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When you are talking with a prospective partner. Okay. And you know that they’re not educated. How do you call them out? Because I know a lot of people always want to be professional and courteous. And really get to make sure that they’re not offending anyone as an operator. I know other investors are romanticized and multifamily investing, and I’m looking to learn from other investors mistakes.
I know you are too. You found the right place. Welcome to Myers methods. Presents multifamily missteps.
Hey everybody. And welcome to multi-family missteps. I’m your host Jerome. And we’ve got another multi-family kickstart session with my man Hertz rye Hersh. How are things? Aren’t you like the Midwest? Jerome. I actually made the move out to Hawaii about a month ago. So I’m super stoked to be out here. I’m out here in Hawaii, live in Ottawa.
And I want to say, thanks for having me on man. It’s I’m looking forward to the conversation. Outstanding, man. I’m grateful that you took me up on the invitation I have to guys that goes down in the DM I have to in Hurst is Dean was like, man, come hang out with. Straight up. No, I’m always, I’m always looking forward to doing a podcast intro.
I know we’ve had a lot of interaction on the LinkedIn platform, seeing each other’s content, hype, beat each other up, but that’s the real deal. It said time, baby. I better get ready. So I’m ready for you, man. Let’s just dive in and see if I can give you some money. Okay. All right. So first question goes back to my first deal and actually my second and third one, too.
How do you deal with the frustration of extending closing timelines to the point where you are like, is this deal actually going to happen? What makes you persevere through those and gold dates of, Hey, here’s the closing date? Wait, no, we’re going to go three more weeks due to some, probably due diligence financing.
So that’s my first one. Yeah. So I think the first one is, would you rather for your plane to be delayed or would you rather for, to not. Because that is, and I love the airplane metaphors with multifamily, but that’s the situation you’re in anytime they delayed the flight because of weather or because there’s potential for a, uh, a mechanical issue.
Um, I’m all good again in there a little bit later and the same thing with your deal, because once you’re in the deal, there is no way out. And so everything that you can fix prior to the deal, you can make the. Um, previous owner and I make is a relative word, but you can make the previous owner pay for those things.
And there’s, if not, then they can keep their property, which most people don’t, they’re looking forward to the payday. And so the extension in time is leveraged. Now, if there’s stuff that you should have saw in the beginning and you didn’t figure that out until the last one. Then that’s just a function of not being diligent upfront.
A lot of folks get into due diligence and it’s like, oh yeah, we got 45 plus 45. So we’re just going to wait until week. Well, I don’t know what that is. Six of the, of the 45. And then they’re rushing to get everything due because they’re procrastinating or whatever, but that isn’t actually the game. And I think most people who are.
You know, been in a game, they’ve got their process, they’ve worked through it. They know, Hey, I need to check this, this and this. And I guess the only other thing I can say here at Hirsch is, you know, you’ve been through a few deals. So check those things upfront, right. Make them part of the checklist. And that’s what we do.
Like we ask for all the information and we also go a step further. We tell the broker, Hey, our due diligence period, doesn’t start until we get all the dates. And you gotta be careful with the way you contract, because it can be from data contract or it can be from date of data requests being fulfilled.
And there are some owners who will say, oh yeah, well over contract, we’ll get. And then they get to it a couple of days before you go to finance or a couple of days before closing, like, wait, no, this isn’t okay. We got these issues that we need to work through. And so getting everybody aligned that I need stuff as early as possible so that I can do the diligence necessary, I think is important.
But I mean, if you’re willing to, let’s talk about some of those specific issues that you dealt with in due diligence and see if there was any way around them. Yeah, no, absolutely. So going off your. Insight, you know, you always talk about the four things, right? Knowledge, capital deal, float experience.
Those are the four things that primarily make up someone who trying to get into the multifamily space. So on the first deal that we did, we brought the deal. So one of the primary objectives was to do this one as a joint venture, right. We didn’t want to syndicated, it was small enough deal, a million bucks that we could bring in maybe one or two capital partners and really try.
Provide sufficient returns for an active investment standpoint for them to learn the business as well for those Breslin business. So I would say my first question is, do you try to get the money after you have the deal? And if so, what are the steps that you take to educate your investors? Because, you know, I approached, you know, quite a few people and, you know, obviously we finally got it done, but some people, you know, being 23 years old, not being in the location I was in at the time.
They’re like, you know, why should I trust you versus, you know, going to one of those gurus and investing with them and getting my passive income and not being active. So, you know, just how do you frame that? Yeah. So do I, I don’t ever try to get the money, the money, isn’t the thing I’m ever after. Right?
You’re looking for a partner who has aligned values with you and they get the opportunity to participate in this amazing deal that you found. Now, if they’re not interested in that, But I don’t want your money. I want your intellectual horsepower. The way that I get your intellectual horsepower. Is by you participating in a deal financially.
And so as soon as you move it away from the money, cause there’s a whole lot of energy around the money and you get to, you want to be in a partnership with this person and build a business and create whatever the result is, right? The result isn’t the money. The result is returns. The result is depreciation.
A result is passive income. Like all of that is what the conversation should be about the, is the mean to the, and it’s just the tool is to leverage that you’re using. Exactly. Yeah. And like, you know, bring up all those points that you said, right. You know, talking about depreciation, passive income, you know, these are tools that you leverage as both an active and passive investor to identify what the strengths and weaknesses of real estate investing are.
And. The problem that I initially had with speaking to the investor is I was communicating that, but it says, okay, what’s next? You know what happens in a joint venture scenario? If, for example, one of the investors we brought in, two of them brought in 90% of the total capital allocation would their intellectual horsepower, as you say.
So, you know, how do you frame from getting through closing. To having that operate operating agreement and, you know, making those game time decisions, you know, what kind of role do your larger investors play with you being mainly the boots on the ground type, getting the business plan. Items taken care of versus, you know, your larger capital partners who might want to just make decisions on large cap ex you know, how do you frame that?
Yeah, I think one of the most important things you can do. And so the important distinction for me is like, everybody that’s on my deals are partners, right? They’re not investors, I guess they are investors, but we’re doing a joint venture partnership. And so the expectation is that they’d be active now, the way that I think you can delineate.
A partnership decision from the boots on the ground operator decision is by putting in place the asset manager contract and having a property manager report to the asset manager. And then that asset manager is contracted to the partnership, even though you’re going to be a member of the partnership.
And so then as the operator, you can sit in that chair and be the asset manager, do a lot of the. Kind of day to day operations piece, interacting with the property manager and then report that back to the other partners and have a conversation. And then kind of go back and be the conduit for that information.
Instead of the property manager serving in that role, somebody’s got to manage your property manager. They want one person to manage them. And the minute that you try to do that with 3, 5, 7 people, you end up with a mess. And so then we need one person to do it. And often I think the asset manager should also be the manager of the LLC that you created to hold the role.
Right. Okay. Absolutely. And like, luckily that’s the stance we ended up taking for the, for the joint venture. So we have that in action. So it’s good to hear that we’re following something. Right. Um, so, you know, you’re involved in, you know, solely joint ventures from what I understand from seeing your content from listening to your content.
So what happens? I haven’t come into scenario yet, but what happens when one partner is like, Hey, I don’t want anything to do with the dealer. What steps do you take besides whatever you have written in your operating agreement to ensure that either one doesn’t happen or two that investor’s taken care of at the end of the day to ensure the equity buyout is done or things like that?
Yeah. I mean, if they want out and are you really trying to take care of them or has it become a adversarial relationship where you’re on opposite ends of the negotiating table and you know, only you can answer that with how you got into this. To that place. I think communication is the most important thing.
And so people should tell you where they are, right. And how they feel and why they feel most people don’t just magically want to get a divorce. And of course, I always allude that to getting into one of these partnerships is like getting married. Um, usually they’re complaining along the way, right?
Telling you that they’re not happy with your cooking and how much weight you gained and whatever else, and they want you to do something. Yeah. Right. And if you don’t listen, if you just ignore them, then of course, they’re going to say, Hey, I want out because I don’t have a voice in this matter. Now with I said, if they’re wrong, it doesn’t really matter.
I don’t know. But that’s just the cynical piece of me that the operating agreement is for you to make all the decisions that need to be made in bad times while everybody’s. And that allows you to make this really clean. And so in the operating agreement, there should be something that says, you know, somebody dies or somebody wants to leave a partnership, what happens.
And so more often than somebody wants out, you get an appraisal. You want to try to make that person pay for the appraisal, right? Cause they’re causing the need for the appraisal. You see what the property is? And then we put a discount in there for somebody leaving before the deal is done. Cause they should be penalize.
Cause they’re exiting early and creating a frustration for us within the partnership we get first right of refusal because more than likely we don’t want any additional partners, our new partners. And if we can do that, then people within a deal buy it. If nobody wants to buy other shares or they’re not liquid or can’t buy other stuff.
Then it’s up to the person who wants to leave to find people to come in and buy those discounted shares. Right. And if they do that, then we also expect the opportunity for the partnerships who approve the person that they’re bringing. Right. The last thing that you want is somebody to come into the deal and create havoc and depending on how much ownership that that person has.
You know, they could potentially be able to control the deal with one other person voting. And so you want to be, this is why the joint ventures it’s the operating agreement is extremely important. And you know, if you don’t have a great attorney putting that thing together for you, you can put yourself in a really bad spot everybody’s buddies until somebody doesn’t make.
Yeah. Yeah, no, that’s, that’s definitely a good way of looking at it. Right. Everybody’s buddies until you, you know, somebody doesn’t make money, you know, again, I mean, it’s human psyche, right? I mean, everything is going well, everyone’s having a grand time. And then all of a sudden, the plane crashes into the runway and you know, they’re like, all right, what’s next?
What do we do? Ship’s going down. However, whatever analogy you want to use. So I appreciate the insight there. Well, let me, let me go a little bit deeper there. Cause you talked about this shit, right? And so when you’re getting into the thing, do you want to make sure, and the thing is a partnership. You want to make sure that your partners are going to get the bucket, right.
And pour the water out of the boat instead of looking at you and saying, why aren’t you bucketing it fast? Right. If you’re end up, if you end up in that spot, you did something wrong on the front half of it. And you probably did a deal with somebody that you didn’t really want to do a deal with, but they have money.
So you partner with them and that is always ends up being a disaster. That’s like it right there. Right. I mean, I love all my partners right now. Right. And you know, we are going through some, there had already been some, you know, insurance claim issues. Somebody crashed into one of our buildings, things like that.
But you know, we’re learning and we’re adapting and we’re overcoming. Right. But when that scenario does come up, you know, now I have this insight to be able to apply it if need be on a future scenario. So that’s good. Um, moving on to my next question, this one actually stems from what you just said.
Partners at the beginning. Right? So whenever you get into a deal, I’m sure by now you have, you know, your trusted partners who you’re like, yeah, we’re done. Like, I can call this guy in one day, you know, I can call Jim or whatever and say, Hey, I want to do a deal with you. Uh, but you know, or you, you know, but you don’t want to do a deal with John DOE.
Right? So, you know, you have the people that you want to, you want to collude with and people you don’t want to essentially. What happens if someone comes up to you, you know, let’s say LinkedIn guys like drum, I know I like your content. I know what you do, but you don’t know them. You know what makes you either say yes or no to a partner initially, if they reach out to you or you reach out to them, you know, what makes you reach out versus them reach out to you?
Yeah. I mean, the answer is always no, until there’s a reason for the answer to be. Yes. Right. I mean, it’s just like, again, getting married, right? Like. I didn’t just meet somebody and decide I’m going to marry you. Like we’ve, we’ve developed and cultivated a relationship. I’ve watched them move around. I’ve seen them figure out how to get out of challenges.
I’ve watched them in stressful situations and I’ve seen them demonstrate their knowledge. Right. I have no desire to partner with somebody who has no experience. And hasn’t done anything from education standpoint, outside of listening, I guess I got to show them. Why do I like your intellectual horsepower on this subject matter is about this big, and I know what it’s like to run buildings.
I don’t want to argue with you about the thing that you heard on the podcast when you haven’t spent any time actually operating in this space. And yeah, I mean, your 80 grand is great, but it’s a commodity too. And for some people be like, man, that’s harsh. But that’s truly how I feel. The people who make the money for the deal are the experience part, right?
The operator is the person who makes the money. The money is just, they’re in a holding account. And it’s just the air for the project. As long as you got air, nobody cares when you run out of air. Yeah, of course it becomes an issue. And if I’ve ever run into cash issue, I write the check. Right? And so for me, it’s not like I don’t actually need you.
And so it just puts you in a different space now. And I guess the other piece of it is where, where do I actually, cause that wasn’t the question you asked. I just want to get on the soap box tout a little bit. So the question that you asked us is what makes you want to partner with somebody? They’ve got to have a deal that I want to do that I didn’t have access to any other way.
Right. And this is what I tell everybody who comes through our program. Right? If you go through our education program, 11 week deal, this is what makes you value your valuable, your ability to find a deal and presented to somebody that they couldn’t find anywhere else. Don’t bring me a deal off LoopNet. I saw that one, two months ago, don’t bring me something as BMS marketed from Cushman and Wakefield.
Yeah, I can’t buy that deal. I can’t compete because somebody from some other market where cap rates are 3%, it’s going to buy it at a cap rate where they parked their money, but they can’t actually make any money on the deal. I’m looking for deals where we can make money. I’m looking for deals where I can crash it and it doesn’t sink.
Right. And I think everybody that I know who’s been in this business for 20 years is doing the exact same thing. And what I see with the people who’ve been in it for three months is they’re buying whatever they can and ignoring the fact that something’s going to go wrong. Their budget is probably a little bit higher than what they expected it to be the actual compared to the budget.
And that their income is probably going to be a little bit lower than I expected. And there is nothing that they can do about it once they’re in the deal. I watched so many people just buy these things and pretend like everything’s okay. And I know it’s not because I can see, like, I actually, like, I just finished the dashboards for the first quarter for our stuff.
And I’m like, man, I didn’t like that. I didn’t like that. Oh, that went well. And I know what it costs us to run a store, run stuff on a per door basis. Right. And so when I see people and they’re like, oh yeah, we were buying this thing and it’s $500 rents. You’re not going to make any money, brother. You just can’t, there’s not enough in there.
You got to pay the mortgage and you got to fake the property to operate. So, you know, a long way of saying, find a deal, bring the deal. That’s what makes me want to partner with you? Anything other than that? Yeah. I have a hard time getting there because what’s the value you’re going to. Yeah, exactly. And it comes down to those four main points, like we talked about earlier, like you said, but yeah, I mean, not.
I agree with what you’re saying and again, right. I’m not, I’m definitely not as experienced as you, and I’m still learning, doing the asset management piece alongside more experienced operators that I’m working with, which is great. But to those new people, I, I mean, basically what you’re saying is, Hey, don’t actively partner, just go invest in a REIT in occasion, go do something where, you know, you have partners that you can.
Or operators that you trust to handle your deal, because they’re the ones that are going to make you the money, which is okay. I mean, you know, some people want to do that. Some people don’t, and that’s why there are such things as passive investments for executive investments. So another question following up to that is, you know, once you identified the partnerships, right, what cautions you.
From partnering with someone per se, like your property manager, because I’ve had people come to me and, you know, there was an idea. I had this idea very early on, you know, we’re talking like fall of 19 when I first started, you know, kind of getting into the space and learning about, you know, what deal flow is.
And deal-making what makes you shy away from wanting to partner with a property manager. If it, if it’s not. Yeah, we don’t manage. And I don’t have a property management firm. I’m scared of fair housing, right? It sounds really silly, but somebody can say the wrong thing and you can be in court for a really long time spending a lot of money for something that somebody who was making a little bit over minimum wage that, and that just isn’t a risk that I want to be exposed to.
But you know, my first deal we partnered with the property manager and what I would say is. It’s back to the depth of knowledge. You have to make sure that, you know, all the vendors are being fairly compensated. And I can say that we pay our partner. Who’s a property manager on that project more than I’ve ever paid any other property managers.
And it infuriates me. In fact, we’re about to take that deal to market. And I told the broker, who’s also a partner in that deal. That the biggest thing that we can offer the deal story is saying that we overpay the property, man, and everybody on the call laugh because all the partners is on. I mean, and I’ve been unapologetic from the beginning when we were negotiating our property managers.
Yeah. Right. And has he kept it full? Has he done a pretty good job running the building? Absolutely. But the premium that we paid I think is outrageous, you know, we’re paying half a month security or half a month’s fee for new move-ins we’re paying. Um, and he, he, he, I won’t call it a swindled. He horse traded us.
Right. So give me half a month’s rent. And honestly that probably is. Half of what he charges. He probably charged as a full month’s rent and somewhere in the eight to 10% range for a property besides that we’re talking about. And so we did six and a half and half a month’s rent and he told us, Hey man, you guys are getting an amazing deal.
But when I look at the property management costs and it’s like 14 to 17% on a monthly basis, This is not an amazing deal by any stretch, from my perspective. And so, you know, at the end of the day, I think what you’re really looking for is people who you want to be in the deal with. I don’t think you want to partner with your vendors because if you decide that they aren’t performing, it’s going to be a really awkward conversation to say, you want to fight it.
Yeah, no, I, I agree. And that’s, that’s the thing with vendors, but no, I, I completely understand that input. And it was just a question that you hear all the time. Right. You know, why hire a property manager when you can part with them, get a lower. And, you know, but like you said, it’s a marriage you’re going to be in that deal with them.
And they’re going to have an ownership stake. And if you don’t like the way they’re running it, you can’t just break the month-to-month contract by the way, get them onto one contract. If you were the property manager, I’m going to put that on here right now and you can’t break it. You got to go find someone else.
It’s all illegal issue at that point. Then you have to take someone out of the deal. Like we talked about before, and that’s a whole other ball. So that was the one thing that we did did. We said, Hey, if we decide that you aren’t the right property manager for the project, are you still going to keep your money?
And if we fire you and he said, he’d be fine. And I mean, he’s pretty well off. So I think he would have been fine, but the fact that the macro matter is once you fire somebody, you kind of don’t want them in your world. Cause you’re probably upset. That’s why you’re terminating because the switching costs are just so heavy.
Right. And so, you know, you, you want to figure out a way to get away from it. And so, yeah, man, I don’t think you actually want to partner with your vendors. Yeah. Okay. Good to know. But you did talk about that first deal you did with your broker. So is that, do you think a broker is different from a vendor or do you think a broker is still in that vendor?
I think the brokers in the vendor role and, you know, a lot of times brokers just want to throw their commission and maybe they had a couple of good months. They don’t actually need the cashflow so they can just put it in a deal, get some backend. And I do think they’re brokers of vendor. Now, the guy that we partner with, I mean, he sells the whole world, so we don’t really have to worry about him performing, but you know, it is.
You pay a price again, you pay a premium for those types of folks. And so, you know, it’s kind of in, in, but could we terminate our list in agreement with this guy? Absolutely. And I don’t think that would be as big of a frustration for us as you know, the property management, because I think the property manager is your quarterback.
Now, could he give us a broker value of opinion? That’s way our broker’s opinion of value that’s way below what we think the market is. He could, but, you know, I think he’s going to be greedy because he stands to profit more on the backside if he gets the right number. So I think our interests are aligned there.
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Three, four steps to getting into monster. Let’s get back to them.
What piece of advice do you have for me moving forward, uh, on like, uh, on a joint venture deal. Right. You know, I have a couple of deals under my belt, right? I’m still primarily the one who’s finding the deals just because that’s what I’ve become somewhat good at. Uh, you know, being able to identify something off market and not off loop that, not off Cushman Wakefield site.
What’s the one piece of advice you have for me to do my next deal. Just direct to sellers. Period everybody is. And you know, you’re moving into bigger and bigger deals. We got a mutual contact. It was like, yeah, man, it hurts just looking at, I think it was like a 200 unit deal and he’s trying to put the scene again.
I was like, oh my goodness. He went and got Moby Dick, but, um, yeah. I think just getting direct to seller is the game for whatever you’re working on that. And I guess the last piece I would say is your reputation is everything. And so while you’re searching and hunting for the next, still make sure your operations are tight on the deals that you’ve already done, because whoever’s coming into the new deal.
Uh, assuming that you’re not selling something you already own. It’s probably new, just because of where you are in the progression. And they’re going to want to talk to your other partners and you want your other partners to be able to say something good about the situation and a lot of things. Good about the situation.
And if you’re an operating isn’t tight, they’re not going to have anything to say. Yeah, no, I a hundred percent agree with that. And I think direct to seller is the name of the game right now. And, you know, as it, so a question stemming off that to be completely honest with you is all of these people are looking for direct to seller.
And I have people ask me all the time. How do you make a list? Where do you find the people to make the list for you? So as the space becomes more competitive, what do you think is one way to stand out? I mean, I think we, we have our niche that we like to look for in different markets, but what would you offer a general piece of advice to, for listeners in terms of how, how do you, how do you be different within the space of direct to seller communication?
Yeah, I think you’ve got to figure out who your avatar is and then craft them as a specific for that. Some folks are looking for 1990s build or newer and so on and so on. And so on. I don’t, my avatar is somebody who’s 55 or older. They self-manage, they have some deferred maintenance at their building.
They. Probably didn’t make a whole lot of money during COVID cause their cashflow got chunked down more than likely they don’t have a mortgage. And they’ve got the majority, the vast majority of the net worth tied up in a real estate portfolio and it’s not providing income for them anymore, so they need to liquidate.
And the problem that I solve is you have your equity trapped in a property. Aren’t you ready to retire? I can help you retire by buy your real estate firm. And for whoever’s out there does, in that situation, they’re ready to do a deal. I is how I’m different. No, and I, I, a hundred percent agree with that.
I think what you said, the biggest thing is being able to solve someone else’s. Right. It’s not about, Hey, like, you know, I’ve had plenty of people say, Hey, I called the guy and asked him if he wants to sell, nobody’s going to sell this some random person who calls to buy a $60 million deal. It’s just not going to happen.
All right. So you have to be able to foster that relationship. And what I tell people is, you know, when you pick up the phone, ask about the person’s business, ask about what assets they own, how they fared in the COVID market, what they’re doing right now, what their biggest challenge is. People love to talk about themselves.
And then from there, if you were able to solve something and offer a piece of advice, And that’s how you learn. I mean, I just read Stephen Schwarzman book, what it takes. I don’t know if you’ve read that one yet highly recommended, but he basically talks about exactly what I just said and what you just said.
So, you know, solving other people’s problems is the way it’s best way to handle these sellers and be able to communicate with them. So, no, I do appreciate that. And then moving forward from that question, as you find deals, That come to you, that aren’t necessarily from a partner perspective partner, but you know, let’s say, you know, Logan’s brokering a deal in Kansas city, or I’m just calling Logan out here, but let’s say, Logan comes, he’s like, Hey Durham, I got this awesome deal.
Let’s do a joint venture on it, but you not, not to put Logan under the bus here, but he’s, he might’ve sent this out to 50 other people. Right. So how do you compete on the open market on these deals?
I can’t, I don’t have enough money. That’s patient enough. That’s willing to take the risk versus the potential return that’s available for that deal. I don’t. And some people may say, what do you mean? You sit on the sidelines. You lose. It’s going to go up in my, or it could go down. Yeah. Find the wifi network.
You might want to check the modem or router. Alexa. Yeah. Or it might go down. And so you got to go through that stuff and, um, it’s better to not swing at the pitch cause there’s no call strike outs and multifamily investing. Right. And if I can’t get the deal at the number, I need to get the deal at, in order to make the returns I need to make, then it’s a pass.
I’m not going to force it. Cause I don’t want to be in that space. And this is a part where, um, in 2020 I realized my business was at risk. I realize that if you’re deal dependent, then you’ll buy something to get your acquisition fee. And that is probably the worst thing you can do because three, four or five years later, the folks who trusted you are going to be disappointed because they didn’t actually make the return on the investment that they were hoping to make.
Right. Right. And that’s the biggest thing, right? Taking care of other people’s money as if it’s your own, you got to, I treat, I try to treat those better than mine. Yeah. What do even better? I mean, that’s an even better way of looking at it, but at least, at least having the same respect as it is, at least at the very least.
Yeah. So moving forward from, you know, talking about, you know, deal flow, how it arrived and where you get to, where do you think the market is going to be? Not, not a year from now, not six months, but. It’s the summer. All right. The residential housing market’s already out of boom and summers even more. So usually, you know, in the summer months, people are looking to sell off more because more people are apt to moving.
It’s not cold for majority of the United States. So where do you see multi-family just going in the next year. In terms of interest rates, you know, Janet Yellen saying, no, we’re not raising interest rates, things like that. So, yeah, I think interest rates will stay low. I think folks are trying to keep the economy going.
I do think that you’re going to see some people trading because I think the eviction moratorium is going to be lifted. I think all the folks who took forbearance that stuff’s going to come down. And they will have some trash departments that people lived in for free for a year. And they’re going to have to make a move with the property, but it’s probably not going to be bankable.
And so I think there’s going to be people moving into the bridge debt world and being aggressive, trying to buy things that maybe don’t actually flow the way that they think they’re going to flow. But for the person who’s in a pinch, they need to earn some income. And they’re willing to sell at a bit of a discount.
I think those are the deals that actually make sense to buy buying the mass marketed deal that boasts great COVID collections and so on is probably just a ticking time bomb because, you know, I think the moratorium is going to lift at the end of June. But what if they say, you know what? We just want to give people peace of mind.
It’s all December. How many owners can actually stand to go that long? I don’t think there’s a lot. No, I agree. I agree with that. So moving from there, right? So multifamily is one thing, but real estate as a whole is another. And a lot of people are talking about right now, the tax implications. That might be common.
Yeah. I don’t, I don’t necessarily think they’re going to happen, but what, what’s your take? I mean, I’m sure listeners are begging to hear what your, what your opinion is. Yeah. I, I don’t think what most presidents, uh, propose actually happen. I mean, they’ve got to get through piece through two houses of legislature and so on.
I don’t think the things that have been around for so long are actually going to happen now with that said I’ve actually had a pretty, yeah. Interesting discussion on LinkedIn about some of this stuff though. Like when you tax the things that they’re talking about taxing at a higher rate, people say, oh, well, that’s not going to stimulate the economy.
That’s not going to this, that or the third, but who’s in a better position to actually help pay for the stuff that we’ve been doing over the past few years, the person who has a ton of investment income and probably is a high wage. Or my resident who can’t figure out how they’re going to pay their $700 rent this month because their job where they make 12, 50 an hour is closed.
And I mean, I think those are the people who’ve been asked to pay for stuff in the past. And I just don’t think it’s realistic. And, you know, it’s not popular, it’s certainly not best for my tax situation, but, and again, I’m a real estate professional. And so I’m able to offset a bunch of income, right. And you know, I’m not a tax advisor, but I think if you do these things right, there will always be an opportunity for you to figure out a way to, um, be tax effective.
Best way I can get away. That’s a good way. I like what you did that being texted. Yeah, no, I mean, okay. I appreciate the insight there. And you know, a lot of people have mixed opinions on what will happen. What will happen. Inventory will go low sellers. Won’t sell. I think people are always going to be buying and trading, man.
I don’t, regardless of whatever happens, I think, you know, people are going to be moving around inventory, but I do think that. As you know, these buyers and sellers start to they’re there. It’s going to cause more exorbitant pricing that’s going to happen right now. That’s just my opinion. Um, what, yeah, go for it.
No, I was just thinking like the 10 people not trading, right? The, the whole concept of 10 31 just irks me and I, I get it. I know why you would do it, but the thought that your equity is trapped and you just kicking the can down the road. It just seems really painful to me. I feel like there’s gotta be a better way and that’s why I like opportunities on, but I don’t think opportunity zones actually worked the way that they were intended to work, because I don’t think people actually pull it out of the capital gains and put them in places.
Now we’re doing a project or a couple of projects and opportunities on over the next 18 months or so, but that is kind of rare. I don’t know too many people who are actually doing opportunities. No, it’s, it’s pretty rare to find that. I think a lot of people are scared of opportunity zones because they don’t know what the implications might be in that, in that area.
So it definitely takes a very cautious, cautious investor and experience as well. Um, you know, moving forward from the opportunity zone ask type, cause I just don’t have much experience in it. Do you think the real estate market specifically. Institutional level buyer is going to continue to dominate the space as it has in the past five to 10 years, or even before then in terms of multifamily, right?
Everyone’s always talking about, Hey, I want to buy the a hundred unit C class asset in a neighborhood type project with the value added strategy. And you know, you, but you have these real estate, private equity shops and institutional level money. That’s using funds of tens of billions of dollars. Who are able to buy these things and, you know, just park their money.
So do you see that the space has continued to get compressed in terms of unit size and count for what people are looking to scale with in the multi-family space? Yeah. I just don’t think there’s enough cash flow in the smaller deals for them to play. Once you drop down below a hundred, you don’t have the on-site management and you’re dealing with a smaller property management companies, et cetera, et cetera.
They don’t want to deal with that. Right? They’re looking for efficiency. They’re looking for ease. They’re looking for somebody to just kind of take care of it. And so I think whoever is trying to grow and compete in this space needs to be looking for stuff where they’re not direct competitors with them, because I’ll be honest, there’s two different risk profiles and the returns look very different in no way, shape or form.
Am I ever going to do a deal where my proforma says I’m going to make 4% or 500. They can do that all day, right? If the returns aren’t double digit, I have zero interest in it. And so the thought, the idea, the concept that I’m going to compete with them is insane. Now I just saw somebody who I a couple of years ago was doing deals that were in the $10 million range.
Say they’re doing a $90 million deal. And I don’t, I can’t count that high. I’m excited for them. And I would love to see what their acquisition fee is gonna be on a deal like that. But, you know, I’m not playing that game and, you know, folks that I deal with, again, aren’t going to be looking at returns that low.
Um, they’re just that doesn’t incite them. Yeah, no, I, I completely agree. And I think. There’s going to be a lot of competition that continues to come, you know, in any, in any space in commercial real estate, whether it be multifamily mobile home park office, I think, you know, you’re always going to have those level of institutional and real estate, private equity guys who are willing to accept that four or 5% return because they have a huge fund where they can hedge it against, you know, whatever people are buying are cryptocurrency and, you know, notes, promissory notes, whatever they’re buying.
Right. And they’re able to make. A large amount of money for these, uh, larger investor types. What kind of return do you look for, for your investors on your deals? Yeah, I mean, we look to two partners. We usually looked at two or three X, the invested money in five years and how the cashflow let’s on the front end.
Isn’t really that important because it is a equity play for us. Right. We’re trying to grow right. Uh, we’re not investing for cashflow, even though we know that that becomes important for the deal when we’re ready to exit, but, you know, we’re willing to come in for something that doesn’t look great, but we see a big spread in between what it’s renting for and what market rent is.
And when we find those deals, we get excited about them. Cool. Awesome. Awesome. Do you think. So that’s an interesting strategy. You know, I’ve heard you talk about that before. And I think, you know, some of the listeners may disagree cause everyone’s always like cashflow, cashflow, cashflow, not equity and equity, not equity.
What would you say when you underwrite for an equity play is your cap rate go-to you, but obviously dependent on the market, but you know, how do you underwrite? Do you, do you underwrite for compression? Obviously not. So, you know, what’s your general rule of thumb for the expansion on that cap rate. Yeah.
So we know that we’ve decided that the entry cap rate doesn’t matter, the entry cap rate doesn’t matter. We’re buying something that doesn’t perform well. And so, because it doesn’t perform well, the cap rates going to be low, it’s absolutely going to be low. Right. And so to say, Hey, well, you know, the entry cap rate is.
4%. So we’re going to grow by 150 BEPS. I mean, it sounds great in theory, but that’s not realistic. What is the cap rate for this asset class in this market? 6%. Okay. Do we think it’s still going to be 6% in three years when we exited or do we want some cushion? Ah, well, let’s just pat it a little bit and see what happens.
Okay. Let’s go to seven. Does this deal still makes sense? Yeah, it does. What if our, we don’t hit our NOI? What if we’re off 10%? What does that look like with that cap rate? Okay. Worst case scenario, we only make two times our money. That’s why I say two to three times our money in the worst case scenario, we only made two times a month.
So if I’m half wrong, we’re going to increase our money. One time. Well, right. So if I’m half wrong on what the worst case scenario is that we put together, then I’m going to increase our money by one time. So I doubled our money over the course of five years. Are we good? Or do we actually have to have the three to four X that we really desire and think that we can achieve?
I like the concept of being, I would say if I’m half wrong, I’m still going to double your money. That makes me feel. No, no, that made me feel good too. Obviously you’re doubling my money in five years here. You got to take it as long as I got some capital up and around, but I’ve got it. All right. So what are you seeing right now in terms of deal flow for you personally?
Like, are you seeing deals at your desk every day? Or are you seeing like you’re maybe putting in one to two hours a week? I mean kind of tell me about what you’re looking. Yeah, so really focused on a development deal and. Property that we’re going to buy from the city of Greensboro right now. And that development deal is taking up a ton of time.
It’s pretty big project. It’s 120 units and other projects last smaller is 24 units, 120 units, and make sure once it was in threes, the 24 is all too, but everyone’s real deal. Workforce housing. And so. The stuff that comes in. I look at it, I put it through our little five minute analyzer thing. And if it makes sense, we look at it if not shoulder shrug and move on and, you know, brokers or reach out and they send stuff from time to time.
But if I didn’t see it before it got mass marketed, then I don’t want to actually talk about it. And they people say, well, how can you be that way? We’ve got enough stuff going on, where we’re running our own portfolio and we’ve repositioned stuff to the place where if we want to exit, we can right. And get back to what we’re talking about.
Double, triple and quadruple money. And so we don’t have to buy the guys that I talked to today. The wealthiest guys that I know they’re building and they’re selling, they’re not aggressively buying. And if they’re buying is something that was off market from somebody who got in trouble, who needed to exit, I’m not smarter than those guys.
Right. So why am I going to go do something different than what they’re doing? That’s in the same, like they let me into the room and they said, Hey, Jerome, here’s the strategy for right now? And I had a deal that was a 66 units. I thought it was going to buy. It was like, um, yeah, I don’t do that. You’re going to get in trouble.
What are you talking about? This is amazing. No, you didn’t think about this, this and this. Um, but plus everybody’s walking around in a mess. Do you really think that this is what you want to do when people are walking around a mess? Okay. All right. So we’re not going to buy it. No, we’re not going to buy that.
That doesn’t make sense. And, you know, I felt so simple, but then they’re like, You’re getting ready to put this online. It’s going to make whatever it makes on a monthly basis. Oh, by the way, it’s not where you cores. You’re going to, it’s fully amortized over the course of 40 years. Like, you’ll have this deal until you are no longer practicing this trade.
And I was like, wait. So I’m running around trying to find these things to get the acquisition fee where people really haven’t felt the pain there aren’t really in distress or struggling. And I can come back to that when they’re trying to realizing that they’ve got to put $10,000 or $5,000 per door into their property, because the person who was living in there and not paying them any rent destroyed it.
Right. And since we’re not scared of construction projects where the perfect opportunity for them to exit that deal. Now, with that said there was a property that I really wanted to buy this 56 units here and. They collected half the rent that was on the potential last year. And it traded at a number is if they collected all the rents and I’m not competing with any of those folks.
Right. I, I can’t compete with those guys and gals and that’s okay. But in two or three years that deal’s going to come back up and maybe I can compete. Yeah. Yeah. And that’s where the opportunity lies. It’s a patience game. It’s a patience game. My friends. Absolutely. So you touched on a development. All right.
So I mean, I know that’s a, that’s a space that a lot of people are curious about. They’re like, Ooh, how do you develop something? What do you look for? So kind of walk me through, is, are these your first development deals at one 20 and the 24 or, and so how’d, you kind of get started in that space. I’m very curious.
Yeah. So the one 20 is kind of the strangest story, and this is. It’s really interesting. So I was the chair of civil engineering board of my Alma mater, and I was fortunate enough to get selected, to be a kind of guest instructor client for their senior project. And I was like, man, so let’s do it. And so the civil students and architecture students did their thing to help me figure out where we should do some development.
And the city council person came to one of their presentation. Cause we even went as far as doing a presentation to the neighborhood, like the civic association. So the city council person came and she was like, we want you to present as a housing coalition. Um, summit. And I was like, oh, that’s cool. And they was like, Hey, we want you to kick it off for us.
And I was like, wait, I didn’t have any plan. I’ll be a part of this. Anyway. So I walked down off stage and like a developer that since his assistant to me, he says, we’ve got a piece of land that we think you’d be interested in. Long story short. We ended up putting into land on a contract. I go through, I rezone it.
And then I’m like, wow. This is huge, right? And I don’t actually know what I’m doing. I need help, but I had the deal, right? This goes back to deals. What make you valuable? And so I ended up in this meeting for HUD and, um, housing, urban development, and a guy from the white house came and he’s talking about opportunity zones kind of beating his chest about how great they are.
And I said, I got a question, actually, I’ve got a problem. So everybody I talked to about this opportunity is on projects as strong. There’s been no development there in the last 25 or 30 years. How do I know my money’s safe? And it got so quiet, a pin could drop. And he said, well, there’s a ton of smart people in this room.
We’ve got developers of all different shapes and sizes. How are you guys? And he was talking to them too. How you guys dealing with this dilemma? And nobody said it. And he said, well, we’ll take that as an action item. We’ll, we’ll get some feedback back to after the meeting guy and walks off, he’s like, Hey, um, let’s go to lunch and talk about this.
And from there we built started building a relationship and eventually we became joint venture partners on the deal. And so that’s how we’ve done it. And so we’ve put all this money in the drawings. We are dealing with his own apartment. We just went through another review and they put red ink all over our paper.
And I was like, we’re trying to get out of our senior project class. But, um, yeah man, it’s, it’s it’s, there is no class for it. Right. You’ve got to get into it. But back to the point, you got to have some cash and you’ve gotta be able to, um, take a little bit of risk because. Most of those deals don’t ever actually get built.
Most of those deals aren’t actually financially viable. And in order to prove to other people that they are, you got to spend some real money. And if you aren’t in a position where you can wait three or four years for you to get your money back, that you put into it, then development’s not the game for you.
Yeah, no, I absolutely agree. A hundred percent, but I think the biggest takeaway that I’m, I’m thinking is. It’s just like that role in multifamily, right? You start with something and you offer them a P you offer them something that they don’t have. Right. They have the, they have the experience, they have the capital, they have the knowledge, but you got to give them the deal flow.
And that’s right. It’s really simple. It’s really simple. I, you know, people always hype it up, you know, development’s heart. I get it. Right. But there’s people out there have done it. Right. People have been developing things since. Pre, you know, medieval times, right. Have people are building things out of sticks and leaves and all these good things.
So, I mean, yeah, no, I appreciate the insight there and it’s just, it’s just good to hear that it’s, it’s similar to multi-family again, there’s different hurdles, right? With zoning and all these different things you have to look at, but it’s all part of the beef part of the game. So do you think that’s what the direction you’re going to be starting moving it, like only development side.
Are you still going to be doing your, you know, pure bread and butter? Multi-family. I don’t think we can build enough. So the goal is a thousand doors by 20, 28. And so I don’t think we’ll be able to put enough up, so we’ll have to acquire, but we want to acquire when the situation is favorable. Exactly.
Three, four years down the road. When you can go pick up that 56 unit again, for whatever sucker that bought that. I mean, Hey, hopefully they do well, but you never know. You never know. Especially with the current market cycles markets. Cool. Cool. Um, so I think my last question, this is the, this is the home run.
This is the one that’s coming around to, uh, to finish this off when you are talking with a prospective partner. Okay. And you know that they’re not educated. How do you call them out? Because I know a lot of people always want to be professional and courteous. And really get to make sure that they’re not offending anyone.
So, you know, I we’ve, we’ve talked before I follow your content. Right. You, you put it out there, your blood you’re honest, you just, you let people know the real deal. So how do you develop? I think it’s a two part question. One. How do you do it? And two, how do you develop that confidence to get there? Well, I think when you’re dealing in love and that’s my one rule, right?
It’s treat everybody with love when you’re dealing in love, then. You’re not doing anything to be, you mean spirit or a harm them. In fact, you’re trying to protect them. And so what I say is, Hey, it seems like you’re pretty inexperienced. And I don’t know if you realize this or not, but there’s a lot of people will take advantage of I’m one of the people who will not because right, is right, regardless of the situation, I encourage you to do X, Y, or Z, so that you’re in a better position.
So that you can take care of yourself because everybody has access to all the same information, the person who has money, but doesn’t have experience in the ring with somebody who has experienced and no money will walk out with experience and no money. Right. They’re always going to lose that battle experience is king in the space.
And so, yeah, you can lawyer up, you can try to put it all on paper, but if you don’t know what you’re doing, you can’t protect you. And so that’s yeah, it’s going, trying to help them solve the problem that they have. You know, I have people that message me pretty regularly. They say, Hey, I got money. I want to put it the deal.
I was like, I can’t help you. Do you want me to introduce you to somebody? Or you can, because that, isn’t what actually moves. But like you said, you only partner with people who are experienced and that’s okay. There’s nothing wrong with that. Everyone has to have their own niche. Otherwise you’d be, you don’t have a hundred heads and you can’t balance.
Yeah. Well, but the issue is the person who leads with the fact that they have money, use the, have some ego tied to it. Right? If you think about the wealthiest people, you know, they probably come across as people who don’t have a lot of money, there’s a reason. And once you start to, you know, build the relationship, then you get a true understanding of who they are, what they’re about.
Then they start to explain to you their wealth and give you idea. But again, a real estate, you know, flashing dash usually means that they’re big hat, no cattle, right? They don’t have anything bad going on. Yeah, absolutely. Absolutely. Well, Hey, I appreciate that. And I appreciate you, uh, dive in deep into that one.
That’s definitely a, a, a question you hear a lot about, but nobody really wants to talk about, so definitely appreciate you going into it. Yeah, man. It’s and I’ll, I’ll take it a step further. Like we don’t take people who, um, need a house right away, like. Our property manager. If somebody needs them by Friday, they won’t take them.
I guess it’s a two to four week process to move a new person in. Everything’s done, like with, um, extreme diligence and people really just take their time. So hopefully this was valuable Hersh, man. By far have asked the most questions with the most that, but I think that’s just a function of how much you’ve done so far.
Man, certainly respect your intelligence and you’re absolutely on your way to crush this thing, man. I appreciate it, man. And you know, I just, I wanted to set some good questions, you know, with someone who has a depth of knowledge and understanding that a lot of people don’t have to offer right now or somebody.
Transparent about it as you are. So, I mean, I really appreciate you diving in deep, giving me your insight, giving the listeners your insight and, you know, sharing this time with me today. I really appreciate you having me on as well. For sure, man, let me know if I can do anything for you, but to the listeners, this is the longest multifamily kickstart episode so far, but hopefully you got something from it until the last time the pack is with you.
We’ll talk soon, the favor, give us a five-star rating. Give us a review and share this with somebody who’s interested in until the next time the package.