347 Charles Carillo VideoPassive Investing in Real Estate with Charles Carillo

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Hello, enlightened investors.

Welcome back to Real Estate Investing Abundance.

I am your host, Dr. Allen, and I'm delighted to be back with you again today. As we take a look at passive investing in real estate with Charles Carillo. And Charles is a returning guest. He was with us back in 2001, and you can learn more wisdom from Charles by going to episode 52. And Charles is the managing partner of Harborside Partners, a real estate syndication firm, and has been actively investing in multifamily and commercial real estate since 2006. Since that time, he has invested in over $200 million worth of investment properties. Charles is also the host of The Global Investor Podcast, where he interviews professionals about investing in the United States real estate markets. So Charles, take us into the show and share a memorable experience that brought you to where you are today.

A memorable experience I would say was buying my first rental property. That was something that got the whole thing started and I didn't really know what I was doing at that point, but, um, which I think most people don't when they buy their first rental property, uh, and you learn a lot very quickly drinking out of a fire hose. But I would say that was, that's what really started the whole process.

And what kind of property was that?

It was a little, uh, 3-family. My first couple properties were, um, 3-family. This one I was doing a house hack on, and, uh, it, it needed a lot more, a lot more repairs and renovations to get prepped for, uh, renters than I anticipated or had budgeted But I was still able to do it. It took me like 2 months or 3 months working with contractors to get it done. On my second one, I was a little bit more knowledgeable and it was less work when I purchased it. And I had it all— everybody was lined up before, so it made it a lot easier and there was a lot better planning to go on with it. But—

Well, that is the way I think a lot of us start out. I particularly like the house hacking. That's where I started too, essentially, was with the house hack. And I bought a single-family home and converted it to a triplex. And I did all the work myself on that first one. So learned it from the ground up there. Well, Charles, what makes cash-flowing real estate so powerful?

Cash-flowing real estate is one of the best asset classes, I feel, because it allows you— you have 2 things that are happening there that you're really generating wealth. Number one is you're having the appreciation of the asset. Which is great, which means that your investment, your property is going up in value, uh, you know, over— there might be some down years, but over a whole period of 5+ years, you're going to see increase there. And the cash flowing portion of it is great because during any ups or downs in the market, you're able to realize some cash flow from that property as a distribution form, which could be done monthly or quarterly, but it allows the investor to see some of the returns, actually receive some of them instead of just certain investments where it's just all appreciation. You don't really see that and you're just kind of hoping. It's kind of more of a guess, right, of what you're going to have at the end of it.

I call it a gamble.

Yeah, it's exactly. And we always love appreciation and I'd love to work some into some estimates and stuff and kind of put it in the back of my mind of what I'm thinking it's going to go up. But that's— it is like you said, it's completely a gamble. With the cash flowing part, you have something where You can show yourself, you can show your investors exactly what kind of cash flow is going to be coming off that, that investment over these years. And some months or some quarters it'll be higher than others. But over the lifetime of that, you'll be able to realize those returns before actually selling the property.

Makes a lot of sense. Well, what are some of the biggest mistakes that real estate investors starting out rather than doing all the work themselves or underestimating?

Doing all the work yourself is one thing that I've never done all the work myself on a property, but it's one of those things that you learn a lot, but it's also very time intensive. And if you have— if you're investing into real estate, you probably have a different occupation that allows you to get paid more than what you'd get paid or paying someone else for to do work and get it really just done. Because the real goal is really getting the work done, If you have a renovation that you have to do before putting people in there, it's really getting it done as soon as possible, getting people in there, and then kind of going on, going on around, you know, about your business. But mistakes I would see investors make, number one is on their first property, they're, they're taking on too much of a heavy lift. So they're getting into a project that's requiring a lot of renovations upfront. And if you've never done it before, it requires a lot of people on your team, as we were just talking about, unless you want to do it all yourself. But some things you're just not gonna be able to do yourself, some things that required licenses and some things that, I mean, if you've never done a roof before, you probably shouldn't be doing one on your house for the first time. So as you own property, you start to build your network. And you know, you build your network of vendors and contractors. But on your first one, you're not going to have that. You might have met someone and say, oh, my contractor, and then they don't show up. And now you're back to square one. So after you've done a project or two, then you really have a team, let's say, that you can call upon for estimating new projects you're looking at, and then also utilizing on future projects. So renovations, major ones, major renovations for your first property, I would say is a no. And that's something you should avoid. I would also say people getting very short-term debt on a first project. There's different financing for different levels of real estate investors, but getting any type of very short or very variable type of debt for your first project is not suggested. It's something where you should be getting Get long-term fixed debt. You know exactly what your payment's going to be for the lifetime of it, or if it's a commercial property, probably for the first 5 or 10 years. And that gives you enough time to get the project where it's supposed to be, even with some hurdles that you're overcoming. So those would really be the 2. And then the 3rd one I would say is not buying in good areas. The numbers— brokers have a way of making numbers on lower-class properties, let's say, look fantastic. Okay. Huge returns is what they're saying. Managing it is a whole different story, and you will go brain dead trying to manage those properties and manage everybody, not just the tenants but also handymen and contractors that have to go into those properties. So I would say spend extra money and buy better properties in better areas, and that's where you're also— you're going to get the cash flow, you're going to get long-term tenants, and you're also going to get more appreciation. Poor properties don't really appreciate. So those would be the, the 3 things I would say about mistakes I see.

I would totally agree with those 3. I would just add one more, and that is undercapitalization and insufficient reserves. Both of those, or all 4 of those things, are going to get you in trouble anytime, but certainly when you're new in the, in the market here. So outside of avoiding these 4 things, how do we mitigate risk when investing in real estate?

Mitigate risk. I would say number one is what you just said, which is having the reserve. The reserve is huge. And if you think it's going to cost $20,000 to do renovation, it's going to cost you $30,000. And make sure that you're putting away— when we talk reserves, that sounds great, but I mean, you want to put away, I would say, at least 6 months of your expenses. Okay? So mortgage payments, insurance, taxes, all that into an account that you're not going to touch, and then add on to it every month. for repairs that are going to happen. And maybe you've bought something and it's, you know, you've got 5 years left on all these mechanicals or 10 years left and the roof's good. Still put away money every month from your cash flow into that savings account. And because there will be issues that pop up and, you know, certain tenants don't care about your financial situations and they're just not going to pay rent. So if the roof was never taken care of or if hot water stops, I mean, you're just going to have First of all, it's— you're not taking care of your part of the bargain as a landlord, and you want your tenant to pay their bargain of it. So it's good business if you fix that as soon as possible, but that money has to come from somewhere. So having the reserves is number one. Number 2, I would say, is when looking for properties, you know, you're getting more units. The more units that you're able to purchase, it's going to be something that's going to make your management much easier. So dealing with a— like you said, you had a triplex. I had a triplex. It's great. It'll make your management much easier in that sense because your cash flow, the more units you have, the less volatile that cash flow is. Renting out a single-family house might look great on paper, but as someone moves out, now that property is 100% down compared to a duplex, compared to a triplex or quad, which you can finance with your regular— as we're talking about— your regular FHA or residential mortgages without any type of problem.

Makes sense. Uh, sounds good. Well, how do you decide which sponsors, deals, and markets to focus on?

So markets, there's really 3 parts to markets when I'm looking, and I actively invest. We do our own syndications, but I would say the majority, I do more passive investing. Well, more deal-wise passive investing on a yearly basis. And when looking at those deals, number one, the markets is I want to see a market that's growing, population growth, which is number one. Number 2 is you want to see job growth, which can be a little harder to track, Because you want to make sure that jobs are coming in that are going to be really living— those tenants are going to be living at your properties, your target properties. And number 3 is I want to see a decrease in crime. And 1 and 3 are easy. You can just Google those in 1 second and see what those look like. And really what you want to see is you want to see a consistent increase in population over like 20 years. You can pick a number, but we usually do 20 years. I want to see job growth increasing over 20 years. And I want to see a consistent, a consistent decrease in crime. And obviously there's going to be years where, you know, it's not perfect. But if I look at 20 years ago and I look at today, I'm going to see a decrease in that that's steady. And that shows that not only is crime decreasing, but also you can see that the economy, the MSA, the market is investing into education and healthcare. And that's what will be a long-term thing. It's easy to lock people up and then 10 years later it changes. But when you see a steady decrease over many decades, that's when you know that there's been some real reinvestment into facilities in that area. And it's very hard to fake that.

Yeah, that's a good indicator. I don't think I've been— I've heard of too many people really focusing on the decrease in crime. I know people look at the current crime rate, but that's a good factor. I'll have to keep that in mind because, yeah, it shows A lot of people might look at that and think, oh, it's just law enforcement. But really what is happening there is actually investment in communities. That is what really decreases crime. So good indicator there. You've talked about syndication and active investing. So what is a syndication?

So a syndication is where you have 2 groups of people. You have the general partners who are also known as the operators or the sponsors on the deal, and you have the limited partners or the passive investors. And so what happens is this model goes back hundreds of years. And what it is, is that you have the general partners who are the ones that are operating the deal. They're going to find the deal, they're going to do everything, everything one would do that owns a property, a rental property. And then on the other side, you're going to have the limited partners or passive investors. They have one job in the eyes of the general partners, and that is to fund the purchase and fund the renovations of that project. The general partners are the ones that will be following through on the business plan, that were outlined for this, for this project. So you'll have many times where passive investors can now invest with smaller amounts of money than it would definitely cost for them to purchase that same property, but it gives them exposure into a larger property or in a different market that they might not have any people on the ground, any team there, or they just don't want to deal with any of that, which is usually what it is. So you might own a couple duplexes and then someone comes along and says, hey, do you want to invest in this 150-unit complex? You know, one state over. Well, that was something now in their portfolio where they have exposure to that market. They have exposure to a large complex like that that's probably going to be a little bit more consistent cash flow-wise than their duplexes. And it allows them to really step back from the active role a little bit and, uh, in operating the real estate asset management portion of it or property management portion.

Enlightened Investors, if you haven't done so already, be sure and click that like button and also click that share so others can take advantage of the content. And finally, be sure to subscribe so you don't miss a single one of our upcoming episodes. Well, Charles, you've got a wealth of knowledge and experience. Tell our viewers and listeners how it is that they can get in touch with you to take advantage of that knowledge Yeah, sure, Alan.

So our company is Harborside Partners, and you can find us online at harborsidepartners.com. And we will work with— we work with passive investors. We have a guide online that is a free guide to passive investing if you want to learn more about dealing with syndications, what they are. And if you're interested in investing, there's also a form there for learning how to get in touch with one of our partners and learn more how you can get involved with investing in the syndications throughout the Southeast.

And all of that information is in our show notes. So you do, you have opportunities for out-of-the-US investors. Tell us about how you work with them and how foreign investors can invest with you in the United States.

So for foreign investors, it's a very similar process to US investors except for a couple more hurdles that are put in place. Number one is that when we have, we work with a lot of foreign investors, and when foreign investors are looking at investing into a syndication in the United States, What we'll do is number one is we kind of get on a call with them. We go through exactly how they're currently set up. If most investors we have have some sort of setup in the United States already, some sort of corporation, or they have a they've done investing before in the U.S., so we kind of see exactly how they're set. And then number two is what we'll do is in most situations, if not all of them, we pass them. We give them a list of providers that we use: CPAs, attorneys, accountants that they can contact that work. Specifically with foreign investors for the majority of their business. And, um, this— these investors, we have them speak to, uh, one of these professionals, and, um, they can choose who to work with, or they can find their own, whatever is easier for them. But either way, it's important that they're set up correctly before they're investing into any kind of project here in the United States. Tax treaties differ per country, and taxes are greatly different between a U.S. citizen and a non-U.S. citizen that wants to invest in the US. But the process is very simple, and, um, it will, uh, usually it consists of you getting set up with a limited partnership, uh, an LLP, limited liability partnership, or a limited liability corporation here in the United States. And your attorney or accountant will help you do that. Then the second part of it is opening up a bank account here in the United States, and that's also something that we can assist you with, with giving you names of companies and banks that do work with international investors. And then the third part of it is really when money is paid out to foreign investors, so non-US citizens, we are required to withhold a portion of your distributions, and you will get that back from the US government once you file your annual taxes. So it's just one more kind of step getting you set up, whereas a US investor can just, you know, pay their taxes to the government as, as required. The US government does not trust foreign investors, let's say that much. They want to make sure that those funds are staying here in the United States. And with them until they've done a tax return, which will show you that it's money owed back to that investor. So if investors are interested in that, they can reach out and we can talk to them about that. But it's a similar process. It's just a couple more steps and we can do that and assist investors in getting them done.

What are the pitfalls for foreign investors other than the fact that the government's going to take a portion of their, of their cash flow and hold on to that and And earn their own interest on that rather than them earning it for the year.

So, uh, one of the main ones is that there is a— so for U.S. citizens, the estate, the estate-free, you can, you know, you can heir your estate to someone, and I think the limit's like $12 million without penalties. For foreign investors, it's $60,000, which means that if someone hasn't done— at this point in time, if someone hasn't done their planning, I mean, a $50,000 investment can get up that, you know, you can make that much money on a smaller passive investment. So it's very important that people are getting that set up. So the taxes can be a trap if it's not done correctly. And I would say the second part is, even though, as I mentioned, it's a pretty simple process, right? You're dealing with the US government and you're dealing with different agencies setting stuff up in the sense of corporations and stuff like that. It can take 3 or 4 months, right? From the time you had your call with your accountant to the time that you're getting your your tax ID number and your LLC and your EIN and all this kind of stuff in the bank account. I mean, it's a process that could be 3 or 4 months. So if it's something that you're interested in investing in US real estate, it's just something that you want to start the process sooner than later. And like I said, it's not a difficult process. It is a— because of the government intervention, I mean, it does take a longer term. I mean, once you get to the point where you open up a bank account, that's done in like a day or But the whole process leading up to that. And then the final part is really when you fund your bank account, because U.S. syndicators like ourselves, we will only accept funds from that U.S. bank account. We cannot accept funds internationally, and that's just to protect us as well.

Well, for U.S. citizens who are working full-time jobs, what advice do you have for them in terms of getting into or expanding their investments in real estate?

So if, like most professionals, are probably interested in just the benefits of real estate, not really becoming a landlord, I don't think anybody really wants to become a landlord per se. It's really, if you're in that, you really want to become a passive investor. And it's really figuring out what you want to invest into. I mean, real estate, there's so many different real estate classes. There's commercial, there's retail, there's multifamilies we're talking about a lot here, RV parks, mobile homes, self-storage, and finding out really what you want to invest into. And then finding out as you do research more into it, what really is your goal? We have some investors that want to really invest their money and they don't really need any type of cash flow or distribution. They're really looking to get higher returns by not having that normal distribution. And there's other investors that really are focused on getting that distribution, getting that regular cash flow. So Figure out exactly what's most important to you. And then when you start reaching out to syndicators and finding out exactly what they offer, they also know what you're doing. So they know what your goals are and they can direct you to opportunities that might fit and check those boxes. But it's important to let people know that you've reached out to what you really want and what you're looking for. And those are really the questions. Some of the questions we ask on our first call when people reach out to us is, you know, what are your goals? What is your experience in real estate? Before? I mean, what do you really want out of this? And for the most part, you'll have some people that say, oh, I want to be a syndicator, but I'm just doing it passively to start. Or I— you'll hear a lot is I have some small investments actively and I want to get into bigger stuff. And this is their route of doing it, is going passive route and really, you know, expanding their portfolio out of their local market and out of small properties. So that's really kind of the questions that we ask and kind of how we formulate and start the relationship.

Charles, we're in some uncertain times, and to say the least here. I know this is looking into your crystal ball, but what do you see happening in the real estate market within the next couple of years?

I think what we're going to do is 2023 is going to be a— there's not going to be many rent increases. We're seeing rents already pulling back in many markets. And that doesn't mean that you're not going to get rent increases on your properties. That means that a unit that is in the same condition in the beginning of in 2023, that's in the same— at the end of 2023 is probably going to get the same rents or a little bit less. However, for what we do is we're focusing on value-add and adding value to units and renovating, repair, and repositioning properties. We don't really see too much of an issue there with our business plans. What we've been doing and what we see coming is we've been kind of not pausing our business plans and our renovations, but we've been really cutting back on Maybe we were doing on one property 4 or 5 units a month, maybe we're doing 1 or 2, making sure that we're still getting the rent increases, the set rents that we had anticipated a year or so before. And when we see that kind of taper off, or if it does or if it doesn't, we will adjust the number of units that we're renovating by the appetite of the tenant base. So that's one thing that I'm— we're seeing and how we're kind of playing this in 2023. What I see too is It really depends on where regional banks are, and they are a huge lender for real estate. If you're buying a property and it's under a few million dollars, you're not going to be going to a large bank. You're going to be going to small regional local banks, local credit unions, which we love to work with because they love lending on small commercial and multifamily properties. If that starts seizing up, that's going to really put a strain on People buying, people refinancing, and people selling properties. And that's going to really— that'll pull back prices even more. But I have to say, I mean, we're selling a property right now and it was— there's still buyers out there. There's buyers out there and they are— they're probably not paying as high as they were when we were selling last year on some properties. But it's very close, you know what I mean?

Mm-hmm.

So if you have quality properties out there, you're going to be in a better position than people with less than ideal properties, let's say. So if you're buying good properties in good areas, they're going to be more liquidity for those properties compared to, you know, D-class properties or C-minus properties. So that's another thing I would see. And on interest rates, I have no idea. That's, that's really crystal ball there. I think we are hitting up on the top there of where they might go, how far if they do come down, we'll soon find out and we'll see. But with interest rates being where they are now, it actually is a benefit for multifamily investors because People aren't selling their houses if they've got locked in at these low interest rates that people were able to get over the last 3 or 4 years. And I think I saw a stat the other day or so, it was, it's like over 90% or 94% of homes in the United States, residential homes, are under 4% interest rates.

Mm-hmm.

So that's massive. Those people really need to get deals on properties if they're going to move out and they're going to stay where they are now. Makes it harder for renters, which means that if you own apartments where you have possible homebuyers in, you're probably going to see them stay a year or two longer until this kind of shakes out a little bit.

Yeah, it's interesting, interesting times. We will see what comes of this. But yes, it sounds like you're doing a good job on your end of it and protecting your assets. And that's certainly what investors who are looking at passive investments certainly need to be looking at. In terms of how that debt stack is stacking up with any particular investor. Well, Charles, it has been wonderful having you back with us today. Thanks for returning. It has been a pleasure once again.

Thanks again, Alan, for having me on again.

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