We Study Billionaires - The Investor’s Podcast Network - TIP448: A Way to Hedge Inflation? w/ Dan Handford

Starting point is 00:00:00 You're listening to TIP. In inflationary times like these, we have to focus on preserving our purchasing power. Therefore, invite the CEO of passive investing.com, Dan Hanford, to join us today to teach us how to invest in commercial real estate as a hedge against inflation. Dan has closed to $1 billion and more than $4,000 on the management. You certainly don't want to miss out on this one. So, without further ado, here's our interview with Dan Hanford. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most.

Starting point is 00:00:39 We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Jake Broderson, and today I'm accompanied by my co-host, Robert Leonard from Real Estate 101, and Dan Hanford from passiveinvesting.com. Dan, welcome to the show. Stig, Robert. Thank you so much for having me. Looking forward to sharing with the audience today. Inflation is all the rates right now. And like every other investor out there, I'm just worried about keeping my purchasing power intact and real assets. And I should then say most noticeable,

Starting point is 00:01:19 real estate really comes to mind here. So with that said, we are quite excited to provide an audience who are primarily stock investors, the opportunity to learn more about how to diversify into a different asset class. And Robert, I know you have the very first question for Dan. Real estate markets, Dan, have become so expensive and competitive recently that local and state governments are actually starting to feel the need to intervene. Atlanta has recently put limitations in place for Airbnb investors. And Dallas, where I know you have properties, is even considering putting in laws and regulations to slow down real estate investors. As part of your underwriting process, you stress test your properties at 60% or less occupancy, you use conservative rental

Starting point is 00:02:03 rates and occupancy rates, and you build into your business plan at least eight months of reserves. In a market environment that is so competitive and full of capital, how are you finding and acquiring properties that fit all of your criteria? Well, I will tell you that it's very challenging. Right now in the market, we're underwriting dozens and dozens of deals every single week, and it's very hard to find deals at actually pencil. And then when we find deals that we feel like pencil, we try to put a great strong offer in,

Starting point is 00:02:33 and we get to the best and final round in some of these assets. Because our group acquires assets that are in the kind of $20 to $30 million low end range upwards to maybe $100, $110 million. So the types of assets that we're looking at, there's usually a lot of good quality buyers. And so there's a lot of competition, and there's a lot of institutional buyers. And so when we're competing with them,

Starting point is 00:02:53 we obviously have to do a few things to kind of stand out, maybe have some additional hard money that's the earnest money deposit that goes non-refundable day one, and then some additional earnest money deposit that goes non-refundable after the due diligence period. And we're talking about significant like seven figures of earnest money deposit. So we're talking about just putting down the typical, you know, the typical, you know, 10,000, 20,000 you might see in some of these smaller assets. These are pretty large assets. So the earnest money deposit has to be meaningful. And so that's one of the ways that we stand out. Then at the end of the day, a lot of it has to do with the purchase price. And so, you know, we pass on a lot of deals because

Starting point is 00:03:28 when we do our underwriting very conservatively, we have certain metrics that we have to hit that we know that we want to hit as investors. We also know that our investors want to be able to hit as well. And we won't be successful in that asset if we can hit some of those return metrics. And so for us, being able to find assets that hit those return metrics and having a maximum amount that we are willing or able to pay for, that asset allows us to, you know, you know, having the even more challenging time trying to find assets because we pass on a lot of them because the bid on these assets goes way up higher than what we can afford. And a lot of times we'll get into the best and final round and feel like we were going to get awarded the deal

Starting point is 00:04:07 and somebody comes in at the last minute and bids it up, you know, several million dollars more. And it just doesn't make sense to us at that point. Whose earnest money are you using in these deals? When you talk seven figures for an earnest money, are you just taking that out of the capital you've raised? Well, oddly enough, you know, with our types of acquisitions, we're raising all of our money from contract to close. So earnest money deposit actually has to be submitted within two days after contract signing. And so we don't raise the funds until we get closer to a week or two down the road.

Starting point is 00:04:35 Once you have to get all the documents sent out, we do our, you know, webinar to promote their offering. And so we actually use our own personal capital to be able to do that. So we've never had to use outside capital or, you know, had to be even more risky and use the offering and money because you never know. I mean, at the end of the day, it's possible that the offering, you know, that the closing might not occur. and you have to either eat that earnest money deposit or somehow try to get it back. And so we've been very conservative with that and said, you know, we're just going to put our own, you know, neck out there on the line and our partners.

Starting point is 00:05:03 We have three managing partners, myself, Daniel Randazzo and Brennan Abbott. And between the three of us, we put up all of our earnest money deposit. And so far, up to this point, we've never lost earnest money. So that's a good thing. And every deal that we've put under contract, we've been able to close. So it's a good track record to have. And of course, it gives us more confidence when we're going out there and putting three or four million dollars on an asset that's hard in non-refundable day one.

Starting point is 00:05:27 Interesting. Well, I think that's a good segue to the next question here, Dan, because in the personal finance world, there are a few different general rule of thumbs for emergency funds, and there is a similar approach in the real estate world. Some funds and investors are a bit more conservative, aiming for closer to 12 months of reserves. And then the others are a bit more aggressive and are okay with three months. Why has your firm chosen to keep at a minimum eight months of reserves and stress test as a 60%

Starting point is 00:05:55 occupancy rate? How has this benefited or perhaps hindered your business throughout the years? Yeah, so I would say one of our earlier assets, we didn't have enough operating reserves, and we were doing a major renovation on that property. And with not having the major operating reserves off to the side that we could potentially pull, we actually ended up not being able to. to, we ended up getting to a position we may have not been able to complete the renovation plan because the renovations went over our budget, right? And so one of the things that we had to do

Starting point is 00:06:28 was is the partners actually had to loan the asset money to be able to keep it afloat, not keep it afloat, but to be able to pay for the additional renovation so that we can continue to maintain returns for investors. And so with that particular asset, you know, even though in the offering documents and the operating agreements were allowed to charge interest if we loan the property money, We just didn't feel it was prudent to do that because we don't necessarily want to make our investors feel like we're just loaning money to the property to make extra money, right? And so we gave a no no interest loan to the property and we held on to that note until we ended up selling that asset. We sold that asset for higher than the projections that we had had originally. So it was a great return for our investors as well as us.

Starting point is 00:07:10 But that's one of the lessons that we learned early on is that we want to make sure we have plenty of operating reserves. And so what we try to do is we have, so some groups might say they have, you know, 12 months of operating reserve, you know, we're eight, what we do. But with us, our operating reserves at eight months is actually, if the property goes down to zero percent occupancy, we can continue to support the property and pay the debt service and expensive for eight months, right? But the chances of the property going down to zero percent is pretty remote. But if you look back in the last 100 years, all the recessions and economic cycles that have occurred, the recessions don't normally last more than about 15 to 18 months. So as long as you can hold on to that property, continue to support the property for at least 24 months or even 18 months, right? We always plan for 24 months, then on the, you can hold on to that asset to the other end, then you'll do really, really well. And so for us, even though we have this, you know, eight months of operating reserves, we're not going to go down to 0%, right? And so with that, that eight months of operating reserves will actually get us farther down the road. And when some people say they have 12 months

Starting point is 00:08:14 of operating reserves, they really don't have 12 months of operating expenses and to go all way down to 0% occupancy. They have a certain number that they would say, if it drops below 25% occupancy or 30% occupancy, we can continue to support the property for 12 months, right? Which, again, that's just our conservative nature. And when we looked at in the beginning doing this, it reduced the returns for investors for sure, because when you have a large operating reserve, you actually have to raise more money. The more money you raise, the lower the return is for all of the investors in the deal.

Starting point is 00:08:46 But at the same time, that return only reduced it by about 100 basis point. So one percentage point is all it reduced to buy. And so for us and our investors, they're like, absolutely, I'll give up 1% on my return profile to mitigate any future risks of capital calls and any types of issues of potentially losing the property or anything like that or the property happened to take loans to help to support itself. So we actually do that to make sure that we have a much more conservative deal. And yes, we have to bring on more money. But at the end of the day, it allows everyone to be able to sleep well at night.

Starting point is 00:09:19 That's that swan principle, right? Sleep well at night. And so we have a lot of operating reserves that we can make sure we can sustain the property, even if there are some economic pressures that come across. The capital call you mentioned and your debt structure is where that risk comes from. And I want to talk about that for a second because smaller individual real estate investors are typically pretty limited in the financing options that they have available to them, whereas large funds, such as yourself, who are acquiring multi-hundred unit properties,

Starting point is 00:09:48 actually have access to a lot more financing options, such as family offices, hedge funds, and sometimes even insurance companies. Who does passiveinvesting.com typically obtain its debt financing from? And how is it most commonly structured? It depends on the market, right? So there's been sometimes there's usually like six to nine to 12-month periods where it kind of changes and shifts based on the debt market out that that's available at the time. So there's been times where we've used agency financing, whether it be Fannie Mae or Freddie Mac, and we get fixed

Starting point is 00:10:17 straight financing that's long term, you know, seven, 10, 12 year terms with usually some interest-only periods for the first, you know, three to five to seven years, depending on the asset and the market. And then most recently, we've been doing bridge debt. So we're using some of the options that you mentioned. So we've actually used life insurance companies. We've used hedge funds. We've used other private funds. We haven't used for any family office money, but it's supposed to be those other institutional level funds that we even obtained our debt from. And they have a floating rate, which is a little more risky, but it also provides the ability to not have any type of prepayment penalties, if you will, that will cause the performance of the property

Starting point is 00:10:55 to start to go down if you try to sell it earlier than what you would originally project it. And, you know, right now at the current market and the types of assets that we're buying, the bridge debt seem to be, it seemed to have a better terms for us. Obviously with the capital markets in a major state of flux at this point in time, like we're today sitting on a day where we actually have the Fed going to be probably increasing the Fed rate by about 50 basis points, right? And so there's a lot of flux that's happening right now and a lot of the floating rates now instead of being based off of LIBOR, they're now being based off of SOFER. And so there's a lot of structure changes there as well. But typically, as far as the structure is concerned, if it's an agency debt, you're usually going to have right now a little lower loan to value.

Starting point is 00:11:39 It's going to be like 55 to 65% loan to value. And you're using some sort of bridge debt, you're going to see that tick up a little bit, maybe 65, 70. If you're lucky, 75%, if you're lucky, 75% percent. But usually we try to stay between that 65 to 70% range when it comes to a bridge debt option that's there to be able to make the cost of capital kind of more cohesive and their returns a little bit better for the investors and lower risk. So, Dan, I wanted to transition and talk a bit about taxes, and I can already feel like our audience or like taxes. That's not typically the most exciting topic for most people, but it is for me, and I know it is for Robert because, you know, it's a game of making the most money and taxes are an expense.

Starting point is 00:12:20 How are Americans typically taxed whenever they make investments with you? And is there any way that they can lower their taxes? When it comes to the types of assets that we acquire, obviously there are there their large, high quality assets and they have a lot of depreciation available on them. Because we, every single one of our assets, we actually do what's called a cost segregation study. And so the smaller investors, I'd have heard of that before, but we basically have an outside engineer firm come into each one of our assets. The IRS is one that requires us to have the outside engineer firm come in. And they piecemeal the property down to the sheet

Starting point is 00:12:54 rocks and the stud and the appliances and the countertops and the flooring and the shingles on the roof. we can piece the property down to accelerate depreciation. And so instead of, I can say, for example, like in a multifamily offering, like the one in Savannah, Georgia that we're doing right now, this particular one is a multifamily deal. And there's three different levels of depreciation that are available for investors in our offerings. There is straight line depreciation, which is pretty standard, right? It's 27 and a half years for residential properties, including multifamily. So even though multifamily is considered CRE, commercial real estate, it actually still is classified as residential in the eyes of the IRS.

Starting point is 00:13:33 So you get 27 a half a year straight line depreciation schedule. And then, of course, on the commercial side, it's 39 years. So you can depreciate that, just basically take the value of the property minus the land, divided by 27.5 or 39. That's how much depreciation you get every single year. But then there's two other additional levels of depreciation that you can obtain, which is accelerated depreciation. And that's where that cost segregation study comes into play,

Starting point is 00:13:56 where you can actually piece the property down and in certain parts of the property, you can actually accelerate to the first five to 15 years based on the life expectancy schedule that the IRS gives us based on the items there in the property. And so what that allows us to do is to really front load a lot of the depreciation of those first five to 15 years, which allows investors to have really high depreciation benefit. So on our assets, well, I'll mention that in just a moment. Well, I don't know what we kind of see using our assets, but the third level of depreciation is bonus depreciation, right? And so any time of renovations or anything that we're doing on the

Starting point is 00:14:32 property in those first 12 months, we can bonus depreciate that. And right now it's been about 100 percent, but it's going to go down year over year over the next couple of years. I think like the next year is going to be like maybe 80 percent. It kind of tapers down. But that bonus depreciation still allows us to front load that for those first several years, which gives us those nice pops of depreciation. And that depreciation is going to offset any of the income that comes off. That comes off. of the property. And so if somebody comes into our assets and they invest, you know, $50,000 on one of our assets, they can expect to be having a depreciation benefit of any of between 40 to 50% on the low end, upwards to 70, 80, even 90% depreciation of that investment in that first year,

Starting point is 00:15:13 and they can take that depreciation to offset the income off the asset, but also to be able to offset some other types of gains that are on that they have some with other types of income. Now, I'm not a tax professional, so I'll just make that disclaimer right now. But you definitely want to check with your CPA, all the different nuances here. But one of the things that I found with my CPA is I had a CPA that was local to me. I really enjoyed working with them. It was a great CPA until I started going into real estate. And once I started going into real estate, he started asking me questions about the real estate professional status

Starting point is 00:15:45 and the depreciation benefits and stuff like that. I was like, if you're asking me these questions, you're not the right guy for me. So I had to find a different CPA that was really knowledgeable in real estate to really be able to help me they had a great impact on my taxable liability. And now I don't pay federal income tax right now because all the depreciation I'm getting is offsetting my income. And it's also because I also have the real estate professional status, which helps to offset my income that I have that comes in.

Starting point is 00:16:12 And I think it's a great benefit for real estate investors is to be able to have the ability to have that depreciation, offset the income that you're getting off of it, but to also offset some of the other income, whether if you're an active investor, it can potentially offset some of your active income, whether it's in real estate or at W2 or your spouse, you're filing jointly, you can offset spousal income as well. And then also, if you are, if you don't have, you're not an active real estate investor, then you can have that depreciation offset other passive gains. If you have passive gains and other types of investments, whether it be real estate or stocks or whatever, it can sell to offset so with those gains as well. And of course,

Starting point is 00:16:49 you know, when you go to sell the asset, you know, that's the real beauty of these types of assets and what we do at passiveinvesting.com is when we go to sell an asset and we've now grown that nugget from 50,000 to say 100,000 or 150,000, we can now do what's called a 1031 exchange on the back end and defer even longer those capital gains. And if we can continue to defer those capital gains until you pass away, when it turns over to your aor's, then at that time, the basis of the property resets to the current value of the property at that time and allows you to effectively pay zero capital gains tax. If you can continue to do that, you can still live off of the income that you're spending off of each one of the investments as you go throughout.

Starting point is 00:17:31 So with our investments, what we do is we give investors the option to 1031 exchange or liquidate out whenever we go to exit a deal and move on to the next asset. And so up to this point, we've been able to exit eight deals and we've been able to successfully to execute those 1031 exchanges into the next asset successfully and to be able to allow our investors to continue to offset those gains. from one investment to the next. Let's take a quick break and hear from today's sponsors. All right.

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Starting point is 00:22:10 percentages are, their ears are probably going up. They're probably excited. But on the back end, there can be this concept of depreciation recapture. Talk to us a bit about how that impacts your property and some of your investors. Yeah. So, you know, whenever you go to sell the asset, if you do not 1031 exchange and you liquidate out, then you'll be subject to two different types of taxes. You'll have the depreciation recapture tax, and then you'll have the capital gains tax.

Starting point is 00:22:38 And so if you have, obviously, we've been receding this to depreciation, the negative K-1s, if you will, at the end of the year where you've been able to use some of that depreciation to lower your income to effectively pay no income tax. Then, of course, when you sell the asset, that's where that depreciation recapture comes in. And they're going to say, okay, well, you already took a benefit for the last, you know, three to five years on this depreciation. Now that you've sold, you've liquidated out and you did not do a 1031 exchange, we're going to recapture what we should have captured back when you use that. And so that's why it's powerful to use the 1031, because we want to make sure we can continue to defer that as long as possible.

Starting point is 00:23:15 And if we can do that all the way up until we die and pass it over, then the recapture, the depreciation recapture and the capital gains goes away. On the 1031 exchanges, is that a decision that passiveinvesting.com is making when they sell their property to go into the next property? Or is that on the investor basis? The investors have the opportunity to make the decision as to whether or not they want the 1031. So if we have, say, you know, 20% of our investors that says, hey, I want to liquidate out, we can liquidate out those investors when we sell that asset.

Starting point is 00:23:47 And the 80% can actually move on to the next asset. And so the next asset that we 1031 exchange into is not a choice that the investors have. It is one another choice that we choose that next asset and move on. Sometimes we already know in the T-DEPs, we can tell the investors which asset we have chosen, so they can decide whether or not they want to 1031 into that asset. But usually at that point in time, most investors don't really. have that much concern about it because, number one, they trust us because we're always invested alongside of our investors in each one of our assets. They know we have a vested interest

Starting point is 00:24:18 to make sure that the next vehicle that we put them into is going to be a great, solid investment. But at the same time, they're not really too concerned about it in everything else I've just said, but also they don't want to pay the capital gains tax on it. So even if it's an asset that maybe is not the return profile that they would exactly want, then they still trust us to find one that's a good and solid for them that will still produce returns. and they're going to have a higher investment into the next one. So if they initially put in 50,000 and when we sell, their new investment amount might be 100,000 because of the gain that we had on that sale.

Starting point is 00:24:50 And so that benefits them because now all their returns are based off of the new larger investment amount, which is the 100,000 versus just the 50,000. And then again, you kind of do that three or four times, and now you're at 175 or 200,000, then you go to 300,000 and like 600,000, and you can see how it can build on itself as you go from one asset to the next asset, and you continue to live off the cash flows, and the actual principle continues to grow over time. For anyone that is just hearing this 1031 exchange conversation for the first time, it's also known as a swap to you drop. So if you do a quick Google search, you can check out 1031

Starting point is 00:25:23 exchanges under its other name from time to time. But Dan, earlier in the conversation, you alluded to the 320-unit luxury apartment complex in Savannah, Georgia, that you and your team at passive investing.com are acquiring right now. As part of that deal structure, investors are being offered the opportunity to choose between two different classes of shares. There's class A, which is preferred equity, and then there's class B, which is the common equity. Many of the listeners of our show are stock investors, and therefore they're familiar with preferred stock and common stock within the realm of stock investing, but they might not be so within a real estate deal. Why is your team chosen to offer these two different options? And what do these options offer to investors?

Starting point is 00:26:06 You know, we started offering these two types of share classes several years ago. And it was primarily because we had a subset of investors that wanted to have, I say, guaranteed returns, but we can't guarantee returns, as you know. These are investments. So there are nothing that's guaranteed. But when you are in a preferential position in the capital stack and you have a preferred return. So on our class A share, we typically offer a 9% preferred return. And if they invest more than 250,000, then they get a 10% preferred return. But with that preferred return, there's no participation in the upside over and above that. But what they get is they get a preferential treatment in the capital stack. And then they also get their capital back before the class B investors. And it's usually

Starting point is 00:26:53 only about 20 to 30% of the capital stack. So the deal would have to go really south. I mean, really, really south from them not to get their return or for them not to be able to get their capital back. They are sitting in that preferential treatment position. And that's why I say it's as close to a guarantee as we can get is for preferential treatment in the capital stack. And we do get questions from investors like, why would anybody want to invest in that if you could invest in Class B and get a 7% per pervert return and then have the opportunity to get 15, 20, 25% return on these types of investment? And the answer to that is it really just depends on the investor. Because Some investors are more risk-averse than others, and so they might want to do a blended approach.

Starting point is 00:27:33 When they do like 50% in Class A and 50% in Class B, they have this kind of nice blended return profile on the same investment. And we also have investors that are maybe a little bit older, and they don't necessarily really care too much about the appreciation. They want to hire cash flows so they can live off those cash flows during retirement or whatever. And so there's a lot of different dynamics there, but we don't usually have a large portion of our capital stack for Class A, so it usually fills up pretty quick, and then we don't have any more that can go into

Starting point is 00:27:59 class A, right? So the large majority, I'll give you an example. So like actually at the Merida Grove deal, which is out in Savannah, Georgia, that deal has the two class shares, and it's a $35.3 million capital raise, and the total purchase prices, close to $100 million, I think it's $906, $97 million. So it's a large deal. Of that $35.3 million that we're raising for the equity side, only about $3 to $4 million is set aside for class A. So I'm about 10% of the capital stack is really there for that Class A stack. So you can see that being in a Class A position is a really good thing. It has a very, very low risk when you're trying to invest in that.

Starting point is 00:28:39 And so when somebody wants those higher cash flows, it's a great opportunity for them to be able to invest in that share class to get those higher cash flows. And then, of course, again, you are giving up the opportunity for the upside. They're giving up that opportunity to have that safer, almost guarantee, if you will, in the return. Dan, the luxury apartment complex we just discussed there in Manor Grove, that was built in 2016 and it now has nearly a full occupancy. 96% of the numbers I'm looking at right now from early March.

Starting point is 00:29:08 Now, the 8th of the property and the listing photos led me to believe that the property is in great condition. And then despite this, the offering states that there's a potential for a 24.7% annualized return for a 2.24 equity multiple for the Class B common equity. a five-year hold period. How are these potential returns to be achieved for investors? And what is the business plan for this property? Yeah. So one of the things that we try to do is we try to buy assets that either are direct from the developer, so they have some opportunity for, you know, organic rent growth, or we try to buy them from people that we have bought from the past that

Starting point is 00:29:48 have good quality assets. And this particular asset is the ramps are actually undermarket. And And also the amenities set is under market. And so what we're going to do is we're going to go into this asset. And there's also some deferred maintenance that are some different items that we even notice that we want to clean up. It's about to improve the property and improve the community. And so being able to do that allows us to be able to look at our competitor set and see what are some of the other cop properties doing from an amenity set that are very

Starting point is 00:30:16 attractive. And we can start to add some of those amenities sets to our property, which will allow us to be able to have the opportunity to increase the growth of the rents because we're now starting to be more competitive with the rent that has come in. And a lot of it has to do with, you know, location, right? So if you're in a great location and you have a maybe a little bit of a lower amenity set, people still might want to drive an extra five or ten minutes, if you will, to be able to get to a location that would allow them to be, you know, maybe have a few more amenities on the property. And so for us, we always look at that competitor set and see what are

Starting point is 00:30:49 the competitors doing? Why are they able to achieve a little bit higher rents than what we're doing right now? And what can we do on the existing property that would allow us to be able to go in and to be able to improve the property and to be able to maybe make some of renovations? And so for us, in addition to some of the exterior things like the pool, enhancing the pool deck and adding a new dog park with some fencing, it's nice and nice saw it in there and also doing some additional landscaping and replacing a lot of dead plants that are surrounding the property. We're also going to be updating some of the fitness equipment. And then one of the other things that we're looking at doing on the interior is maybe

Starting point is 00:31:23 updated some of the kitchen and the bath plumbing fixtures and having a more modern lighting package package inside the property, including maybe even adding some of the ceiling fan. And then one of the things that's really popular right now is increasing or adding the technology to the unit. So you have these technology package packages that you can add to the unit, which with smart thermostat and things like that that would allow us to be able to increase the risk. and achieve rent, so premium is up to a dollar per square foot, which would get us more in line with the competitor set that's around the property.

Starting point is 00:31:56 Dan, for a second here, talk to us a bit about why you're focused so heavily on increasing the rent and doing these types of activities that are going to drive the rent increase, rather than not just from a cash flow perspective, but explain how that impacts the valuation of that property. Yeah, so one of the things that you have to look at when you're buying these properties is the exit, right? And one of the things that the exit is based off of, or really the only thing that it's based off of, is the NOI, the net operating income. And so there's two different ways to be able to affect the NOI.

Starting point is 00:32:26 One is to go in and improve the property, spend some money, to do some renovations and spend those CAFEX dollars to improve the property and to get it to a better quality asset that will allow you to be able to charge more. And then the second thing is to reduce expenses. And so that's one of the things that we're really good at is going into a property, seeing what's missing in that property, to add value from that perspective, but then also to be able to look at the expenses and see where can we shave off some expenses, so it still allows to increase that income. And then the types of assets that we try to acquire are in great quality locations, right? So we try to look at assets in primary or at least high-end secondary markets, where we know there's lots of competition for those types of asset. And some people

Starting point is 00:33:10 might be scared sometimes of competition, but we actually look at it as almost like a litmus test. If there's not any competition, we don't want to invest there. And so if you look at cap rates, which is how you value a property, if you look at those cap rates and you say, okay, I want to get a higher cap rate, right? Because a lot of like, you know, gurus and real estate, you know, coaches and stuff like that will tell people, go look for high cap rate of assets. Well, I mean, high cap rate assets are usually in markets that have low competition. And the only way they can get investors to go invest there, is to raise the cap rate so that that, of course, again, reduces their valuation, but also reduces the valuation on the exit as well.

Starting point is 00:33:49 Especially right now in the market where we're in, we have very, very compressed cap rates right now. And even in these markets where you normally would have seen like 10 and 11 and 12% cap rates, these tertiary and even quarterly markets, you're now starting to see those inch down to, you know, five, six and seven percent. But what's going to happen will we have some sort of, you know, economic, you know, correction, if you will, you're going to start to see those cap rates go back up again, right? And then the primary markets and those kind of higher and secondary markets, you're not going

Starting point is 00:34:17 to see a major shift. You might see like a 50 to 75, maybe a hundred basis point increase in the cap rates. But when you start to go into buy assets at a 6, 7, and 8 percent, and this type of an environment in a tertiary and coordinate market, when you go to sell, you're going to have a harder time because now you're going to be having to sell at a 10, 11, 12% or maybe in 13 or 14% so those values of those properties are going way down. And so for us, we want to go to buy assets that are in low cap rate environments to be able to have those higher exit potentials. And to give you kind of an example of those exit potentials and kind of the time and energy and effort that are involved with when it comes to

Starting point is 00:34:52 the valuations and the cap rates, if we buy an asset in a 5% cap rate market, we buy another asset in an 8% cap rate market, let's say that there are a very similar asset. We spend the same amount of time, energy, and effort on them. We do some renovations on each one. We've increased the net operating income by $100,000. Well, on a 5% cap-pruded environment, we've increased that net operating income by $100,000, and the value of the property has increased by $2 million.

Starting point is 00:35:21 But if we look at that same $100,000 in a 8% cap-rated environment, we've only increased the valuation on that particular market by, or that particular property in an 8% coppered environment by $1.25 million. So you can see that the exits for the same amount of time and energy and effort are much better in a higher quality market that has lower cap rates. And that's what we go after with these types of assets. I can definitely speak to personally the quality of Savannah as an area. I was actually just down there last month and spent some time in downtown Savannah.

Starting point is 00:35:52 So definitely can speak to it myself. It's a great market. As part of that capital structure for the property at Mariner Grove in Savannah, you guys have a private loan at 74% loan to value with an adjustable industry. interest rate of approximately 3.8% with five years of interest-only payments. How are our rising interest rates impacting this variable debt product and this deal? Were you able to purchase an interest rate cap to mitigate risk prior to interest rates rising dramatically recently? So right now, if you know anything about the debt market, interest rate caps are coming

Starting point is 00:36:25 more and more expensive. And so, yes, the lender requires us to buy these interest rate caps because they want to mitigate their risk as well of this increasing interest rate environment. And so, yes, we have been able to purchase that interest rate cap. And what we've done strategically is we bought a short-term interest rate cap over the next time of two to three years, which allows us to be able to kind of renegotiate the rate for the next two to three years as we're continuing to stay into this particular asset. But it is possible because this is a kind of private loan or bridge loan option that has, it's a five-year kind of three-one-one option.

Starting point is 00:36:58 We do have the option to be able to refinance in two or three years into a fixed-rate debt at that time that we want, pull out them in capital and return that back to our investors. So there's a lot of different options here, but from a debt perspective, there is risk there right now, right? Because there is some volatility in the market, and it is possible that the interest rates will continue to rise. And a lot of the economic economists are saying it is going to continue to arise, a rise, it's going to continue to rise in this environment. And what's going to happen is that the cash flows of the property will be reduced. And so investors have to expect that if interest rates do rise, there is going to be some cash flow

Starting point is 00:37:35 fluctuations. So it's going to affect some of our projections. But the thing is, is that we can't, when we underwrite, we can't speculate, right? We have never speculated with our underwriting. It's always been what's happening in the current environment and can we plan for the speculative side of things, right? We don't underwrite for it. So when I mean that we planned for, we talked earlier about having ample operating reserves, right? So if there is some that, major shift in the debt market where we have this large increase in the end, we're in the rate, and it starts to impact cash flows. The biggest thing that's going to do is they're going to reduce in the short term the actual cash flows that are going to be distributed to investors

Starting point is 00:38:12 in the short term. But there's still not going to be, you know, the property is still not going to be in a position where it can't meet the debt service, right? We'll still be able to meet the debt service. We'll still be able to produce great solid returns for investors on the full cycle end of the deal. It's just in the short term, because of that shifting on the debt market and where it's going to be, it's going to change. And that's also, it's the, it's the nice thing and also the bad thing about floating rate debt, right? Because with floating rate debt and a great economy, when the interest rates are kind of on the low end, right, we get the benefit, right? And then as the Fed starts to try to shift their policies or whatever, they start to increase the rates,

Starting point is 00:38:49 we kind of get the brunt of it, right? But then, again, once they start to shift them back down, we get the nice benefit of it. So that's the nice thing about the floating rate, so it should hopefully equalize over the life of the deal. But right now, we are starting to shift, it's starting to see that sometimes it's better to go into some fixed rate debt. Even fixed rate debt right now is expensive. And the problem with fixed rate debt right now is that the debt coverage service ratio that they need on that fixed rate debt is pretty low. And so based on the current cap rates in the environment right now and the debt service coverage ratio, we're starting to see that the loaned of values, the low of costs are going down. So it's going down to 50, 55 percent on some of these

Starting point is 00:39:31 higher quality assets just because of the valuations on the properties. And they want to make sure that the debt coverage service ratio is in line to make sure that the debt will continue to be paid. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up. And customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a stock two or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots,

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Starting point is 00:42:40 Past performance does not guarantee future results, current distribution rate as of 1231, 2025. carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. Mariner Grove that we've been discussing is just one of the opportunities that you guys have available at passive investing.com. One of the other ones is a self-storage fund, which similar to Mariner Grove, you guys offer Class A and Class B shares. The class B shares for this fund have a potential annualized return of 21% and a potential

Starting point is 00:43:21 IRA of 18%, also over a similar whole period of about 5 to 7 years. With investors' money only being able to be invested in one place at a time, it is important for someone to consider their opportunity cost. How should an investor consider multiple investment opportunities for their portfolio? What should investors look at just beyond the potential returns that they could achieve? One of the things, so when we first started passiveinvesting.com, we made the decision that we wanted to name it passiveinvesting.com and not multifamily investing.com or self-storage investing.com because we wanted to leave ourselves open to the opportunity to add additional asset classes as we continue to grow. And so what we have seen over the last couple of years is that our investors have started to request additional assets. So the majority of our holdings right now is in multifamily. followed up by self-storage, and then express car washes, which is a topic that we may get into today, maybe not, and then also hotels, right? And so from an asset allocation perspective,

Starting point is 00:44:25 it's great to have a diversification. So, you know, for many of you are listening that have a portfolio in the stock market, you're not going to put all of your eggs in one basket, right? You're not going to put all of your eggs in Ribian. If you did, you'd probably be in a bad position right now if you You did the RIPO, right? Or even Diti, right? If you put your eggs in the Diti stock, it's really tanked right now. But anyway, so you want to create that diversification in your portfolio, right? So same thing in a real estate portfolio.

Starting point is 00:44:53 As a passive portfolio, you want to make sure that you have some diversification. Obviously, you want to have a diversification of markets within the same asset and also asset classes within the same asset. But you also want to have a diversification in the type of assets that you're investing in. So right now, like I said, we have the multifamily assets that we have. We have the self-storage asset. We have our express car washes and our hotels. Every single one of them actually has a different risk and return profile.

Starting point is 00:45:21 And what's interesting is, is if you look at it from the ability to be able to shift and pivot quickly, multifamily, we have a one-year lease agreement, right? They're renting that unit for one year. And self-stores, they're renting it for 30 days. in hotels, they're raining it for one day, and express car washes are running it for five minutes, right? So we could actually pivot a lot faster in a lot of these ones that are even outside of multifamily. So if the market starts to shift and change, we can adjust pricing to mitigate some of that risk in those, and so these asset classes very quickly, they can pivot a lot faster.

Starting point is 00:45:58 And so, you know, those are kind of the four primary assets we have right now. And as we continue to grow and expand, we will expand it to some other asset classes like industrial and smallware, warehouses and medical office building, assets that we know that can do really well in any type of economic recession and also cash flow very well as well. Interesting. So, Dan, both of the investment opportunities we just discussed, they have this defined whole period between five to seven years. And the question then becomes, how does passive investing determine when the right time is

Starting point is 00:46:32 to dispose of an asset? One can easily imagine a situation where the asset is performing really well, but then the predetermined whole period has been reached? One of the things that we always do right now is we're underwriting every deal on a five-year hold and time horizon. And the reason why we say five to seven years is because it is possible in five years that it's not the right time to sell. And so we don't want to set up our operating agreements and our offerings to the point

Starting point is 00:46:58 where we are forced to sell at any point in time because if there is an economic recession and there's a downturn in five years from now, we don't want to be forced to sell. in that environment. So the investors in these operating agreements have given us the flexibility to make the right decisions for them of when to actually sell the asset. And so what we do to make sure we're always trying to figure out when is the right time to sell, every year that we're in the deal in each one of these offerings, we get a B-O-V, which is a broker opinion of value, which allows us to determine what can we sell this property for right now in the current environment. And then once we get that analysis back, we can determine is right now a good time to sell. And

Starting point is 00:47:38 And I'll give me a quick example of that recently, one of our assets that we sold last year. I'll also see an example of one that that's being sold right now. It's under contract just this week. We bought it for $51.5 million. So it was an asset out of Raleigh, North Carolina. And we held on to it for two and a half years. And in the BOV last year that we got from the broker,

Starting point is 00:48:00 they said that we could sell it for between about $72 to $73 million. And our kind of five-year time horizon and target to sell that asset, was to sell it for about 68 to 69 million. And so, of course, we're looking at that going, wow, we've only the whole this thing for two and a half years. We can go ahead and outperform and achieve the returns that we had projected in five years and get it done in two and a half years. And so we pulled the trigger and decided to go ahead and sell that asset. Once the bid started coming in, we ended up selling it for $79 million, so it was much higher than the BOV. And of course, the lower 10 million more than what the investors were expected to receive on that one, right, based on the exit price.

Starting point is 00:48:38 And so it was a great return for our investors with like a 35% return. It was a phenomenal exit, right? But that's what we have to do because if we would have just said, no, we're not to look at it until year five. Then in year five, the market might have been a little bit different and changed. We might not have gotten 79. Maybe we would only got like the 72, 73 or maybe even like 68, 69. Who knows, right?

Starting point is 00:48:58 So if in the current environment we can sell and outperform the projections, then we'll go ahead and make that decision. Then, of course, we try to tee it up, like we said earlier, with another asset that they can 1031 exchange those proceeds into. And then right now, another example for you is we have an asset right now out of Charlotte, North Carolina, and we've held on to that for just over two years now. It's probably closer to two and a half years now as well. And that particular asset, actually is only about a year and a half, excuse me,

Starting point is 00:49:24 but a year and a half, we've had that asset. And we were projected to sell it for, I think, like, 33, 34 million, somewhere like that. And we've already got an offer and we're signing the contract this week. for $39 million on that. Right? So for us, it made sense. Now, there's another asset because of the volatility of the market right now that's located in Charlotte, North Carolina that we put on the market.

Starting point is 00:49:44 We're going to go sell it. And the offers came in, and they weren't hitting our price that we had originally were given by the brokers. And so we said, you know what, it's a great asset. It's cash flowing very nicely. We're not even, we don't have to sell right now. So we're not going to get what we want for that asset. We're just going to continue to hold on to it for the entire hold period, right?

Starting point is 00:50:02 Right. I remember that for the entire whole period, but at least until the next year, we get out of a B-OV to see is that the right time to sell. So to answer your question, we always look at this on a regular basis. Our director of asset management, our asset management team is always on top of this, making sure that we know when is the right time to be able to sell that asset so we can maximize the returns for investors. As you were talking about your approach to diversification at passive investing.com, I was thinking back to a few weeks ago, I had Jay Papazan on our real estate podcast. And for those who don't know, Jay Papazan is the

Starting point is 00:50:36 right-hand man of Gary Keller, who founded Keller Williams. And Jay Papazan is the co-author for some of the most best-selling business books and real estate books of all time. And so one of his main focuses is focusing on this one thing. He says, you really need to drill down and focus on one thing. So I'm curious how you balance diversification within those multiple asset classes versus really doubling down and focusing on what you guys are really good at. It's a great question because, you know, even our investors, as they've continued to see our growth, you know, right now we've acquired just over a billion in assets in our group since 2018 since we came together as passive investing.com.

Starting point is 00:51:16 And we've had seen a significant trajectory of the amount of money and capital we've been able to bring in. And it's all non-institutional capital we've been able to run. So we raised money from just private, high network, accredited investors. And so I'll give you kind of a trajectory of how we've been. So in 2018, we raised $4 million from our investors. In 2019, we raised $32 million. During the middle of COVID, we raised $61 million.

Starting point is 00:51:41 And then last year, we had a banner year and raised over $196 million from our investors to be able to acquire the assets that we've acquired. And so this year, we're on a great trajectory, even just in the first quarter, we've raised over $110 million. So we're on this trajectory. And so you have had investors that have reached out that, hey, you're growing really fast. I really like it. I really enjoy investing with you.

Starting point is 00:52:00 But I'm concerned. I'm concerned that you're growing way too fast. Maybe you're spreading yourself too thin with too many alternative asset classes. And so I'll kind of share with you a story from I actually owned four non-surgical orthopedic medical clinics. And when we were growing those clinics, one of the challenges that we saw is when we actually grew up to the second location, We went from one location to the second location. We ended up taking our entire core solid team from the primary location, the first location,

Starting point is 00:52:30 and moving them to this new location. Because my thought was, I don't want that new location to fail. So I want to give it the best opportunity to be successful. But guess what happened? We took our eyes off of the primary one, right, at the first location, and it really started to suffer. And we didn't notice it until like three or four months down the road. And so there's a lot of things that we learn during that time frame. And during that growth period, which allowed us to be able to expand into the third and the fourth location successfully without having any dramatic impact on the first two locations.

Starting point is 00:53:02 And so what we decided is that, you know what, in order to grow and expand these clinics, we have to hire on ahead of time and actually put these people in some training. And this is just some training so that when we hire, when we open up this next location, we already have another core team that can support that location. So as we started to grow these clinics, that's what we learned. And then also we learned that we can't monitor the numbers on a quarterly basis anymore. We have to monitor the numbers on a daily basis to make sure we can shift and pivot as necessary. And so being able to set those KPIs and watch them on a regular basis like that allows us to be able to make those pivots and those changes a lot faster instead of waiting until there is already a major problem in place. And so we learned a lot about that going through there. And so because of the learning curve that we had expanding those clinics, we learned that even in this business with passiveinvesting.com, if we want to add on a new asset class.

Starting point is 00:53:56 So we were just multifamily and we said, you know what, we got a lot of feedback from our investors that they want us to be able to provide them with some opportunities to invest in some self-storage assets. We actually set out to find a self-storage team that can help us be able to manage that business unit so that we don't take our focus off of the process. primary and the core aspects of what we're doing with multifamily. So we hired on a team to manage that particular asset class. And then as we started to branch out at the hotels and express car washes, we've again hired on a team just for those different, we call them kind of business units, if you will, those business units to be able to manage those so that we have this diversification of our team members across the board. Now, there are certain things that you can share across the asset classes like finance and accounting.

Starting point is 00:54:45 and stuff like that, but that are pretty easy to kind of share, right? But when I say you share, it doesn't mean you just have the same one or two people when you had multifamily managed that side of things. When you had on additional asset classes, you got to hire more team members to work in that account and a few team, right? And so as we continue to grow, we're able to grow that way. And one of the things from the very beginning that Danny and myself decided on early on is that, you know, each one of these assets that we acquire, we charge an asset management

Starting point is 00:55:10 fees, right? Usually between about one to two percent to be able to manage those assets. And we basically told ourselves from the very beginning that we are not going to take those asset management fees and put them in our own pockets as partners. We're going to take those management fees and we're going to put them into our passiveinvesting.com LLC operating account. And it's going to be there to support the growth of our team because we know that more and more assets that we close and we acquire, of course, those fees also go up month after month after

Starting point is 00:55:36 month, right? And so as those grow, our team can grow with the portfolio. And right now we're sending at about 39, 40 full-time, full-time, team members that are working full time with passive investing.com is because we know that we have to continue to hire people to be able to support the growth and the trajectory that we're on so we can make sure we can protect the investments for our investors, but also, again, for our own investments, because our goal is to grow our wealth as well as our investor's wealth and our family's wealth together, right? We can only do that if we continue to have that

Starting point is 00:56:05 direct alignment of interest. To go full circle, I think it's important to go back to the basics. And one of the eight topics that people will learn about at your multi-family investor nation convention, next one is Charlotte, and I just wanted to intersect and say, Shag is going to be there. I mean, how awesome is that. But to continue with the question, one of those eight topics, that is how to select the analyzer market. The Mariner Grove acquisition we discussed previously is one of your first acquisitions in the Savannah, Georgia market, which is a part of the south that is benefiting from this population growth, 10.2% in leading the west mid-west and northeast. How do you and your team analyze a market like Savannah prior to investing? Well, just to kind of tag a little bit in there about the MFI income that you mentioned come up in Charlotte and June. Not only do we have Shaq, we also have Jocko Willink. So Jocko is the author of Extreme Ownership and the Dicotomy of Leadership. He's a former U.S. Navy SEAL, and so we're excited to have him there. A lot of people and know who he is.

Starting point is 00:57:06 And it looks great to have shared the same agent. And, of course, we have Barbara Corcoran coming in as well from Shark Tank. So it's really excited. It's been a great event. There's a lot of excitement coming around that event. And we've been doing a virtual event for our multifamily investment for quite some time. Even before COVID, we were one of the first, or if not the first group in multifamily to do an event that was virtual. And we've done almost, I think, like seven or eight virtual multifamily investigation event.

Starting point is 00:57:31 And then now we decided that our group is big enough or they wanted to do a live in-person event. And of course, we wanted to do it with a bang. And so that's why we have these great celebrity speakers that each one of them have a story. around, except for maybe Jockland. I'm going to work on him a little bit. His mindset is more around the leadership aspects of what we're doing. But Barbara Corcoran and Shack both have a large portfolio in real estate. We're going to really dive into their investment strategies and give opportunities for

Starting point is 00:57:57 our investment to rub shoulders with them to go to talk with him a little bit. But going back to your question about selecting the market of Savannah, right? So one of the things that we look for is we want to make sure we have markets that have significant population growth. We want to make sure we have markets that have significant job growth, right? And we also want to see markets that are stabilized by some form of industry, right? So we want to see especially like publicly traded companies, right? Those blue chip corporations are really what provide some stability in a market.

Starting point is 00:58:32 And so we look for markets that have that. Of course, being the largest port on the East Coast really helps the story, right? because there's a lot of industry that comes in from that, which allows us to be able to see that there's a lot of growth that's happening in that market. There's a lot of growth that's going to continue to happen in that market, especially with this type of an asset, especially with some of the colleges and universities that are there. There's a lot of growth that's going to happen in that market. And so it's poised for a lot of continued growth. Even though it's already had some growth, it's poised for some continued growth because, number one, it's a great market, right,

Starting point is 00:59:04 as far as being in Savannah, the temperature is great, the weather is nice, and it's a on the coast there. I would say that it's one of those types of markets that in the beginning we looked at it and then as we continued to follow it and monitor it, we knew we wanted to be in that market. So we've been looking at assets. Even right now, there's another asset that we're invested final on in that market that we are hoping to get. It's not awarded to us yet, but there's sister property to Mariner Grove, but this property is going to do, this Mariner Grove is going to do really, really well. And the owners of this property right now, we've purchased multiple assets from them in the past.

Starting point is 00:59:41 They're a great group. They take care of their assets. And so we're not worried about any major deferred maintenance that's going to cause me major issues with the property. Of course, it's only a 2016 vintage asset. So we're not worried about water main breaks or something like that happened on the property or happen to replace the roof during our tenure or anything like that. So it's a great quality asset that's going to continue to do really well.

Starting point is 01:00:02 It's going to have a great exit for us and our investors. those that join us. Fantastic. Dan, as we wrap up the show, we want to give you the chance to tell the audience about the best place to connect with you and also about this amazing investing conference. I already said that Shag is going to be there. So if that is not enough reason, Dan, please take it away. I'm sure there are other good reasons why they should go to the conference.

Starting point is 01:00:24 Sure, sure. So if you're interested in kind of checking out the conference or whatever, it's very easy. Just go to MFINCon. at MFIN stands for a multifamily investor nation. So MFINCON.com. It's the multifamily investment. It's in Charlotte, June 23rd, 24th, and 25th. Just coming up pretty soon next month.

Starting point is 01:00:44 So we'd love to have you go check that event out. And we'll look forward to seeing you there and meet me in person and shaking your hand. If you want to follow me more, you can go to my LinkedIn. So you can actually just go to link with Dan.com. That'll bring you straight over to my LinkedIn profile. You can link with me there and connect with me further. And then if you want to follow me, us more for it with our passive investing.com group. You can go to our website, passiveinvesting.com.

Starting point is 01:01:06 On the top right hand corner of the page is a blue button that says, join the passive investor club. If you click that button, fill out the form, one of our investor relations team members will reach out to you, discuss your investment goals to see if our group is the right fit for you. And that way you'll be apprised of so that's of the offerings that are available to you. And if you go to our website, you could also go to look at this Barron-Agrove asset and so the details on it. It's under our current offerings tab on the website so you can see more details on this particular offering. It's likely to fill up pretty soon, but if you go there and it's not available,

Starting point is 01:01:35 then make sure you sign up for our list and there'll be appraised some of the future offerings that we have available coming up. Fantastic. And we'll definitely make sure to link to order that in our show notes. Very excited about this, Dan. And Robert and I are excited about looking more into those properties. You know, it's rare that we get the, we have different advertisers on the show, but it's rare that we get an opportunity to invest together with them,

Starting point is 01:01:57 you know, eating our own cooking. And we sort of like feel good about sharing the upside with the audience, but also sharing the downside. I think just sharing your upside isn't a fair way of doing partnerships. So Dan, thank you so much for taking time out of your business schedule to speak with Robert and me here today. I hope we can do this again soon. Yes, I really do appreciate you inviting me on and being able to share this information and looking forward to coming back on and sharing some more insights later on as well. Fantastic.

Starting point is 01:02:25 And just rounding off the interview, I just want to say that if you want to learn more about real estate. Make sure to check out Robert's podcast Real Estate 101 by the Investors Podcast Network. Every week, you will learn everything you need to know about real estate. And Dan will be one of the guests here soon on that show. So with that said, that was all that Dan, Robert and I had for this week's episode of the Amherstas podcast. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional,

Starting point is 01:03:07 this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

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