomorrow’s “Cap X”, capital expense. Every investor looks for cashflow. But if you have not owned a building for four or eight years, you have not experienced a Capital Expense Cycle. The Capital Expense Cycle is a function of building mechanicals as they get used up and need to be replaced. The replacement of these systems are capital expense.
The cost of replacement is significant, and is why the IRS provides for depreciation and cost segregation studies to help investors plan and prepare for these events. Ideally, your positive cash flow is put into reserve so that you have funds for these events.
With this in mind, Ben underwrites for a minimal amount of cash flow starting in Q4. As the value add improvements get implemented, the cash flow will continue to increase.
The true measure of profits in real estate is defined by appreciation, regardless if you are buying and selling single family or multifamily.
In single family properties, homes sell based on what the neighbors homes are selling for. This market gives the investor no opportunity to push the value.
In multifamily, the market value is established by market cap rates and the property net operating income. Multifamily investors have some control over income and expenses which gives them control over the net operating income. When you increase the NOI, you increase the value. Your ability to increase NOI is the appeal to multifamily investors.
The Multifamily Market Outlook is favorable based on multiple data points. The Federal Reserve’s set goal is to keep inflation at 2%. This is manageable and will naturally push the cost of rent up.
Add to this the growing demand for rental housing due to population growth, formation of families and the growing segment that does not want to own a property.
The cost of new construction is prohibitive when compared to cost to rent for a potential buyer making the median income. This will keep the amount of multifamily supply from growing out of control and the demand high.
How do I exit this syndication? This is a reasonable question from someone who has pooled their money with others. Ben is very conservative, and underwrites to a 14% internal rate of return for 10 years. He does not want to be in for 10 years, but does not promise any returns to his investors until the ultimate sale.
Only after the value add plan has been substantially implemented, does Ben begin to project cash flow, usually by Q4. His experience has taught him that cash flow needs to be accumulated for future capital expenses. By keeping the property well maintained, he can drive future sale value.
Each week I ask my guest what is the Biggest Risk they see that real estate investors face.
BIGGEST RISK: The BIGGEST RISK is always, you don’t know what it is. Strictly buying for cash flow without an idea for how you are going to get out.
How to manage the risk: Underwrite each deal for a 10 year hold. Not because I want to hold it for 10 years, but for safety if we need to.
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Podcast: Multifamily Syndication Unscripted
Q: That I'm curious in your your business if you could identify what your BIGGEST RISK is and if you could then share with this how you go about managing that?
A: I think most people assume that the market, the economy is the BIGGEST RISK with in real estate. Historically, it’s true, interest rates have a huge component to that in terms of the pressure that puts on it.
Obviously we saw that with the big crash. We saw how the markets reacted in the fall of the real estate market based upon the banking industry. That is a component of what we have to deal with.
The way in which we mitigate the risk for that is we make sure that we don't over leverage what we’re doing. We always want to maintain, you know, 65 - 70 percent equity to depth ratio.
Prior to that, we were doing stackhouse's that were ninety percent debt. We were getting huge returns off it, but it was Insanity in terms of what they were allowing us to do, and there's huge risk in that.
Fortunately. I felt that the market was going to crash. When I saw, doctors and investors coming in and being developers. Or the guy that I hired as a carpenter in our first job, who was literally off the boat from Poland and couldn't speak English, was now my competitor. And now he’s doing homes much larger, all of a sudden. How did this guy, in a short amount of time become such a great expert that he could get these huge loans?
It was the American dream. It was fantastic, right? But when I saw all those people flooding the market, who did not have a background nor expertise, that's when I began pulling back.
That's how I mitigate risk. I watch with the market is doing. That's how we got into self storage. because that I've seen an inefficiency within the marketplace and recognized how to take advantage of that inefficiency.
The fact is that the self storage companies, the REITS, stopped developing because they couldn't have that overhead. They couldn't have a non-performing asset on their books for three years while they were waiting for it to become a performing asset. It would pull down on the valuation of their stock.
And so that's where we come in and we build that into our modeling. That is the first way in which we mitigated risk is to avoid over leveraging.
The second way is we really study the market saturation. Recessions are my biggest fear. Our biggest risk is there's too many other facilities within 3 miles. So a lot of that risk is offset by the fact that zoning will prohibit people from being able to accomplish what they what they want to do in terms of our product.
If they can't get the zoning, then they can build. For instance are one in Milwaukee,Milwaukee put a moratorium on any new self storage facility. So in essence it's going to be very hard for anybody to come in and be competitors to us, based on the fact that we already have the zoning. That's the competitive advantage that we have in that Marketplace.
The same in Toledo. They d-zone the entire downtown area to make it mixed use. Our building that we bought was already zoned it and so all we have to do is you know maintain the existing zoning and we have it. But literally across the street, you can not do that because the zoning would not allow.
Those are the type of areas that we look for and we make sure that our competitors don't have the ability to reduce our share of the marketplace.
Q: I'm asking all of my my guest if they could identify the biggest risk that they face. This could apply to this topic, or as you as an investor or even you as a lender. If you could identify a BIGGEST RISK and then if there is a strategy that you recognize to minimize or manage that.
A: I'm going to probably give you a different type of answer. I think DarrIn, the greatest risk is the risk of not doing anything. I look back on my life and it's when I take the risk to do things that are outside of my comfort zone.
Sometimes it works and sometimes it doesn't. But I'm trying. And, I look at it, like I said before earlier in this podcast, that I have friends that I know that are so fearful of taking risks that they won't do it. Even though, they might be miserable in what their particular situation is at that moment. But to to risk failure is is worse than staying in the status quo. So my personal opinion about risk is is to go forward and and try things even if you feel uncomfortable doing them.
Q: What do you see is your biggest risk that you face?
A: I think the biggest risk I face is kind of ties into what I was saying earlier is that I think the biggest risk is thinking or pretending that you have a crystal ball and knowing or thinking that the market has topped out and then letting that turn into fear of buying anymore, or continuing to grow your business model. Which, for us is acquiring property and growing the portfolio.
I get asked almost weekly now, “Well, don't you think the markets too hot and where the ceiling?” I'm like we could be but you know people were saying that three years ago and here we are and we're higher than we were then.
You can always play that game where well. “You know, things seem too hot. I'm just going to go and wait it out”. Well, you could be waiting it out for the next 10 years. So the question is do you want to wait it out and let 10 years pass you by or do you want to take a calculated risk now?
As long as a deal makes sense and the numbers make sense and you can you can run it like a need to, then everything is fine.
So I think the BIGGEST RISK actually is letting that fear overrun you, or thinking that you know better than the market. Nobody knows where the markets going right nobody knows but I think letting that turns to your and then turning to in action. I think it's the BIGGEST RISK, at least for me.
From an investor and rehab standpoint the two big issues that people get hung up on are under estimating the rehab cost and under estimating the time to complete the project. You'll find that if you go forward that type of lending, they're always going to ask, “What’s your exit strategy? What's your backup exit strategy? What’s your third exit strategy? That's what I try to find. If I can't refinance out, can I quick sale? Can I fire sale it? Can I do some type of creative strategy? What does it look like on a commercial note? What does it look like on a fixed 30-year, you know Fannie and Freddie note? I try to play out that worst case scenario, “can I weather that storm?” Then I back into the deal.
Headaches faced by Centimillionaires, really? If you had $100,000,000 would you really have headaches?
Richard Wilson is the authority on wealth challenges faced by the ultra wealthy. He is the founder of he The Family Office Club, and author of the best seller, The Single Family Office where he helps Family Offices deal with the challenges of preserving and transferring the family wealth to the next generational.
By design, centimillionaires, families with net worth in excess of $100,000,000, keep a low profile. They don’t do interviews, nor share publicly about the the challenges of managing and maintaining their wealth.
Prior to starting The Family Office Club, Richard worked in risk consulting for publicly traded companies and then as a placement agent working with hedge funds calling on investment managers. During his investment placement work, he realized that the investment managers were not a good fit for his opportunity. He also learned about Family Offices.
Family Offices were the qualified prospect that had the ability to invest in his opportunities. He searched for information about Family Offices, but found very little. There were no white papers, no network, nothing.
To satisfy his own curiosity, he followed Gary Vaynerchuk’s advice and documented his journey. He started reading, meeting with family offices, and sharing his findings online. Shortly after starting and documenting his journey, he received invitations to speak at family office events. Suddenly, he had the attention of the audience he sought, family offices.
Looking for expand his reach, he purchased Family Offices.com and focused all his efforts on meeting with family offices to learn more. Since 2007, he has done over 115 events, written a dozen books, posted 1800 videos, all of this on family offices.
His progression from finding a need for information, gathering the information, and sharing the information is a textbook example of how to develop and be recognized as an expert in your field.
Inefficiencies in the Family Office industry are and forever will be. Which provides the opportunity for Richard or anyone seeking a chance to develop a niche in a market space.
While he developed a ton of digital information, it was not until he was invited to speak at events that his family office consulting business took off.
Richard truly started from scratch. As he researched and shared what he learned, the volume of digital content grew. Once he had the digital content, he got the opportunity to speak at events, which put him in front of his ideal client. Being in front of his ideal client gave him access and deal flow with his ideal client, which provided him additional, quality content. This cycle continued to where he it fed itself.
Additionally, he has found that the best way to attract investors is to take the long view and provide the most value. When you you believe in the niche, and want to be involved in 20 years, it shows.
Family offices have specific needs. For those, Richard and Family Offices provide consulting help to get set up, and connecting them with providers to meet their needs.
On the other side of the fence are the service providers and Investors looking to provide services or raise capital from Family Offices. For these, Richard shares what information that helps these business tailor their offer so to better appeal and attract the attention and business of family offices. Richard has also authored the number one book, Capital Raising which teaches investors how to raise capital.
Knowing both sides of the market allows Richard ot better serve these individual markets, and be the connector between the two.
The centimillionaire is one that has $100,000,000 net worth. There are 16 times more centimillionaires than billionaires. Every billionaire was first a centimillionaire. The centimillionaire has just as many headaches as a billionaire, less identifiable and typically more accessible.
In Richards book, Centimillionaire MIgraines, he found six unique pain points. Here he shares a few. To learn more about each pain point and get a free copy of the book, go to and complete the webform at https://centimillionaires.com/book/.
Most Centimillionaires achieved their wealth through the sale of their business for which they had a single focus for as many as 20 or 50 years. Now they have hundreds of millions of dollars and could literally do anything they want. They have request to participate in multiple investments, and joint ventures. What they need is clarity specific to what they want. Without it, they will be instructed by others on what to do.
In order to gain clarity, they need to make decisions, on what they want regarding income, investment returns, transparency, where do they want to live, where they what their kids to go to school, etc.
Mismanaged expectations and communications are a recipe for disaster. A lot of families stop talking when money is involved. Without mutual understanding of what is happening things can go awry. Why is the brother, who has an interest in and operates the family business, using the company jet? If the brother happens to lose the sisters money in the business, what happens?
Centimillionaires may not even know they have a deal flow problem. If they are only seeing three deals a quarter, how would they know this a problem if they are not talking with a similar family office to compare notes?
These ultra wealthy acquired their wealth due to their ability to control their outcome. Now they have a less control, and they don’t know what to do.
To learn more go to https://centimillionaires.com/.
Too many times service providers think they can charge more because you are wealthy. For most wealthy people, part of the reason for their success is due to not over paying for things. While the ultra wealthy can afford to pay more, they are not interested in paying a luxury price for budget level service. They are willing to pay a high price for a high level of service.
They need people who they can trust and who are in it for the long run. Not someone who is short sided. They need ethical people capable of providing valuable service.
Each week I ask my guest what is the Biggest Risk they see that real estate investors face.
BIGGEST RISK: The BIGGEST RISK is Key Man Risk. Most ultra wealthy individuals have developed the specific skill set and knowledge over time. If they drop out of the picture, how long can the business sustain itself?
How to manage the risk: As much as possible, systemize, push the task down to support staff. Realize that the results may be less, but still effective.
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