Step 10: Reap the Rewards

Welcome. This is the Insider's Edge to Real Estate Investing with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program you'll learn game changing strategies to outperform the market. James will teach you how to source, execute and capitalize on the best real estate opportunities in New York and around the world. Now here's your host.

Welcome to episode number 127 of the Insider's Edge to Real Estate Investing. This is your host, James Nelson. I am principal and head of Tri State Investment Sales for Avis and Young. And welcome and thank you. And for those of you who have been listening to this 12 part series, congratulations, you have made it. We are culminating this and then we're going to get back to our regular programming where I will be interviewing some of the legends in the business, hearing their stories. Uh, but yes, we are wrapping up our program on these steps to gain the Insider's Edge to Real Estate Investing. Uh, and the Insider's Edge to Real Estate Investing is not only the name of this podcast, but also the name of our upcoming book which will be out in January, which I am writing with my writing partner, Rachel Hartman, who will be joining us shortly. She is amazing. She's, she's got an incredible background, having written for various Fortune 500 companies and is a regular contributor for U.S. news & World Report, among others. And so we have been working through this series which started off with Rachel interviewing me about my experience not only as a broker but also as an investor. And then we talked about why real estate, why is real estate such a compelling investment compared to other asset classes? And then we went through the various 10 steps on, on everything you need to know from start really through the end of the sales process. So how to what to initially to look for, how to source opportunities, how to build the right team, how to reposition these assets. So a lot of great stuff. So if you are joining us for the first time, you're going to want to go back and start sequentially. But if you've made it this far, this is really where you're going to reap the rewards. And this is where it could be selling the property. And we're going to talk about how best to do that and how to maximize value. But it could also mean refinancing. And I can tell you that some of my wealthiest clients have amassed tremendously valuable portfolios of properties by maybe it started with one property, buying it, improving it, refinancing, taking those proceeds and then buying another property and so on and so forth. So we're gonna talk a lot about that process, but also talk about other opportunities such as 1031 exchanges and how to continue to bring grow. So I know you're going to get a lot out of this episode. We're going to have a brief word from our sponsor, but before I break, just want to remind you if you've not checked out james nelson.com Please do so. That's where you can find show notes and prior podcasts as well as an exclusive video series that covers these steps. And it's also where we're going to be launching our pre sales for the book which should be happening very shortly. So thanks as always for joining. We're going to have a brief word from our sponsor and we'll get right into the discussion on the final step. 10 Reaping the rewards A different approach to putting our clients first Avis and Young's Tri State Investment Sales Group sells multifamily office, retail development and specialty sales throughout the New York metro area. As experienced thought leaders in our industry, our 35 member group is available to help you make informed investment decisions by advising you on your current holdings or identifying new opportunities in the marketplace. Our one unified team is built on an industry unique platform which promotes unparalleled collaboration and teamwork. We share core values of hard work, integrity and expertise. We put our clients first providing tailor made strategies to achieve superior results. Please Visit us at aytristateinvestmentsales.com and follow us on Twitter, LinkedIn and Instagram amesnelsonnyc to learn more. Okay, welcome back everyone. James Nelson, your host here with my co host Rachel Hartman for this exclusive series that we have been doing. In case if you are just joining us for the first time we have rebranded this podcast. It is now known as the Insider's Edge to Real Estate Investing. Why? Because that's exactly what we're here to teach you what to do and will also be the name of our new book that we are working on which will be out early next year. So we have already covered an introduction where I told my story, we talked about why real estate and then Rachel maybe talk about the other nine steps and we've covered a lot. So again if you're listening for the first time I would go back and listen to that introduction and kind of go step by step so you can find out how we got to this point which today is Reaping the Rewards. So at this point you've successfully reposition the asset and this Is, you know, you're down the home stretch here. So we're going to talk about how to capitalize on your investment. So, Rachel, maybe tell our audience what they've missed so far, if they're just tuning in or just remind them on what else we've covered that we're now building on.

Yes, I'm happy to. This is a ten step approach and each step is so important. So one thing I love about these podcasts and the other material that James produces is he really has the heart of a teacher. So you can listen to the podcast, you can read, you can listen to other presentations he gives, and you can get those key takeaways of how to act. So we talked about different property types. Where do you start? Do you get an apartment building? Do you get an office? We looked at the importance of building your team and finding great deals. Finding a property and opportunities is much more than just an online search. There's a lot that goes goes into it, and James breaks that down as well. We talked about what you have to look for when you walk through the property. It's much different than going and getting a home and different things to look for. No matter what professional background you're in, you can bring some to the table as you walk through and you'll want others to come with you as well who can share other insight. So the financials are super important. We talk about underwriting, raising capital, working with lenders. All of those are key parts of the process. And you need to have those resources available and ready to go when you want to get moving and close on a deal. We moved into some exciting steps after that. You know, talking about what do you do with the property once it's in your hands and how do you bring on tenants? Which is a incredibly complex topic in and of itself. But we went over some very key points to get you started on that. So today we're really talking about what comes next. You've acquired the property, maybe you've brought in tenants. Maybe it's producing the cash flow you were hoping for. So you're looking at the returns that are starting to come in. What do you do next? So I'd love it, James, if you could talk to us a little bit about that. Maybe we could look at options. Should you keep it, should you not? What options do investors have after they have held a property for a while?

Sure. So, and let's kind of go back to before we even made the acquisition, because this really speaks to what your business plan is. Right. And so assuming that you're, it's one thing if you want to just buy something for your own account, you want to just enjoy the benefits of cash flow and just hold it forever. And there's nothing wrong with that. But for most of you listening and really understanding that the power of real estate investing, it's not just at the asset level, but it's also, you know, having an opportunity to bring in other investors, to promote off of them, to really upsize your return. So assuming that you fall into that category, you have already told your investors what is the business plan and how long is it going to take you to execute. And that should typically be, you know, in your deck, should be in the plans. And so if we're looking at the timeframe, what these investments take. Look, these are not quick investments. Unless if your goal is to go and to tie up a deal and flip the contract or get approvals and resell it right away, that's typically not the most efficient way to do things. Certainly from a tax perspective, when you do that within a window of a year, that gets treated as ordinary income. And again, this is where I have to always give the caveat, check with your accountant. But you know, the point is, you know, even if you double your money, you get it, you get the money back. And then what? Then you got to go deploy it again. Right? So, you know, most investors here are going to be in for the longer term. You know, most real estate funds out there, usually the fund life is somewhere in that five year range. And then you have the ability to harvest that investment, you know, on up into seven years. But some of these funds even run out 10 years. So again, you want to make sure that you allow yourself enough time for this investment. You know, it could be, you know, six months to a year just to acquire the asset, start repositioning it and doing the construction. It could take two years to get through that process and then another year to retenant it and stabilize the cash flow. You're already at year three. And at that point, you know, again, based on what you've told your investors in your timeframe, you know, once you lock in and you've, you know, brought in these tenants and that they're paying rent, which is typically the best time to resell. I mean, you want to kind of see this investment through, add that value. That is the time when you want to start thinking about capitalizing. And sure, that could be a sale, but it could also be refinancing. And again, this goes back to how you're going to structure these partnerships. If you have investors who've come in and invest alongside you, typically, you know, there's a time frame on their money. They don't want to just give you an investment. And then, you know, you've got infinite amounts of time to return that capital. Unless again, if you say, hey, this is the business plan, this is a forever type investment, we're going to buy this for cash flow, we're holding onto it, that's what we're doing. But generally speaking, those investors are going to want to get their money back, you know, generally in that five year period. And so a sale can obviously accomplish that, but so can a refi. And if a refi happens, you know, there should be language in that agreement to say, okay, well, if, you know, you, the sponsor, decide to stay in the deal, how are you going to buy out those limited partners? And typically that's going to be at a. Whether it's based on an appraisal. Right. Where this is what the property is worth. You know, we bought the property for 5 million, we put another million dollars into it. Now we're selling it for $10 million. But if we're not going to put it on the market for sale, you know, getting that appraisal to say, yes, market value today is at 10 million. There's also different ways to structure this. It could be a right of first refusal where go out and market the property, establish that market value and then one partner could buy out the other. So, Rachel, it's a long way of answering your question. When is the right time to capitalize on an investment? A lot of that has to do with what was the business plan and what did you set out to accomplish.

Perfect. And I'm glad you brought up refinancing because I think it comes up a lot during this step. So I'm curious if you can talk a little bit about how that process works. Maybe we can go over advantages or disadvantages as well. Things to be aware of.

Perfect. So, yeah, I mean, refinancing in many cases and a lot of this is market driven. And here we are talking about this in May of 2022, where the Fed just raised rates by 50 basis points and we're expecting there will be more. So the cost of borrowing is going up now over the last year or two, money was basically free to borrow. So, you know, I'm here as a sales broker trying to sell product and I would say that I have success roughly selling about 60% of the product that we bring online. Does that mean that we're failing with the other 40%, that we're not getting that price and then our competitor is selling it instead. No, the majority of the time when we do not execute a sale, it's because the seller says, hey, appreciate the effort here. You know, the offers were good, but it's much more accretive for me to just refinance. Right. Because when you sell, Rachel, there are costs associated with that. And I'm not just talking about the brokerage fee, you know, transfer taxes, but there's also taxes associated with it. And I know we're going to get into 1031 exchanges how you can defer some of those capital gain taxes, but, you know, there are friction costs and expenses associated with the sale. And look, if you can lock in the right type of debt, it could be more accretive. So again, it does go back to what the business plan is, because you might not have the luxury. I mean, some of these funds that have raised capital and they have to return, you know, the money to the investors, they might not have the luxury to refinance. So, you know, flipping sides, you know, and here, here's kind of giving you that insider's edge to real estate investing is knowing the profile of your seller. I mean, that is really important. What is the seller's motivation? We've talked about it on this show before. If they're a fund and they need to close out their fund and you end up buying one of those last few assets where they just had to get them off the, you know, the balance sheets, they can close things up. They might have already booked a huge gain and, you know, generally, maybe the last, you know, assets or two, maybe they weren't so hot. And at this point they're willing to just say, look, we've got enough gains in the book. We can, we can absorb a couple losses here. And you, the buyer, kind of knowing what the situation is and the timing, you know, might be well, well positioned to capitalize on that.

Okay, great. And then with refinancing, can we talk a little. You said it's market driven. Can we talk a little bit about, you know, the opportunity to get better rates and also how loans might be structured differently in real estate investing, as opposed to, you know, a home mortgage, what type of loans you'd be looking at.

Right. So there are similarities as far as when you are going out to secure a debt between a residential and a commercial investment. Again, with residential, the bank is a lot more concerned about you, your balance sheet and your ability. Yes, of course they're appraising the house or the apartment you're looking to buy. But they are especially interested in what your income is and your ability to pay that debt service. Because again when you living in a place you're not that, that, that assets not creating cash flow, right. Whereas when you're seeking a loan for an investment property, the bank of course is looking at your financial wherewithal. But they are, you know, equally if not more concerned with what is the performance of the asset. Especially most commercial loans for stabilized cash flowing assets are non recourse loans as opposed to recourse. So if you're getting a home loan, it's recourse. That means you're signing on the dotted line. If you don't pay, you know, that bank has the ability to come after you and your assets. Whereas for commercial, typically it's the LLC that's borrowing, you know, your exposure is limited to the value of that asset. And that's why the banks typically look to be conservative. You know, they're only looking to lend 60, 65% loan to value, you know, so God forbid, if the asset doesn't perform, you can't pay your debt service. Let's say the market takes a turn, values are off 10, 20, 30%. Hopefully the bank is still going to be secure in their position. Now in times like the financial Crisis back in 2009, sure you had a lot of situations where the debt in many cases was more than the property's value. Now the property's upside down. And for all of you out there, you know, looking, you know, distressed investors, looking for these opportunities to buy the bank, you know, from the bank, you know, oftentimes, you know, and this goes back to who are you dealing with, you know, an owner, a borrower who might be under duress and might have the inability to pay off their debt service or they might be getting foreclosed on. And sometimes that can be difficult to find out if they've borrowed money. With cmbs that's, you know, they make that data available. People know it can be very public if a borrower is not paying. Sometimes with the lender it's a little more difficult to find out. There's private services that you can go in and take a look and see if there have been any defaults. But those could be opportunities where you got to say, okay, well if this person owes more to the bank than the property's worth, you're wasting your time speaking to the borrower. Right? You should be speaking to the bank. So I realize I'm going off on a little bit of a tangent, but kind of understanding again the ideas of borrowing against you, the borrower versus the asset. And so that's why the banks are going to be very interested in what's the cash flow, understanding the value of that property, getting that appraised. And then there's a variety of different types of lenders out there as opposed to, you know, residential. You're typically just dealing with banks, but on the commercial side there's life companies that are very competitive. I just mentioned cmbs which are securitized loan products. They bring in these pools of mortgages, package them, sell them off in tranches. So pros and cons to those different types of debt vehicles. And that's why, going back to our show about the importance of having the right team, having if you're doing this for the first time, having an experienced mortgage broker, incredibly important to have that member as a team because they are going to know what is the best type of debt source for your investment. And look, if this is just kind of a mixed use, again value add kind of right down the fairway, you know, having a good bank relationship, that the reason why borrowers like dealing with banks is because there's someone at the other end of the line on the phone who's willing when things get challenged or there's a question, you can call them out, call them up and you know, easily try to work through this. Whereas if you're talking about on the other end of the spectrum with a CMBS loan product that's been securitized and sold off, those bondholders, you know, they're not looking for you to modify terms or you know, hey, I know we said we would only lease the retail at this rent, but the market's not there. We need you to agree that we could rent this store for less. There's no one on the other end of the line, right, to, to, you know, to, to get that, that loan modification. I mean, yes, you could kick it into special servicing. That's a whole nother process. So then you've got a special servicer set up to make sure that the property is doing what it should be doing for the fiduciary that the bondholders. So again, I think for most of our listeners out there who are looking to do the first couple of deals, having a bank that's in your corner that's willing to work with you is important. And again, if you're having challenges getting financing yourself, that's why it's great to have a partner as well, that experienced partner, hopefully they have banking relationships they might be able to get, if they have more experience, better access to debt than you do. A lender might be more likely to say okay, we'll do this non recourse loan because you know your partner has a track record, we know that you've done this before, you'll do right by the property. As opposed to someone who's doing their first real estate deal, they might say, well that sounds great, but we haven't seen you accomplish that before. So we're going to need you to personally guarantee this. Right. Or there's even some guarantees, you know, springing guarantees where if you know the retail sitting vacant, they might say hey, you're personal on this retail value until you can actually get a tenant in there paying rent. So but again I think having that mortgage broker to help lay out the options and there's all different kind of products. I mean obviously term is, you know, one of the most important. And rate, of course. So is this a, a floating rate that's fixed to an index with the spread, Is it a fixed rate for 5 years, 7 years, 10 years, 30 years? Are you paying amortization as opposed to an interest only type loan? Can the loan be assumed? So if you're going to turn around and sell it, can someone assume the debt? Again, for those of you listening right now, where interest rates have been going up, we're now looking to sell properties where maybe debt was put in place a year or two ago. And our first question is, hey, can this debt be assumed by the buyer getting, taking over that loan? Existing debt might be more favorable than what you could actually go out and get into the market today.

Great points. And it speaks to some of the other things we've talked about with working with the team building up that right, those right people and also the value of integrity and credibility in this space, you know, can certainly go a long way and come into play here at this. So when we think about selling, I'm curious if you can talk about some of the tax issues to be aware of and what might go on with a sale.

Sure. So when you purchase a property, you are establishing the basis. Okay. So the basis is that acquisition cost and then you add to that basis as you make improvements. So if I buy a property for $5 million and I spend a million dollars renovating it. Right. I'm adding to that basis. So when you go to sell, what they're going to do is take the sales price. They be IRS is Going to look at the sale price minus the transaction costs, right. Which are the broker's fee, legal fees, transfer taxes, your net sales proceeds, and going to look at that difference and that is the amount that you are taxed on at the federal, state and sometimes city level. Again, if this is over a year, you're talking long term gains. But it gets, it gets more complicated from there. So it's why it's very important to have an accountant as part of your team who is familiar with commercial real estate. Right. Because first of all, I just said there's three, can be three different layers. There can be federal, that can be state, there can be city. But also understanding the depreciation, right? So one of the values of owning commercial real estate, especially if you're holding it for cash flow, is to depreciate it, right? So what that means is over time a property's value, you lose that value. Because in practice and theory, which makes sense, the older the property is.

The.

Value of the existing property becomes less, right? In that it needs more repairs. It's not as competitive as maybe some of the newer product. Again, this is really for accounting reasons because you might say, well James, a lot of the times the hope is I buy this old building and people like that character and that look, and it's going to actually add value. In some cases there's examples where these buildings might sell for more replacement costs, but that's not what we're talking about. Talking about the accounting principles of depreciation. Well, you're going to get that benefit where, you know, after we've figured out how much cash flow we have at the end of the year, okay, again we're taking our gross revenue, we're taking out the expenses, we're taking out the debt service and we're left with our cash flow. Okay, that is what will we would be paying taxes on at the end of the year. But offsetting that is some of the depreciation, that loss on the, on the building, which will preserve some of the cash flow, which is why real estate can be such a great tax efficient vehicle. That being said, when you go and sell the property, the IRS is going to ask for some of that depreciation back. Hey, we gave you benefit over the year. That's not just like, you know, a free tax abatement that you get to double dip on. No, there's going to be depreciation recapture. So this is really, you know, when you're filing and, or you know, when you're a general partner and you've got limited partners and you're giving them K1s to explain, you know, to account for what happened in that year. You really need an accountant who's got that experience who can understand how to report and file the property.

Perfect, right? Lots to be aware of. And you certainly want to know before you move forward with any decisions. So I'm curious if we can talk a little bit about the 1031 exchange. If that tends to occur quite frequently during sales or not necessarily. Maybe we can speak to advantages and disadvantages there.

So the 1031 tax free exchange is one of the biggest advantages of investing in commercial real estate. It's something that's been on a part of the IRS code for decades. Although in recent years it's, it's come up against attack as far as potentially limiting the 1031 benefit or even completely eliminating it, which I think would be a horrible mistake because it's such a driver of business. We find that roughly half of our transactions involves a 1031 exchange on either side of the table. It could be a seller, it could be a buyer. Okay, the way that the 1031 exchange works is, remember I just kind of went through and told you how to factor that gain that we're now going to have to pay capital gains tax on if we're just cashing out. However, if we defer that gain into a like kind property, we can defer that tax that is due. So the way it works is after you close on the property. Well, let's start before you do that, your attorney needs to designate that you are actually going to elect to make a 1031 exchange. And look, if you can't find one, you got to cash out. Of course you can do that. You're not forced to do it. But you need to make, put that in the contract that you are going to elect to do that, make that filing. And then after you close, whether that you know that those closing proceeds, whether it goes instead of it going straight into your bank account, it's going to go into a qualified intermediary account which is going to be a separate bank account. This is important when you do this, make sure that it's a dual signature account where both you're signing and the qualified intermediary signs. There's horror stories of these qualified intermediaries running off with the money. And again, this is like the 1% of the 1%. But again, we're just trying to make sure that everyone's careful here and what they're doing. And it's A reputable qualified and intermediary having a good attorney also, they will, you know, can certainly make recommendations on who you know, good choices for that. So that money is going to sit in that qualified intermediary account. And you have within those first 45 days, the most common way is the three property rule. You have the ability to identify up to three properties that you can exchange into. There's also something, you know, known as the 200% rule, where you can identify as many properties as you want, but in aggregate, those properties cannot be worth more than double what you sold the property for. So I would say most investors I know go with a three property rule. And you have to identify within 45 days of those closings those three properties. Those are the only three properties that will qualify for you then to make an exchange. Those 45 days happen within six months. Okay? So you have to close on the new property, which is the up leg of the transaction, within six months. If you are successful in doing that again, there's no capital gains tax due. Your basis shifts into the other property. But very important, you have to not have to. But in order to completely defer, you have to purchase a property of same or greater value, right? So you have to replace the equity and the debt. So if I'm exchanging a property that I sold for $10 million and I have $6 million of debt on, I have to go buy another property for at least $10 million, if not more, and has to have at least 6 million of debt. Right. I can't just go in, retire that debt because if I do that, then I've got boot is what they call it, where there'll be a tax owed on that. So you can't try to use the exchange but still pull some money off the table. That's not the intention and how it works. So, you know, that's basically the timeline. I mean, you can get really fancy with these things. There's also reverse 1031 exchanges where if you have enough money, you could go buy the property that you want to replace into first. Right. And then you have to sell your property within six months. Most people do a forward exchange because they obviously want the money that they've sold for them to go buy the up leg property. The other thing, Rachel, that I would just advise our listeners to is be a patient seller and a quick buyer. Okay, so what do I mean by that? You know, again, I just told you that once you close, the clock starts ticking, right? So you got 45 days. And that's very like you know, stressful and, you know, kind of being on the clock. But if you work with a good sales broker and you understand, you know, your sale, you might want to have flexibility to close that transaction. We might say, hey, Rachel, I'm going to sell you this property, but I want the ability. You're telling me you can close in 60 days, that's great. But I, the seller, want the ability to push this closing out to 120 days, 150 days, because I want to use that time while I'm in contract and the clock is not running to go find replacement options. Now, you know, sometimes you have a patient buyer and they say, great, whenever you want to close, I'm ready, just give me 30 days notice. Other times they'll say, hey, look, we'd love to help you out, but I got my own 1031 exchange problem. I got to close within six months. I can't give you any more time than this. You have to close in this time. So. But look, when you can have that flexible closing where you can make sure and see properties don't show up on day 44 and say, oh, wow, I better start looking for properties, what should I bid on? I mean, by the time you close, you should already have potential options. I even have clients who sometimes have, you know, they have accepted offers, they have contracts and other properties. So they know that out of these three properties that they identify, they have a very good chance of being successful in closing.

Perfect. And you brought up like kind properties in there, which I wanted to clarify a little bit. I know before we've talked about different types of properties. When we're referring to the type of properties you can use in a 1031 exchange, does it have to be investment? And in that category, can it be broken down more? For instance, you know, apartment building to office and such.

Right. So again, this is where I should just have this disclaimer that, you know, check with your attorney. You know, don't operate heavy machinery while listening to this podcast. You know, again, you know, check what I'm saying here. I'm trying to be helpful. I. But what I will say is generally when you're making an investment, if it's real estate and it's income producing real estate, going from residential to commercial should not be a problem as long as it's you are an operator, it's for investment. Okay. Exchanging into land, just sitting on land, land banking, that's not cash flowing. Okay. That might not qualify for an exchange. Right. If there's a, you know, a one Story taxpayer sitting there on a development site, they're paying income. That might work. Right. Even if it has future development potential. That means that, Rachel, you can also exchange and buy for your own use for an office. So you're. If you want to go buy an office building or an office condo for your own use for business, that can qualify. Okay. That being said, it cannot be for your own residential use. Right. So you can't sell an apartment building and go buy, you know, a nice house on the beach. That doesn't work. You could buy a house if it is leased. Right. So if you're buying it to rent it out. Right. So again, it's it. This is for investment property only. And interestingly, I believe that you can also exchange, if you're into aviation, an investment in, you know, a plane for other plane artwork. But again, we don't talk about that. I get myself in enough trouble just talking about real estate. But this is definitely something that, again, has encouraged so much investment and has created so many jobs, because typically when they exchange, they're doing this to keep leveling up. And if you go back and listen to my podcast with Rob Revani, he talks about how he started small and he took a $1 million deal, and he turned it into a 2 million to a 4 million to a 10 million. And he just kept exchanging and exchanging, exchanging. And when you don't have to pay, you know, capital gains, which is could. Could be roughly somewhere in the ballpark of 30, 35%. If I can defer that and keep using my equity to continue to grow, maybe even, you know, get better financing moving forward. That. That is how every time you make a gain, you go out, do larger investments or go get a portfolio. Again, if you identify three properties, you could buy all three of them if you wanted to. Right. So that's another way is you can start expanding your portfolio.

Perfect. Yes. And listen to that Robert Ravani podcast. It sounds like a machine when he lays out his story. It's just incredible what these exchanges can do and how you can level up. So I do want to talk a little bit about potential pitfalls with 1031. I feel like sounds like it can be very beneficial, but we definitely want to address some things that can come up along the way, perhaps that you've seen in your experiences and how those can be addressed.

Yeah, I mean, I think that just goes back to what I was talking about with the timing. And if you sit and wait too long, you want to. In everything you do with your investment, you want to Use time to your advantage. Right. Especially when you're not on the clock. Right. And so that's why we talked about when we're in contract. That's just when you've signed a contract and you got 60 to 90 days to close on it or more. That's not just the time where you say, okay, well, the bank's got to do their own thing. Get their appraiser, you know, get everything lined up so we can close. No, use that time to line up your contractor, get your architect working, get those plans approved. And conversely, if you're, you know, that's. If you're buying, if you're the seller, you're thinking about, what are you going to exchange? So I think most of the blown exchanges that I've seen, buyers just waited too long, you know, and so really, you want to day 44, you want to have. You're actually not just thinking about buying three properties, you're actually negotiating. You've negotiated on three properties and you feel very confident that there could be a deal on any one of those three properties. So, you know, other than that, it's just, you know, making sure that you've got the right team in place to execute on it.

Perfect. And when we think about leveling up and moving forward, I'd love it if you can talk a little bit about that idea of building their real estate portfolio. For instance, we could cover things like timeline, you know, how long might it take? Is it a process that sometimes can go fast, that within five years you have these five properties? Not usual. And then I'd also like to talk a little bit about criteria to use to determine what's best for this situation. For instance, do I just want to keep one? Do I want to aim for 10? What, what, what kind of factors go into those decisions?

So again, this kind of goes back to one of the first things I was saying in the show as far as what is the business plan? What's your structure with your investors? Look, if you're in a fund and you have investors who have invested with you in this one specific deal, right, Typically you're going to do this through an llc, a single purpose limited liability corporation, and you all sell as a group. And the way these things work is if you want a 1031 exchange, and everybody in that LLC has to go along with you, right? So, you know, your investors might say, hey, you know, Rachel, great investment. You doubled my money. Really appreciate it. But I, you know, I'm going to go buy an apartment on the beach now. So you know, I'm going to pull the rip cord and get out of this one. So, you know, again, if your investor group wants to do a 1031, everybody's got to be on the same page. And that would actually be a better answer to your last question about what are the pitfalls? You know, if you have investors and then they say, hey, you know, wait a second, I don't want to go into another investment. So you kind of have to have that all or nothing. There is. And here I go giving legal advice, which I'm clearly not authorized to do. But, you know, there are different ownership structures out there that could allow for investors to go in their different directions. A popular structure to ask your attorney about are ticks. That's tenant in common, as opposed to those pesky insects that you find up north. But yes, the tenant in common would allow investors to go in their separate directions. You could have three partners who want to go into three different investment vehicles. But most especially if you're raising money from LPs, that tenant in common structure is a challenging one to operate in because in an llc, it's very defined. This is the general partner, this is the limited partners, this is the promote structure. This is what happens. Tenant in common. We all own collectively a property together, and so we all have a say in that investment. Right? So that can be a lot more complicated when you have different investors coming in, different classes, different economics. This is really one where we kind of all go in as equal partners, where everyone has an equal say, which can be very difficult if everyone is not on board. But I think just understanding the structure and what you can and can't do is important. But let's make it easy. Let's say it is just you and your own personal investment, or you've got a group that says, hey, Rachel, you know, you got a great knack for finding these things. Let's go, you know, find five or ten of these things, just let it roll. And you got an investor behind you who just says, look, let's just keep doubling down. That's a great situation. And you know, as far as what's, what's too much or what's to take on, I mean, what I would say is on one hand, there's a lot of benefits for owning multiple properties in the area. There's efficiencies. Whether it's you. Now you've got more bargaining power when you're running these buildings. You have a superintendent who can travel amongst the various buildings. You have one tenant, you know, you Fill up in one building, you don't have any apartments left. Of course, you always leave that apartment for rent. Sign up, you have a tenant looking, you can now bring them across the street to your other property. Right. So it makes a lot of sense to develop that, that portfolio. But how many, I think it really depends on, you know, what's your infrastructure look like, Are you set up, do you have the right management? What you don't want to do is get in over your head where you can't manage the properties effectively or you overextend yourself. So I am not a big fan of high leverage where, hey, just because you could get 75, 80% debt, I think you still want to sleep well at night. So take your gain exchange into something larger, but don't the idea of tripling every time the size of what you're doing and taking on high octane debt, you know, unfortunately that, you know, that works well when the market keeps going up. But when things change, especially when tenants, you know, if they stop paying and you can't pay your debt service, you don't want to be in a position where, you know, it goes down, you know, like a house of cards.

Exactly. And we've talked before about, you know, understanding what your risk tolerance is and also what risks come with different types of investments and different types of properties. And then also we've spoken to parameters to set up to make sure you're not over leveraging. So those are great points to emphasize. Once again, you brought up a couple market trends. I did want to touch on this to see if there's anything else we want to be aware of in the market, how things might change that might affect the return coming off an investment or that decision of what to do with the property.

So, Rachel, maybe I'll answer this question and maybe this is in the same vein of what you're talking about, but I think understanding macro trends, what's happening, you know, where are the opportunities, you know, the premise is you want to buy where, you know, we used to say jobs is the number one leading indicator. Now that a lot of people work remotely, it can be a little more difficult to find out where people actually are moving. But looking at those demand drivers, you know, you want to be investing in a city that is, that is growing. Right. And you also want to understand the landscape. And you know, what, what is we talked about in a prior show about, you know, renting out apartments. What's the regulatory environment? Are these apartments can be rent regulated? Are they fair market? Can I take Advantage of this growth, if not is that value priced into the investment and then also knowing about what the trends are. And so I think generally investors like to stay in their lane. And if you know, multifamily, you understand it, you've got your system built up, you keep building those units for the reasons I gave before, those benefits of efficiencies, of scale. But sometimes you might say, hey, I don't like where this office market's going to, I don't like where this regulation's going with multifamily. I want to go do something contrarian. I want a different asset class. I want to jump into, say retail. Now you need, and we talked about some of these earlier shows and what to buy. You need to really study that type of investment. Buying apartment buildings is very different than buying retail and understanding how it works and what to go into. And that's why, you know, look, you might have a great partner for doing multifamily, but you might need to go find another partner to execute on a retail strategy. Right? So again, I think when you sell, these can be opportunities to say, you know, hey, I want to go invest in a new neighborhood, I want to go invest in a new product type. I've got very substantial clients here in New York, New York, families who've owned here for decades and decades. And for many of them, they used to say, look, I like having my entire portfolio in New York. And you hear a lot of these long term investors saying, I only want to buy where I can walk to. And what they're saying is they want to keep eyes on their property. Remember, this is a very hands on intensive business. Right. And sure, we're not talking about the triple net lease that we learned about, you know, that CVS where they just pay the rent on the first of the month, but we're talking about real estate that you need to actively manage. So there's a lot of benefits to owning in your backyard. But there's also, you know, sometimes when you get priced out or you don't like what's happening in your market, it could be an opportunity to diversify and say, you know what, maybe I want to go across the river, maybe I want to, you know, go invest in a new city, maybe I want to go invest in a new product type to really diversify what you're doing.

Perfect. And one of the last questions I wanted to address actually deals with partners. So we've been talking about how you might interact with your partner during or partners and investors during this step. I'm wondering if we can speak to, you know, do partners change? Might they be together for years? Just some aspects to consider especially because in these previous steps we've often referred to, you know, that partner who is obviously with you during these initial steps, finding property, closing the deal and such. So as we look ahead I want wondering if you can speak to those partnerships and relationships, how that might stay the same or ebb and flow.

Yeah, the people in this business, I mean it is the number one part to success here is your relationships, who you do business with. Again, going back to that podcast with Bruce Ratner, he talked about people in the team more than 50 times in a one hour interview. You know, and so it's really this team that you've assembled. So you know, I talked about, I just talked about diversifying, maybe trying some different things, but that's also going to require building a whole new team. There's a lot more benefit to having this well oiled group that knows how they work together a partner. You know, how you work together, you have this hopefully mutual success together as opposed to just hopping around and you know, trying to partner with whoever's out there. You know, very sophisticated institutional operators who have institutional type investors, you know, they understand, you know, how to bring different types of capital for different transactions. But if you have an ultra high net worth individual that, that is like the dream for most sponsors is, you know, find that ultra high net worth individual, that tech entrepreneur that just sold that business, that foreign investor who you know they're coming to you because you've done the work, you have the lay of the land. Most importantly you have deal flow. Right. That is the number one thing, you know, they want to know you have the experience of the track record but that's not going to do you much good if you don't have live opportunities. So when you're speaking to these partners, look, these are the six things I'm looking at right now. I'm looking for a partner who can help me grow. Right? And you have that partner that you can keep rolling with utilizing that 1031 exchange. There's a lot to be said for that because you know, it's a lot goes into finding the right partner, structuring how it's going to work. Obviously the economics, the control, control rights, who's got major decision making rights. That's a lot of things we talked about on that episode with Derek Akin which is so important kind of that, you know, that, that, that relationship that I think once you've figured out how it works and again, nothing's perfect. Right. You're going to learn from these deals and say, okay, well, on this one, I think this one took a little too long or maybe I need to have. When we talk about major decision rights, I probably don't need to come to you every single time I want to spend $1,000, you know, to do replace a door in an apartment. But, you know, if we're going to go out and refinance, we're going to sell. Obviously the person who's got most of the money in the deal is going to want to have those major decision making rights. But again, I think it's just learning how to work together is very important.

Perfect. And that podcast with Bruce Ratner for me was so eye opening because I don't think I personally was an expecting him to talk so much like he did about the value of the team, which basically adds up to a lot of these points we've been addressing and the same messaging you've been conveying, James. So I'm curious as we wrap up, if we can look at maybe a podcast to highlight or a place that listeners can go to to learn a little bit more about this step, those reaping the rewards.

Yeah, I think I would take this last question in a little bit of a different direction and maybe this ends up being a bonus episode. Well, we'll see. You have to wait to see if it comes out in the book or next week. But I think the sponsors who have been very successful not only at acquiring more product, but also bringing in more investors, have created a great network and a great brand. Okay. And so just like here I am, you know, a broker and, you know, we're doing this to be helpful and I know people are going to learn. But let's face it, doing a podcast, writing a book that also, you know, people are going to see James Nelson, okay, this guy's out there, he's providing great content, see what his team's doing in New York, what his company's doing around the world. If I have a real estate question, a need, I want to buy, I want to sell, they'll probably call me, right? Okay. Same way when you're out looking to become an investor out there, you want to be known. And there are two schools of thought on this. Some investors say, hey, I want to be below the radar. I don't want to be in the public eye. I don't want to create attention to tenants who think that I'm getting all this success and will make my life more difficult. But on the flip side, letting people know when you close a property, making an announcement, one of the great on social media traded, you can take a look at that. They publish every single sale, they post every sale that happens. And getting your name out there and saying, hey, we're active buyers. And I think of my friend Stephen Kashanian from Closed Properties with a K, or I had Alex Rabin and Alex Cascal from Peak come on the show. Both of them are incredible about posting their success, right? And letting investors know, hey, we just closed on this. Hey, we just resold this. Hey, we're buying here. Hey, send us information. What they are doing is staying top of mind, right? And so for those of you listening, look, for your first deal, you know, that's going to have to be a relationship thing. You're going to have to just, you know, work on getting to know those brokers. You're not going to have a, you know, a huge deal sheet or tens of deals that you've posted on before, unless if you were a partner working for a bigger shop and you were able to get some visibility for the stuff that you're doing and now you're going to go do it on your own. But once you start, you know, creating your brand, and that's why, you know, it could be as, you know, from just what's the name of your company to having a website, a professional website, having a certain look and feel. If you talk to the guys at Peak, when you go into a Peak building, you know that it's a peak building because the way the lobby looks, the way it's branded, the way the materials are, and again, they're just doing a great job of getting the word out there. And that's a big part of it, right? Because when a broker has a listing, you know, and you want to be that first phone call, you want to say, hey, I've been seeing these guys. They're posting, they're active, they're buying. You know, I want to sell product and I want to, I want to go to the most logical buyer who's going to transact, right? And that's also what you are signaling when you do that again and again is, look, we are active, we're out there, we're successful. And PS investors are watching that too. So when you're, you know, because, yes, you're waiting for brokers to find you that deal, but you know, most of you out there, you're going to continue to raise capital for your entire real estate career until you're independently wealthy. And if you want to just invest for your own account and you know, God bless you if you're at that point. But for 99% of us, you are going to continue to raise capital and having that awareness from the investment community is really important. And now we're seeing that, you know, on a lot of the social media platforms. And I'm learning more about it now. I've been on Twitter, you know, I post occasionally, but from an investor standpoint, I'm hearing that a lot of deals, a lot of funds are now getting raised there. And so it's a great way to build your network. So hopefully, Rachel, we've given people a lot to think about. Hopefully by now you really have a sense on how to get in at the ground, find your first property, how to reposition it, how to build that team to make sure that it's a success. And then, you know, again, this last step, this is the fun stuff. It's a lot of hard work. So take some time also to celebrate. You know, we like to do closing dinners, we like to go out and have some fun. It's, it's can be a lot of work to get to that final stage. But I know you all will get there soon if you haven't already. So Rachel, this, this is a lot of fun. Thank you again for, for doing this. Really ended up being a 12 part series. There might still be a bonus episode out there, probably more books in the works, but this has been a lot of fun. So I really appreciate your joining me for this.

Thank you for listening to the Insider's edge to real estate investing. We appreciate your subscribing and sharing with your friends. If you haven't already, please connect with James at jamesnelsonnyc on LinkedIn, Instagram and Twitter. Please also visit jamesnelson.com where you can find the show notes and other episodes along with an exclusive video series and other helpful resources so you can gain the Insider's edge to real estate investing. Until next week.