#120 Value Of Due Diligence During A Recession, ft. Dr. Pranay Parikh, MD

Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now, let's get on with the show.

Hey, everyone, thanks for joining us for this talk. I'm excited, of course, as always, to talk to really good people that know a lot about multifamily, know about a lot about education in this space, and I can't be more excited to be talking to my partner on a lot of things that I do, Dr. Pranay Parikh. Pranay, how are you doing?

Hey, Peter, thanks for having me on. Very excited.

Cool. I want to introduce you real quick, Dr. Pranay Parikh. He's a hospitalist, mostly an nocturnist. He's gonna tell you all about it himself.

He.

He's had quite the journey himself into real estate, both through active and passive real estate investments. I know that now he's been involved, especially on the passive side, not only with his own investing, but as a partner in a company called Ascent Equity Group, which, disclosure, I'm part of as well. But he's been actively involved in that passive side in over $1 billion of real estate at this point. So he's built himself quite a portfolio, been super experienced in the space, talks to sponsors, operators, and is so knowledgeable about all of these things. I thought we might just do a talk about due diligence right now on these deals, especially considering what's going on in the market. So, Pranay, did I get that right? Is there anything else you want to add?

Yeah, yeah. You know, I started off with active real estate. A lot of people here know that. I bought first four unit here in la. I thought I'd buy a property every year and just got stuck after my first one. It just took so much effort that I realized I probably could have just been working my regular job and invested in two or three passive deals. So that's when I asked you and begged you to teach me how to do passive investing, and we ended up creating the course from that. Now we've had a couple thousand people take the course and rate and invested a couple million dollars.

That's pretty cool. I mean, before we get into kind of your background and history, we're going to talk a little bit about it. Can you let people know what Ascend Equity Group is?

Yeah. So after we created the course from Passive Real Estate Academy, we thought we were done you know, we taught everyone how to invest in passive real estate, but people, we realized people were still getting into deals that weren't that great. You know, we wanted our doctors and, you know, everyone else that took the course to get into the best deals available. People also said, hey, you know, we've seen the course. Now we want to invest with you, we want to use your connections, you negotiate together as a group. You know, we're stronger together. So we created a send equity group. And what we do is we go to the table with some of the sponsors, have 30 years of experience, never lost money, never done a capital call, and we say, hey, we have this very large group of doctors we've experienced, we've done this before, and what are the terms you're going to give us? And we are able to really handpick the best of their deals with sponsors that we've had a ton of experience with.

All right. I mean, you told us about your history a little bit. I mean, obviously what you've done with Ascent, and you built that quite a bit. You know, really quickly. I want to talk a little bit about due diligence because I want to provide a little bit of education around that because I don't know if you've noticed and I've noticed that things have changed in the market, right? I mean, people probably noticed that. And again, I believe, and probably you believe as well, that due diligence right now is more important than ever.

I'm wondering, what is your take on.

The market right now? What's going on out there and what are you seeing?

Everyone looks at stocks, and I told you that I got into crypto a couple months ago is the wrong time to get into crypto. It's down like 90%. Right. But when things are going well, when crypto was going well, real estate was going well, you kind of just really threw a dart at any property in real estate, and it would have been a success. Right? And you didn't really have to follow the fundamentals as much. So now it's very, very evident that you really have to stick to the fundamentals. And really, the due diligence that we'll talk about shortly, it's even more important. Right? And there's a couple reasons for that. Interest rates. Interest rates are huge, right? For us people who have only been investing for the past five to 10 years, we're kind of used to low interest rates. But the average interest rate for a mortgage is like 7, 8%. Right. And it used to be in the teens, like 2030 years ago. So this is new for us. Right. Second is inflation. Right. Though the thought was that you would just sit on your money on the sideline, but because of inflation now you're really losing buying power by not having it in an asset that's making money.

I mean, the problem is now we see rising interest rates, we see inflation, we see the stock market tanking. Like you said, crypto is tanking. Why do you think that real estate is still a good area to invest in as an asset class?

Yeah, so I actually talked to someone earlier about this today. You know, it's nice to invest in something, something physical. Right. And it's nice to invest in something that's a necessity. Right. So housing is a necessity. Right. And the type of housing that we invest in is called class B. It's kind of in the middle ground, right. Not too bad, where you have to worry about being a slumlord, not the high end. Like the type of apartment a doctor would live in. Right in the middle, right. So we go in, we renovate and we increase rents tiny bit so that people are able to live in this really nice renovated place and they are just paying a little bit more rent than the year normally too. So we feel that everyone wins in that sense.

I mean, I think people are wondering and they, they think about the real estate bubble and they back and they've heard a lot about 2008, but typically, how does you know these kind of, this kind of real estate that you're talking about, apartment buildings and things like that, how does that do in a time like this, in a bear market or even in recessionary times? I'm just curious because I think people are looking for, obviously looking for safer investments, if that's even a thing.

Yeah. I was telling someone earlier today that you're getting a 5% return in this market. You're winning, especially when the stock's going down 20, 30%. So we like apartments because apartments are where people go to. So kind of the class A, the really high end apartments. Maybe you realize, oh, you don't need this, you don't need a gym when you can't even go do it. You don't need a sushi chef. Right. These are some amenities I've seen in pretty high end places in la. So you go down to class B, right. Maybe the house is starting to get too expensive and then you go to an apartment. So there's a lot of safety knowing that there's a big class of people that could potentially go there. Right. And 2000 2008, really? 2008, the subprime crisis that was with house mortgages, right? People were getting into this mortgage at really low rates, subprime so lower than prime. And they couldn't afford it. They were just handing out mortgages like Ken, right? So people had issues affording their mortgage payment. And what happened? Where did they go? Most of them, fortunately, were able to find housing in apartments. So that's why we think that apartments are relatively recession proof.

I mean, in this time right now, I think a lot of people, like you said, are, I guess it'd be nice to make a lot of money, but they just don't want to lose a lot of. So I mean, it's all about risk mitigation. And I think that's absolutely important. Warren Buffett always talks about not losing money as the first rule of investing. And rule number two, like, see rule number one, right? So he talks about mitigating risk. But how are you able to mitigate risk when looking at these deals? Because right now everyone worries about a real estate bubble. You worry about apartment buildings or whatever, prices dropping. Like, how can you as an investor, look at this market, look at this asset class and then find a, you know, a better investment that fits your risk profile.

Yeah, yeah. And that's the magic word, right? Risk adjusted returns. I could be promising you 50%. Actually in crypto, you'll see that 50% APR, but super high risk of losing all your money, right? So it's making sure you get the highest returns with the lowest risk, right? So risk adjusted returns. So there's a couple of things that we look for. And this is kind of going back to due diligence, right? It always starts with the sponsor, right? Who is this person or group of people and what is their track record, right? And I want to see an extensive track record, right, of at least someone that's on the team, right? Have they been through a recession? You know, unfortunately, if you've been in the business for 10 years now, you've been through a couple of recessions, right? How did they, how did it go? Did they ever lose money? You know, that's not a deal breaker. If they lost money maybe once or twice, maybe they learned something, right? We're not always 100% successful, but how did it go? And then reputation, right? Fortunately, you've created passive Income Dogs and Platinum Investor Club and all these great communities. And you can ask around, right? How is this reputation? How is it, how is their communication, right? Are they super friendly before I give them their money? And they just kind of disappear after. After the money is given to them, or they just hand me off to someone else. Right. You can ask our investors, how many people have my cell phone number. You know, I'm happy to talk to people. And we're all very available for that because, you know, you're giving a significant chunk of your money, you know, to a lot of people, to a lot of sponsors. That's not a lot of money. But for us doctors, you know, 25, 50,000, that's a month or more of the work we take, right? So for us, it's really important for our investors to sleep at night, right? So a couple weeks ago, someone said, hey, I already trans wired 100,000, but just wanted to talk to someone. We're like, total whatever it takes to help you sleep at night to make you comfortable. Knowing that you're making a good investment, I think is important. Right? So track records, super important, but also kind of the art and just talking to them. So reputation, but also just getting on the phone. Us doctors, we're able to kind of size someone up pretty quickly, right? Because we have to. Right. When we're at the hospital. So you'll learn a ton. Even if you never really done it before. You'll learn a ton from just getting on the phone. And if you're even able to get on the phone with someone, I mean.

What are the kind of deals that I'd say in this market right now that still have an opportunity to do well? I mean, it's like, again, if you're doing fixed and flips right now, probably this may not be the best time just overall. But what are some things in deals, like as an average investor, as a limited partner, you can go and say, like, all right, this has some of the components of a deal that is potentially positioned to do well right now, with rising interest rates, inflation doing what it's doing, possible recession kind of looming, like, what are some of those factors that people should be looking for? Yeah.

So you know, what I want to see is has their business plan changed at all in the past, literally two weeks? Things have gone so different in the past two weeks, but even the past few months. So if I'm talking to someone and I'm seeing the same thing over and over and over, it's worked before. We work with someone in the past. It's copy and paste, right? Copy and paste, copy and paste. But you can't copy and paste anymore. Things are different. Right. So for example, interest rates, right? How are they dealing with this? Increased interest rate. Right. Because the highest concern or the risk of default is by not being able to pay your mortgage. Right. So how are they able to cover their debt service coverage ratio and how has that changed? We've seen some with like 1.04. So basically they make a $104 and they owe $100. Right. So there's like a $4 buffer. So how are they mitigating that? Right. Are they getting different types of loans? Are they working? Do they have a good relationship with the lending companies? Right. So that usually some of the bigger, bigger groups are able to have really good relationships with debt. Because, you know, a lot of times we look at debt as the enemy. You know, they're the ones that are charging us interest, but remember, they have the largest amount to lose. Right. Because they're putting in 60, 70, 80% of the money in the deal. So if it goes poorly, they're gonna. It's gonna suck for them. Right. So do they have good debt relationships? And one thing that we're really looking at, and it's very rare right now, is fixed debt. That means the interest rate stays same for a certain amount of time. So in commercial real estate, you know, three, five, seven, 10 years, if you're able to find that, at least you know that, that really important. And one of the most important variables is stable. And you can kind of worry about some of the rest.

I mean, what if the economy does change? Like some of these deals, like, what is the end point for a lot of these deals? Because I know some people probably out there have invested in syndications. Maybe they have, maybe they haven't before. But I think for some people, they don't understand or they like to know a little bit more about how a deal ends. And like, what happens? Do they have to sell it at some point if the recession hits or it's a bad time? Like, what do they do with that property? Just wondering what that end looks. Looks like for people.

Yeah. So, you know, it's really important to know what happens to these properties after. Right. So for example, a property has, let's say, 80% occupancy, right? So that means it's 20% vacant, right? So a lot of companies, a lot of big companies are in their mandates, they're not allowed to invest in that kind of real estate. So pension funds, insurances, life insurance. It was a big eye opening to me that a lot of these apartments are bought by these big insurance companies because they just sit on cash. Right. And instead of sitting on yours and my deductibles, they just go out and invest. And if they need it, they take it back. So because they need their money relatively safe, they can't go in to these properties that have 80% vacancy. So they'll say, hey, you over there, Ascend. You guys make this 95% occupancy and what is called stabilize it. Right after you guys do that, we'll pay you a premium for it. So it's insurance. Big insurance companies, MetLife, big pension funds. It's also real estate Investment Trust. So REITs, you guys see those on the stock market, they buy billions of dollars of real estate. It's also Goldman Sachs, Blackstone. So it's large companies like that that are too big to be able to go in and kind of do renovations and all that stuff.

All right, so are you seeing opportunities still in the marketplace right now? Are you holding back, like, what are you looking at personally? What are you looking back at, like, as a group? And what can people look forward to ultimately?

Yeah, so we actually have a current deal. It fell in our pocket because we were kind of going to take a little pause on multifamily and just real estate in general. Right. But the reason that we picked up this deal is because we have fixed debt. So the mortgage interest rate is 2.9%, which is wild. And it's fixed for nine years. So you were talking about exit plans. So the nice thing about that long period of fixed debt is that we have no idea how long this recession's gonna last. We've been fortunate that the average recession has lasted about 18, 19 months in our lifetimes. But inflationary recessions have lasted a lot longer. In the 70s and 80s, it was a really long time. So that nine years really just gives us a lot of safe in mind that something that we can kind of ride out whatever is happening. Right. It's four years of interest only. That means we don't play principal. Right. So in our hope, that is in four years that we're able to sell it and it's 70% leverage. You know, when you and I buy a house, we put down about 20%. So 80% leverage. It's with a sponsor that we've worked with a ton. They own a thousand units in the area. So because of how great that loan is. So that loan is called a loan assumption. It's with Freddie Mac, they lost a lot of money, as you've heard, in 2008. So they're super strict on who they will get loans out to. We, we Got underwritten ourselves and they asked us a lot of questions and they're very strict with who they'll give out loans. So if you see something special, something different than what's been done over the years, I think it is a good reason to jump in. But I definitely wouldn't just look at any deal. I know a lot of times in the past couple of years there's a lot of fomo. You'll see a deal and then two seconds later it's full, you know, and it just sucks. But I think right now it's, you know, it's a buyer's market.

I mean, what do you see among like professionals out there, syndicators, sponsors like yourself, like in terms of the overall sentiment right now? Like, how are people viewing this market? And this time is it more of something to be fearful of or more like an opportunity or something in between? What are you seeing?

Yeah, so I think it's something in between. So for example, Goldman Sachs just put in 450 million into a real estate deal. So there's a ton of money on the sidelines, but interest rates are going up. So right now it could kind of go either way. What I think in my professional opinion is that prices will go down a tad bit, maybe 5 to 10%, and it'll kind of equal equilibrium, equilibrium to go down to kind of meet up the interest payments. But I don't think it's going to go down a ton because people are chasing yield, meaning that they're looking for safe places to invest and multifamily investments has been that. So people are a lot of people, probably people on passive income docs, they're seeing the stock market and they're like, yeah, okay, I'm going to buy the dip. Oh, it's dipping more. I'm going to buy. Oh, oh, it's dipping more, you know, so it's kind of hard. It's like a falling knife. Right. So you don't know when to buy. A lot of people will dollar cost average, but then they'll have exposure to the stock market. So people are trying to find something else. And we thought that was crypto, supposedly uncorrelated asset, but it's highly correlated, as you can see. So people are looking at real estate and then there's other types of real estate. Industrial has done pretty well, but Amazon is down a ton. So hard to say how that's going to do. Retail, hotels, it's just kind of iffy. So a lot of people are going into apartments.

I mean, I know That a lot of the returns that you might see on some of these deals and again I see them all over the place. They're all projections. So they're all, you know, again it's all assumptions based. But what are people still projecting around this time? You know, some of these returns might be.

Yeah, so we're starting to see lower projections, which is good because the projection should include volatility. The lower projection doesn't mean that we're assuming or projecting a lower return in the future. It's just that the confidence interval is a lot higher. Then we'll pick something on the lower part. This last deal is the one we have right now called Chisholm Park. Because of the low interest rate, the majority, like the 90% of the expenses are fixed. That gives us a lot more sake of mind to pick a higher confidence interval. So we're predicting a 17 to 19% IRR, which is kind of nice. I haven't seen one like that for a while. All right.

I know that people first of all are going to be interested in finding more about you, finding more about Ascent and maybe even the steel. Where's a good place for people to do that?

Yeah, so we actually just revamped our website. Ascendequity group.com I'm super easy to get a hold of per day@insectequitygroup.com Happy to talk about anything passive real estate. If you want to run a deal by us, let us know. You know we're happy and getting more doctors invested in what we feel is the best asset class.

That's awesome. I know you're going to be a speaker at pimdcon as well. So I mean, yeah, I mean I know you're going to be there. So. So can you tell people a little bit about like conference experience and just, I don't know why, why should people show up for that?

Yeah. You know, and the past couple of years we've done virtual conferences and they're fun, but there's, there's just nothing that beats the excitement, the enthusiasm and the energy that you get by meeting in person. Right. And even if you're just starting, which I was, you know, five, six years ago, but just running to someone else. It's almost like residency again. Residency was tough, but it's just so exciting being around like minded individuals. I find that you can get coaching, you can get all this stuff and go to one conference and you're so energized that you feel like you can take over the world, especially for people like I was many years ago just on the fence and just let me read this other book, let me take this other course, let me do all this stuff instead. You go to a conference, you talk to other people in the same boat you are. 90% plus will be doctors. They've literally been through the same part of life as you. And it's going to be fun. We're going to have a ton of events on the side after. I'm super excited. We're going to make it fun, especially since this will be our first time together in years.

Well, I want to thank you for all the great work that you do in helping physicians and doctors get into some really amazing opportunities and obviously, at the end of the day, try to keep their money safe. And, you know, obviously I've been working with you a lot for a long time. And it's funny because we don't get to talk like this very often, at least on camera. But I know the amazing, the work that you're doing. So just keep it up and yeah, let's do this again soon.

Thanks, Peter. Bye.

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