#16: Real Estate Investment 101 - How to choose the right investment opportunity

It reminds me, we had an episode a number of weeks ago with Paul Young. If you haven't listened to the episode, incredible episode, talking about talking to a gentleman who's invested in a lot of real estate and had done a few things that hurt him in the tax situation. And so from that point forward, he set a tax, or, excuse me, he set an investment criteria for himself. And one of the main points is how does this investment fit within my tax strategy? Because just because it's a great investment and just because it's flashy and it's beautiful, it's a good deal, does not make it a good investment for you if it doesn't fit your goals and your strategy. So get out in front of it. Talk to your CPA when tax season ends, which is coming up here, April, the day after April 15, sit down with your accountant and talk about what does this year look like? What sort of real estate investment deal should I be looking for at fit my tax strategies? On today's episode of Heading West, Steve and I talk about how to choose a good investment opportunity. Steve, at this point, I think we're in probably week three or four of our new podcast series of let's call it Real Estate Investing 101. Week one, we talked about how to choose the right syndication partner. If you want to get started in passive investing, you should choose a syndication partner who's going to be doing a lot of the legwork and to find the right properties and to manage them for you and you're trusting them with your money. Step two is talking to your CPA about, well, how does this affect my personal tax situation? How does this fit within our my long term goal for investments in generational wealth and things like that. Today we talk about the next step, which is, all right, you're ready to start investing. How do you even choose the right property? And today I think we laid out a really good sort of criteria of what people should consider when they're looking at all these passive real estate opportunities to determine which one's best for themselves.

You know, Jake, you've heard, you've heard the phrase real estate is all about location, location, location, and that's just one of the factors.

Yeah.

But choosing the property in the right location can minimize a lot of risk and also allow you to take advantage of the headwinds of a great location, which accelerate returns, accelerate occupancy, and make that investment much better if you're in the right location.

100%. Well, if you haven't watched the past episodes, you could certainly jump in right now. But I, I highly Recommend Watch episode 1 and watch episode 2. Come back to this one. We're, we're producing them in order for your benefit to help you take these stair steps, these building blocks to, to become more comfortable in passive real estate investing. But again, stay tuned as we head west and as we talk about how to choose a good investment opportunity here on Heading West. This episode is brought to you by Skyline Point Capital. If you're anything like me, you're always considering where to invest your money. Stocks, bonds, crypto, a rental home. The list is literally endless. As we've all seen over the past year, the stock market is unstable, the housing market is just weird, and inflation is on the rise. In times like these, the clear place to invest my money is in multi family real estate, AKA apartment complexes. Here's why. Returns on real estate investments have little to no correlation with the stock market. There's lower volatility, stable income streams, and the tax benefits are insane. And let's not forget that the apartments will typically appreciate in value over time, which means you can walk away with a pretty nice return when the complex is sold in three to five years. Best of all, multifamily investing is passive, so you get all the benefits without the hassle and headache of your typical rental home investment. Getting started has never been easier. Head to skylinepointcapital.com to learn how you can start investing today. Welcome back to Heading West. On today's episode, we're going to talk about how to choose a good investment opportunity. Over the past few weeks, we've been building these stair steps, these building blocks for you as you get into passive real estate investing. Week one, we talked about how do you choose the right syndication partner because you want to do this passively? You should. You need to find a syndication partner to get you started. Episode two, at this point, you should have learned that, okay, we need to talk to our cpa. We need to figure out what sort of property would fit within my investment in my tax strategy and goal. So at this point, you should have already accomplished those. If you haven't done those already, push pause, go watch episode one and two, take care of those and come back and watch this. But again, today, we're going to talk about how do you find and choose a good investment opportunity. So right off the bat, Steve, we're going to start with where we left off on the last episode is how does this investment property that's being proposed to you by your syndicator, how does it fit into Your investment goals and tax goals.

Well, Jake, that's. That is one of the most important questions every investor should ask themselves. And your CPA is what are you trying to accomplish by investing passively in real estate? And the biggest thing is to build a generational wealth and passive income. But the other thing is, if you do it correctly, you can save on your taxes. And that's why it's critical that you're talking to your CPA and your attorneys of what you need, how much and how it fits into your overall wealth and investment goals.

Yeah, and, and do yourself and, and them a favor. Favor. Excuse me. Get ahead of it. Don't wait until you, until you're. Hey, I'm just depositing cash right now into this property. How should this fit? Give them as much advanced warning as possible. It reminds me, we had an episode a number of weeks ago with Paul Young. If you haven't listened to the episode, incredible episode, talking about talking to a gentleman who's invested in a lot of real estate and had done a few things that, that hurt him in the tax situation. And so from that point forward, he set a tax, or, excuse me, he set an investment criteria for himself. And one of the main points is how does this investment fit within my tax strategy? Because just because it's a great investment and just because it's flashy and it's beautiful, it's a good deal, does not make it a good investment for you if it doesn't fit your goals and your strategy. So get out in front of it. Talk to your cpa. When tax season ends, which I was coming up here, April, the day after April 15, sit down with your accountant and talk about what does this year look like and what sort of real estate investment deals should I be looking for that fit my tax strategies that's.

So important you can't start soon enough?

Yep, absolutely.

It'll be a great journey for you.

So, so Steve, is there. Let's get some advice on what type of opportunities they should be looking for based on their tax goals. So are there certain deals that are more, more beneficial for cash upfront? Is there, is there deals that are better long term? Kind of walk us through how each investment opportunity fits that certain criteria.

Let me, Jake, let me start first.

There's a.

There's different asset classes or types of real estate. There's multifamily, there's retail, there's office and industrial. What Skyline Point Capital mainly invests in, they're in multifamily from that site. So we'll Talk about multifamily, because that's the most common way to invest passively into an investment. Then if you go back a couple years and even a year ago, the typical duration for a multifamily investment for a passive investor would be four to five years. That would be the plan that you invest in into the property. And then at the end of five years they would sell the property and then rinse and repeat on another property. But now today with the higher interest rates, you are seeing what was four to five years becoming a seven to ten year hold on the property. And that's due be due to the higher interest rates and it's taking longer to recoup the that return on the property with the long term debt that is in place. And as an investor, as you talk to your cpa, what do you really need? Are you interested, interested in more cash? Are you interested that hey, I really don't need the cash, but I can, I'll take the upside when we sell. And that's why you need to be with the CPA what's most important. But typically, let's just say we take an average deal. An average deal. Today a passive investor can expect anywhere upper fours to 7% cash on cash. That means for your investment you will.

Get.

Four high fours to 7% and could be more depending on the property a year on your investment. And that is, and that is used typically distributed out on a quarterly basis from that site. And if you don't need that, you, you may say I'm okay with the lower cash, but I need lots more. Distribute lots more depreciation like we talked back last week on what it takes and the tax benefits because of depreciation. So it's basically what do you need? You need cash, do you need long term from that side?

Yeah, yeah. And you might find some deals that, where you get a high cash on cash return, you might find some that also have a high IRR return. And in today's day, with what interest rates are sometimes you might find one that puts off a lot of cash. But you might not get a, you might not be able to double your money in five, seven, ten years or you might find the opposite. So you really have to choose a property that like you said, fits your goal. If you and your CPA sit down, CPA sit down and say, you know, you're in a good position, we want to have a long term hold because the long term holds typically are more risk averse, then you can look for something that you know might double your money when you sell it because the appre appreciates over time. But it might, it might not put off a lot of cash and you're okay with that. Or you might say, you know what, I have a profile that allows me to be a little more risky, therefore, I want to go with a little bit more cash payoff throughout these quarterly distributions. And it's up to you and your CPA to really decide what you should be looking for. And that will really give you a good litmus test, so to speak, on when your syndicators bring you deals. You can, you can tell right off the bat, well, that one doesn't put off enough cash or that one's held too long. And that will give you a good indicator of which way you should go with investing in a property. You know.

You know, Jake, typically in the last five, five to maybe a year and a half ago, it was very common. And, and to double your investment in five years. That was incredible. And that was, that was the benchmark that if you can't double your investment in five years, that was not a good deal.

Yeah.

Well, with, with today's interest rates and the debt market that is so challenging now that, that once we. Where you doubled it, now you're only able to get about 80% of it.

Yeah.

And in that range. So it is less. But that's one thing nice about real estate. In addition to the passive income, you can get a great return on your capital that's invested that you can't get in much other areas.

Yeah. Which, you know, we'll talk about. We'll talk about that more in depth on later episodes where you've got the passive income, you've got the appreciation of the asset. So when you sell it, hopefully you're doubling your money or, or 50% growth or 85, whatever. But also the tax benefits are huge. But I will say even if you're, if you're only getting 80% growth on your investment, that's still better than what the stock market typically predicts. Or they predict they'll say, I think the, the going timeline is you should expect to double your money in the marketplace every 10 years. Well, if I can, if I can get 80% growth in, in, you know, three, four, five years, I'll take it. Still better than the stock market, so I'll stick with real estate. So, Steve, let's move into more property. Specific criteria for how to choose the right investment opportunity. Let's talk about markets. Are there specific markets that are better than others when determining if this is A good opportunity for you to invest in.

Every syndicator, depending, depending on where they're located has a criteria of where they want to invest. And I'll tell you what Skyline Point Capital does and why we want Skyline Point Capital wants to invest in high growth areas. What I mean by high growth I mean where the population is moving to. One of the things we use is the U haul reports and we look at states where who has the highest one way U haul rental to what city that means they're moving there. So we want high growth areas like Texas is that the Carolinas, Nashville, Charlotte and basically the southeast area is where people are moving to but just not people you find companies are moving there and what they're doing is moving away from high tax states to a more tax friendly environment. One thing about Texas, the Carolinas and Tennessee, they are pro landlord friendly meaning that they are, they're on the times. They, they look out for what the real estate landlord, what they're trying to accomplish, what they're trying to build. And it's very attractive that when you move into those states you have a, a really good legal understanding what happens if things go awry in those states as compared to like California which is a very renter friendly state. A lot of regulations, a lot of taxes, they don't have to pay the rent for a long period of time and that I don't know how many landlords can, can own, keep their business running when they aren't getting paid. So we want those attractive states and we like, like I said Texas and this in the Southeast, towards Florida.

Yeah, the Sunbelt. I think you were, you were hinting at this. Every syndicator gets to have a different perspective on this. But you'll find that a lot of them are, are really targeting the Sun Belt because of the reasons you talked about. It's, it's landlord friendly. A lot of their high growth from people moving there. It's, it's there at the top of the list of where other businesses are moving to because typically tax benefits, you're finding that there is a disproportionate of housing that's available and housing that's needed. So apartments become very attractive if it's maybe landlocked and they can't build new, build new houses or the cost to build a house is too high. So there's, when you look at that, those criteria you tend to find that the Dallases, the Houstons, the Nashvilles, the Charlottes and other Carolinas, Greenville fall into that quite a bit and you'll have some other, other ones like, you know, Kansas City or maybe something in Arizona, but for the most part, it falls the sun belt. So those are typically what you want to find marketplace wise. But again, it depends on what's your criteria, what is your goal for investing, and what specific deal is being brought to you by this indicator that you've already chosen. So Steve, we've talked about this before, is that as a syndicator. We talked about this, I think in episode one as a syndicator, the fun and sexy thing is to, is to buy a property, buy an asset. A tough part, and where the money is really made and it's really lost is in managing that asset. It's running the business. And in that sense, it's incredibly important for a passive investor when I'm analyzing a property is to say what's the business plan the syndicator has in mind in order to raise the rents, raise the value of the property? Because at the end of the day, this is an investment for me. Yes, I want it to, I'm investing for security because I want to diversify from the stock market, which, you know, does this security, it's safe, but I also want to get a return and that requires that the rents get pushed up and the value of the overall asset increases. So the business plan is incredibly important. Steve, talk to us a little bit about what the impassive investor should look for in the, in the business plan to know that, okay, these guys and girls know what they're talking about and they've got a good plan in place.

Buying an apartment complex is no different than running a business. It could be a manufacturing business, a service business. It is a business. It's not just like you said, acquiring, that's the sexy thing, acquiring the property. But when you look at a deal, look at the experience of the syndicators and what property are they buying that, that they're presenting to you. There are different classes of property. Class A, which is the high end, very, very little we call heavy lifting to upgrade the apartments to down to a class C property where you're turning the apartments, you're, you're putting in new granite, new fixtures, new amenities, and which is takes a lot of work to do that. And where you see syndicators get themselves into trouble is when they take on an asset class they're not experienced with. And I can tell you, no matter how well you plan and think, the investment, the analysis, the due diligence, there's always surprises. And that's the same way it's been in business over the years is that you must have the experience, the capital reserves and have a business plan that's well laid out to take it to take into consideration if there is a, a deviation or if something happens and et cetera, that you turn this business, business forward and you, you provide great returns for your investors. So I have seen syndicators that are jumping in at the, at the, for the first time or a second time and virtually with not a lot of business experience. They may have some other professional experience, but they get in, they buy it, they're excited, but things may go haywire a little bit like interest rates going up or they have a problem in the property. You've got to be able to quit things or you have to be able to fix things fast, know what you're going to do and run the apartment complex like a business because in fact, it is a business.

Yeah, yeah. So if they've got business experience or running teams and building teams experience, it's great sign that they're going to be able to, to deal with running their own business. But also to your point, when things go awry, they're going to know how to pivot, they're going to know how to manage when things, things when there's chaos and turmoil. But if you get into the investment, if someone presents you an opportunity for an investment and you ask them something as simple as, well, how, what's your business plan for raising rent and adding value to the asset? And they really don't have a great answer or a very thorough, well thought out, presentable plan. There's a good chance that they, that they don't have a fully formed business plan yet. Because you can't just say, well, rent's eleven hundred dollars, I'm gonna raise thirteen hundred dollars. That's how we're gonna do it. That's not how that works. You can't just, I mean, you could do that, but you'll see, you'll see people vacate their, their apartments and you'll have an occupancy of 70% or whatever, 75%. And so you can't do that. You have to have a business plan and it's gotta be one that's actionable. It can't be a pie in the sky plan. It's got to be something that they know is going to work. And I think that's the, that's, it's incredibly important.

One of the things you hear the most, well, how are you? What's your plan? Well, the Common thing. Somebody says, I'm going to increase the rates to market. The next question you ask is, tell me how.

Yeah.

How do you plan to do that and why? And then listen to the answer.

Yep, a hundred percent. All right, let's move on to the next one. You know, we talked about the, the asset itself, talked about the markets, talked about their business plan, how they're going to get, how they're going to increase the value for your investment. But one of the most important things, especially now, is the debt. How are they going to fund this? Is it going to be a fixed rate debt? Is it going to, and who's providing it? Can you talk to us about the importance of having the right debt for.

Investment opportunity in today's marketplace? It's even more, more important to have the right debt on the deal with high interest rates. Right now, deals are being done with fixed debt and it's absolutely critical with this fixed debt, the time frame is longer. So you have to think about that. You may hold the property for seven to ten years, but with the fixed debt, the syndicator has to raise more capital than they were used to a year and a half to five years ago when they were using bridge debt. And the debt on the property can make or break the performance of the multifamily for the apartments. And you're seeing that right now with some syndicators where they've had bridge debt in the last two to three years. And with or without rate caps and this, the rate just keeps going up and up and up and the performance gets worse and worse and worse.

Yeah.

So right now it's long term debt is the key that is so critical. And if you make, if you put the right debt on it, Jake, it takes that complexity out of the asset. You don't have to worry about that because you got 50 fixed long term debt.

Yeah. Now let me, let me play devil's advocate a little bit or at least ask a question that might be devil's advocate. Does fixed debt always make sense and maybe, maybe take disregard what's currently happening? Because that's, that's the right answer right now everybody wants fixed debt. Is fixed debt always the right answer? Or does it depend on the property? Does it depend on the time? Does it depend on the investor?

It depends on all of the above. Today it's fixed debt, but what you want to do is put whatever financing debt on it that makes the property profitable, provides great returns for the investors and provides that ability to do the things you need to do and not Constrain you as a business. That is so today because it's cheaper to get a fixed rate debt than it is a variable debt. And if you go three years ago, five years ago, it was cheaper to do a variable debt like a bridge than a fixed. And it just changes over time. It just depending on what's happening in the macroeconomic area, the financial conditions. So there is not one right or wrong answer. But right now, today, you see the majority of the syndicators doing fixed debt. And now there are some that are doing the bridge and have a little twist on how they're doing it. But that adds risk to the property. In some cases you don't need that risk.

Did I hear you correctly even saying that the fixed debt today is cheaper or is it more expensive because everybody wants it?

Well, the, the fixed debt today, very. When you want bridge. When you want variable debt.

Yeah.

You want debt because you think the rates are going lower.

Yeah.

And they're going to keep going lower. And they keep going lower. And so I use variable debt. You would never. I can't say never is the wrong term. But it's probably not prudent to get a variable rate and do your underrating. Underwriting at the rate today.

Yes.

And you know the rate's going up every year.

Yep.

Because you have to factor that all in and it's a risk. It can go up and it, it adds risk and variability.

Yep.

Agree to the asset. Now, today, in every real estate property, you have to, you have to manage the risk and the return. You can't just go ahead the return and then just the risk. You manage a boat, you have to manage both of those. And right now, today you see people to manage the risk, the interest rate risk to manage that. Today, people can't. It's very difficult to determine whether the rates are going to be three months from now, six months from now, a year from now. And there. And there is historical information that says after an interest rate rise that the rates come down 18 to 24 months after. And. But that's no guarantee.

That's no guarantee. Sure.

So if you underwrite the deal conservatively and you take into the risk factors, that's a very wise thing to do.

Yeah. Yep. Understood. That makes sense. So debt is an incredible, incredibly important component of if this investment is a good opportunity for you specifically, I'd say there's a few before we wrap up, I think, I think there's a few more that are worth noting and I'll just run down the list and you can jump in if there's any that you want to jump into a little more. But is the syndicator putting in their own money pretty good indicator if it's. If they believe in the deal, if they are or aren't, what's the team they've assembled? Do they have a pretty well thought out team that they've assembled that has a lot of great experience and there's a lot of. There's a lot of examples of when that team's worked together in the past. And what is the investment timeframe? Any of those you want to jump into before we wrap up? Yeah.

Let me jump into how much money the syndicator is putting in. What we do at Skyline Point Capital is we buy properties we want to own for the long term, so we put our own money in and then we bring along investors with us so we can buy much bigger properties. But our investment criterion thesis is we want to own properties we would love to own.

You.

As you ask the syndicators, if you're looking at deals, how much money are they really putting in of their own money?

Yeah, a lot of them.

Not fees. A lot of them just roll their fees in and they say, yeah, we're putting X amount of money in, but it's really the fees they're putting in. You should ask how much money out of your own pocket are you willing to risk to put in the deal?

Yep.

This way you, they the syndicators and you are aligned because you're the passive investors are putting their own money in. You should, you should expect the syndicators to put their money into.

Yeah. And there's nothing wrong with a syndicator putting their fees into the deal. That's not. Not a problem. The point in asking that question and differentiating, is the money you're putting in your fee that you're rolling in, or is it cash from your pocket that you're rolling in, or both. The reason why you want to know that is because it tells you a lot about either their confidence in the deal or their excess cash they have on hand. Because if they, if they don't have excess cash to put in, that might be a problem. If, if, you know, current circumstances happen and they're cash strapped and they can't, they can't work with. If they're cash trapped, they can't do much. Yeah.

And you'll get a good feeling if they're put. A good feel if they're putting in their own capital in the deal. Yeah, that's. That's critical. One other one is the team assembled. And I just really short goes back to the business and the team. You want a team, the Syndicator GP team that is aligned. They have business experience to handle the ups and downs in any business. And that is so critical when you have an aligned team on your properties. That's like magic. And it just. Things move at a much faster rate for improvement. And when I go about a team, I'm talking about the gps. But then also what's very, very important, and I've said this before, is that there's the phrase of in golf, you drive for show and putt for dough. And one of the most critical components of a successful real estate investment is the property manager. And managing the property, that's like analogous to putting in golf. That's where you can make or lose money. And if you've got the right property manager and you're managing the property manager and they're aligned with your goals and what you're trying to do, it is a great, great team. And I encourage you to ask the syndicator who's your property manager? Because there are good property managers and then there are other property managers.

That's a good way of putting it. That's very political. Let's actually I have one. One other question before we wrap up that we didn't talk about beforehand. But what should passive investors look for in a fee structure that's that makes sense, it's equitable, that's fair. Is there a, a range or a, A, A, a sort of criteria for what a, a syndicator's fees are that they should be okay with?

Let me start with A typical syndication has what is called a SP split that the GPS on on average will get 20% of the split and the LPs get 80% of that. So on the distributions, if there is a 100,000 distribution going out, the GPS would get 20,000 and the LPs would get 80,000 to distribute across the investors. I've seen the splits as The GPS get 10 and the investors get. The LPs get 90. And I've seen it where GPS get 30 and the LPs get 70. It's just different by syndicator and by property from that side of it. Miley encouragement and that we like Simpler the better when it comes to splits. Jake the I've seen them where there's waterfalls and hurdles and thresholds and it becomes very complicated and I don't like complications.

I like simple investors don't.

Simpler the better. Yeah, it's easier to manage. And with Skyline Point Capital, we just keep it as simple as we can.

Yeah, I don't want to have a if I'm a passive investor, I don't want to have to have an Excel spreadsheet and a, and a, and a formula to determine what I'm going to make for an investment. I want to be able to do it on like my phone or my write it out on a piece of paper to understand what I'm going to make. So I agree, complexity is a killer. Simplicity is always the best way to go, but okay, let's wrap this thing up. This episode we talked about how to choose a good investment property. Talked about the the you already have the right syndicator. You already figure out what your criteria is for what your tax goals and investment goals. But now you need to figure out, okay, which market are we going into? What sort of returns am I hoping for? Do they have a good business plan in place? Do you have the right team? What's the right debt structure? What's the right fee structure? These are things you should really consider when you're looking at investment properties and take a look at multiple properties from your syndicator or a group of syndicators that you've chosen. Don't go with the first one that's brought to you. Take a look at a couple of them, compare of them, get started small, but at the end of the day, have your attorney and your CPA review the deal before you get into any of them just to make sure you didn't miss anything. And that really does fit into your investment intensity tax goals. But thanks again for tuning in. Stay tuned for the next couple of weeks as we dive further into how to get started in passive real estate investing. If you want to learn more, go to skylinepointcapital.com and we will see you next week.