Podcast Summary
Diversification in Real Estate Investing Amidst COVID-19: Warren Buffett's diversification principle protects against ignorance in real estate investing, emphasizing equity and cash flow, managing risk, and choosing the right market.
Warren Buffett's philosophy of diversification as protection against ignorance applies not only to overall investments but also to income-producing assets like real estate. The hosts, Brandon Turner and David Green, discussed this concept in the context of COVID-19's impact on real estate investing with guests Sam Grooms and Ben Labovitch. They emphasized the importance of considering both equity and cash flow, managing risk, and choosing the right market. The episode included a follow-up segment discussing how the guests' strategies have adapted since the initial recording. For new investors, the episode covered high-level topics, and resources like BiggerPockets.com/glossary and the BiggerPockets official Facebook group can help clarify any unfamiliar terms. Additionally, the hosts mentioned an opportunity for accredited or high net worth investors to invest passively in real estate through a private real estate fund with PPR Capital Management.
Investing in Real Estate with Experienced Teams: Experienced teams like PPR Capital Management, Rent to Retirement, and Integra Development Group offer passive income opportunities through real estate notes, turnkey rentals, and rent to own strategies, some with no money down. These teams have strong track records and help investors achieve steady income since 2007.
Experienced teams like PPR Capital Management and Rent to Retirement offer investors the opportunity for truly passive income through strategic investments in real estate notes and turnkey rental properties, some even with no money down. These teams have strong track records and have helped individuals achieve steady income since 2007. For those interested in investing with no money down, Rent to Retirement provides discounted new construction properties and investor loans with low rates and minimal down payments. Integra Development Group simplifies the real estate investing process with their rent to own strategy, offering access to aggressively priced new construction homes with tenants in place and built-in equity and appreciation. These opportunities provide immediate cash flow, above-average rents, and a foolproof exit plan. By investing with these teams, individuals can mitigate risks and build wealth in the real estate market.
Following a passion can lead to a fulfilling career: Starting from a CPA job, Sam pursued his passion for real estate and successfully transitioned to flipping houses, then multifamily syndications, demonstrating the importance of determination, hard work, and skills like finding leads and negotiating deals in achieving a successful career in real estate.
Having a passion for something and taking the leap of faith to pursue it can lead to a fulfilling and successful career. Sam's story illustrates this perfectly. He started as a CPA, but his love for real estate and the desire to do something more passionate led him to leave his job and start flipping houses. The transition was not easy, but with determination and hard work, he was able to automate his tasks at his old job and spend more time analyzing deals. He then moved on to multifamily syndications and sponsoring deals with Ben. The key skills required to make this transition were the ability to find leads and negotiate deals. Flipping houses may seem simpler than running a larger business, but it still requires dedication and effort. If you have a passion for real estate and are willing to learn, you can make a successful career out of it.
Recognizing when to grow beyond house flipping: Focus on strengths, outsource weaknesses, find leads efficiently, analyze deals quickly, and be open to new opportunities for personal growth when you've reached a plateau.
House flipping can be a simplistic business if you focus on your strengths and outsource the rest. However, finding leads is crucial, and being able to quickly analyze deals is essential. For some, the personal growth and desire for more significant impact may lead to transitioning from house flipping to larger real estate investments, such as multifamily syndication. This transition can be driven by a desire for growth rather than just financial needs. Sam's personal story illustrates this, as he outgrew the small multifamily investments and sought new challenges and growth opportunities. Ultimately, the key is to recognize when you've reached a plateau and be open to new experiences and opportunities for personal growth.
Start small, learn, and grow in real estate: Success in real estate comes from starting small, learning the basics, and building strong partnerships to grow and adapt.
Success in real estate, or any field, doesn't come from following a rigid, predetermined path. Instead, it's about taking the first step, learning the basics, and then being open to change and growth. The most successful people in real estate have a career trajectory that involves starting small and gradually building up to larger projects. They learn the fundamentals and gain confidence before branching out into new areas. A good partnership is crucial for getting through the tough times and pushing each other to reach new plateaus. It's important to find someone who shares your passion for growth and is willing to put in the time and effort to make it work. Building a partnership involves trust, clear communication, and a shared vision for the future. And remember, real estate is just a tool. The real answer lies within yourself. Once you've identified your goals and passions, you can use real estate as a means to achieve them.
Find the right business partner for complementary skills and contrasting perspectives: Attend events, know your strengths, and seek a partner with complementary skills and contrasting perspectives for a successful business relationship
Finding the right business partner can significantly add value to your life and business. This partnership works best when both individuals have complementary skill sets and contrasting perspectives, such as an optimist and a pessimist. The optimist drives new opportunities, while the pessimist filters out the unworthy ones. To find this partner, put yourself out there by attending conferences, networking events, and meetups. It's crucial to know your own strengths before seeking a partner, as this understanding will help you identify what you're looking for in a business relationship. Ultimately, a successful partnership requires a balance of optimism and realism, with each partner bringing their unique strengths to the table.
Collaboration between different perspectives leads to better outcomes: Effective collaboration between individuals with diverse perspectives can lead to more accurate underwriting and informed decisions in various industries, including real estate and podcasting.
Effective collaboration between individuals with different perspectives and approaches can lead to better outcomes than working in isolation. The discussion highlights the partnership between Ben and Sam in the real estate industry, where Ben takes a more qualitative, liberal arts approach, and Sam takes a more quantitative, numbers-focused approach. By combining their unique perspectives, they are able to arrive at more accurate underwriting and make informed decisions that capitalize on opportunities while recognizing risks. This approach is similar to the way Brandon and the speaker evaluate ideas for their podcast, where they consider the knowledge sharing potential, efficiency, and synergy from one angle, and demand, fun factor, and desirability from another. By combining their perspectives, they ensure that only ideas that pass both of their internal underwriting systems are implemented. This collaboration model demonstrates the power of diversity in thought and the importance of considering various angles to arrive at the best possible outcomes.
Understanding market, product, and audience: Successful real estate investing requires considering both financial numbers and qualitative aspects, understanding the market, product, and target audience, and having a complementary partner.
Successful real estate investing requires considering both the quantitative numbers and the qualitative aspects of a deal. The speaker shared an experience of buying a "weird house" that had a good financial return on paper but was ultimately a loss due to its unappealing qualities to potential buyers. He emphasized the importance of understanding the market, the product, and the target audience, as well as having a partner who complements your perspective. When choosing a market, considering personal preferences and potential demand from others can be a good starting point, but it's crucial to back up those decisions with data and analysis.
Considering Factors Beyond Market Data: Successful real estate investing requires competitive advantage, being local, and investing in diversified economies with populations over one million. Understanding progress principles is valuable.
Successful real estate investing involves considering various factors beyond just market data and population size. Competitive advantage, being local and having knowledge of the market, is crucial. Additionally, a diversified economy is important to ensure long-term stability. When investing in large multifamily properties, aim for a population of over one million people. Being in the path of progress is also beneficial, but understanding the principle behind it is more valuable than following a specific formula. Ultimately, having a competitive advantage, whether it's through local knowledge or other means, is key to making informed and profitable real estate investments.
Phoenix: Ideal Market for Real Estate Investment: Phoenix offers long-term appreciation and stable cash flow due to its competitive advantage, diversified economy, large population, population growth, job growth, and high rent growth, making it an excellent market for multifamily real estate investment.
Phoenix, Arizona, is an attractive market for real estate investment due to its competitive advantage, diversified economy, large population, population growth, job growth, and high rent growth. These factors make Phoenix an ideal location for investors looking for long-term appreciation and stable cash flow. The population growth and job growth in Phoenix are major drivers of rent growth, making it an excellent market for multifamily real estate investment. Additionally, the long-term perspective on multifamily investment, viewing it as a "long-term flip," provides investors with more options and safety in their investment strategies.
Creating value through renovations and rent bumps: Focus on extreme value-add projects in markets with increasing rents for higher property value and consistent returns.
Successful real estate investing, particularly in multifamily properties, comes down to understanding the concept of equity and creating value through renovations and rent bumps. Ben, the investor in the discussion, emphasizes the importance of not relying solely on the market to grow equity and instead focuses on extreme value adds. This approach involves improving properties in environments where rents are increasing, allowing for higher rents and greater property value. However, it's crucial to consider the specific market conditions, as some markets may not support significant rent bumps or may not allow for substantial value-add projects. In Phoenix, for example, Ben's business plan includes a long-term flip strategy, focusing on renovating units and increasing rents, while also ensuring quality improvements to withstand potential down cycles. Ultimately, the success of a real estate investment strategy relies on the investor's ability to match their business plan with the appropriate market.
In-house renovations vs. outsourcing: A better approach: Managing renovations in-house offers benefits like better quality, faster turnaround times, and cost savings, but requires a critical mass of units and skilled workers to be successful.
When dealing with large-scale property renovations, it's essential to consider the benefits of taking the project in-house. The speaker shares his experience of managing renovations through property managers and hiring contractors, which proved to be time-consuming and inefficient due to high turnover and coordination challenges. To overcome these issues, they started their own construction company, hiring a crew, and coordinator. This move led to better quality, faster turnaround times, and cost savings. However, starting a new business comes with its own challenges, and there's a critical mass required to make it viable. The speaker emphasizes the importance of having a sufficient number of units and hiring skilled, reliable workers to ensure redundancy and consistent production. In the last 17 months, they have acquired 500 units worth $50 million, and their in-house construction company has been a significant contributor to their success.
Building relationships with brokers leads to more opportunities: Demonstrating reliability and ability to close deals quickly positions investors as desirable partners for sellers, potentially securing under-contract deals and setting them apart from competitors.
Building relationships with brokers and closing deals quickly can lead to more opportunities in the real estate market, particularly in competitive markets where large brokerages dominate. By demonstrating the ability to close deals swiftly, investors can position themselves as reliable and desirable partners for sellers. This strategy was effective for the speaker, who closed four properties through the same broker and was able to secure deals that were already under contract but had fallen out. Additionally, being local and inspecting properties thoroughly during initial tours can also set investors apart from competitors and provide valuable insights into potential issues. Overall, this approach highlights the importance of adaptability and effective communication in the real estate market.
Capitalizing for Capital Expenditures: Being well-capitalized and planning for CapEx is crucial in multifamily real estate investing to cover unexpected expenses, maintain property quality, and avoid financial stress.
In multifamily real estate investing, it's crucial to be well-capitalized and plan for capital expenditures (CapEx) to avoid renegotiating contracts (retrading) or running out of funds for unexpected repairs. CapEx refers to expenses for improving the property beyond normal maintenance, with a lifespan longer than 30 seconds. These expenses include roofing, HVAC, water heaters, and contingencies for unnamed items. Adequate reserves are essential for covering unexpected costs and ensuring the property remains habitable. The lender also calculates and requires a similar reserve amount to protect their investment. By setting aside funds for CapEx and understanding the importance of depreciation, investors can effectively manage their properties and avoid financial stress.
Understanding the Impact of Capex on Real Estate Investments: Budget for Capex costs when evaluating real estate investments, especially for larger properties, to ensure long-term profitability. Factor in location, size, and experience. Have an exit strategy for unexpected expenses.
While cash flow is important in real estate investing, it's not the only factor to consider. Capex, or capital expenditures, can significantly impact your investment's profitability over time. If you don't account for the cost of repairs and replacements, you may end up losing money instead of making it. Therefore, it's crucial to factor in Capex when evaluating potential investments, especially for larger multifamily properties with more complex systems like HVAC and plumbing. The speaker suggests budgeting for Capex based on the property's location and size, as well as your own experience. He also emphasizes the importance of having an exit strategy, such as refinancing or selling the property, to recoup your investment when unexpected expenses arise. In essence, focusing on both cash flow and equity can help protect you from the risks and uncertainties of real estate investing.
Maximizing real estate wealth with cash flow and equity: Investing in real estate requires both cash flow for sustainability and equity for growth. Flexible strategies like BRRRR investing can help maximize returns by refinancing, earning cash flow, and minimizing risk.
Building wealth in real estate involves both equity and cash flow. Some investors aim to pay off properties and live off the cash flow, while others focus on appreciation. However, the truth lies in the middle - you need both cash flow to stay in the game and equity to get rich. Flexibility is key, as cash flow allows you to hold onto properties long enough to maximize returns. Strategies like BRRRR investing can help you refinance properties, get your money back, and continue earning cash flow, all while minimizing risk. Redfin, with its updated listings and personalized recommendations, can be a valuable resource for those looking to buy or sell properties.
Streamline operations and reduce costs with integrated business management systems: Businesses can save on IT costs and improve efficiency by using NetSuite for accounting, financial management, inventory, and HR. Off-market real estate deals can also be found through services like PropStream for motivated sellers and efficient deal-making.
Businesses can reduce costs and streamline operations by utilizing integrated business management systems like NetSuite. By bringing accounting, financial management, inventory, and HR into one platform, businesses can improve efficiency, reduce manual tasks and errors, and save on IT costs. Additionally, off-market real estate deals can be found through services like PropStream, helping investors find motivated sellers and close deals more efficiently. In the discussed deals, buying directly from brokers and syndicating with investors were effective strategies for acquiring multifamily properties. Additionally, having a flexible financing plan and understanding the market conditions are crucial for successful real estate investments.
Understanding the Trade-offs of Fixed and Variable Interest Rates and Using Syndications for Capital Raising: Fixed rates provide consistency but may have prepayment penalties, while variable rates have potential for higher interest rates and smaller penalties. Syndications can be complex but offer significant returns by allowing investors to share profits and risks with sponsors.
Choosing between a fixed and variable interest rate comes with trade-offs. A fixed rate offers the security of a consistent payment, but it may come with significant prepayment penalties. Variable rates, on the other hand, have the potential for higher interest rates but typically smaller prepayment penalties. To mitigate the risk of interest rate fluctuations, investors can purchase an interest rate cap, which acts as an insurance product. When it comes to funding, syndications can be an effective way to raise capital, with investors typically receiving a larger share of the profits and the sponsors managing the deal and earning fees and equity. In this specific deal, the investors and sponsors saw success by renovating the property and selling it for a profit, despite initially underwriting for a lower return. The investors learned valuable lessons from the experience, including the importance of conservative underwriting and maintaining liquidity. The deal was a 70:30 syndication, where investors received 70% of the profits and the sponsors received 30%. Syndications can be a complex process, but they offer the potential for significant returns for all parties involved. In the next deal deep dive, we'll explore a 117-unit property in a different part of town in Phoenix and discuss how it was found and the strategies used to make it successful.
Considering unsolicited property suggestions from your broker: Keep an open mind to potential investments, even if initially dismissed due to location or other factors, as they could lead to successful deals and higher returns.
Being open to considering properties outside of your initial assessment, even if they're brought to you unsolicited by your broker, can lead to significant investment opportunities. In this case, the speaker initially dismissed a property due to its location, but later learned that it was situated near desirable amenities and was priced below market value. The deal resulted in a successful BRRR strategy, where the investors are refinancing and holding onto the property for future gains while their partners continue to receive cash flow with minimal investment. The lesson learned is to trust your broker's expertise and keep an open mind to potential investments.
Identifying Unfair Competitive Advantage in Real Estate: Successful real estate investors focus on their unique strengths and avoid wasting time on unsuitable opportunities. Life is short, play your own game.
Successful real estate investors have an unfair competitive advantage that sets them apart from those who give up, fail, or never get started. Ben emphasized the importance of identifying this advantage and not wasting time on something that may not be the best fit. Sam agreed and added that life is too short to play someone else's game. They also shared their favorite real estate and business books, including "The Complete Guide to Buying and Selling Apartment Buildings" and "The Checklist Manifesto." For fun, they enjoy traveling and trying new experiences, such as canyoneering.
Identifying and Leveraging Unique Competitive Advantages: Ben and Sam's experiences highlight the importance of persistence, consistency, and leveraging unique competitive advantages in real estate investing. Despite adversity, they succeeded through determination and exceptional skills. Current data suggests that rental collections remain strong, emphasizing the need to stay informed and adapt.
It's essential to identify and leverage your unique competitive advantages in real estate investing. Ben and Sam, the guests on the podcast, shared their experiences of overcoming adversity through their distinct advantages – Ben's determination fueled by his MS diagnosis, and Sam's exceptional analytical skills with numbers. Consistency is also crucial, as they emphasized the importance of persistence and not giving up during the challenging periods. In the context of the current situation, Ben and Sam reported that their rental properties have experienced good collections, with most properties achieving over 96% rent collections. Despite the widespread fear of tenants not paying rent, their personal experiences and data from the National Multi Housing Council suggest that the issue is not as widespread as portrayed in media. Overall, it's essential to know yourself, stay consistent, and make the most of your unique advantages to succeed in real estate investing.
Potential Increase in Cap Rates for Real Estate Collections: The economic downturn caused by the pandemic may lead to higher cap rates for real estate collections due to stimulus money and revenue uncertainty, but long-term investors may wait for normalization.
While collections in real estate have been performing well despite the economic downturn caused by the pandemic, the real question lies in how these collections will be priced by investors. Cap rates, which reflect how the market values income, could potentially increase due to the large amount of stimulus money injected into the economy and the uncertainty surrounding revenue validity. However, long-term investors may choose to stay in their deals and wait for cap rates to normalize before making new purchases. The conversation around real estate operations is largely priced in, but the risk premium, or cap rate adjustment for risk, remains uncertain.
Buyers and sellers have conflicting expectations in the real estate market: Buyers believe cap rates will rise, leading them to expect discounts, while sellers maintain their cash flow and argue property values haven't changed, causing a market stalemate. Sellers' reluctance to sell, influenced by past economic memories and passive investment strategies, delays price drops.
The current real estate market is experiencing a disconnect between buyers and sellers, with each side having different expectations. Buyers anticipate cap rates to rise, leading them to believe properties should be worth less and deserve discounts. However, sellers argue that their cash flow remains stable and the property's worth hasn't changed. This dynamic has resulted in a market stalemate, with buyers waiting for sellers to face trouble and sellers unwilling to sell at a discount. The lag in price drops is due to sellers' reluctance to sell, influenced by memories of better economic times and the passive investment strategies of wealthy individuals. For those actively seeking real estate deals and looking to learn the business, it's essential to understand this dynamic and be patient while waiting for opportunities.
Wealthy investors vs regular investors: Wealthy investors can afford to be more selective and patient, while regular investors must seize opportunities. Underestimate rent growth conservatively, and consider renovations and niche subclasses to attract higher rents.
The investing strategies and perspectives of wealthy investors, like Mark Cuban, can differ significantly from those of individuals actively building their portfolios. Wealthy investors have the luxury to be more selective and patient, passing on multiple good deals to wait for the perfect one. For regular investors, it's crucial to seize opportunities and not miss out on potential deals. Regarding rent growth, it's essential to be conservative in underestimating it, but not to a fault. Renovating properties and offering improved products can still lead to rent premiums, even if overall rent growth is stagnant. Lastly, understanding the nuances of property classes and creating a niche subclass can help attract tenants who are willing to pay more for a better living experience.
Providing a Premium Living Experience in Lower Income Areas: Identify target market needs, tailor property, charge higher rents, and consider Fannie and Freddie financing options with mid-70 percent LTV and extra reserves.
In certain markets, even tenants in lower income areas want a premium living experience, similar to that of a Starbucks. By providing a better product than competitors in the area, landlords can charge higher rents, even if the location is not ideal. The strategy is to identify the unique needs and wants of the target market and tailor the property accordingly. When it comes to financing, despite challenges, refinancing with Fannie and Freddie products is still an option, with mid-70 percent LTV and the requirement of extra reserves on hand. Overall, it's essential to adapt to the specific market conditions and provide a desirable living experience to attract tenants willing to pay a premium.
Maintaining adequate reserves in real estate investing: Being conservative, underwriting deals carefully, and maintaining a solid reserve of 9-12 months' worth of expenses is crucial for success in real estate investing during uncertain economic times. Flexible exit strategies and access to low-interest debt can provide opportunities.
Having adequate reserves is crucial when investing in real estate, especially during uncertain economic times. As discussed, going from a typical 2-month reserve to a required 9 or 12-month reserve can significantly impact projections and even cause deals to fall through. However, if investors have a solid deal and sufficient reserves, they can weather the storm and continue working their plan. Additionally, there are different exit strategies, such as selling a property as a work in progress or a turnkey property. The current market uncertainty may delay some exits, but having flexible options and access to low-interest debt can provide opportunities for investors. Overall, underwriting deals carefully, being conservative, and maintaining adequate reserves are essential for success in real estate investing.
Applying Class A principles to Class C and B properties: Implementing high-quality standards and financial stability in Class C and B properties can attract better tenants and secure a steady revenue stream.
Implementing Class A principles in Class C and B properties can help attract high-quality tenants and provide a more stable revenue stream. Additionally, maintaining strong reserves and cash flow allows investors to exit the market on their own terms, rather than being forced out by external factors. During times of economic uncertainty, having control over your investments can provide peace of mind and potentially lead to better outcomes. The speakers also emphasized the importance of staying informed and not letting fear drive decision-making. Overall, the discussion highlighted the benefits of being proactive and well-prepared in real estate investing.
Leverage local market expertise with BiggerPockets.com/deals: Connect with investor-friendly agents for neighborhood insights and deal analysis to make informed real estate investment decisions, but remember, investing involves risks and past performance doesn't guarantee future results.
Partnering with local market experts through BiggerPockets.com/deals can significantly enhance your real estate investment journey. These experts can guide you through neighborhoods, help analyze numbers, and provide confidence to make informed decisions. This free resource connects you with investor-friendly agents to help you secure deals and move closer to financial freedom. However, it's essential to remember that investing in real estate, or any asset, involves risks. Past performance doesn't guarantee future results, and all opinions expressed are those of the individuals involved. Always consult qualified advisors before making any investment decisions and only risk capital you can afford to lose. BiggerPockets LLC disclaims all liability for damages arising from reliance on the information presented.
