My Realty Gains
Rob Beardsley oversees acquisitions and capital markets for Lone Star Capital and has acquired over $300M of multifamily real estate. He has evaluated thousands of opportunities using proprietary underwriting models and published the number one book on multifamily underwriting, The Definitive Guide to Underwriting Multifamily Acquisitions. He has written over 50 articles about underwriting, deal structures, and capital markets and hosts the Capital Spotlight podcast, which is focused on interviewing institutional investors.
What You’re Going to Learn
What is your perception about multifamily or any other asset class?
Prashant Kumar, CCIM – Through this podcast we are trying to educate the Passive Investors who have lesser time, what can multifamily or any other asset class for that matter, bring to them?
Rob Beardsley – Yeah. I mean, there’s a lot that can be done outside of the box. You can live in your little box and kind of go through the regular track, but it’s much harder to get ahead when you do that. When you start thinking outside of the box you will find things like you said about multifamily investment opportunities. These private investment opportunities, that’s when you can start structuring things more favorably and not only generate cash flow, but you can also build your actual wealth. My parents were running their business, but in reality, their business was running them. They weren’t accumulating assets along the way. They were just working and earning money and then spending money. And then that was it. So when you kind of change this paradigm and start building net worth, you start building assets, assets that cash flow, it really can change your perception of wealth and put you on a different track. And on top of that, it introduces new tax advantages and opportunities there, which can be very beneficial to the overall financial picture for someone. So I think those are just kind of the things that you need to do if someone has this idea that they want to get ahead.
Prashant Kumar, CCIM – Awesome. I like that if you want to get ahead of others or you want to get ahead of yourself, you have a jump start, in the long run, it’s better you start early enough. You start investing early enough in the vehicles which are creating passive cash flow and at the same time providing you the benefits of appreciation as well as giving you a lot of tax benefits.
What does investing mean? How safe is investor’s investment?
Prashant Kumar, CCIM – What does investing mean? Is it like they’re investing or they’re buying a stock or they are becoming a partner? What does it mean to the investors? Is it backed up by something? How safe is their investment?
Rob Beardsley – Sure, there are obviously many different ways to structure an investment, but I’ll walk you through our investment structure from the legal side, from the economic side, and hopefully that will make a lot of sense. So starting with the legal – in every deal, we set up a new organizational chart with new LLCs, and the simple way to explain it is that investors are investing directly into the LLC that owns the property. So they don’t necessarily own the property directly, but they own the LLC that is the sole owner of the property, and what are they essentially buying is a partnership interest, and what that’s backed by is its also security because as you know, we do securities offering an SEC exemption, which has disclosures and legal things like that to protect investors. It’s a partnership interest, it’s a security that they’re buying, and that puts them in an ownership position of the asset. Of course, debt comes first, and that’s why debt is very important. It’s something that we spend a lot of time thinking about, analyzing, and making big decisions about the type of debt that we’re using.
In the deal structure, first the debt is paid, and then after that, we have cash flow that we’re able to distribute to investors. The way we set up what is called our waterfall, which is the partnership structure, is first we give investors or we owe investors an 8% preferred return. Preferred return is a common term that you’ll hear throughout these partnership structures, but they can all be structured a little bit differently. So our preferred return, as I said, it’s 8% typically, and it’s cumulative and compounding. So in a year, if we only distribute 5% instead of eight, that’s the thing I want to step back and make clear because some people get confused when they hear 8% preferred return.
They think, great, I’m getting 8% cash flow every month but that isn’t always the case, right? It’s that you’ve owed the 8%. It’s not a guarantee of payment. So, for example, if there’s 5% in a year of cash flow, the 3% that you weren’t paid as the investor will accumulate and roll over to the next period and in our structure, it compounds. The 3% that you don’t receive earns 8% interest on itself. It’s a compounding calculation so that you actually get caught up over time and then after we’ve caught up at 8% preferred return, then we return all capital to investors. So really, the way I like to explain it to investors is that they get their minimum return of 8% compounded and their original capital back. So now their risk is off the table. Once that happens then we split the rest of the profits 70% to the investor and 30% to us as the sponsor for our performance. Compensation to ideally go above and beyond the 8% which historically we’re able to do. So that is kind of from legal to partnership is how investors are investing with us.
Prashant Kumar, CCIM – If an investor is investing with you he’s not just buying a paper stock that could get devalued to half in no time. I think that we are saying is investors own part of the property in a very layman term, right? They are not buying a single-family home but the property is being bought in an LLC and depending on how much they are investing they are buying part of that asset. Investment is backed up by the real estate collateral in a way.
Rob Beardsley – Yes.
What is Passive Investing? How many types of investment class are out there?
Prashant Kumar, CCIM – What is passive investing? And tell us a little bit about what are the investments classes which you deal in and what are the other investment classes, if you know of any, which are similar to what you deal in right now?
Rob Beardsley – Our company is very focused and that’s one of the things that we believe in, that the key to success is our focus. We focus only on, like I said, Texas workforce housing, and our portfolio is primarily concentrated in Houston. We’re focused on a limited type of deal and the location of the deal. And that helps us both in the acquisition process because we’re experts in that realm. It’s easier for us to identify opportunities because we’re focused. We have a better reputation and we have strong relationships. So we also get to see better opportunities. So it helps on the acquisition side and it also helps on the operational side because we have that centralized portfolio. We’re able to operate it better and we’re able to be better experts in that. Focus is great for us. So that’s at the moment what we’re doing but there are a lot of things that are similar and also provide different types of risk profiles and exposure so what we do is we buy assets that have cash flow from day one, we’re buying an existing asset, we’re renovating it, we’re improving its value, improving its cash flow, which those still can vary in risk. You can buy a property, that’s pretty stabilized and there’s not much to do, and that’s the lower risk or you could buy a property that has a lot of work that needs to be done. But it has a bigger opportunity to raise the income and raise the value. So we’re kind of up and down that spectrum But to go a step further. For example, investors could invest in development to get a different risk profile when there’s zero cash flow, but again, a larger opportunity to achieve higher returns. But again, of course, that comes with more risk. So there’s always a risk and return in everything and different profiles, which lean more heavily towards cash flow or appreciation. So as an investor, you have to identify, What are your goals, What are your preferences, and risk tolerances, and then go out and try to find those deals that best fit your profile?
How to start the conversation with novice investors?
Prashant Kumar, CCIM – What would you say to very novice investors? How do you start your conversation with them? and What do you explain to them to make them feel comfortable, and make them want to invest with you?
Rob Beardsley – Yeah. I think the best way to get investors comfortable is to show them the track record, to show them our process, and make it real for them. They like to keep it simple. At the end of the day, they want to know, what are the projections? and what are the mechanics? I think investors do like that we provide monthly distributions. So right after the deal closes, about a month or so later, we’re already providing cash flow distributions directly to their bank account every single month. And that means a lot to investors. That helped in speed up the trust process because if they’re seeing money coming into their account every single month, they see the reports, and they see the performance is matching our forecast which speaks volumes. I think that one of the best ways to show investors and get them comfortable is to tell them – Hey, look at our previous deals, here are the projections that we had, and then here’s the performance, and here’s how they match up. We do that every single quarter with our quarterly reports on all of our deals. Every single quarter, we’re always benchmarking the performance against not only our budget for that year but the underwriting that we used to project the returns from the beginning. So doing that is very transparent and can provide a lot of comforts.
Prashant Kumar, CCIM – Awesome, Very good Rob.
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