Journey to Multifamily Millions

Vetting the Deal is Vital, but so is Vetting Partners! with James Stratton, Ep 101

• Tim • Season 1 • Episode 101

Share episode

Join us with James Stratton, an expert in commercial real estate. He has a Master’s in Real Estate Finance and he’s put it to good use, working in urban planning, real estate development, and optimizing real estate portfolios.

In this episode, James, who’s a seasoned pro from OTG Realty Advisors, dives into the key reasons why multifamily real estate deals can fail. He talks about the importance of having a solid exit strategy, hiring the right team, organizing your finances, and having a clear process for acquisitions.

James also highlights the importance of thoroughly screening potential partners and investors and warns about the dangers of real estate scams.

Don’t miss this episode filled with valuable insights for anyone interested in real estate!


Episode Topics

[01:02] Meet our guest, James Stratton
[04:19] The Impact of Market Volatility
[10:07] Financial Pitfalls in Real Estate Investments
[17:38] Vetting General Partners and Team Members
[26:26] Equity Distribution Strategies
[29:01] Importance of a Defined Acquisition Process
[34:28] Understanding Risk in Real Estate Investments
[41:48] Identifying and Avoiding Predatory Practices
[33:22] Connecting to James 


Notable Quotes

  • "Not beginning with the end in mind can lead to deals going bad." — James Stratton
  • "Bridge loans are usually going to be a higher interest."  — James Stratton
  • "The three tenants of finance: magnitude of cash, timing of cash, and risk of cash." — James Stratton
  • "There's 5 trillion in 401ks out there. People just have a lot more money than they realize." — Tim Little
  • Your best partner is a silent partner and that's the bank." — James Stratton

 


👉Connect with  James Stratton

👉 Connect with Tim

Subscribe, Rate, and leave a review here 🌟
https://podcasts.apple.com/us/podcast/journey-to-multifamily-millions/id1634643497

[00:00:00] James Stratton: If there's anything we need in real estate is good investors coming into the investment community and making sure they're educated properly. I really applaud the federal trade commission doing the things that they're doing out there because they're now. Catching up with a real problem that's taking advantage of people. That guy I told you about did the $75,000 on a credit card, that was a scam he got involved in and he just really wanted to be involved in getting into real estate. He just was not qualified. 

[00:01:02] Tim Little: Welcome to the Journey to Multifamily Millions I'm Tim Little, founder and CEO of ZANA Investments.We have James Stratton with us who brings a wealth of experience in commercial real estate He has a bachelor of business administration and a master's in real estate finance and has put them both to good use In his work focusing on urban planning real estate development and redevelopment as well as real estate finance portfolio creation and optimization. James, I know you've seen a ton of deals and advise others on real estate investments and Sometimes have to probably save them from themselves. So I'll stop talking now and let you introduce yourself a bit more and get into the presentation. 

[00:01:45] James Stratton: All right. Appreciate that Thank you for having me hereTim said, I'm James Stratton. I'm with OTG Realty Advisors We're a brokerage out of Texas and Florida who primary focuses on buyer and investors and we put together syndication packages and help people analyze those packages from a analysis point of view and So I talked to Tim I guess it's been a couple weeks ago and I was listening to what he was saying And of course, a lot of my background is all the numbers. And, but the reality of the situation is that it all comes down to people. So people make deals. And so we, with the focus of today's,discussion is going to be about the five ways good multifamily deals go bad. Really focuses on the people in it. So if you notice I have my screen here, I have the bouncing balls of happy people because that's how people really start out when they go searching for a multifamily deal. It's all exciting.  It's really exciting to find the deals, try to acquire the properties and Run them and that's when the smiles sometimes start changing. So we're going to talk about the different focuses that we should have when we start looking at commercial real estate. Now, I tend to look at things from a finance point of view, but, so I always leave that caveat. There's a lot of legalese and multifamily. So if you hear something in here that sounds strange, always talk to your lawyer. So that's a safe thing to do. The, is that Mark, are you a lawyer down there? I thought Mark was chiming in. but, yeah, so I'm also retired Air Force. I spent 22 years in the Air Force, traveled the world, worked on AWACS most of my career. And,after I retired, I went into real estate from there. All right, so let's get started on this real quick. we're gonna start out here.    The number one thing, that, that causes, I'm going to try to see if I can shrink this screen because I can't see what's doing on my side over here, not beginning with the end in mind can lead to deals going bad. And what I'm going to do is I'm going to introduce the slide and the bullets on there and we're going to try to add some examples to each one of these so we can give some context to it. But if you think about it, it's really easy to get into the deal, but you also need to figure out who's going to be the person who picks it up. when you go to sell it at the reversion period or the selling period. So you always start out with that almost exactly at the same time you're looking at the property itself. So as a general partner, sponsor, promoter, however you're looking at that, you need to always begin with the end in mind. And,so we need an end game, because without one, deals are more likely to go bad. an exit strategy is essential to make sure a deal doesn't go bad. It provides a timeline. And helps you stay focused on your goals and your exit strategy should be flexible enough to accommodate market conditions. And by the way, think about what we're going through today. For the first time and in a long time, real estate is pretty volatile, especially commercial real estate. If we go back to 2008, When the residential side was in crisis, it was predicted that commercial would get there in 2011. And because the market took proper actions, they stayed that off and we never experienced it. not like we were supposed to, but today it hit where everybody was surprised. And so for the first time, volatility is a big issue when we start looking at multifamily deals. And so we can't rely on things in the past to help us decide today. We have to do a much better job. There was, as an example, there was a lady I spoke to, not too long ago. She, she, it was her first time to really be a general partner in a deal.  So basically she was money chasing a deal. And when I talked to her, I said, you really need to. Before you start settling in on a plan, you need to start figuring out who's gonna buy this property when it's over with. And, you don't want to be the one standing up with the music stops. And unfortunately, her first deal, she didn't listen to that, and she ended up buying an eight play eight plex, but she never evaluated or never figured out that the person who had it before took seven years to sell it to her. So the holding period was five. that she was doing. So it was like two years past her holding period. So you can imagine that was a situation that didn't work out so well for her. and using these timelines also help us. Keep things in check. We know at certain points that we have a decision point to make, and Tim's also in the Army, so I'm sure he remembers a lot of this as well. They have standard operating procedures that are like checklists, and we don't do things unless it checks off the list, and having the timeline is a checklist, and so that's part of that as well. All right, the second reason is failing to invest in the right people talent can lead to deals going bad. Real estate is a team sport and failing to have the right people on your team, can create some real issues and be costly. multifamily real estate is expensive and takes a lot of teamwork. In fact, Kevin and I were talking about this earlier today, that,he likes putting, just simply going and finding the, investors and doesn't really, he can do the underwriting, but it's not his thing, and he trusted the underwriter to go do the job for him, and so this is part of using that teamwork, and without the right team in place, deals are likely to fall through, and when they do, losses can be great, and part of that reasoning is, unlike the stock market, so the stock market, millions of trades happen every single day, and it's referred to as a strong, efficient market, Real estate is a weak, efficient market, which means there's not as many transactions that happen each day. And the real cost to that market is agency costs to people who actually take part in the transaction with you and information. It's very expensive to get. And, it's very costly when you don't get the right. So I always like to tell people that, when you're investing, it doesn't matter if you're investing in the stock market, Or the real estate market speed kills. But for very different reasons here, you can't move fast enough in the stock market, because machines are going to outpace You can't move faster than the machine and in real estate speed kills because people don't take the right amount of time and They don't necessarily produce the right team of people to help them do that work when they try to do it all themselves to do all that heavy lifting themselves By the way, Anybody other than don and kevin old enough to remember mimeograph machines. If I chime in on that one, I don't know why that came to my mind, but all of us remember being in the eighth grade and the teacher turned around and said, Hey, go off and make some copies. And everybody raised their hand real quick to go make copies of the mimeograph machine because of the alcohol that was in that. but when you, that's where the girls were hanging out, that's where they were. And you sit there and run that drum through, right? And so one of the things I find on the finance side, I'm trying to use this as an example is, it's not uncommon for me to find a promoter who is rushing through the system and they don't necessarily put together the financials correctly. That's the last thing on their mind. But this is a financial investment and reminds me of a mimeograph machine because oftentimes these guys will go get a spreadsheet offline. Dr Google will give them a spreadsheet and they don't know where that thing came from. They don't know how the calculations are doing.   They don't even really understand the financial model they're looking at, but they're just running it through that mimeograph machine. And, all of us remember that when you first get the first one in there, it comes out crisp and it starts getting really fuzzy. and unreadable as you start getting that drum going, and that's the way this works. So if people start passing around, spreadsheets, and they really don't know what's really going on in those spreadsheets, and, this is where you need an actual finance professional as one of the people on your team, to help you with that because they truly understand what's going on behind the,the spreadsheets themselves or the proformas. So some of the people that are typically found on a team. Would obviously be the promoter, but you're going to want people like your inspector, your architect, your lender, yourlawyer, obviously you have to have a lawyer on this one. Who else is going to put together your private placement memorandum and your operating agreement? I hope you're not doing it on your own. No, I wouldn't. so you want to have those people involved in it, but there's a whole series of people. When I. Typically, representing limited partners and looking at deals, the general partners put out, and this is a freebie. One of the things they really look at is legacy.  So who's going to take over if God forbid something happens to the promoter or the person responsible for the GP? the unfortunate thing happens, who's going to take over for them? So we always look for that kind of thing. So the other thing we're going to look at is the strength, meaning the resume of who's on that team that's doing the promotion. Do they have the right people there? Not too long ago, I looked at a multifamily deal that was coming out of Central Texas, and the gentleman who put together the financials for him was a CPA. And while that was fine, he really didn't understand the deal he was looking at. And it didn't take long to look at the financials and realize he was wrong in a lot of areas. And so that deal got passed over. And a lot of times limited partners just simply won't tell you, why they passed you over. And that's a shame because if you have a good deal, you want to make sure it goes through. All right. So this is a big one. not getting your financial house in order can lead to the deals going bad. Look, 

[00:10:13] Tim Little: go ahead. Hey James, can I slow you down a little bit? Because we're burning through these and I just want to make sure that we have time because what I'm afraid of is that if we get through all of them that people will have forgotten each one in case they had questions on each section. So I'm gonna, I'm gonna rewind you a bit and on that first one, begin with the end in mind. Understand what you're talking about there in terms of having an exit strategy. It is the main takeaway. It sounds and I would say You should probably have more than one exit strategy in mind, right? absolutely you have what's basically your best case scenario which you might even hold in your hip pocket, but then what you're telling to investors Is your worst? I don't want to call it worst case, but more likely more conservative is exit strategy so a lot of times on these deals what you'll see is, a sale or You'll see a refi in year three and a sale in year five But a lot of times that investor knows that if they can sell it year three And you know get that speed of money going and get that. That investment back to those investors With the appropriate returns, then they're probably going to sell in year three, right? and say you're getting a 2x on that investment. I'd rather get that 2x in three years than five so While you need to address the needs of your investors, whatever the reasons they're in it for be it cash flow Or long term investment take that under consideration for sure But you're going to look at that deal and you're going to say hey You we're going to, we're either going to refi in year three, or if market conditions are appropriate, then we'll sell in year three.  And so you just make that clear, I think, to limited partners, passive investors. That we're not held to that so that if we do have to hold on to it for two or three more years We have the correct loan or whatever the case may be in place to do that if need be 

[00:12:16] James Stratton: Yeah, so I can appreciate what you're saying there. So one of the things that you brought up is the three tenants finance, which is the magnitude of cash, timing of cash and risk of cash. And so one of the things as a general partner you will always want to do is you're always wanting to operate in the best interest of not only the entity that you're in, but the LPs that you represent because you have a fiduciary duty to them. And so it may be, like you said, that you may see the cash flows are looking at a, as such, whether you should sell it or continue operating it as you've talked about, based on those cash flows. And that's also going to be found in your PPM and your operating agreement as to what that capability is. Okay. From a limited partner's point of view, keep in mind that,what Tim was talking about is the GP is usually in charge. making those strategic decisions. That's another reason why you want to make sure that you have the right people on that team that will make those right decisions. But as an LP, you're going to be in that, that, investment for a while. It's not like the stock market where I can go and buy a share right now and turn around 15 minutes later and sell it. I can't even option it. But, in this investment, you're gonna be in it for a while. So you got to do your, we always talk about doing your due diligence that goes without saying, but we're really talking about here are the people involved and how they get to go about it.

[00:13:31] Tim Little: Yeah. And Steven just asked a great question. He said, how do you accurately predict who your buyer will be? In three to five years from now I think there's a couple of different ways to look at that. I think there's a very broad way of looking at it So you could say hey my intention is to market this to institutional level investors you know say you're going to take that b class property and you're going to rip it down to the studs Make it new again and put in all these amenities Please And make it so that it's more attractive to those institutional type investors who are looking for very stable, a class properties, then that's your business plan. And so you, like you said, you, you have the end in mind, you know that you want to make it attractive and pitch it to those institutional investors. Whereas if you have a regular value add property.your business plan might be such that hey, we have to make the numbers simple, right? We have a hundred hundred unit property and we're going to renovate 60 Of those units so we'll renovate 60 of those units thereby leaving some meat on the bone for the next value add investor who wants to purchase that property because they could say, Hey, it's still value add to me because I got those other 40 units to renovate, to update, and still drive up the value of that asset.

[00:14:51] James Stratton: Yeah, so I can appreciate what you're saying there. So I think what we were getting at on that is that you begin by finding exactly what you're talking about ahead of time before you even started looking at the property you have because when you know who that end buyer is going to be or who you have planned out two or three, four, whoever you're going to court, they will have already told you what they're looking for. And so you're building that, that plan to meet their goals. So they're ready to pick it up. Yup. It's like passing off a baton. They're willing to pick it up right where you were right where you passed it off 

[00:15:19] Tim Little: Yeah, so it's not so much like an individual per se. I mean If you got one of those lined up three to five years out then they're good on you But it's more The types of folks that you'll be looking to pitch to that's at least how I think of it I don't know if anything likely 

[00:15:33] James Stratton: if you've got somebody like that, they're gonna do it right now. They're not gonna do it Not many of us run around with that kind of money in our back pocket You 

[00:15:38] Tim Little: Alright, 

[00:15:41] James Stratton: So thank you for slowing me down here. What do I need to go back through here? and I think we talked a little bit more about that timeline, didn't we? And we're talking about, hey, when you step into it, I already want to have all these people lined up that are my potentials. So when the time comes, whether it's that three year mark, maybe you turn around at that point for finance and you say, OK, I've got a great person to step in right now. Thanks a lot. But you needed to have that next card ready to deal so and that's what that purpose is And of course, you know right up, great example This is something that Kevin and I talked about today and maybe you and I talked about that too. I had we had that Entity that wanted me to look at their cash flows because their loan was coming due in March And they were not capitalized in such a way to be able to take advantage of the really good job they did putting their loan together, because they didn't take care of the property to a point where they could, basically they were upside down. So they were going to lose that property. And it's an unfortunate thing because they didn't use a timeline to help make sure all their stuff was lined up at the right time. In fact, you talked about that too when we were talking about, one of the properties that you're working on that you, your job is to be on the phone with that, with any contractor on there and you're keeping them up to date on, on, on the task at hand. And, so that's what that timeline is about. And we talked about this,this finding the right team members involved in this. And I think we talked a little bit about that too. And even in the first step, it went into who is on your team and what their resume actually looks like? Do they actually have the resume? The background necessary to take care of the job. Look, I see them all the time where people will go online and they're trying to get a full financial analysis done for 200 bucks. Do you really think that you're going to get a full financial analysis done for 200 bucks? Especially if they're turning around and asking for 100, 000. So it's not a whole lot of effort going into that. So when I look at this from even a general partner's point of view, I want to see who's on, who's coming on my team. And what's their qualifications? Do they have the right pedigree? Do they have the right experience? Or are they just pretending?

[00:17:38] Tim Little: So let me ask you, when you're working on behalf of a limited partner, how do you go about vetting those general partners? 

[00:17:44] James Stratton: So I'll actually Talk to the general partner and ask him who's on their team and look him up and do my own vetting as to whether or not the person is if it's properly filled out. I'll ask him, Hey, here's what you may have, I think you need this on your team. And they may turn around and say, we've already addressed this. This person is a contractor for us that will step in at the right time, and that satisfies it, right? So they don't necessarily, when you start talking about smaller investments, you're not gonna be able to afford to have all these people on your team full time. Unlike the stock market where, if you're, there's companies that operate on the stock market do exactly the same thing. they can afford it, but you can't. So you're going to need to do things at ad hoc, but you've got to have access to these people. And so when I get ahold of you and to say, who's the person doing the inspection on your property, I want to make sure that person's actually qualified to do the inspection on your property.

[00:18:34] Tim Little: Makes sense. 

[00:18:36] James Stratton: same thing with a lawyer, you want to make sure that, lawyers typically don't have this problem because they know that they can, they only practice in the areas where they're good at so that you won't usually find somebody who's a, car wreck attorney, for example, doing syndication that's just outside their field and they just won't do it. So they'll just refer you to somebody else. And by the way, a good professional will do that, right? If you get to an accountant who doesn't deal with multifamily, they'll just tell you, hey, I don't deal with that, but here's somebody else that does. Yeah. Okay. Thanks. Which always Go 

[00:19:02] Tim Little: ahead. No, I was just gonna say, I think you're absolutely right about your point that gps have to vet their cogs too when you're right. When you're partnering with other folks that, maybe you haven't done, deals with before, they check out on paper and stuff like that. certainly vet them, look at their deal history. But at the same time, stay alert because there's just a varying degrees of experience, and you don't want to assume that they'll know something that they may not know, because we all know what happens when you assume, especially when you're talking, SEC compliance with a 506B and stuff like that, because it's going to fall on you anyways. So just make sure that everyone is on the same sheet of music and do not make any assumptions that people know Not to post things on social media Oh yeah! Good point! 

[00:19:49] James Stratton: I've When you shouldn't be correct.so yeah, it's a good point that's there. Same thing with the, I always tell people that when you get into an investment, your best partner is a silent partner and that's the bank. And so if the bank is struggling to get into your deal and there's a limited partner, you should probably be looking at why. it should be harder for a limited partner to vet a deal than the bank. Because the limited partner actually has less rights if something goes wrong. The bank's going to get your property one way or the other. They're going to get their money. But the limited partner is the second to last to get their money. And so it needs to be harder to get it. All right. We already talked about this here. Are we good enough to get back to our financing on the house? So Tim's being my timekeeper. 

[00:20:38] Tim Little: Yeah, we're good. We're good. 

[00:20:39] James Stratton: All right. So just because you're an accredited investor. does not mean that every deal is available to you. And you really need to take an inward look at yourself and determine whether or not this deal is a good deal for you to get into. Can you maintain things right? Let's get to that part of it. So if you're already not, it's just like gambling. Don't ever gamble money. You can't afford to lose. And it's the same thing with investing. Don't ever invest money that I need today, because when you're in a, with all the benefits associated with being involved in investments and multifamily, the detriment is that you're in it for the long haul. You can't just jump in and out. And so you need to make sure that you can deal with a long time of not having that cash available to you. and in fact, depending on what kind of a deal you have, you certainly can't get out of it in less than a year, but depending on what kind may determine whether or not you can get out of it at all. You may be able to, if the operating agreement allows, you may be able to sell your unit off, maybe a year from now or whatever. Don't count on it. So always assume that you're going to be in it. And furthermore, it's very possible that there might be a cash call where now you have to have more money going into it. You really didn't count on that. and this is probably more so true today than,than just even a year ago. so many more deals right now, their debt service ratios are so low that in order to get the reset taken care of, They're going to have to put more money into the deal. They're going to go right to the limited partners who get it. And so a great example of something not to do is I talked to a guy, he's out of Florida. he's new to investing, which is where a lot of us are. A lot of us are brand new to investing that get into it in the beginning and they get their information from a variety of sources. They'll get their information maybe from family members or maybe even some friends or they'll go to the internet and that's where a lot of people get their information from or they'll go to a seminar. And in this particular, this guy, this particular guy got brought into a seminar. And unfortunately he went through a funnel process and he ended up paying 40, 000. to go through a training course. Then he paid 30, 000 for a database that everybody in the world had. And then he paid 5, 000 for a website to be designed for him. And so we got 75, 000 into this thing, right? And he put it all on a credit card. This was a gentleman that should never have been involved in this kind of investing at all, because his only source of cash was his credit card. And when the real deal came along, He just wasn't able to do anything and it's an unfortunate deal for him. And those are the things we want to avoid when we talk about getting your financial house in order. and we talked about that. So we want to make sure we have enough cash reserves to make sure we can handle any disaster that might come down the road. And especially if you have a portfolio that's all in one area, you want to make sure you've got your portfolio spread. And that way you don't have to run the risk of it. All right. Now, this is more of an area for you, Tim. One of the things we want to talk about is, making sure you use all the financial tools available to you. And,Tim, I think you deal more with the 401ks and the self directed IRAs, don't you? 

 

[00:24:24] Tim Little: Yeah. and this is, this really just goes, making sure that the, The deal happens, right? there's, I don't know, something ridiculous 5 trillion in, 401ks out there. And some of that is self directed and some of that can be put into self directed accounts. And people just have a lot more money than they realize. as you're going out there, you're raising deals. A lot of people think that this isn't for them because they don't have a hundred thousand sitting in the bank. without realizing that orphaned 401k that they had from that company that they worked at for 20 years, can be transferred over into a, self directed retirement account to, whereas they could use that money as they wish, and I would recommend that they use it on real estate and they can do it passively. it's just another one of those things that a lot of people don't realize is an option. And if you're the syndicator and you're not taking advantage of that or educating people on that fact, then you're doing yourself a disservice. And, you may be preventing deals from happening just. Just based on not having that cash flow coming in 

[00:25:35] James Stratton: Well to your point you were talking about having these reserves of cash in different places all of us have Things like netflix accounts and money in all these different subscriptions And we don't realize that we don't always use those things all the time, right? So we're not really efficient with it. One of the products I create is an optimized portfolio of You of properties. And I deal with hundreds of these. And one of the things that this product does and does is it tells you just how much money you should have as far as your equity in each property type or each property itself, and how much your net present value will be in that property. So why is that important? Let's say, for instance, you've got two, two properties that you're looking at. Do you and you have 100 bucks? What is the use of something simple? You got 100 bucks. Do I put 50 in each one? likely not right. So what you want to do is take a look and see what your equity distribution should be. But let's say, for instance, that you've evaluated it. before you evaluated it, you did put 50 in each one. Unfortunately, if it turned out that you needed 40 in one and 60 in the other, one of them is embargoed. It's gonna take some effort to get that money out. And so one of the things you want to do is from time to time, look and see how much equity you have in these projects and make sure they're optimized. So where you can free up that cash for other deals. And we talk about things like, when we go in there to, to, to raise capital from limited partners, you may have people who actually have more money than others. That's another source. What we call,from a raised point of view, you may end up having, Somebody who is what we call a first in investor and a last in investor, and they may have exactly the right equity that you need to fit your deal like a jigsaw puzzle. And there might be a little bit of a different setup and something called a side letter, that would help them get into the deal and keep getting your deal across the timeline or the threshold. And those are some of the things we want to look at as far as using all those resources. to your advantage. Bring them all to bear because the more control you have over your investment, the more likely that deal will go through and not go bad on you.

[00:27:53] Tim Little: Yeah. And 1031s is another one, right? A little more complicated because then you get into the tenant in common structure, but it can be done and it is a source of,it's a source of money that needs to be Allocated very quickly oftentimes because these people are under the gun when it comes to that timeline that they're beholden to as part of that 1031 exchange 

[00:28:21] James Stratton: That goes back to what we talked about earlier about beginning with the end in mind again, right? So usually when you're representing a person who is selling a piece of property a good broker Will have identified the next property for 1031 really quick. this is also true of a person who's a gp or a sponsor they will be in the market looking for somebody who's getting ready You their property is getting ready to sell and they can jump in there real quick and say, Hey, we're going to identify these properties that you can use as a tick. It is more complicated. And this goes back to using your attorney again because there's, you have to, yeah, there's just more rules involved in getting a tick involved in a syndication. Alrighty. Okay. Another five not having a well defined process and system and multifamily acquisitions can lead to deals going bad. That is so true. You have to have a checklist. So you don't ever deviate from it. Don't be this person who's chasing butterflies. And so this happens quite a bit where a person looks over and says, I got this great deal to go look at my uncle Bob told me to look at or whoever. And you're just chasing butterflies. You need to have a model put together ahead of time so that the market's not pulling from you, you're pulling from the market. And then you also have a checklist that you go through a multiple step process in order to get to that deal. I always look at things from a standpoint of your due diligence period. And one of the things that always bothers me. It's when a GP looks over and says, I got a due diligence period of 30 to 60 days. That tells me that you're operating in a seller's market. That means the seller has got you chained.

[00:30:00] Tim Little: If you shouldn't get involved in it, then all those bad things that happen with weak markets, South. I had a guy not too long ago. He's actually an army guy. He was an army vet and he saved up a pretty good chunk of change and I don't want to say too much there. I think his mother had passed away and he had money from that to go invest and he just

[00:30:21] James Stratton: He ended up, the deal ended up going bad because he didn't have his ducks in a row. And he didn't have all that checklist. And he got so emotionally charged about buying it and excited about it that he lost sight of what he really should be doing. And he lost his money and it's an unfortunate thing. And like I said, before I cut out there, always put yourself in a position where you can just walk away from the deal. It's as simple as that. 

[00:30:46] Tim Little: Now, when you say lost his money, I think you need to dive a little bit deeper into what that means. 

[00:30:52] James Stratton: because he wasn't experienced, and it goes back to understanding who's the pretenders and who's not, he invested money with people who were largely pretenders, and the charlatans in the deal, and they just took his money and ran, because he wasn't, Surrounded by people who could advise him well, and he just tried, you know He went out in the market and unfortunately got burned and he didn't have he should have just simply had the notion of walking away And that's I guess that's what i'm driving home. If you see a deal that just doesn't smell right walk It's as simple as that and don't get yourself in there 

[00:31:25] Tim Little: Yeah, it probably falls into that category if it sounds too good to be true. Then it probably is, was it one of those? 

[00:31:31] James Stratton: Yeah, so one of the things I tell people to do is do a comparative analysis of deals. So if you're looking at multiple syndications, look at the profitability index and whatever measure makes you happy. there's so many measures that are out there. Not any one of them is a magic bullet. The closest one I could think of that would be a magic bullet would be net present value. But even then it's got its limitations. So use What makes sense to you? And then also, don't be afraid to just simply ask for help. It's as simple as that. But compare those deals and make sure that since your money's locked up, it's going to give you the best return over that time period. What's your opportunity cost in that deal? Ordeals and so that's an area of concern for that. I think I know what happened when I did this slideshow because it's my powerpoint stuck. It sure is I bet you so we're out of the powerpoint No powerpoint anymore. 

[00:32:29] Tim Little: Yeah, and I was gonna say just on that whole, Dirty little secret of the business Like honestly, there's not a huge range in between the returns As long as you're comparing like deals,traditional value add to a traditional value add, they're going to have, an approximate range. And if you see anything, that's a great deviation from that. Like you said, if you look at five deals from five different syndicators, They should be within a certain range. If anything is far outside of that then that's a red flag. It doesn't mean they're necessarily doing anything nefarious But there has to be a very specific set of circumstances that would cause Those returns to be so far outside. Whatever the general range is 

[00:33:20] James Stratton: And to your point, if you're doing nothing but value adds and that's what you're into, then you're comparing across that. Now, make sure that you're not prejudging something where they maybe changed the property type. we were, I think Kevin and I were talking about one of the things that's happening right now. is that we're seeing people that are taking old hotels and converting those into apartments. And those serve a lot of functions. That's going to be a redevelopment. And that redevelopment is going to have a lot different returns than a value add. so don't prejudge it. You need to know exactly what kind of property type you're looking at and what profile that should look like.

[00:33:56] Tim Little: Sure. Yeah, exactly. And that's why I say properties. Cause yeah, you talk about a bill to rent. straight, ground up development, you're gonna have longer timelines, higher risk. So those rewards have to be commensurate with that. So it makes more sense if it's higher on that side. 

[00:34:16] James Stratton: So anytime we're looking, even from a finance point of view, we're always looking at here's the risk free rate that's out there, but there's, I need to have a premium put on this project because of all the risk. It's broken up into two sections. What we call, non systemic risk and systemic risk. Systemic risk. I can't get rid of it. There's no way to stop it. But non systemic risk. I can diversify out. And, when I'm dealing with properties, this goes back to that experience again. If I'm a multifamily operator. And now all of a sudden, I'm expecting to be an office operator while there's similarities. They're different from one another. For me to get into that deal, my risk premium is going to have to be higher because my experience level is lower. So I'm going to have to surround myself with people who have that experience. So it all comes back to that with that non systemic risk. And I think the very last slide that was supposed to be up here was the bonus. And that bonus one that gets people in trouble is they don't take the time to make good decisions. And so they apply something called finance referred to it as financial or behavioral finance. And they'll go out and they'll learn about a particular multifamily type of deal, for example, and that's what they're into. And all the research they do will back up what their belief system is. And so it's called confirmation bias and they won't look for information that tells them the opposite Especially since real estate is highly local. And you know if you're buying a piece of real estate right now period I don't care what type it is and for me You probably should be concerned. Oh, I see something popping up on the screen here. There we go and so the other thing that they do is something called heuristics, which is this rule of thumb business And rules of thumb and investments, especially in real estate will get you in trouble every time. So rules of thumb work very good when we're involved in things that we're very experienced at that we do all the time. If I go out and go buy a loaf of bread, I'm not too worried about it. I've got my rule of thumb as to what I should do, what I'm looking for. And the value is so low. I really don't care if I get home and I find it's a moldy piece of bread. It's not worth my time to jump in the car and drive back to the store and return it. I'm just gonna throw it away. But you can't do that in real estate. So in real estate, you're in it for a while. So the concept here is you don't use these rules of thumb. they work in areas where you're very experienced and you have very little time and the cost. Is not so high they work against you the other way around So if you have to make a snap decision don't do it in real estate 

[00:37:12] Tim Little: yeah, I guess the only pushback that Myself or others might give on rules of thumb is that it's a starting point it's certainly not something that should be used as a final analysis but when You know if like you said, you have to get through a hundred deals to find that Diamond didn't In the pile there, then you have to find ways to make your time more efficient. And one of the ways to do that is to do the, use these rules of thumb to say, okay, it doesn't even fit within my rules of thumb. So garbage next deal. And in that way, but then that's just a trigger. That's just a trigger to say, okay, now I need to dive even deeper. Onto this one. so yeah, it's just a way to separate the wheat from the chaff, whatever you want to use 

[00:38:01] James Stratton: Or the other pushback is to use the right tools to begin with And so again, if you're hiring people that are in finance, they're going to know the proper tools to use I think we talked about that before where I analyzed about 300 000 properties in about 20 seconds And that doesn't use a rule of thumb that just uses good math You Not everybody has access to those kinds of tools, but,if you're going to go put a lot of your money, which is a large portion of what your assets are into a project, you need to use better tools. And, so heuristics are not a good way to make a final decision like we talked about. 

[00:38:38] Tim Little: Absolutely. 

[00:38:40] James Stratton: And with that was the last one. 

[00:38:41] Tim Little: All right. I know I've taken up a lot of the oxygen in this room, at least. So I want to open it up in case anyone has any questions. On any of the material that you presented and get some From free consulting advice, from you since you probably charged for this stuff when working on behalf of especially limited partners, I would imagine 

[00:39:01] Irish Kevin: could this be for anybody in the group, like you were talking earlier about You know just proper Underwriting what are your thoughts like? You When you have bridge financing right versus agency debt. I would think people on the agency side would be going through the underwriting more with a fine tooth comb versus say a bridge debt underwriter because you know what they say like bridge loans are like. Loan to own and the agency side doesn't want the property back. So would you think that the underwriting on the agency side might be a little bit tighter?

[00:39:39] James Stratton: So underwriting is always going to be tight anywhere you go, because each one of them has their own objective. So that bridge loan in many cases, like that credit card loan. So it's usually going to be a higher interest. And usually the underwriters there, they don't want a bridge to nowhere. I hate to use that as a Kind of but they want to make sure That whatever the end result is going to be picked up, their loans are going to get bought by the permanent loan So that's what they're looking for. And so they're going to have their own underwriting Criteria, most of those bridge loans are private lenders. So they're going to be out there. It's hard to remember it's harder for them To get their money back. So What they're going to be looking at is to make sure your deal is good and solid and you have something you're working on So usually when you see these bridge loans it's because they're working with an agency a usda or a freddie mac, freddie mag, whatever and Whatever the alphabet soup is for the government because it takes them so long to get these things processed and you still got a business to operate You So you got to have a bridge loan to get you from point A to point B. If your planning works out good, then you may not need a bridge loan. You've already started working on that long before it ever comes.

[00:40:50] Irish Kevin: But if you're looking at it on the LP side, do you think you'd feel good, like not knowing enough about the underwriting that It's already been done by maybe two or three different groups of people.

[00:41:01] James Stratton: I'd wanna look if I was representing the LP, I wanna see those financials. I wanna see the proformas and the cash flow statements. And I wanna look and see how that, that, how that's affecting it. And, remember, I, I, I don't know of a GP one who doesn't say, Hey, if I reach a certain level, usually measured in a, in an RR, then I want 50 50. I know that greed is going to take over and that GP is pushing for it, right? So I can't imagine a GP putting their own money at risk or their upside at risk. So hopefully they've done their job and done that too, but, you should do your own looking, but I'm going to assume that the GP wants to make that extra money. They're highly incentivized to do it. Or they're going to get out 1 of the 2. 

[00:41:47] Irish Kevin: Thanks. I was going to add, this is Don Canada. 1 of the things James, you were mentioning earlier, I'd like you to expand on is that there're pretenders and even more importantly predators in every industry. Trying to weed these people out and identify them, especially with the age of the Internet and people can be whatever they appear to be on the Internet without any creds. could you expand on, even from identifying the investors, that say they're accredited investors and, until you get to the financials or the dance to figure that out. So can you tell me how you identify people quickly like that again, try to save time for everybody that's involved.

[00:42:29] James Stratton: to your point on this, Don, there's a, a factor of several, the, the,FTC just got through getting quite a few lawsuits. on some of these predators that are out there that are involved in multifamily deals. And they have the Federal Trade Commission actually got some judgments out of that. They really did a really and I'll probably drop that. Tim, I'll drop that in the notes in there so you can see that. But they did a really good job of outlying what the predators con game is. And it's a very, very Simple thing. They invite people to a meeting to talk about everything you need to learn about real estate in an hour, which I don't know how you would do that when they get you there. They assigned you a mentor and it's really a salesperson and they learn about your finances and get you to buy courses. that ultimately leads to you, spending lots of money on nothing. And, so they'll have some of the same attributes to 'em. they'll, they won't talk a lot about the downside of a deal in any deal. There's risk. It's just that. And,Tim alluded to that a little bit earlier, that you always want to be, you may have a, you keep to yourself. They're a really good outcome. But you always want to tell your investors what the possible downside can be, and that way they're aware of it, and they can plan. Be honest. That's all there is to it. And so one of the things that, that Don has identified is the. is the pretenders will oftentimes just dishonest and you get that feeling, but some people just can't sense that feeling. So it's the system that they use of funnels, they get you to come through their system, and unfortunately their deals just go south. And that money is gone from the investment pool. And if there's anything we need in real estate is good investors coming into the investment community and making sure they're educated properly. I really applaud the federal trade commission doing the things that they're doing out there because they're now. Catching up with a real problem that's taking advantage of people. That guy I told you about did the $75,000 on a credit card, that was a scam he got involved in and he just really wanted to be involved in getting into real estate. He just was not qualified. Now to the other side of that. Don, there's a form that the syndicator or the promoter will give you to get some information about your financials. You need to be able to prove that up. One of them is they want to make sure that you're an accredited investor versus a non accredited or even a sophisticated investor. you really have to watch out for the ones that are non accredited because there's extra special rules that you have to take into account for them. But,That's really a declaration that the LP has made. It's a danger and a risk that GPs can take on because even the LP could be a fraud. they may give you the money, but not have not really been an accredited investor. And if something happens down the road and an audit comes from the SEC and they find out, but that's really not on the GP. That's on the accredited investor for Lyon. Basically, it's all boiled down to. Don, did I answer your question? 

[00:45:30] Irish Kevin: yes, sir. Thank you. 

[00:45:32] Tim Little: Yeah, and obviously, you can get stuff from their CPA. that's one way to do it. Or, I know one of the safest ways that people recommend is just having a third party, verify that. there's services where you pay 35 or whatever it is, 50, to have that person, Accredited and they do all the verification and that just gives you a little bit of extra top cover, from an SEC perspective, because it shows the SEC that you've done your due diligence by, having them or you paying for that service. To get the verification done. And that's what they're really looking for, I think, is the intent. did you intend to have someone who was non accredited, 

[00:46:12] James Stratton: act as, or did you, 

[00:46:14] Tim Little: do your own due diligence and try to get that person accredited on paper? Yeah.

[00:46:19] James Stratton: Yeah. To piggyback on that. like I'm seeing a lot of deals lately where they're 506 B deals, but they're only open to accredited investors. So it's almost like they're trying to avoid going to all that BS and taking the time to make sure. They actually are accredited and they're just letting themselves certify, which I think is crazy, but it's setting themselves up for failure. If I'm a GP, I would tell you that I probably wouldn't, I would also restrict, because there's going to be a point in time when there may be a cash call and that non accredited investor just won't be able to stick with you. And not to mention the extra reporting I have to do for that non accredited investor. So in other words, there's too many ways out for a non accredited investor. It's just, if you can get the deal across the line, you're better doing it with the proper LPs. So even from a GP's point of view, you want to do a much better job of vetting, just like Tim said. 

[00:47:15] Tim Little: Yeah, that's funny, Kevin. I hadn't heard that one and I was confused at first, but once you explained it, I got it. I probably wouldn't do it myself, but I understand, there's Less of that burden on there if they're self certifying, if it's a if it's a b, but all right we're running against the clock here. it is 804. So we're hitting out about an hour a james, I really appreciate you coming on real quick Why don't you tell people where they can get a hold of you? This was a ton of information I know I appreciated and we'll make sure it gets pushed out to everyone else But let everybody know how they can get a hold of you where they can, get more information about you and your services.

[00:47:55] James Stratton: great. You can actually find me on LinkedIn. I'm right there. That's how we found each other. And I'm in several of the investing groups as well. So that's one way to connect up with me. I also have a, my, my website is www.otgrea.com. And,you can find information there. for you guys, this is a small group. My phone number is 817 225 5838. I certainly wouldn't do that if there were 1,000 people in this group. But, I appreciate the small group here. And I'll definitely give you my phone number. we covered, like you said, Tim, a lot. And we can't cover a decade's worth of information in an hour. you just gotta jump in there where you can. Bye bye. 

[00:48:34] Tim Little: Yep. All right. Again, appreciate it, James. everyone who's still here. Thank you for coming. Definitely appreciate you hopping on. Our next one will be on december 14th where we'll have dakota brown and alex zapata from franklin street They're going to be discussing the rapidly changing debt and equity markets there should be some definite good insights there, too and if you want more content in the meantime, I do host a weekly podcast called the journey to multifamily millions So please check that out and leave a review if you don't mind i'll put a link to that You In the notes just in case you need it. and again, connect with me on LinkedIn Love having the conversation and talking to other real estate investors. Thanks again. 

[00:49:19] James Stratton: All right. Take care. 

[00:49:21] Tim Little: Have a good night everybody 

[00:49:22] James Stratton: All right. Be good everybody. Happy thanksgiving, by the way

 


People on this episode

Head Shot

TIM LITTLE (FOUNDER/ CEO)

Host