#95 Ask The Right Questions Before You Invest, ft. David Scherer

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.

Hope you've had a great week. Before we get started, I just want to give people a quick shout out. To those people who I met at the White Coat Investor conference, I'm going to talk a little bit more about this next week, but it was amazing meeting people face to face. Obviously, this last couple years has been extremely challenging for everybody involved, and it was nice to at least meet some people in a very safe environment, you know, and talk about life. Right? Talk about real estate. Many of you said you're listening to this podcast while you're driving from, you know, to and from work. Some people mention they're up in the, you know, the Northwest, Pacific Northwest. Some people mention Northeast Ohio, in particular, Florida, Oklahoma City. You know, I just met so many really cool people from so many different places. So for those who came up to me and said that, you know, this podcast brought you value, I just wanted to say thank you for letting me know. It really helps to get that feedback and only pushes me to continue to put out as best content as I can to get you the information, the education you need, make great decisions to ultimately get you closer to that journey, you know, on the way, you know, to whatever you want, whether it's financial freedom, creating your ideal life, whatever that is. I'm just glad that I can play a part. So this week, we're gonna be talking to David Scheer. He is the, you know, one of the co founders of a huge investment group called Origin Investments. I feel really honored to be able to talk to him because he sees so much in the marketplace today. And we're gonna be talking about something that I haven't talked about too much in the past, which is development, like development and why it's a great place, great time to be in development, what some of the margins look like, why many groups have pivoted into development, and some of the ways that people and investors can get involved in that as well. So I think it's really fascinating to talk to him about market forces, where the winds of change seem to be going, in his opinion. And this should be a fun one. So enjoy. Hey, everyone. This is going to be a great talk. I mean, I feel really lucky that we have David Scheer. He's One of the co founders, the co CEOs of Origin Investments. I'm sure you've heard quite a bit about them. Whether it's on my site, one of our partner sites, we're fortunate to have him today. We're going to be talking about a whole range of things about multifamily, talking about the markets, we'll be talking about development, which you maybe have not heard me talk a lot about. But he's someone who's extremely knowledgeable in that area. Again, he's the co founder and co CEO of Origin Investments. He's going to talk about what they've done and their track record and their history. But I, but I can tell you that they've invested in over a billion dollars and actually really about $3 billion of real estate at this point. Huge fund with some amazing returns. So I'm so excited to talk to him today. David, how you doing?

Peter, thanks so much for having me on. I appreciate it.

Yeah, I mean, I'm excited to talk to you because I've heard a lot about Origin Investments and I've tried to do my part in introducing you well. But do you mind sharing a little bit more about you and your company?

Of course. We were founded 14 years ago, myself and my co founding and co CEO Michael Episcope and I. It was really created as a place to invest our own equity and so I'll, I'll get to our returns and you know, some of the things we're super proud of. Peter but the genesis of Origin was to invest our capital. And then as we started to build out the platform more and more we had, you know, the ability to attract importantly really good people. And the underpinning of everything we do at Origin is everyone on the senior leadership team at Origin has been here 12 years, 10 years, 8 years, 7 years. So everyone on my team at the senior level, they were here for fund two, fund three, Fund four, Income plus, like all the funds we'll talk about same team. And as much as business changes, some things don't change, right. And if you get it right with hiring and you're able to retain and develop, develop people, that's what creates process and creates risk management and returns.

I mean you talk a lot about being part of multifamily and being all that. Why, why specifically multifamily versus some of the other kind of asset classes that people might think about, whether it's like retail, office, industrial. Love to hear that.

When we, when we first started we, we had these conversations because, you know, it's not like we're 100 year old company, we're 14 years old. Right. So this wasn't that long ago. And we were always very, very data driven. And so now it's become, and we can talk about this later, but we've invested a significant amount of resources into machine learning and AI. And we talk about that, but 14 years ago we didn't have machine learning and AI. What we had was access to data like anybody else. And I would just tell you multifamily, to answer your question, in the last 30 years, multifamily is the highest returning real estate asset class. It's also the lowest standard deviation. And so you get both. And it's kind of intuitive if you think about it. Multifamily is an essential real estate asset. You need a place to live. And you know, when you think about retail, since you mentioned it, or hotels, right. And now increasingly even office, but those are discretionary consumption items. And so if there's a recession, if there's a downturn, if you're pinched, you can cut those off. You don't have to go out to dinner, you don't have to take a trip, you don't have to take a business trip. And increasingly we found that you don't have to have an office lease expense and you can be equally productive. So they're disruptible discretionary real estate asset classes. And what you see is their standard deviation is higher and it should be. Right, it should be, because they're going to boom and bust and multifamily just tends to just chug along.

I mean, I'm wondering what's changing your strategy though now you're 14 years in. I'm sure you've been learning a ton along the way. You've seen the markets go up and down and now up again. Right. How has your strategy changed over the time and where are you currently sitting in terms of that strategy?

Yeah, I'll get to what changed because we have changed some things. But I'll start by telling you what hasn't changed. Right. So what hasn't changed is the focus on multifamily. That's 14 years there. What hasn't changed is the focus on our geographic regions. I haven't spoken to that, but we made another decision 10 years ago that we didn't want to be in New York, we didn't want to be in la, we didn't want to be in Boston, we didn't want to be in San Francisco. Those are the gateways. We didn't want to be in D.C. where we wanted to be was the warm, low tax, low cost growth markets. And that's the Southeast, Texas and the Southwest. And so what we did, we didn't just learn about those markets, we set up offices throughout the country where our people live and work. And so these are long term investments in origin, the platform. And so, you know, the asset class hasn't changed, the geographic emphasis hasn't changed. And then the other thing that hasn't changed is our risk management. We don't use a lot of leverage, we never have, we won't. We believe we're better in process acquisitions, risk management, investment management. And we can build margin the right way. We don't need to use lots of leverage. That won't change either. What has changed, because that's your question, is we've changed where we invest in the capital structure and strategy. For example, Peter and I were talking about Income plus fund a second ago before we started the show. And that's a multi strat fund. And even prior to Covid, but then when Covid hit, there was so much uncertainty that we said, you know what, we really want to be in a more protected capital position. And so preferred equity sits above common equity, it's protected by common equity. And we could get at the time 13 to 15% returns, but also have that sort of 15 to 20% cushion. And so we really focused the fund there and we kind of went from 15% preferred equity to 40. Right. And we have that type of flexibility now. On the common equity side, we've also, over the last four to five years, we've been gradually moving out of value, out investing and in development. And that's really picked up pace in the last three years. And Peter, it's really simple. The expected value and value add investing, it keeps going lower and lower. And it's really because the capital flows, there's just too many really large funds, multi billion dollar funds and just buyers, family, office buyers, sovereign buyers, foreign buyers, pension buyers that have entered the space. And the return on equity in my opinion has gone from mid teens into single digits. If I were to invest in single digits, I'd really want to be more in a core asset. I don't want the value add asset. And another way of thinking about this is value add investing. Today you're forced to pay above replacement costs for 10 year old product which you then will put even more money into. You wind up 10 to 20% of a replacement cost. That doesn't make sense. When we were doing it in 2014-2015-2016-2013, whatever. We could be at an all in basis below replacement costs. And that does make sense because make no mistake, a value added 10, 20 year old asset is still inferior to a new asset. You know, you can use the same litmus on your, on your house. You're buying a home if you. Would you rather have a brand new home or would you rather have a renovated home? I mean, we all know the answer, right? And so at the same time, development margins, and we can talk about this in a bit, have never been wider. And that actually also makes sense. There's been a risk and wealth transfer in the last three or four years from core buyers to developers. So core buyers is just keep going with the math. If you're going to pay replacement cost pricing for value add, that means that brand new core is trading 15, 20, 25% above replacement cost. And it is. And four or five years ago I could buy core at replacement costs. So there's just been a giant shift from the expected value in core and value add in development. And that's why we shifted there. And I'll tell you this, Peter, it'll shift again. And when it does, we also will reallocate our activity. I have the ability to move in and out of these portfolios. And so we will.

I mean, if you don't mind, I'm going to recap some of the things you said and you can kind of correct me if I'm not correct. But for some of the people who may not be familiar with some of these terms, some of the things you mentioned is that currently in the market, you can basically build a brand new, totally brand new building for almost less than it would to buy an older building and renovate it. And so it doesn't seem to make a lot of sense. So the margins there are smaller is what you were saying. And then even some of the really, really nicer properties, which you were calling the core properties, which most people might see as some of the properties probably the people listening to this would live in. Right? Some of the high end buildings in these high nice areas that are probably pretty brand new, I mean the cost of that is significant now at this point to get into those that the margins don't seem to make a lot of sense. So it sounds like in today's world, as the market kind of shifts and moves and they're always cyclical, as you said, development seems to have the best margins and the best opportunities to create nice profits for investors at this point. Did I get that right?

Absolutely. You nailed it. And you're absolutely right. I mean, I'll just give you an example to make it tangible. Garden stick products all over the Southeast, you know, we develop a lot of that. So I'll stick, I'll stick to that. You know, we broke ground on, you know, phase one of a three phase project in Charlotte. So I have very fresh pricing, if you will. You can build all in for 275A door. Okay? And when I say a door, typical multifamily unit garden is about 900 square feet, okay? If you were to buy that, typically you're going to buy that at a core level. So now we developed it again. My basis when we developed was 275. That today is 375 to 400, right? So that is quite a large margin. And that's how we always view the world is what is the margin? Some people talk about that in terms of cap rate spreads, right? And they'll say, oh, well, you know, I'm, I'm developing it for a five and a half and you know, I can sell it for a 3 7, right? That's another way of saying it's a 35 margin. It's like people use fancy terms and. But I, you know, let's just keep it real. You build over 275, you're selling it for 375 and 400. That's your margin. And you know what that is, Peter? It's not just your profit. And these are big numbers. Because if it's a 300 unit building, right? 100,000 a door, you're talking about 30 million profits, right? So these are big numbers. But you know what also is, it's your actual protection, right? So when I think about development, and I'm sure some bankers who are on this call or people who have that sort of training, they won't agree with me, right, because you're far from cash flow. I get that. But if we have executed on the billions of dollars of development, and we have, and we always deliver the product that we want on budget, on time, and we capture these margins, that's also your protection. So now let's go through a world where, you know, interest rates go up, cap rates go up, and your margin is squeezed, right? So I have an awful lot of room before you're actually at risk, right? Because if it's supposed to trade 380 a door, 390 a door, and now you get squeezed and you lose 40 grand a door, that's a pretty big loss. You still have $15 million of profits, right? And then you get squeezed again. Like in other words, your first loss is actually your profit margin and I believe well executed development. The key is you have to be with the right managers. I get that. But if you're with the right proven managers that know how to do this stuff, I actually view this as way less risky than buying a core building. If there's any sort of correction right now, you could be out 15, 20, 30, 40% of your equity in three months. Right? So that's why, you know, I'm in either prep equity, it's protected by the capital structure, or I'm in development because it's actually protected by the margin.

Well, let's talk about due diligence then a little bit because I mean, what people care about when they're listening to this is how do I know? Like you mentioned, it matters who or whom you invest with, right? We talk about that all the time. You know, the deal is important, but it really matters who's operating or running the deal. So when we're looking into something else, let's say I'm an investor and I'm looking into like a development project or a fund that focuses heavily on this type of stuff, what questions am I supposed to ask to make sure that I'm partnering with somebody that knows what they're doing, knows how to run, you know, work with these profit margins, get it done on time. Like what? What am I supposed to ask? Maybe you can help me out.

Yeah, that's a great question. I'm going to break it down into the two things you said. So if you're an investor that wants to invest in a fund, right, that's going to give you a diversified group of assets. So our funds are 10 to 15 investments, they're not one. And they're across all our geographic regions. You get some vintage diversification. So if you want to do that and there's. I'll spend a little bit of time on this, Peter, because there's some other reasons to do it. Like for example, if you said to me, look, I want diversification, but I'll just do it by investing in a bunch of one off deals, right? And we can get, I'll explain how to vet one off deals in a second. So I'm not skirting that side of the question, but all I'm saying is there's a structural problem with that, right? So if you say, okay, I'm going to have a portfolio, I'll do five one off deals, I'll bet them the Problem is those deals are not cross collateralized in terms of equity. So now let's say three of the deals work, two of the deals don't. You're going to pay a full promote on the three that do and the two that don't, you're going to take a full loss. Right? They're not cross collateralized in a fund. And this is, this is one of the questions you have to ask every fund manager. Is the equity in your fund cross collateralized? You want it to be because that means that all of my deals have to work. You have to receive all of your money back, all your prep return before I take any incentive. That's not different, that's better. Like there's some things in investing that are different. This isn't different, it's better. It's better for you to have your assets cross collateralized in equity. Another thing you need to ask a manager, since I'm talking about cross collateralization, ask every manager if any debt is cross collateralized across assets and if it is, don't invest. Because that's not only a terrible risk management strategy, it also shows you they're not a risk manager. If I'm a manager, that is cross collateralizing debt across assets, it means I actually am not a risk manager at all. I'm just saying I am. And it's indicative of a lot of other things I'm probably going to be wrong along the way. So, short answer with managers, always have cross collateralization of equity, never have cross collateralization debt. And in terms of manager selection, a couple things I would ask, certainly historical returns are important. I would ask them about any losses, any of their funds. I would ask them about standard deviation of returns because you really don't want to see a lot of big wins and big losses. You want to see consistency of returns because it speaks to a competitive advantage, not just picking a couple deals. Right and wrong and those types of things. We touched on this before, but it's really important that there's continuity of the senior management team. Make sure that it's not a bunch of people they just hired and there's a lot of turnover. That, that's, that's a big red flag and that's something that's quantifiable. I would ask them about the debt to equity ratio. You know, in real estate you really shouldn't be above 70% leverage ever. There's no reason to be. If you know what you're doing, you're able to generate margin at other areas of the business plan. So I would say it's. It's a big red flag if people are using more leverage. And by the way, preferred equity in MEZ is leverage. It sits above your equity. So make no mistake, if they say they're 70, but they're using press to 90, that's leverage. Right. If something goes wrong, your equity is behind the press. So it's, it's no different. It'll behave the same in a loss situation for you. So those are some of the things that I would look at managers. And then if you really want to get in the leads, I would ask to talk to large investors in these funds. Now, who are your largest investors in your legacy funds? I want to talk to them. You can go deep, and I would tell you that you should. I also believe the deeper you go, the better choice you'll make. And that's. It's important. Like, you've worked hard to make your money. Make sure that you're making really educated decisions in terms of. Do you have any questions on that before I move on?

No, I think that's great because I think something we talk about a lot in our group is the importance of due diligence. Right. I mean, most people will just, they'll spend more time trying to figure out which hotel to stay at, like on their vacation versus who to invest within a fund and that sort of thing. And a lot of people always ask, what question should I ask? We try to educate people as much as possible for those people that are interested in any sort of, like, I mean, it's not just for development funds. This is any sort of fund that you're, or syndicator or sponsor that you're working with. These are great questions. I hope you're writing them to take notes on this. Keep going. Yeah, I love it.

Peter. We, we have a section of our website, our education section, that really is the best in the industry because we're committed to trying to educate people in these ways. So, for example, this is an amazing story. It's true. One of our largest RA clients, they invested in our third fund. They ran an unbelievable process of diligence on offs. And it lasted months and months. And the last thing they asked for was, we want to talk to anyone that used to work at Origin and no longer works there. Okay. And there was one person. So we found that one person, and they talked and I. They wound up becoming a client, obviously. And I said to the woman who ran the process, they said, you know, this has been an amazing process. Like, how did, how did you think to do all this stuff. And they said, well that's, that's easy. We actually downloaded the man manager selection article that your partner Michael wrote on your website. And I went and pulled it up and they literally went 1 through 12. My point is like I've touched on some, but if you have interest in this on our website or I can just email it to you. We've written extensively on manager selection. It's somewhat self serving in the sense that I believe if you're really educated and run a process, you'll select this. I mean that's what I believe. But it serves you either way, right? Like you could use it on any manager. All this stuff's on our website. Like we've written about all this stuff. Now you asked about deal selection, right? How do you know a good deal when you see it? Right? And that's, that's in the realm of if you say okay, I don't really want to be in a fund, I want to pick my own deals, I understand the promotes aren't cross collateralized, I'm still going to do it, that's fine. I would tell you that the first thing that you need to know, like you need to have a background in finance in the sense that you need to be able to understand the model, right? Don't take the write up the PDF, you need to have the model, you need to be able to manipulate the model, you need to understand the inputs, what drives it. So that's, that's the first thing. Or you can hire a consultant to work with you on that. Obviously the next thing you need to know, and this is probably more important, is you need to have enough domain knowledge that you can question the validity of the inputs, right? So if they are telling you rent growth is going to be 3% in, you know, Tucson, Arizona in this submarket, at this site, like is that, is that believable? If they believe starting cap rates are X, is that believable? If they say exit cap rates are X, is that believable? If they say that, you know, this is what they paid for the land, is that, is that a, is that a good price, an average price, a bad price? What is their construction budget? And is that, is that actually market today, not nationally, in that region? Because you know, I can tell you that in Denver right now it's way more expensive to build than it is in Atlanta, right? So like, like you can't just read the news and say, oh well, you know, lumber's up, therefore it's the same price everywhere. It's not true. Like, you have to have some or higher consultant to do this. Because the thing that I always think about is at the deal level, if someone said to you, peter, I don't know what your domain knowledge is, right. What is there you know the most about? I'm asking, like, is it electrical engineering?

Is it anesthesiology, for example?

So that's an area where you would know the validity of all inputs, right? If I said to you this area of anesthesiology is xyz, like, I don't know anything about, you know, a lot of that. But in general, if you say to someone who, who's successful and smart, you know, hey, I have this electrical engineering company and you know, it's X amount of EBITDA and blah, blah, blah, blah. Most people would say, like, I can't value unless you're in that domain. But there's something about real estate and multifamily real estate. Like, everyone thinks they can do it, right? Everyone thinks that they can kind of figure it out. And you know what? It's a trap. I'm gonna just tell you that right now. Most people can't do it. And it's not a good idea unless you really have domain knowledge. Like, again, you've worked too hard for your money. Like, unless you can honestly say I'm an expert in this, either hire a consultant or understand you're not. Right?

No, I think that's great advice. I think it's. I mean, you're really just touching on the importance of, you know, what does due diligence take? Like, how important it is, what it really takes to do the proper due diligence. I think that's awesome. And I know you guys spent so much time educating people on this. So honestly, I appreciate your honesty with that and I love it. You know, we talked about due diligence and we went off on this, you know, tangent. I think it's been amazing. I'd love to get back to development a little bit, if that's okay with you. Because I want to take your time and understand where the market is today. And like, you talk about the margins and I think, like, someone like me, I'd like to know, like, why do those margins exist, like, right now? Like, why are they there and then why do you think? Like, it sounds like you guys are very optimistic about where it's going to go, like, what's going to keep it going and make sure that those returns are still there in a couple of years, especially when these buildings are done.

Yeah, the margins expanded for a couple reasons, but there's three drivers in a development model, a multifamily development. I mean, there's a lot of inputs, but there's three that really matter. One is the growth rate of rents. The other is input costs. So that would be land, raw materials, labor. And third are cap rates. And two of those three variables went our way. Right. So cap rates went down, which obviously is your multiple on earnings. So that's good. Rent growth in 2021 was really the highest. It's been on record 10 to 15% nationally, depending on the market. Some markets were 20%, 25%. It's not normal, but I'll get to why it happened, if you want to discuss that. And then obviously, input costs were up 12 to 14%. So that's bad. But the. The two things that were good were better than the one that was bad. And so a lot of the times people focus on one and they say, well, no, I don't want to be in development because we're up. And why would you want to do that? That's exactly what we want people to do. Right. Because we want less people developing. And if you can manage input costs, and we believe we can, and I can get into how we do that. We also should talk about industry hedging, because I think that's important right now. And I get a lot of questions on other webinars on that. By the way, Peter, we do, for our seven active funds, we do four webinars a year for each. So 28 webinars a year. Like, we have 2500 active investment partners. So that's a lot of questions. Right. And half of our webinars are like this. They're Q A. Yeah. And I can tell you, in the last three months, half of the questions are some form of interest rate question, like, how are you dealing with inflation? How are you doing with interest rates? How are you hedging this? How are you locking it in? So again, back to our prior conversation. When you're interviewing managers or thinking about your own deal, make sure that you have interest rate hedging strategies baked into what you're doing. Right. It's important. But back to margins development. Margins are high because two of the three variables have gone our way significantly. And there's less capital in development than there is in core, which equates to more buyers of the end product relative to how much is being produced. Right. So there's just. There's a supply demand imbalance, and there's just. There's more demand for units, for apartment units than we've really ever seen in my, you know, 15 to 20 year career. And I think a lot of that is just there's two things going on. One, nationally, the price of homes that you buy, they've gone up a lot, right? And, and there's just a lot of people that have been kind of priced out. And then at the same time, you have a lot of folks now that want to stay mobile, right? They don't, they don't have to live in one city anymore, they don't have to work in one city. It's much more flexible. And so there's, there's more of a premium on flexibility. And a lot of people are priced out, yet they need somewhere to live, right? So it's creating quite a bit of demand. And it's not, by the way, just from millennials, it's also from older people, right? So people in their 50s, 60s, 70s, they're selling their homes and renting. This is a new thing, right? And I'm not talking about, you know, moving to a senior living facility. Like, we don't do that. We're not in that business. I'm talking about someone who, you know, they're renting in a building next to a bunch of 30 year olds. Right.

I think that's fascinating. I mean, do you see any of that changing over the next three to five years? Are we just in a special point in time right now? And something that you did mention, I'd love to hear, like you did talk about right now, why rents have spiked dramatically. I mean, these are all things I'd like to know what's happening now. Why is the phenomenon happening? And then you see a changing in like three to five years.

So rents went up last year. It's actually a big reason why CPI is 7% and it seems to persist. It's not as transitory as you think. The cost of housing and CPI is measured by rental apartment units, right? So what we're talking about is literally the input in, and we're talking about 10, 20% rent increases last year. So that's a big reason that's up. So why did it happen? It happened because it's flying, man. I mean, I know that sounds simplistic, but there weren't enough units built nationally of quality relative to the people that wanted to rent them. And there's also, there's inequity in where people want to live and where the units are, right? So people really want to live in Austin. They want to live In Nashville, they want to live in Phoenix, they want to live in Charlotte, they want to live in Florida. A lot of this is driven by low tax states. They want to swap out a huge state income tax in New York for zero in Florida or Chicago, swap it out from Miami. I mean, these are my clients. I don't have to look any further than the people who partner with us on the investment side. They're leaving Chicago, New York and la, and they're going to these states. Right. Those states don't have enough housing stock to keep up with those flows. And so there's an equity there. You see a lot of rent growth there. And in terms of will it persist? I think it will. It will persist, but it won't persist at that rate. Right. I mean, multifamily is. This is why I like multifamily as an investment. I'm a risk manager. I want to see 6, 7% dividends, 2, 3, 4% asset level appreciation compounding over time you get a nice 10% return with, you know, great tax benefits like depreciation, interest, expense, like, like that's why I'm in the business. That's what I want. I don't want to see 15% rent growth years. That's not what I want to see. Right. But will we normalize to 2 to 4% rent growth? Yes. Do the models that we have, you know, it varies by market, but this is what we do as a risk manager, since we're very heavily in development, just, just to make it very real, we never trend rents during construction, number one. So if I think that rents in a neighborhood are, you know, $2,000 a unit, right. Per new product, we start rents at $2,000. We don't move them for two and a half years. Now there's almost no periods of time where rents don't go up over two and a half years ever. But we don't. So when you, when you go to rent them to your pro forma, they're 2000. This is another thing you should ask and look for in models of competitors, whether it's a manager or deal, make sure they're not trending rents during construction. Right. It isn't best practice, it's a risk. It's a risk management management way to get ahead in a pro forma. Right. If you don't have it, it's going to be harder to. The next thing we do is we trend cap rates against us. Right. So if the spot cap rate today is 3, 7, 5 or 4% in a market in our five year model, we're building in 2% a year or 10% throughout the life. That's significant. So now cap rates go up 35 bips. That's already in my model. I'm not even behind like my multiple on earnings price that in. We all know cap rates can stay the same. They can go down, they can go up. But in our model that's, that's already built. And even given all that, I still want to see a 30% margin. Like that's how much, how much cushion and risk is in the model. And so like when I talk about getting the weeds, you got to get in the weeds. Like the weeds really matter. And if you're trained to be in the weeds and you have to make knowledge great, and if not, you kind of need to pick the right manager or bring in a consultant that knows the weeds. Or in a group like yours, it's so diverse, it has so many members. Maybe there are people in your group that, that knows and you, you leverage that.

All right, that's all great advice. I mean, you know, when somebody, I've actually had people ask me like, you know, a company like yours has so many different funds. How do people know when they see these type of things, what type of fund to choose? Like, how do they make that type of decision?

You know, that's a great question. It's really the investor's needs. But the way we're structured, we do one thing, we're a multi family fund manager and risk manager, but we want to provide a lot of different vehicles for someone to come in. Because, you know, if you're extraordinarily risk averse and you want just mainly dividends, we have a fund for that. It's the multifamily credit fund. The types of investments it's making have never had an investment in 28 years. Not made money, not one. Right. So you're literally, you're leveraging a strategy that's multifamily based, that has no losses in 28 years. And think about what I'm saying, that's a lot of stress tests. I mean, I'm old enough, unfortunately, to have been around in 2002. That was a severe recession. It wasn't a joke. Right? You had 9, 11, you had the tech bus, you had Enron, Psycho, GE, like it was a real recession. Then you had the Great Recession, right? That was even worse. And then you had Covid, you know, this program, the bonds that we're buying in this program that are the collaterals, multifamily assets. This has been through all three of those. There's been no losses. And it's. You're talking about all dividends, you know, very dividend weighted. So if you want income and protection and almost sort of like a cash substitute type fund, that's what you want. We have a product for that. If you have capital gains. Right. And I'm heavily invested in our QZ fund. Luckily, I had some capital gains. We have a QZ fund, too. The first one's fully invested, But QZ Fund 2 is about half raised. This is a $300 million fund. We've raised about 150 million. I believe we launched that in mid October last year. So we'll be raising probably for the rest of this year, and then we'll complete that raise. But if you have capital gains and you want to be in multifamily development, it would make a lot of sense to be in that fund because you get the tax benefits too, right? But you have to have capital gains. Growth Fund 4 is a development fund for folks who don't have capital gains, but they have capital that they want to invest as part of their portfolio. And most of our clients, they have some capital gains, but maybe not enough, and they want to have development as part of their portfolios, and that would be growth. And four, the assets that we're investing in and the developments, they're very similar, whether it's Qoz or growth on 4, we're not visionaries in the sense that I don't want to go into a neighborhood that I think will gentrify, but I'm not sure. I have no interest in that. I want to go into a neighborhood that has gentrified, and I have lots of data pointing in that direction. So it really, like sometimes I get the question, I want to invest in qz, but I really don't want to, you know, be in these really tough neighborhoods. We're not. We're really trying to find that small sliver of the map where, you know, remember, QS maps were drawn in 2010. Right. I shouldn't say that it was a 2017 law, but it used the 2010 census. Right. Think about a city like just to pick one. Nashville. Okay? Nashville. In 2010, they didn't have housing stock downtown. There was none. That's how much Nashville has changed from the 2010 census to 2020 census. So as we sit today in QC2, I believe we have the best development site in the southeast period. We're going to build 720 apartment units on it, it's in the gulch. The gulch was part of the QC mapping.

Because you don't mind me interrupting, I want to let you know qoz is a qualified opportunity zone. I know people that that word and that buzzer people have heard before. So I just want to make sure to put that out there. But yeah, keep going. I love it.

Yeah. So it's just an example. And by the way, for the folks that are in front of computers, you can, you can Google it. It's the Beeman auto dealership in the gulch. And that's the land we bought. We bought it a year ago. In my opinion, it's the best development site in Southeast. But it also happens to be in qz. So like this notion of do you have to make trade offs? You don't, but you have to have capital gains to be in qz. If you don't but you want development, it's exposure in a portfolio. That's growth from four Income plus fund. And Peter, you and I were talking about this before. That's our multi strap fund. And so if you wanted dividends, but also growth, that has multiple strategies in it, it has both preferred equity investments. Earlier I talked about how we would never over lever deals. And I view preferred equity as leverage. Right. So I would never use preferred equity if I was common. But I like being preferred equity. Right. I like sitting above someone else's comment. So we do a whole lot of that and Income plus. But we also have some common assets, common equity assets that we can appreciate. And then we have a small sliver, 20% of development. But it's called build a quarter. We develop to a margin and then we hold it producing both a higher dividend and depreciation. So that fund really targets a 9 to 11 net return. Last year it did a 21 net return. But back to what we talked about earlier, that wasn't a normal year. And I'm not saying that because I want you to expect 21. I don't. It's going to average 9 to 11. But if you think about it, 9 to 11 compounded is a hell of a lot of wealth. Right? Think about what 10% does when you're compounding dividends. And you can reinvest dividends or you can take the dividends. You know, it's about a 6 dividend fund. It's pretty significant. So. And it's, it's very tax efficient. So I'm saying a lot. But the bottom line is we have four funds and they're all across the risk spectrum. Right. You can. Our growth area is development and then we have very low risk funds like Multifamily Credit and Income plus is kind of in the middle.

Can I ask you about the growth fund real quick? You mentioned some of the numbers behind some of the income fund, but what are you expecting in terms of the growth fund for what does that look like in terms of length of the term of the fund, what some of the typical returns might be, what that might look like.

Growth Fund 4, it's an interesting fund in the sense that we've given investors an option. So if you want just to have a really high irr, it's a four to four and a half year fund. We've been working on the acquisition side for the last 12 months. So it'll be invested very quickly because we've already found the developments tied up the land. We're in pre development, so it'll be invested quickly. That's a good thing because it'll minimize the J curve for you. We actually don't have a committed fee on the fund at all. So that's another good thing. You get charged as we do the deal through an acquisition fee instead. It's sort of a sub of one for the other. But the other nice thing about this isn't just growth in 4, it's also QZ the fact that we tied up all this land and been working on it for a year. The land is deeply in the money. I mean, if you're around real estate over the last year, you know, multifamily land sites that were going for, you know, 20, 25,000 a door are now going for 50,000 a door. I could point to an awful lot of deals we've tied up that were 3 million, 5 million, $7 million in the money. And we don't mark up land. You know, that's another thing to ask other managers or certainly at the deal level, if you're dealing with a deal level manager, it's almost certain they're marking up the land on you, right? So they tie it up, they take it through redevelopment and we've had a lot of appreciation. It's a really good question to ask because they could be marking it up a lot. They might mark it up 6, 10, $15 million on you. So that's a good question to ask, but we're not doing that. So that's a big edge. And in terms of the investor in growth one, four, the money will be allocated relatively quickly because of the pipeline four and a half years from now. You will have the option to just. We'll liquidate and you can get your return. And we're saying 14 to 16% net returns. We always report out in net. So, you know, that means after our incentive fee or promote after our fees, that's what's due back to you. Which equates to about a 18 multiple on money. So a million in becomes a million eight back to you for those of you that want to stay in. Because one of the things we've learned, we're taxed investors. Like I'm the largest investor in our funds with my partner Michael, I believe we're at 65 million now of our capital in our funds. We feel the same things our investment partner and shield. And one of the things that we've seen over the last 10 years is we create all these funds and they've done really well. Maybe we should circle back in a second and talk about investment performance. But just to finish this thought, the funds have done really well. And then we sell them and then we pay capital gains, which is generally about 23, 24%, and then we reinvest them into the next fund post tax. And it's incredibly destructive for wealth to a tax investor to keep doing that. I've done it three or four times over. That's not very smart. And so what we're thinking now is, wait a minute, we'll develop through these huge margins. If you want out, you can get out. But if you want in to continue to compound your wealth, tax free, you stay in and you have that option. And that happens in about year four, four and a half if you decide to stay in. We lower the management fee because we're not, it's not as hard to run and operate a built building as it is to develop one. And you stay in long term for that growth. And at that point you get the benefits of depreciation, interest, expense. You get a higher dividend because you build to a margin. We can refi. All kinds of interesting tax deferred strategies happen after a year, four and a half. Again, it's an option. So I think that's pretty unique in the market. Usually development funds are, you know, build, refi, or sell, get everyone out. That sounds really good for investors. But for those of you that actually want to, you know, create two multiples, three multiples, four multiples. That takes time. And you actually benefit by folding.

Well, I love that strategy. I think it's pretty unique in what I've seen out there. You mentioned some of your returns. Why not Take the opportunity. Right now I'd love to hear more about origin. Somebody else. They're going to ask you this anyways, I'm sure when they call you, but if you don't mind asking, mind sharing some of your track record. What have you done in the past in terms of typical returns? You already mentioned the fact that there haven't been any losses, but would love for you to kind of hit back on some of those. Your performance in the past. Yeah.

Thanks, Peter. The thing I'm most proud of, we were named a top 3% global real estate manager. Brett Prequent. And what's interesting about that, I believe we were 11 out of 275 global real estate managers. What's interesting about that is it wasn't for a particular fund. It was for all of our activity to since 2014. And so that that encompasses Fund 2, Fund 3 income plus Fund QZ1. It doesn't include obviously growth from 4 because we're just raising that now. QZ2 is not in that but like it's a huge amount of deals and a huge amount of funds. And I'm really proud about relative performance. Right. Anyone can say they did well in a market that did well. We did better than our peers. We beat 97% of our peers. So I'm proud of that. In terms of numbers, we've averaged north of 22% on all realized deals. IRR wise, our first fund was back to multiples because I would rather talk about multiples. That's real money you can spend. Fund one was a 2, 3 net multiple. Fund two is a 2, 1 net multiple. We have one more asset in fund two to sell. So it's a pretty small asset. But that's where that fund will be. Fund three, we're about half round turned on and I think that's going to wind up being about a 175 net multiple. That particular fund, if you break out multifamily versus office because we did have a small amount of office in that fund, you know, we were right there, you know, 2,021net multiple. On multifamily side, we had 20% exposure to office, which we never took a loss. But you know, it was significantly lower returns because of what happened with COVID I get this question a lot. Do you? What do you think of office as an asset class? I think you need to be really careful. I think the demand curve in Office is it's been eaten into by Zoom and teams and people. Think about what we're doing right now. It's very productive. And it's not person to person.

And.

There'S so much operating leverage in office. If you go from a 90% occupied building to 80 and it's not the fault of the building, it's just the demand set, you actually don't have cash flow. Right. So I think you have to be really careful. There'll be winners and losers in office, but I don't like it broadly as an asset class. And so. And then in terms of QC Income plus, you know, Income plus is an open and fun, but it's done exactly what it's supposed to do, which is low volatility 9 to 11. It's done a little bit better than that. But low volatility strategy, like what I want for investors in Income plus and certainly in multifamily credit fund because that's even less risky. I don't want you to ever think about it. So when Russia's about to invade Ukraine or the risk free rate goes up and tech stocks are down 30% in a month like they were in January, I don't want you to then say, oh my God, what's going on in multifamily credit? Because the reality is nothing's going on. You're just getting your dividend. That's what's going on, right? There's, there's a part of your portfolio that doesn't correlate and, and you can feel okay about. Right? So like that's a big part of you as an investor. There's trade offs, right? If you want to go for 20% IRRs, there's going to be more risk. But if you're taking an 8 to 10% return like multifamily credit, where most of it's in dividends, there shouldn't be a lot of risk and there isn't. Right? So like for me, I am really heavily invested in that fund because it's a good fit for me. I'm very invested in growth and other funds that origin has. And what I really want is income I can count on. Right. I want to know that I'm going to get 7, 8, 9, 10% dividends every year. And by the way, we didn't touch on this here, but all of our funds that have dividends have subsidiary REITs. And let me back up because I've talked for a long time, have you. Do you understand why we would do that?

No. Explain why.

So part of the 2017 tax law, which is a little bit obscure, but it's meaningful. Remember President Trump was a real estate Developer, he wrote into the law that all real estate assets that exist and if a fund is run through a REIT, they get a 20% reduction of taxes on dividends. So anything that produces a dividend run through, restructure with real estate as collateral was a giveaway in the industry. And so you take a fund like multifamily credit, that's 100% dividends. I mean, it's all it is. Right. So you're being taxed at ordinary income in this case because it's a bond. So at every bond you own, every corporate bond, every US Bond, it's not a mutie. You're getting taxed in order. And so we're no different. We're bond, but ours gets 20% off dividends and no other bond does. So I would pose to you, not only is Multifamily Credit a better risk return pre tax than anything I've seen, we also get a 20% post tax pump. Right. So every income plus has the same feature. It's not as pronounced because there's not a lot of taxable income because we have depreciation, that. Right. We can offset dividends with depreciation. We don't get that because we're a lender in the credit fund. Right. You're not equity. But in the event that you did have taxes, that has a subsidiary too. And that's, that's another thing to think about. You're a tax investor. I'm presuming make sure that your managers align with you and they have structures. You know, post tax wealth is what wealth is. Right. And you're not deferring. You got to figure out ways to shelter.

All right. I mean, this talk has been so informative. I appreciate your time on this. I don't want to take any more of it, but I'm sure this has given so much information to people who are interested in, of course, passive investments. But number two, really getting to development because we've heard so much about it. We've heard so much about the returns. I think it's been super educational for me as well. So I want to thank you for your time. Amazing work that you're doing at Origin. People can check it out. We're going to put a link around either where you're watching this or if you're hearing this within our show notes and our podcast. And yeah, we look forward to seeing all the amazing things you continue to do. Really appreciate your partnership and let's talk again soon.

Thanks, Peter. Really enjoyed the conversation. Appreciate it.

All right, thanks. Enjoy the show, let me know by dropping a review in the the Podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group Passive Income Docs, and you can always learn more at our website passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.