Common Misconceptions in Real Estate Investing with Kris Morin - REIA 489

Welcome to Streams to Impact, the podcast where busy professionals are empowered to develop multiple streams of passive income built on solid, secure, hands-off commercial real estate investments. This show is not just about wealth development. Every episode, we dive deep into inspiring conversations with professionals who are living life to its fullest while making significant and meaningful impacts on a world in great need. Engage with us each week and discover how you can thrive and flourish abundantly in all areas of your life. Now here is your host, Dr. Allen.

Hello, enlightened investors, and welcome back to Real Estate Investing Abundance. I'm your host, Dr. Allen. As always, it is a delight for you to be with us today, and You are going to enjoy today's conversation. We are going to be visiting with Chris Moran, and he is a former Fortune 200 strategic executive, and he is now the co-founder of Three Peaks Capital, and he helps professionals achieve financial freedom through multifamily real estate investing. which is what this show is all about. So we are glad to have Chris with us today, and I know you all will enjoy engaging with Chris as well. So Chris, thank you for being with us today, and just go ahead and take us into the show if you would and share how it is that your journey took you from corporate America to real estate investing.

Sure thing. Thanks for having me. So, you know, For me, as I sit here and talking to you, I'm 42 years old. For me, this journey really started about 14 years ago. I was in my late 20s. I was moving quite quickly through the corporate ranks for a large consulting firm, Accenture. It's a large international consulting firm doing strategy work for some of the biggest companies in the world. And by all means, to some people, I had made it. I was doing extremely well. I was traveling a lot in the process, having a good time with my work. But I was burning out really early on, right? I think I was having the realization I think folks eventually get to, and that was earning a high level of income and doing the line of work that I was in was coming with a tremendous sacrifice— friends, families, hobbies. I was on a plane 48, 50 weeks out of the year, so I was never around my family. And I knew that wasn't sustainable, right? That wasn't something that I was going to be able to do forever. And it wasn't depressing in a way, right? So, so what's the answer if, if, if, if this isn't it? If earning, you know, a high income and, and achieving You know, title and salary isn't going to get me where I want to go and fulfill me along the way. You know, ultimately, what is it? So, couple that with, you know, it's roughly 2008, 2009, the Great Recession is setting in, and I'm watching, you know, everything unfold that we all saw, right? And I think the big thing there is I watched a lot of my peers lose their jobs, and I lost a— I watched a lot of older Americans have half their net worth ripped out from underneath them, right? Some of these people could have been weeks away from retirement. Some of them might have been in retirement forced back into the workforce. And I thought, so here I am thinking, I can't work this hard forever. And then I couldn't imagine, well, what if I did only to have everything I worked for ripped away and I had no control over it? So I knew I had to do something differently, right? And the first thought that came to mind was, hey, there's a blueprint out there. The ultra-wealthy, what do they do? They have a lot of wealth to preserve. They have a lot of wealth that they're continuing to grow. What is it exactly that they are doing that's different? Then you come to find out, right? You know, private equity, real estate, owning businesses, etc., are all the things that rise to the top. You almost never see any discussion at all about equities and stocks and bonds. And so, for me, the light bulb went off and I knew right away I had to get into real estate. And so, that was it. That was really kind of the genesis of the journey. And, you know, for me, I would say this, my plan was never to replace my job. It was just about adding Income streams and building security, accelerating the wealth, right? I was a young exec and I wanted to continue to learn. There were things that were making me a better real estate professional. So I did the two in parallel for the better part of the last, you know, 12 to 14 years. About half that time I spent flipping single-family homes. You know, I started doing research and that's kind of what the gurus all tell you to do: flip homes and save your money and buy multifamily. You know, fast forward to about 2015. We were well past the recession. There wasn't as much inventory out there for you to buy, and I kind of—I call it the guru era. You had all these influencers popping up, right, saying, "Oh, I'll teach you how to flip houses," and and what happened was you had a lot of people jumping into the game, creating bidding wars on what little inventory was left. So profit margins were drying up. There was a lot of risk in the business, and I remember getting off the phone in a hotel room in Norfolk, Virginia, and I thought. There was a project back in Connecticut that was going poorly, giving me a big headache. And I remember hanging up the phone and being like, this isn't passive income. This isn't why I got into real estate. I don't even want to do this anymore. So I let the business kind of run itself out. I took some time off. And that's when I came back around 2016 and started buying multifamily. So eventually that light bulb went off for me that multifamily is the way to build real wealth. And I've been doing it ever since. And I would say that, you know, I continued to have great success in the corporate world eventually. And my last job in the corporate world, I was head of strategy for a $5 billion line of business in Connecticut. And, you know, I realized when combining the real estate expertise that I'd built over the years with the business acumen and economics and mergers and acquisitions, they all— they combined very well in a way to position me to analyze markets and see things and approach real estate a little bit differently than my peers in the industry. And I think something that really gives me a differentiator and allows us to win in situations where some of our peers struggle. And, you know, I realize there's a lot of demand, right, for folks out there looking for opportunities to invest in real estate. They don't necessarily want to be the active operator. And that's really what led to me forming Three Peaks Capital and ultimately getting into large commercial real estate. So, that's kind of the 50,000-foot view of the journey.

Well, Chris, thank you so much for sharing your story. And as you were sharing it, you were actually pointing out many aspects that I continue to try to point out to certainly our audience who are professionals fulfilled in the work of their calling. And you, you touched on so many things that— I mean, there are all of these myths out there and, and so many gurus out there who perpetuate all of these myths. And of course, one of those myths is, is that if you're going to invest in real estate, unless you're a millionaire, you have to start with single-family, which is— it is the way that I started. And, uh, you know, and of course hindsight is Uh, it's 2020, and but if I could go back, uh, 25, 30 years from now, I wouldn't be starting with single-family. I would jump right into, to multifamily because, like you just mentioned, it, it is scalable. And, uh, you know, no matter how many gurus out there tell you you need to start with, uh, single-family and certainly HGTV glamorizes all of that aspect, but the one thing you mentioned is that it's not glamorous, it's not passive, and the other thing that she pointed out is, is that it's high risk.

Yeah.

And, and certainly HGTV never implies the high risk that's involved in in those particular strategies. I don't even look at it as an investment. It's definitely like you pointed out, it's a job. It's a job. And it's a time-consuming job and a high-risk job and all of that. Yeah. Well, another thing that you mentioned and what I'd like you to really expand on because the financial advisors and everyone out there is telling us, and most professionals buy into this, is that the stock market and the bond market is the place to be and the place to put your retirement funds. I totally and completely disagree with that, and obviously you do as well. So could you expand on that and why it is that you have taken a different path?

Yeah, you know, I'm going to actually give a really specific example that folks can look at themselves. I think it's very relevant. So if you may or may not be familiar, there's a group called a society, it's called Tiger 21. And it's ultimately, it's kind of a mastermind for high net worth individuals. I forget the specifics. You have to have something like $20 million in liquid cash, investable assets, investable assets at any given time. They can audit you and kick you out of the group. There's a total net worth component. You gotta be wealthy, right? You're kind of in the 1% of the 1%. And what they do, these gentlemen, they come together and they talk about how they're growing their portfolios, preserving risk. And they talk about family and wealth, all the stuff that— Eventually, I think we all want to— those are the conversations we want to have. But what's interesting is they publicly publish portfolio allocations for all of their members. And so, you can go and see how much of their money are they actually putting into equities versus various types of other alternative assets. It could even be art, for example, right? And what you find is— so the traditional— the wealth advisors would tell you, they would sort of push you to a traditional 60/40 portfolio, 60% stocks, 40% bonds. And they don't talk about alternatives because they don't have access to those products and they don't get compensated for it. The Tiger 21 members, what you see is 60% of their wealth is in private equity. And there's an even split there. It's about 30% in what I would call traditional private equity. So the acquisition of actual businesses. And then there's about 30% in real estate private equity, which is exactly what we're talking about here. Think of it more like a syndication. You're investing as an LP into a project. But 60% of their wealth, and then you go and look at okay well where's the rest of the 40% and I can't cite all of it but I will tell you 19% of their wealth is is in equity so there is a percentage there but the remaining is still in other forms of alternative assets so so 81% of their wealth overall is in alternatives is really the punchline there and 19% in equities they're investing in assets that are producing cash flow that tend to be untethered from the, you know, economic volatility in the ways that stocks and bonds or stocks might be. They get the depreciation benefits, right? All the things that this audience probably is aware of. And so, I think it's just, um, it helps drive it home that, you know, there's just not the right level of education and awareness out there. And I think more and more people, fortunately, they are becoming aware of it. But I think, uh, it's, it's the job of folks like us to spread the message and help folks understand there's this whole world out there called private equity and Right.

Well, I totally, totally agree with that and appreciate that, Chris. I had not heard of Tiger 21, but I'm certainly going to check them out and check out their publications. Because to grow wealth, we need to do what the wealthy do. And obviously, they're charting a very different path than what our typical financial advisors are going to tell us. And I just want to reiterate what you just said, Chris. mentioned, and that is that the typical financial advisor isn't sharing information regarding private equities because they're not getting commissions on that. And I just want to emphasize one problem with putting your money in the stocks and bonds are all of the fees that come with that. And, and if you really step back and you look at those fees, those fees are taking a considerable amount of our wealth.

That's right.

And, and it's kind of under the carpet. It's never something that is really clear and plain to investors, the amount that those fees are diminishing the growth of their wealth, because those fees are coming directly out of their capital. And there are fees associated with passive real estate investing, but it doesn't come out of one's capital. It comes out of the profits generated.

That's right.

From those investments. And that's an entirely Entirely different matter there, and it makes a huge difference in the growth of one's wealth. Well, tell us about Three Peaks Capital, how that you help investors diversify their investments. And, you know, I think that's another thing people don't realize, that, I mean, diversification is very, very important. But you don't have to be investing in stocks and bonds to diversify. So talk to us about that.

Yeah. So just, we are, I would say we're pretty vanilla in our strategy and that's intentional. We don't chase shiny objects. We're not continuously pivoting on the next hot thing. We stay narrow and focused. And I think that's what allows us to do well. And that is we only focus on value-add apartment complex opportunities. So we're buying C and B class assets in good neighborhoods in markets around the US that are underpinned with strong market fundamentals. And I could talk about what that really means. And we're identifying opportunities to drive additional value. And that's usually a combination of, you know, we can increase the rents incrementally, sometimes substantially, we can moderate expenses or drive them down, sometimes substantially, by bringing management in-house. Or, you know, we can tackle some of the deferred maintenance on the units or the exterior of the building. And all those things combined can add millions of dollars in equity to a building over a period of time that's then redistributed back to investors. And that's just our bread and butter, and we don't deviate from it. I think where we're different, and I, I tell folks, is, you know, if you want to swing for the fences and hit home runs every time, we're not the firm for you. There are people that are doing deals in markets like Dallas where you've got much more parabolic growth comes with higher risk, but you should be seeing risk-adjusted returns, you know, you can go there. If you believe that base hits win baseball games, you want to hit doubles all the time and the occasional triple or home run, then we're a very good team for you. And that's because we look at markets where growth is more incremental, it's more predictable. Take the state of Indiana, for example. Highly afford— so let me just quick aside. When for me, people tend to chase population growth and income growth, right? And job growth. And so you look at the head— who's stealing the headlines? Dallas, Austin, San Antonio, Phoenix, parts of Florida. And that doesn't necessarily make it a great real estate market. And a lot of times when you've heard about a trend, the train's already ready to leave the station, right? And so what happened there is a lot of, a lot of operators like us went in And so do we have to buy there because that's where everybody's going in. But it forces you to pay a premium and, and times too much for a property than you should be paying. Now you're dependent on rent growth that's not really achievable or sustainable. Just because you had 10% year-over-year rent growth, you know, from 2022 to 2023 doesn't mean it's going to continue.

Mm-hmm.

Um, some operators will say, oh, but the, the median income for the area is $150,000. And I'm, I'm building up to, to how we're different here. The reality is if you look at the economics of what's happening in those areas, the cost of living is considerably higher than other parts of the US too. So even though the income is higher, the wallet is stretched further, say, than a resident of various markets in Indiana where it's among the most affordable places in America to live. You have some of the top schools in America churning out some of the leading technical degree programs in the US today. Income growth and job growth is on par with the rest of the United States. So what does that mean? Consumers are more likely to move there. Consumers are going to be more comfortable there. Consumers are going to be more likely to be able to absorb rent growth. So you can actually bake that into your business plans. And, and that's where the predictable component comes in. You know, you're not going to ever achieve 5%, 8%, 10%, but you know, you're going to continue to get 3% regardless of what's happening in the broader economy. In 2022, I was explaining this to folks and they were challenging me to go to Dallas. I said, no, we're going to Indiana. Fast forward, you can look at the headlines now. You've seen flat rent growth for, you know, probably 8 straight quarters in those markets. And Indiana is one of the few states broadly in the United States today that's still continuing to see generous positive rent growth, right? And so we economically, I look at the data and I look for leading indicators, not lagging. You know, I look for some of the things that I've outlined there that tell me You know, long-term, this is a safe, predictable market to invest in. Again, I'm not going to return a 20% IRR to my investors, but I know with confidence I'm going to return somewhere between 15% and 17%, regardless of what's happening in the broader economy. And, you know, we're able to make those projections with confidence because our underwriting doesn't have these really bold and aggressive assumptions baked into it. And so that's a little bit of how we're different. I think it also illustrates a little bit about how we look at markets differently. And so, you know, and if you haven't picked it up by now, Indiana broadly is a state that I love. Fort Wayne is a hidden gem. It's one of the fastest-growing markets in the northern United States. It has been since 2015. Indianapolis is— there's no denying the growth that's happening there. The outlook's very strong. And even Evansville in southern Indiana, which is more of a secondary market, but there's a massive redevelopment going on there that I think investors can still benefit from. We are making a push to the Pacific Northwest into Seattle, and of course, I am a big fan of Connecticut where I sit and talk to you now. I'm a resident of the Northeast. I know the markets extremely well, and again, all markets underpin with you know science biosciences, right? I think you have a large medical community there. They should all be pretty familiar with with Boston and the Eastern Massachusetts market. So we like to embed ourselves in places where. We know with high confidence that we're ultimately going to come out with strong returns. That's really what I'm saying.

Well, Chris, those are very interesting ways to look at the markets and how you have really laid out there that you may be able to get higher rates of return potentially in some higher growth areas. But Generally speaking, that train has already left the station. And so those are really, even though they are projecting higher returns on those, oftentimes it doesn't pan out because, like you said, that train has already left that station. You've talked about some of the misconceptions in terms of investing in real estate as opposed to other assets. Is there anything else you'd like to add to that conversation?

Yeah, you know, it's funny, that's kind of top of mind for me right now. I think there's a lot of passive investors, LPs, who mistake unit count for experience. They say, oh, these guys have gone to 2,000 units in the last 2 years, they must know what they're doing, right? And there's a real danger in that. And so there are groups, I'm not going to name names because I do believe some of these groups made Good decisions with the information that they had in front of them at that point in time, but but they were growing too quickly. Their experience wasn't there, and and and now that's coming out, and and and the cracks are forming. And so I think you've really got to, and then and then I'll combine that with some of the the general guidance that you get on the internet. Some of the influencers will say, vet the sponsors, see how many deals they've exited in the last couple years. That, to me, that's not a very good measuring stick. Anybody, a high schooler could have bought a deal in 2012. And no matter how poorly or how well you operated it over the last 10 years, you came out a winner just looking at what happened to the economy broadly, right? So I think there probably were a lot of teams who were wildly deviating from their pro formas, but at the end of the day, you had record rent growth and appreciation, all those things. They were able to sweep those mistakes under the carpet. wipe the sweat off their foreheads and say, hopefully we don't make those mistakes again. And so deals that have gone full cycle is a little bit of a— it just gives the wrong perception as well. So I think really knowing the expertise within the team broadly from operating and managing real estate themselves to investing themselves, business acumen, economics acumen, those things are pretty lacking in our industry. It's a pretty loosely regulated space. But I think all of those things matter. So I think just getting to know the team, Diving into their expertise in those kinds of ways is, you know, paramount to making a good decision in terms of who you're going to invest with. And I would say throw away unit count and throw away deals that have gone full cycle. So that's just something that comes to mind when I think about some myths that need to be busted.

Well, what are 3 or 4 questions that an investor should be asking an operator or a managing partner before investing?

You know, I think a really good question is, tell me about a deal where you had some profit challenges and show me where you landed. So don't just tell me about it, because no deal goes smoothly. No deal goes smoothly. I will sit here and tell you no deal goes perfectly. And so they should be willing and able to pull back the curtain. If their operation is mature enough, they should have detailed financial reports that show here's what we planned, here's where we landed. Not just in total income gain, but across all the different categories from administrative expenses to payroll expenses to repairs and maintenance. They should literally be able to show you everything that was in their underwriting. What did we plan and where do we land quarter over quarter? And so you can see how those trends played out and have them just walk you through the story. You can see the deviations in their expenses were running hot. What was happening there? What decisions did you make to correct the train? And then you could see whether or not ultimately they landed in a positive spot, right? So I think just Getting them to pull back the curtain and actually show you real data, I think, is, is, is paramount. Um, so that's one question, um, is really digging into projects that haven't gone well and what they've, what they've done to do it. I think talking to teams about, you know, their history managing units, even themselves— granted, this is an industry where you're acquiring commercial assets and you're putting third-party property management in place. I— it's a personal belief, so you could take it or discard it. I'm a big believer that if you've never managed units yourself, how can you manage property manager? How do you know where the landmines are? How do you know what questions to ask? How do you know where the cracks are forming until it's too late? I just think asking them, what is your experience managing property? You'll find a lot of these guys never even managed a duplex. Now they're trying to manage 200 units. It just doesn't make any sense. So those are 2 things that come to mind for me.

Yeah, good thoughts there. Well, Chris, in closing here, how is it that if we're interested in getting in touch with you, how can we do that?

Sure. So I'm a big social media guy. You can always find me there on LinkedIn or Facebook, of course. You can always email me, chris@3peakscap.com. That's Chris with a K at 3peakscap.com. I'm super responsive. I love to answer questions. Yeah, so those are 2 good ways to get a hold of me.

Well, Chris, what are your closing thoughts?

My closing thoughts, you know, I think for anybody who is on the fence, get in the game. You don't make money by timing the market, you make money by getting in the market. I think anybody who is sort of anticipating a doomsday scenario or waiting for one, you know, I just think opportunities are always there, they're always now. So I think The way that the deals are structured is where the risk lives. It's not so much that because other deals around you are on fire doesn't mean your deal's gonna be on fire too. So again, understand the expertise of the team, really dig into how the deal is structured because that's where the risk lies.

Well, I said that was one last question, but I'm going to ask you another question here. We're facing a new world order. A lot of people in the United States are in total complete denial about that, but the BRICS and the BRICS are— I mean, the actual bricks of the BRICS are falling into place. And just in this last year, nations with significant economies have applied for membership in the BRICS. And I think that the reality of that New World Order is going to— this is just my prediction— I think when the BRICS meet this October, that is going to fall on Western economies like a ton of bricks. What's your thought?

Yeah. I'll say that there are macro forces at play, lots of them, that I think all the dominoes can fall backwards here into the mainland. And I think we'll see ripple effects. But the most important thing to remember is those impacts are always temporary. So the way that I would look for real estate deals that can absorb those types of risks, whatever they might be and however they might manifest, long-term structured debt is always going to be the most important thing. And why is that? So, you'll see a lot of deals where they'll say, oh, we're going to return your capital in 3 years. We got a 3-year note. We're going to refinance or sell. You've got one shot to get it right, and you better hope the economy is in a great spot, right? And I'm just giving an example on a 3-year note. Versus even if we have the intent to exit our projects early, we always do 10-year notes or better if we can get it, because we give ourselves a lot of runway. And we always underwrite already for an early exit. So a lot of times when you leave those, those types of projects, you incur a penalty, investors would feel that. We already plan for that in our underwriting so that if we do incur that, it's not something that impacts the bottom line. But the benefit of that is if If we're intending to exit sooner and these types of headwinds come out of left field and it would be a horrible time to exit and it would impact our investors' returns, we just simply notify our investors based on the macro environment at play, we're going to hold on to this thing another 2 years, 3 years, whatever it takes to optimize returns. On the flip side, if you're intending for a 7-year exit and you see the headwinds forming further out, you can exit early. But the point there is you have lots of sort of lots of exit ramps off the highway, so to speak, versus some of these other projects with the short-term debt. You can lock yourself into a position where you have no choice but to face some of the impacts from some of the events that I think you're kind of alluding to. So that's just how I link it to real estate. But I do think there'll be some fallout from some of the changes that are going to happen locally and globally.

Yeah.

Again, just planning for the long term is how you're going to make sure you come out okay.

Yeah, well, good thoughts. Well, Chris, wonderful conversation. Thank you so much for being with us. Enlightened Investors, I know you've enjoyed today's show. It's very informative, so I hope you'll take a moment to like, share, and subscribe. And if you would please leave us a comment— I mean, leave us a rating and a review On your favorite podcast app. Until next time, live abundantly, and we'll see you in the next episode.

Thank you for tuning into Streams to Impact, brought to you by Steed Talker Capital, a company empowering passionate professionals like you to develop multiple streams of passive income built on solid passive real estate investments. As a significant part of our endeavors to make a cosmic and meaningful impact for this world, Steed Talker Capital contributes significant portions of our profits to activities and organizations committed to better understanding the equine. These endeavors attempt to enhance the treatment of horses worldwide. Steed Talker Capital, working for a world where all creatures great and small flourish abundantly. If you are ready to learn how our passive investors have earned an average 33% annual return on their investments, schedule your complimentary Passive Income to Prideful Impact consultation. Obviously, we cannot continue indefinitely to offer these valuable consultations for free, so grab your Passive Income to Prideful Impact consultation while you still can. Go to steedtalker.com/passive.