Journey to Multifamily Millions

From Watches to Real Estate, the Importance of a Diversified Portfolio with Frank Xia, Ep 81

February 01, 2024 Tim Season 1 Episode 81
Journey to Multifamily Millions
From Watches to Real Estate, the Importance of a Diversified Portfolio with Frank Xia, Ep 81
Show Notes Transcript

Today's guest is Frank Xia, an ex-software engineer and data scientist, Frank is the founder of Daytona Capital. He has invested in everything from stocks and options to diverse assets like sports cards, watches, and of course, residential and commercial real estate.

In this episode, Xia discusses his transition from purchasing real estate in cities like Tampa to becoming a passive multifamily real estate investor. In addition, he talks about how he leverages technology and his strong expertise in mathematics to make money on his investments and emphasizes how crucial it is for limited partners and general partners in real estate syndications to have similar goals. 

He also shares his expectations for real estate investing and offers guidance on how individuals in the United States with a green card or visa can also invest passively.  Stay tuned!

Episode Topics

[01:19]  Meet our guest, Frank Xia
[02:54] Investing Journey and Background
[11:09]Challenges and Lessons from Real Estate Investing
[18:16] Leveraging AI and Mathematical Rigor in Investing
[22:55] The Role of Data in AI and Real Estate
[35:15] The Reality of Real Estate Investing
[34:02] What is one red flag every investor should look out for?
[35:12] What is a myth about the real estate business?
[38:29] Connecting to Frank

Notable Quotes

  • "First effort didn't go great, but instead of giving up on real estate, I examined what went wrong. I pivoted to Sunbelt markets like Tampa, seizing opportunities before prices soared." -Tim Little 
  • "I don't like the downsides of single-family or small multifamily. Multifamily is efficient, less liability, and offers a lower cost of entry. I'm all in on multifamily." -Frank Xia
  • "My edge is mathematical rigor, not just AI. Technology is powerful, but my careful underwriting, rooted in mathematics, minimizes mistakes in a crowded market."-Frank Xia 
  • "Understanding your market is key to real estate success. Tampa's MSA and surrounding towns offer great opportunities for savvy investors." - Tim Little
  • "My advantage in real estate is my careful and rigorous underwriting, rooted in mathematical precision. This tech-driven approach minimizes mistakes and maximizes profits." - Frank Xia
  • "AI-driven property management boosts tenant experience, crucial for leasing and quick maintenance responses." - Tim Little
  • "As a limited partner, I wait for deals with a conservative 14% IRR, avoiding reliance on lower cap rates or interest rate bets." - Frank Xia

Connect with  Frank Xia

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[00:00:00] Frank Xia: As a math person or as a scientist, that is my best leverage or my best advantage in this, in this crowded space. Because everybody, anybody can buy a home at any price, right? Because it's a supply demand market. Whoever pays the highest. Get the property, but it doesn't mean that the person who pays the highest Makes the most money. Maybe the person made the bad decision of paying so high, right? so I think my advantage of My practice is actually the technology that the mathematical rigorous that gave me the most advantage

[00:01:14] Tim Little: Hello everyone and welcome to the journey to multifamily millions. I'm your host, founder and CEO of ZANA investments Tim Little and on today's show we have with us Frank Xia an ex software engineer and data scientist, Frank is the founder of Daytona Capital. He has invested in everything from stocks and options to diverse assets like sports cards, watches, and of course, residential and commercial real estate. Frank, welcome to the show.

[00:01:39] Frank Xia: Thank you very much for having me on today's team.

[00:01:41] Tim Little: Yeah. And it's great to have you here. So Frank, in addition to real estate, you are also a watch aficionado. Is that correct?

[00:01:50] Frank Xia: Yeah, that's correct. I'm glad you mentioned that. I collect a lot of luxury watches just for the sake of I like this mechanical movement and I like the design of the watches and Magically over the past few years they preserve their wealth or they preserve their value super well

[00:02:06] Tim Little: Yeah. And so I should probably ask you what you're wearing right now.

[00:02:09] Frank Xia: I usually wear apple watch at homes, but usually when I go out I wear like a Rolex or Patek Philippe

[00:02:14] Tim Little: Yeah. I'm right there with you. I've actually worn my Samsung watch, but I have a Tag Heuer at home. That's my favorite that I've had for a long time, right? And that's the other thing about these watches. They can last a long time. I've never really gotten into Rolex, but I don't know. I'm thinking Grand Seiko might be my next watch. I think those

[00:02:33] Frank Xia: a great brand. Yes, I bought a lot of Grand Seiko in the past. Snowflakes are my favorite.

[00:02:39] Tim Little: Oh, okay. Yeah. I'm trying to think that there's one, because they have all the ones that vary by the season and those are some really nice pieces. I don't want people to get confused into thinking this is a watch podcast, but we can go on for hours for this. But, please get into the details of how you got started on your investing journey and your related background, and tell us how you got to where you are today.

[00:03:05] Frank Xia: Yeah. so I, my, my education is financial engineering. So by definition, people who have that degree go to the finance industry like Goldman Sachs, like banking, iBanking. They also go to hedge fund, do a lot of investment. I'm on a non-traditional route. I joined a tech company just because I like the tech culture more than the finance industry. But in my mind, I'm pretty well trained for investing in general and magically over the past few years, the tech industry has been doing pretty well. I had two successful exits for an IPO, so I'm very fortunate to accumulate a lot of cash. And, I use my finance industry knowledge to help me to deploy money. And, because I was in the hedge fund before I had the sentiment of, there are just so many smart people out there. There's no way that I can beat them. So I don't really invest a lot of my own money into the stock market. I usually just buy S& P 500, which is the Stanport 500 index, which is the market. I usually don't try to beat the market. And, I'm always looking forward to finding different assets that I can make extraordinary returns on top of. Real estate is one of them. Watches are one of them. Sports cards are one of them. That's what I've been doing passively, in the past, maybe five, seven years. So I'm very deep into investing. And then my job also gives me good exposure to all of the technologies that's hot in the world right now. For example, AIs,for the past two companies, we use AI to literally price these alternative assets, right? We build up the pricing system for. single family real estate pricing. Basically the AI system is able to give automatic prices for every single home in the United States. That's between 200 to 500 K and we build up these algorithms that can predict the price. at relatively small error. A similar situation happened for sports cars. We build an AI system that basically prices sports collectibles that allows us to trade on top of it. So that's pretty much my journey. I'm a very mass and engineer person in my mind, and I'm very number focused. And right now I'm transitioning to a full investment. Full time investment role that I allocate my own money and also help my five friends to allocate their money into Multifamily and also sometimes other asset class

[00:05:35] Tim Little: Yeah, it's really interesting because sometimes when it comes to investment, people get stuck in their own little rabbit holes, their echo chambers, where, maybe all we talk about is real estate and someone else, all they talk about is stocks, but you've really branched out into. Multiple different assets, from the more traditional you're S& P 500 to, very alternative sports cars and watches, etc. So it's interesting that you are so well diversified. And the other piece, when you mentioned that you didn't want to try to, keep up with the people that you felt were smarter than you when it comes to individual stock picking, right? but I would argue there's not that many people that are really smart at individual stock picking if you look at the statistics at large, right? Most people are just not very good at it. So it is, really smart if you don't have the time or desire to dig into every single stock that, that you're looking to buy, to just go into, something like the s and p 500 where you could take advantage of the market itself without having to do all the work associated with, picking individual stocks and again. trying your luck. Because a lot of times people are wrong. Cause all it takes is, one, one news story to throw a stock off kilter from what your expectations were.

[00:06:54] Frank Xia: Yeah, exactly

[00:06:55] Tim Little: Yeah. So let's go into the real estate piece. Tell me,what your first real estate investment was and how you got started investing into that industry.

[00:07:07] Frank Xia: so I'm a very traditional Asian and Usually the family has a saying that you have to take care of yourself before you take care of your investment so the first real estate I purchased is my Condo that I lived in San Francisco for a while. I actually sold it last year at losing almost 80 percent of my principal just because I'm 20 percent down, 80 percent leveraged, right? And the house declined 10%. So I pretty much lost everything over there. That was actually a bad investment, but that was actually my first condo experience. And, I obviously don't enjoy it because I have to pay a very expensive HOA. I have to pay relatively expensive tax and during COVID I actually was thinking about renting it out. And I'm actually losing a lot of money because I just wasn't able to cover my expenses versus my rental income. So that, that, that was my actual first investment and I don't like it. And then I'm actually looking for, okay, I'm trying to think about, okay, real estate has been proven working. And then I realized, okay, it's not about these luxury condos that really generate cash. It's about single family homes, multi family homes in secondary or tertiary markets that actually generate reasonable cash or cash on cash returns instead of negative cash flow. So then I, during COVID, this is still during COVID, I started to acquire Tom homes and single family homes in some of the states. I started looking to Austin, Texas, but that was already too late. I was late in the game. People are already migrating into these cities and the price has been hiked maybe 30 to 50%. And the numbers cash on cash just doesn't make any sense anymore. And then I transitioned my focus into Tampa. So I met a guy on social media, never met him in person. He's a realtor. And I talked to him maybe for 10 minutes, 20 minutes, I pulled the trigger. I bought a lot of townhomes in Tampa one by one, up until a point that my bank yelled at me saying, Hey, we're not able to rent your money because you haven't rented out and your debt to income ratio is too high. And then these horses are great because during that year, 2020 or 2019, the rent grows extremely. 10%, 20 percent that makes my cash on cash extremely well. I think I'm still netting 10, 12 percent a year on cash, regardless of the appreciation of the homes. So this gives me a lot of confidence, right? Versus my failure of my own condo. so I started to dig deeper into this multifamily or real estate thing. I started looking into duplex, triplex and quadruplex. I just don't have the experience and I've never purchased old homes before because all of these homes are new builds and my condo was new builds. I've never dealt with old builds before. So I get stuck because I don't know what kind of due diligence I should do? And I actually don't know what I should purchase. I don't know how the numbers work, et cetera. I don't know how to do it right. And then I actually met a friend or my mentor that directly was in this multifamily game. And I taught him for maybe 10 hours on how multifamily real estate works. And then I became his LP. He's actually the sponsor of a deal. And I invested in three deals with him over the past few years. And we have one successful exit, which is pretty great returns. And we are still holding two just because right now the rate situation.  So this gets me to the reality of the multifamily world and I like it a lot because I no longer need to use my own money. Sorry. I no longer need to use my own line of credit to borrow equity. I can just become a solid investor or like a major investor that gets better terms and I get my cash flow. I can, I prefer tax treatment. And I can build up my wealth. So this is how I transition into this multifamily. It's just because it's more efficient to deploy your capital and the return is reasonable. Okay. That's how I ended up with that.

[00:11:09] Tim Little: Yeah, and there's some things that I love about that story. First, that Your first effort didn't go that great, right? And granted, it was your residence, right? You were living there, so you were getting something out of it. but after that, you didn't just say, obviously real estate doesn't work. I'm never going to do that again. You stopped and you examined the problem and said, Okay, why didn't it work? You knew very well that other people were making a lot of money and there were tons of benefits to real estate. You're just like, what went wrong here? And then you pivoted,to like you said, those Sunbelt markets. And then we could talk about Tampa for sure because that's where I'm based. And so I've seen it. I moved there in 2016. And I've just seen the housing prices and the rents. just skyrocketed since then, and a lot of that is due to COVID, right? It shot up like a rocket ship during COVID. Which made it harder to buy once it did shoot up. But if you got in before that, you were in a very good position. And it sounds like you did get in before that. When did you buy it? You said 2019.

[00:12:15] Frank Xia: 2020, 21, 2020 and 21.

[00:12:18] Tim Little: Okay. And do you still own those properties? And do you still own those properties in Tampa?

[00:12:22] Frank Xia: Yes, it's actually north of Tampa in Lutz. so a few miles away, not affected by the hurricane.

[00:12:26] Tim Little: yeah, and so you have those and that's you know, that's when you get down to you know All real estate is local, right? You need to understand your MSA's. Tampa is the MSA but you have all these towns that surround it which are still great because You have a lot of like especially I know a lot of military families that live in those areas, And, town and country and there's all these different places because they can get a lot more house for the money out there versus being in Tampa proper. so you do have a steady stream of both buyers and renters in those markets.

[00:13:01] Frank Xia: exactly.

[00:13:02] Tim Little: So that's awesome. the other piece that I wanted to get into is, you know Why you switched and you said, part of that was because banks were yelling at you, which is understandable because debt to income ratio like you have to keep it at a certain point and You were getting past that point and they noticed, and I think that's something that a lot of people don't think about at first. because that's one thing that I noticed too, right? When I was like, okay, I'm gonna start buying a bunch of duplexes. But it's the same as buying a single family house. From the bank's perspective, they don't really care, but you are gonna reach a ceiling. whether that's 10 mortgages, which, seems to be the magic number for most banks, they won't let you get over 10 mortgages, or whether it's the, the debt to credit in, in debt to income ratio, whichever one of those ceilings, you're going to wind up hitting one of them. And so you transition to the more passive side. Now, do you still feel like you get a lot of the same benefits passively investing that you do with the active side of things? Yeah. Yeah.

[00:14:03] Frank Xia: I like it way better because I'm actually not active at all, because it's, I've never been to Pantempa personally, to be honest, and, it's delegated to a property management, right? So they take care of the tenant part. But when you are doing multi, when you're doing a single family or townhomes, your vacancy is still binary. If you hit like a three month vacancy, it pretty much eats up your entire year's profit. That's the thing that I really don't like. So that's number one. Number two is that as a, as an owner of the home, I know there's like a way you can transition. you can move your property into an umbrella of LLC to protect your own asset. But I'm still technically liable for the danger or damages for the tenant that lives there. so there's a certain exposure of risk that you have to bear. And also just acquiring homes. It's like buying one home at a time, just slow. So that's pretty much the downside. I don't like single family or multifamily. Sorry, like a smaller size of single family or multifamily versus more, versus like a commercial big, like 100 unit multifamily. so I'm very much in love with multifamily right now. If I were to, if I'm still deploying my money, I'm definitely just focusing on multifamily right now.

[00:15:15] Tim Little: Yeah. And that, that exposure of risk thing is, I think something that's underrated. And a lot of people actually don't talk about that aspect, but it's absolutely true. Like me, I owned a duplex and later a triplex. And, even when I had a property management team dealing with it. Like you said, if you have a slip and fall or something like that, like there is that risk there that someone could try to sue you. Like even if you put things in an LLC, that corporate veil is pretty thin. and so what I was advised was to just get an umbrella. Insurance policy for a million dollars because they're like it's not a matter of if it's a matter of when You're gonna get sued. So just have the insurance in place rather than try to do You know cool legal tricks to hide yourself and I was like, wow, okay I appreciate the honesty, but it's not exactly what you want to hear right when you're getting started on a real estate investing journey, but you have none of that when it comes to being a passive investor. Hence the name, you are a limited partner. you are limited in your liability because you are not part of the direct ownership team. And I think that's a lot of people, again, they don't think about right there. They're looking at returns. They're looking at tax benefits, but that, that legal liability, that's a big issue. And I think. If more people understood that aspect who already have a lot of things like single family or small multifamily properties I think a lot of them would make the switch as well.

[00:16:42] Frank Xia: Yeah, exactly. And also the cost of entry is lower in multifamily most of the times

[00:16:47] Tim Little: Yeah, that's true. I mean it Unfortunately, you know even with getting into a syndication There's still a barrier of entry right? you know if you're talking 25 to 50 000 minimum to get into a deal. That's a big chunk of change but to your point if you're having to put 25 percent down on a property, which is usually the minimum the banks require for an investment property, that's also going to likely be a big chunk of change unless it's just a really cheap one or the other. So you might as well take the benefits of not having to deal with tenants, toilets, termites, all that stuff by being passive rather than having to do everything yourself and still be paying the big chunk. And the other point you brought up is how quicklyyour profits could disappear. You talked about vacancy, right? You're three months vacant. All of a sudden. All your profits disappeared. The same could be said for any kind of, major repairs, right? Whether that's a hot water heater or roof replacement, whatever the case may be that could wipe out your profits for months, if not the year, depending on how thin a margin you have there. And I don't think a lot of people think about that because they have this. They have this formula in their head. I'm going to get 200 per month in free cash flow after I pay the property manager. And it's yes, if anything goes wrong that 200 disappears along with the next 200. So I think that's an important lesson. All right, so I want to get into how you've been able to leverage some of your background. Into these investments you talked about ai which you know, obviously everyone knows about ai now. it's the new hotness but have you found a way to effectively use it to help you in say vetting commercial multifamily deals?

[00:18:36] Frank Xia: Okay, so I think the most important thing I took out from my job is my How do I say? It's my carefulness or underwriting carefulness or just like rigorous underwriting. I think this is as a math person or as a scientist, that is my best leverage or my best advantage in this, in this crowded space. Because everybody, anybody can buy a home at any price, right? Because it's a supply demand market. Whoever pays the highest. Get the property, but it doesn't mean that the person who pays the highest Makes the most money. Maybe the person made the bad decision of paying so high, right? so I think my advantage of My practice is actually the technology that the mathematical rigorous that gave me the most advantage Speaking of AI, I personally could not take a lot of it because AI in order to do it you need a team to support it For example, I was at open door, which is a, I buy in homes in secondary market and open doors. Business model is basically house flipping. They basically acquire a house, fix it, renovate it, sell it in a 60 day window, right? That business model is powered by an AI model that basically identifies. Homes, which one is cheaper, which one, like how much to buy. So there's an automatic decision of how much you should pay for any homes in Tampa, for example, that saves a lot of time, right? Technically, if I were to build a company that does multifamily, I can do something very similar. I can say, okay, give me all of the numbers. Give me all the data. I give a price. This is basically the maximum price I can pay at this current moment. Using AI, I'm able to replicate that, but AI is just a more efficient and more time saving, scalable way of doing something at scale. For me, I could not take full advantage of AI because I'm only underwriting maybe one deal or two deals. A day, sometimes a week, because Christmas is slow. I don't have to use AI to help me with that. But the regular, the mathematical rigorous is the same, right? Whatever, how AI generates the numbers is similar to how I generate the numbers. So using that, borrowing that statistical framework, helps me to underwrite deals very carefully. And that allows me to make fewer mistakes. So that's the best I can learn from my practice.

[00:21:46] Tim Little: Yeah, and I guess you know i'm trying to think through like how can We you know like folks that are on the active side of things use it to drill down into the best markets and figure out where those are because sometimes it's the markets that you're not necessarily Looking at the most because they're not the most popular, right? just because it's not the most popular doesn't mean that it's not the most profitable And so there might be some hidden treasures out there that we're not thinking about And so how can we collect data sets from, like CREXI and all these other paid services and create our own,data set that the AI works off of in order to drill down and give recommendations, right? I'm not saying base, base your investments on an AI, cause we're probably not there yet. help you drill down to. Where I could do the, the more rigorous underwriting, but maybe help me identify markets. Do you think that's something that's feasible, going into the future? Cause I don't feel like I could just hop into chat GPT right now and say, Hey,

[00:22:49] Frank Xia: no. Yeah.

[00:22:50] Tim Little: because the data set wouldn't make sense for that. I feel like it would have to be

[00:22:55] Frank Xia: Yeah. Yeah. To be honest, I think CoStar is probably the best company that can help people to achieve that. It's just a matter of how they decide to monetize their data. Because AI is garbage in, garbage out, right? Like you don't feed good data to AI, AI will give you garbage. I think CoStar has the biggest data set right now. And they are the most likely company that can generate this marketing site. So if there's a company that's doing that, I think that's CoStar. and there's also another AI company that helps you to do underwriting, right? Basically, I forgot the name, but they do like automatic underwriting. You basically give them like T12, Rambo, OMS, they feed, they output your spreadsheet. But that's technically not AI. That's just basically grabbing data. That's, there's no AI at all. It's all like cookie cutter formulas. So that's just a fancy way of automating things. Other areas of efficiency, I would say like maybe customer service, you can use chatbot to, to handle customer service if people want to do it remotely. But I still think real estate is a very operational driven business. You have to have a handyman to fix things. You cannot use AI to fix your toilet. So I think a lot of things have to be done by humans, but you can use AI or systems in general. to, if, to make things more efficient.

[00:24:10] Tim Little: Yeah. And that makes sense. And I, we are actually, on some of the properties using AI systems, for things like, driving lease up. So if someone goes to the website and they're looking at the property, like you said, more of a chat bot model. That is, smarter and could follow up, and work with people to answer their questions as if a real leasing agent was there, because people want responses immediately. And sometimes that can mean the difference between them renting at your place or just going somewhere else if they don't get the answers. They want right away. So definitely seeing, efficiencies there. and then, who knows where we could see it next. Obviously, it's helpful to have automation of all types, when dealing with tenants. So they get the responses as quick as possible, for things like maintenance, right? They want to be able to go on a website, say this is the issue and then know that someone is going to a real person who is going to come out there and fix it. Right away,not having to call someone and all this.

[00:25:13] Frank Xia: Yeah. I agree with you. I think when the comp, when the GP or the active investor becomes vertically integrated, this is how, this is the time maybe like using a system, using AI to help solving part of the process issues. But if somebody is just starting fresh, for example, if I were to do my own property management company in. I'm not going to do it, I'm not going to worry about AI at all because the cost of building the AI, there's a huge fixed cost to, to spin it up. And if you are starting, everything is changing. AI is like fixed. Once you do something, if you want to tweet it, it costs a lot of money. So I would not worry about AI until I have a standard process. I like most of the companies that introduce AI. At a pretty late stage when they find a stable profit market fit, sorry, product market fit.

[00:26:04] Tim Little: Yeah, no, that makes sense. Yeah, I wouldn't be seeking to build my own at this point either. I think there's, out of the box solutions. Companies that are already And property management companies that are, finding these solutions already. it wouldn't make sense for me to try to do it, especially at my skill level. alright. And, you talked about how you're a limited partner and you're still, looking at deals, underwriting, etc. what concerns do you have as a passive investor in this unique environment within, commercial multifamily, I'll say?

[00:26:35] Frank Xia: I would say that it's not really a concern, so to me it's not a concern. Because I'm totally fine of not deploying my money this year. to be honest, I didn't buy any property this year. so I'm patiently waiting, but there are some people. who is living depends on acquisition fee. So they have to close the deals, right? Like for example, brokers, they have to make a living GP that doesn't have enough capital. They have to make a living. agent, they have to break, like lending agents, they have to make money. I think these people, whose compensation is correlated with transaction, are in a worrisome mode because right now there's just a huge gap between expectation of the seller and expectation of the buyer. Because the seller doesn't want to lose money. The buyer doesn't want to buy too high. They just cannot agree at this current moment. So there's little transactions until the seller is super motivated to sell. if he has some financial situations, right? But for me,I'm very patiently waiting just because right now they are not, especially right now it's winter and also there's just nothing on the market that's super good to sell, to buy for me. So right now I'm basically just patiently waiting, but I'm also just practicing underwritings in the meanwhile, talking to people, building up relationships, building up meaningful relationships with GP. For future readiness. So I think right now this is like just not enough transactions isn't, is one issue. The other issue is that a lot of deals, especially for the properties I'm invested in class B class C, you will end up with negatively leveraged, meaning that your cash on your cap rate is lower than your interest rate. Most of sophisticated investors don't want that

[00:28:20] Tim Little: Yeah. And so I guess my,

[00:28:22] Frank Xia: Yeah. Sorry.

[00:28:23] Tim Little: no, the next question I was going to ask, and you're certainly not the only investor who's waiting on the sidelines. I think most GPs will tell you who is trying to raise capital this year. We'll say that, yeah, there were a lot of investors who were waiting on the sidelines as evidenced by how hard it was to raise capital. I guess my question to you would be what signs are you looking for? Yeah. To know when it's the right time to jump back in.

[00:28:47] Frank Xia: I think right now is a good time to jump back in as long as I hit my underwriting numbers, which is 14 percent IRR using very conservative assumptions, which means rent grows. Organic rent grows is smaller than 3%. Cap rate doesn't decrease. Sorry. exit cap rate doesn't decrease. And not too aggressive of renovation and not too aggressive of building back of utilities or non rental incomes. I think if a property can achieve 14 percent RRR using these four assumptions, it's pretty much a no brainer. Still. Because right now, the risk of the interest rate continuing to grow is relatively lower than a few months back, but I still don't want to underwrite the deals that assume a lower cap rate, I exit, that's just betting on the interest rate. And I want to make sure that I can make money even though the interest rate doesn't go down. I don't want there's a better place to buy the interest rate. I don't want to use multifamily to buy the interest rate. I just want to make sure that I can make money by GP doing a great job because over the past few years, a lot of GPs don't do anything and they still get a good job, right? so a lot of people join the market. I think it's just a matter of who you're working with and also how good the deal is, how much meat is on the bone. So as long as these two criteria get cleared, I will, I'll pretty much deploy a lot of my cash.

[00:30:15] Tim Little: Yeah, and I think that makes sense. I mean we're at the point now Where I don't want to promise that it can only get better from here. But you know the operators who are hurting are the ones who got in, two three years ago not the ones who are getting in right now because they've You know, where they've already underwritten for the current environment, whereas two to three years ago, we could have even being conservative, we couldn't have underwritten for this environment, because it was to say unexpected would be an understatement. It's unprecedented. So I think that's the tricky part. But again, like you said, I think the risk of rates going higher is pretty low, but you don't want to be too. I don't know, Rosie, on where they're gonna go, cause I don't think they're gonna drop low fast.

[00:31:07] Frank Xia: yeah, I want to make sure I don't make money purely on interest rates going down. I want to make sure I make money elsewhere on the deal. Yeah,

[00:31:17] Tim Little: you on all that, that conservative, especially with the cap rate. you shouldn't bet on cap rate. And if you do it to the more conservative side so that you're showing to your investors that you're stress testing to say, Hey, even if it goes this way, we'll still be good. we're not going to assume that it's going to go down. All right. and the one last thing that I wanted to hit before we get into the turbo round, you were on a visa before, green card holder now, and I know there's other folks that are listening that are in that same situation, and they may not even know that passively investing in the U.S. is a possibility for them. despite being here, working here, et cetera. Can you tell me if there are any extra steps required or special considerations for folks that are in that situation, either visa or green card to passively invest in a multifamily syndication?

[00:32:05] Frank Xia: yeah. So I recently got my green card. So you can do whatever you want with your green card. There's no limitations. But if you're working on a visa, which is if you're working on, if you're using a working visa for me, that is H1B. I'm only legally allowed to spend my time to exchange money for my full time job. I'm technically not allowed to spend my time to exchange money, which is active in this case, doing something else. So actively house flipping, actively daily trading is considered not technically legal, but passive is always legal. You can do everything passive. You can do passive investment on the stock market. You just buy and hold, right? You can do passive investment on multifamily or real estate. For example, all of the single family or townhomes I purchased, I'm passive because I just buy and forget. That's considered passive. But if I'm the, also the property management or if I'm doing Airbnb, That's a big issue. So I'm only allowed to do passive investment while I'm on a working visa. But if you become a green card, you can do whatever you want.

[00:33:09] Tim Little: Yeah, and that's interesting to me because,I assume if you're buying the property yourself, they might consider that active, but you don't, from a tax perspective. You're right. You, in order to have an active role, you have to be managing it yourself. So if you were self managing, then that would have been like a red line is what you're saying.

[00:33:31] Frank Xia: Yup. Yup. Yup. That's right. And also if you're

[00:33:34] Tim Little: No, I think that's really,

[00:33:35] Frank Xia: sorry. If you're a passive investor of LP, that's by definition limited or passive. So nothing.

[00:33:41] Tim Little: Yeah, I think that's a really good insight, for folks. Cause I, I certainly didn't know that. So hopefully that answered a question that some people have. All right. we do need to transition into the turbo round. So I'm going to ask you three questions that I ask every guest that I have on the show. And I just ask for a quick, honest answer. Are you ready?

[00:34:00] Frank Xia: Yup.

[00:34:01] Tim Little: All right. What is one red flag that every investor should look out for?

[00:34:06] Frank Xia: GP scheme again. Do you want to make sure GP interest is aligned with LPC interest? They are not making money on top of acquisition fees. You want to make sure their major compensation comes with the performance of the deal.

[00:34:17] Tim Little: Okay. Yep, absolutely alignment of interest and how do you see how you define alignment of interest real quick? I know some people say oh, it's how much money they have in the skin in the game But what you're talking about is more Compensation for performance. Is that right?

[00:34:37] Frank Xia: both, definitely how much money they take out during the acquisition, how much money they put their own money in. What's the split? Is it 2080? Is it a waterfall? That means a lot.

[00:34:48] Tim Little: Absolutely

[00:34:49] Frank Xia: Oh, and also, sorry. one more, one more thing is how much money do they get compensated by raising money?

[00:34:54] Tim Little: Okay. Yeah. And people need to make sure that they actually dig into that. And it can be as simple as asking the question like, Hey, how do you get paid? as long as they understand that from a basic perspective, they should have a good understanding of how that alignment of interest is. All right. Next question. What is a myth about this business that you would like to set straight?

[00:35:15] Frank Xia: So there's every investing, there's nothing magic about real estate investing in general, it's just a different investing vehicle. you're not going to get super rich fast in real estate compared to the stock market. Maybe you will get rich faster in crypto, but you just, you get a lower chance of getting rich faster. I think real estate is just a way that you can grow your wealth with very little risk. It's not a vehicle that helps you to 10x your wealth very fast. So you need to make sure the expectation is right. You are not going to become a billionaire by just passively investing in real estate in five years. So just the expectation needs to be set straight.

[00:35:57] Tim Little: Yeah, and I think that's a really important point, because especially nowadays with, people want instant gratification, right? They want to be rich within a year and they'll have gurus out there who tell them they could do it. and I think it's complete nonsense. your expectations should be five year time horizons, 10 year time horizons, and maybe even further, but you can certainly build wealth over the long term. Just don't expect it to happen instantly, right there. Like you said, there are a few assets where that could happen outside of random things like meme coins where you can become poor just as quickly. so there's that risk reward dynamic there, but I think it's, I do think it's a myth. Too many people believe that you can get rich quickly with real estate. Whereas that's not what it's about. It's about getting wealthy over time. Alright, final question. What does success look like to you?

[00:36:52] Frank Xia: Yeah, I think, success looks like to me in real estate. Basically, I can keep doubling my money every five years. That means I'm doing a great job because doubling my money every five years means I'm getting 14 percent IRR. And, if I can spend not a lot of my time because I'm passive, not spending a lot of my time finding out good investors. Yeah,

[00:37:23] Tim Little: and that makes sense, right? Like a lot of the deals that I underwrite, that's something that I shoot for on a five to seven year hold. I want to have a two X multiple, equity multiple is what we call it. I know you know this, but saying it for those. And there's a bunch of different metrics that we can use to measure whether something is a good deal. You talked about IIR. I like equity multiples because it's so straightforward. To explain to especially new investors, Hey, rather than getting into cash on cash and IR, which takes into account time, value money,I could say, Hey, a two equity multiple means that your investment will double over the whole period in this case, five years and they're like, Oh, okay, I get it. And so it just makes it so much easier. So that's a great one. Define success for I would argue, any commercial multifamily deal. All right, Frank. this has been awesome We covered a lot of ground from watches to AI to equity multiple there at the end Please tell our listeners how they can get ahold of you And if there's anything else that you'd like to share with them,

[00:38:29] Frank Xia: Right now I'm basically doing full time investment and also I'm pretty active on LinkedIn, talking about building up wealth, talk about W2 jobs, talk about personal growth because I just read a lot of books. I like just growing a mindset and my LinkedIn huddle is Frank the Tank CFA. And I post daily about my thoughts and I'm trying to become just like an education influencer.

[00:38:54] Tim Little: awesome we will certainly have all that information in the show notes again Frank Thanks for coming on the show and I look forward to seeing you do big things on your journey to multifamily millions

[00:39:05] Frank Xia: Thank you very much team for having me today.