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Tax Smart Real Estate Investors Podcast
MLRE: How He Built a $1B Multifamily Portfolio (Without Third-Party Managers) with Rob Beardsley
00:40:29
In this episode of the Major League Real Estate P…
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- [00:05]
A
Welcome to the Major League Real Estate Podcast, a podcast for operators of large scale real estate portfolios. My name is Nathan Sosa and I'm your host. Together with my co host Matt Hamilton, we talk about tax and legal strategies and we bring on operators large portfolios for in depth discussions on how they grow their business. We hope you enjoy. Welcome to another episode of the Major League Real Estate Podcast. I am joined by my co host Tom as usual and we have a special guest on today. We're here, Rob Beardsley.
- [00:31]
B
Rob Beardsley is founder and CEO of LSRCE, a vertically integrated multifamily owner operator with over 5,000 units under management. Since starting the firm in 2018, he's led more than $800 million in apartment acquisitions and built a platform backed by over 400 investors. He's also author of two bestselling books on multifamily underwriting and capital raising as a frequent speaker on these and related topics. We'll be covering these topics such as vertical integration, how AI will impact underwriting, investor relations, Rob's multifamily outlook, and of course, taxes and structuring deals. Robert, thanks again for joining the show. Would you be able to give kind of, I know I just kind of gave you a little bit of an intro, but would you be able to give kind of listeners a brief introduction and kind of how you got involved in the world of multifamily?
- [01:17]
C
Yeah, sure, that sounds great and thanks guys for having me on the show. Like you guys said, my name is Rob Beardsley. I'm the founder and CEO of lscre. We're a vertically integrated multifamily owner operator based in New York, but operate a portfolio of nearly a billion dollars in assets in Texas. The vertically integrated part means that we have property management and construction management all in house. We have over 200 employees serving just our owned portfolio, so we don't do any third party management. And we've also raised about a quarter billion in equity from our varied investors from high net worth individuals, small funds, family offices and more.
- [01:54]
B
Awesome. Awesome. And you know, I've been, I've been seeing you around the multifamily space for, I don't know, maybe 10 years now or maybe longer. It's been a while, you know. How has everything evolved from your original vision when you first started to where you are and how far you came?
- [02:07]
C
Well, my original vision I guess was kind of putting one foot in front of the other. I don't know if I necessarily had a grand master plan and it's just Been kind of first getting the first deal under contract and then getting it closed. And that's a masterclass in itself. And then from there it's scaling from zero to one to one to many. And over that one to many process, we've certainly learned a ton of lessons about the quality of assets that we're looking for, the locations that are a yes or a no go for us, and a lot of things on the operations side as well. Because just the day in, day out of property management is value add in itself. So before you even touch a property and start doing renovations or trying to raise rents or anything like that, just the day to day management of expense optimization and marketing and leasing and retention, all that is already a huge, huge element of the business that creates a lot of value for investors. So that's what we focus on day in, day out. And I think that's changed over time because before it was kind of all about hunting for the next deal or trying to, you know, meet a new investor. Now it's all about how do we optimize our occupancy and our collections and our rents and how do we reduce expenses. You know, that's really where I spend most of my time these days.
- [03:25]
B
Yeah, no, it makes a lot of sense. Sounds like now you're more focused on building efficiencies as you scale. And one of those efficiencies often comes as people scale their multifamily businesses is vertical integration. So would you be able to maybe share a little bit about what vertical integration is and why you decided to take that vertically integrated route rather than maybe continue to work with third party property managers and other vendors on more of a, you know, a less integrated basis.
- [03:50]
C
Yeah. So vertical integration just in the multifamily space specifically refers to an owner like us having property management operations in house. So rather than hiring outside management or third party management, everything is in house. So. And also, that's not black and white, because even when you do have, let's say, third party or in house management, it's a spectrum. There's a lot of different ways that that can look. And someone could be vertically integrated, but they could still outsource a lot of things from contract services to, you know, like landscaping to the pest control, to the valet trash and so on and so forth. And then on the construction side, that's even bigger deal because there's so many savings associated with doing things in house with your own crews, own teams. For example, last year we did a roof replacement project on one of our properties. And if we were to go with third party roofing bids, it would have been over a million dollars and we were able to do it for about 400,000. So on the construction side, there's especially a lot of savings and advantages associated with being vertically integrated. The other key feature I would say that's a benefit for investors is the more hands on and more focused your vertically integrated team can be when they're not busy and distracted by a million other properties. And so that's kind of the name of the game. When you are a third party property management company. You need scale, you need revenue. And the way to do that is by getting management assignments from other owners. And so you collect a management fee. And so a management company, they want to get as many owners that they manage property for and they want to apply as little payroll and effort to each individual property as they can get away with so that they can squeeze out profit from that business model. Well, with us it's very different because our management company exists solely to service our own assets. So we don't do any third party assignments. We're not distracted, you know, so we can put our eyes and our boots on the ground exactly where they need to be and we kind of control our own destiny more that way.
- [05:59]
B
That makes a lot of sense. And I know one of one of our partners who used to be with the firm, he had a very large portfolio, not in the multifamily space per se, but he said no one's going to manage your properties better than you will, so to speak. And I know in this case, like, you know, you have the, it's integrated in your company. And it kind of sounds like that rings true here too, because third party property managers, they're kind of, they're almost disincentivized from, from really dedicating a lot of resources to any one particular client that they might have. You know, all things being equal, what, what are the, some of the challenges or, or things that you think, you know, operators should know or investors should know when it comes to vertically integration? I mean, there's obviously upside, there's obviously benefits to it, as you just mentioned, but what are some of the challenges or risks that do come? You know, there's always trade offs that come with vertical integration.
- [06:48]
C
Yeah, I think investors are savvy because a lot of investors, I know they want to work exclusively with sponsors that are vertically integrated. So investors know of vertical integration. But I would just caution that just because we or anyone else is vertically integrated doesn't guarantee success, doesn't guarantee good management. You can be a bad manager vertically integrated, just the same way that third party management can be bad as well. So it just means that you're in control of your own destiny. But that doesn't, like I said, guarantee success. So I would say that the things to look out for are it's all about the people business, especially this one. It's all about the people. Going down to the site level, you can hire name brand management company, you could hire Graystar, you could hire the biggest names to do your management for you. But Graystar, the brand is not doing the management, it's actually the person who's sitting in the chair at the property. So really that's the most important person and broadly speaking, the most important people for the investment are the on site staff. So I would say the people is the key thing. So when you're looking at a potential investment, whether it be a multifamily or something else, you need to really look at what are the competitive advantages that that company has as it relates to human capital. So one of the advantages that we have is we have a very strong brand and we have a very strong culture that attracts talent and retains talent. So we get great property management professionals seeking to work with us and they stay with us because they love working with our team. We're a small company that's growing big and we want to be a big, small company. And so by having that we can instill better culture and have people feel more kind of bought in and treating what they're doing every day at the property level like an owner rather than just, oh, I'm just here to collect a paycheck. And it's a faceless corporation that this property is and the profits, they're just greedy and the profits are being sent away to some, you know, tower. So yeah, we try to make it feel like a big small company.
- [08:50]
B
That makes a tremendous amount of sense there. A quick follow up question there on vertical integration because there's obviously a lot of good reasons to have vertical integration for everything you just mentioned. What does it make sense like from your journey? At what point did it make sense to say, okay, great, I'm going to pivot from or I'm going to start doing vertical integration versus third party property management. It was like an inflection point. You said, okay, well here's when it starts to make sense. We have the economies of scale or if other strategic reasons. Does it like make sense for an investment company to say, hey look, it's time to do this, yeah, there's various
- [09:21]
C
factors like you mentioned. Could be scale, it could be vision. And what happened was very early on in our journey and starting the business, I would hear about this all the time from investors. You know, I was always looking to talk with savvy investors, and I would hear a lot of times saying, hey, you know, we only invest with vertically integrated sponsors. And I said, oh, that's interesting. So I guess if I want you to invest with me, I have to change, I have to be better, I have to do something different. And so that kind of set me on that path. But at the time, we only had maybe three, four, five properties, and it's not very realistic to vertically integrate without a good amount of scale. And so I knew that I wanted it, but we weren't in a position to do it. So we set ourselves on a path to get there by way of continuing to scale and grow the portfolio, to build up the scale, but then also build up the infrastructure, build up the knowledge, because obviously property management, it's a different business than private equity, real estate. And so you need to learn about accounting, you need to learn about operations, marketing, leasing, recruiting. I mean, HR is just such a massive part of the business. So those are things that you don't really get a masterclass in if you're busy raising capital and doing acquisitions and, you know, underwriting deals and all that sort of. That's a totally different skill set. So we had to learn the skills ourselves, hire for those skills as well, in anticipation of vertically integrating, which we finally did in 2021. And I would say that most companies like us vertically integrate when they're at a bit more scale, maybe having the. Somewhere, you know, depending on the rents and the size of portfolio, I would say somewhere between maybe like a couple thousand units or so. But we did it very early on at slightly less than a thousand units because, like I said, we were just so motivated by this vision of wanting to build this vertically integrated company that we did it very early on and we kind of felt like, well, it's better to do it when you're smaller and you can work out kinks when you're small, rather than you have this massive portfolio and then you're going to transition every property. It's going to be a. It's going to be a big headache.
- [11:30]
B
It sounds like it's like there's like a sweet spot somewhere in there. Maybe there's not perfect science, but there's a sweet spot where it's like you scaled enough for it to make sense, but you're not scaled too much where the integration of the vertical integration, if that makes sense, or the implementation of it would be overwhelming and very challenging. How do you deal with vertical integration when you're in several different markets?
- [11:49]
C
Yeah, some would argue that you can't, and I would tend to agree with that. It's very difficult without economies of scale. And when in the property management business, economies of scale are critical and you need a lot of them. And there really is an advantage to having many properties in a smaller location. So if someone's listening and they're interested in becoming vertically integrated themselves, you know, I would definitely recommend focusing on a geography, you know, just one market or two, and building the scale there. And if you're an investor listening to this, I would be more cautious investing with a sponsor who is vertically integrated with, but is spread across many locations. It's doable. You know, obviously the biggest companies do it and they're capable of it, but they have the experience and the skill for it and the size. So that is something that I think is not for us personally. I mean, we only own property in Texas, and that is what allows us to be vertically integrated. Otherwise, you lose a lot of the benefits of it, and you might be better off without it.
- [12:53]
A
Rob, out of curiosity, why Texas? What kind of like, drew you guys to that market initially?
- [12:57]
C
Well, initially, getting started, we had a mentor who owned property in Texas, so it was a very natural place for us to get started. Texas is obviously no secret. Everyone knows that it's one of the best markets in the country to invest in. So when getting started, I felt that it was wiser to pick a market that was consensus. Kind of like, you know, something that wins the popularity contest. Because starting any business is hard enough. You don't want to pick a market that nobody's heard of before, and you're going to spend all your time trying to convince investors to follow along with you into the market. Whereas in, you know, specifically Dallas. Right. The market sells itself and that helps a lot when you're out raising capital.
- [13:36]
A
Yeah, it totally makes sense. Yeah. Like you said, Texas is not. Is not a kept secret. Yeah. So everybody kind of knows where it's at there. Real estate syndication tax is confusing to you. Well, that's why hopefully you listen to the podcast today. Also, you should go to our website, www.therealestatecpa.com, and you'll be able to get access to the ultimate guide to Real Estate Syndicators and Sponsors, which breaks down everything from preferred returns, depreciation strategies. Whether you're a GP or an lp, Avoid costly mistakes and maximize your returns. Download the complete guide free and get the tax credit you need to succeed. So we talk a lot about actually AI, LLMs and automation on this podcast. How do you see that impacting your underwriting going forward? I know like ChatGPT just literally Friday released their, like, their best model that like actually plays in Excel. Claude's had theirs for a while. What do you forecast as a visionary yourself? Where do you see this heading?
- [14:29]
C
Yeah, we've been experimenting in the AI and kind of underwriting enhancement tools space for years now. And then we actually just made a switch to a new company where we're going to be trying out their essentially like Excel plugins and things like that. So we definitely are there and doing it and it is making things more efficient. But I'm very negative on the idea of having AI replace our existing underwriting process. I think that the human touch in underwriting is critical and I think that a lot of people are excited about it because it's like a logical thing that they think makes sense to use AI for and automate because there's a lot of numbers and repetitiveness and things like that. But at the end of the day, it's much more art than science. And so it hasn't really changed our business much. It's just made us a little bit more efficient. But I can't really, I'm not too excited about all the, you know, innovation and progress from AI when it comes to underwriting. I'm much more optimistic about AI as it relates to property operations, both on the front end and the back end.
- [15:37]
A
Interesting. Okay, cool. We'll have to dive into that actually. No, let's dive in now. What, what do you think it's going to do there?
- [15:44]
C
Well, like everywhere that AI is kind of touching. There's already something happening and there's already progress and maybe there's some things where people are kind of overhyping it and really the change isn't that great. And then maybe under predicting what revolution really can happen. But in the management space, we have AI voice across our entire portfolio. So you could call one of our properties and you could speak with an AI voice that can. If you have a maintenance request, she'll put it in for you. If you want to tour a two bedroom, she'll schedule that tour for you. And so this is a huge competitive advantage and revolutionary for the management space because if you think about leasing, for example, a lot of people do their leasing and touring and moving when they're not working. So if someone has a job which you want to rent to people who have a job, right, they're working probably nine to five and so they might only be able to call your property or tour your property after hours. So if they call the property at 8pm, who's going to pick up? Well, nobody, unless you have AI working hard for you 24 7. Similarly, they might only be able to tour on a Sunday or at 9pm when they're not working. And again, we don't have humans on site all the time available, but we are rolling out AI guided tours so that we can actually facilitate those off our tours for people who, you know, that's the only possible time for them. So I'm very optimistic about, you know, these small incremental tweaks where it's like, okay, you know, obviously at the end of the day most people want to tour with a human, but if we can do a couple more tours a month with the AI guided touring platform and secure an extra lease or two per month, that's worth it right there. That'll help us push our occupancies, push our revenue, push distributions for investors, make our assets more profitable. And so there's, you know, many more examples like that. But I would just say those things are really helping us be more efficient because in the management space there's never enough time and there's never enough people. You're always short staffed, there's always more to do. And so the automations that we can do as far as applications, I'm really excited about that especially because there's kind of like this race right now between AI application screening and AI fraudulent applications. Fraud is way on the rise in multifamily apartments because people are getting more savvy with being able to fake bank statements, pay stubs and so on and so forth. And right now there's a lot of apartment buildings that are offering one month, two month free. That's a very exciting thing for someone to be able to fake their way in, get the two months free, go delinquent and then skip town. And so as the fraudsters are getting more sophisticated, the AI on the application screen needs to get more sophisticated.
- [18:23]
B
It's always the ying and the yang with these things, right. I guess, you know, you have, on the positive side, things could become more efficient, but then you have somebody always trying to, to cheat the system, so to speak, which is always interesting. Nate, do you have any follow up questions on this one?
- [18:35]
A
Yeah, just a Comment like, I've always talked to other people that like, man, it sucks for people who like, like every store, right, is open from work, during working hours, when everybody's working. And that's like just so interesting how like AI solving that specifically, right? So hey, yeah, I can call now at 8:30 after my kids are asleep. And now I can finally actually say, hey, can I go tour this? Right? That actually is fantastic. Use case. That's so interesting. I actually think it sounds like it'll make vertical integration even more popular because of the ability to do these types of things. Would you agree with that, Rob?
- [19:03]
C
I think that makes a lot of sense. I haven't thought about that too much. But if you think about it, if you're an owner and you're seeing all this exciting change happen from AI and then you reach out to your management company and you say, hey guys, what are we doing? And the management company is like, you know, they manage 100,000 units and you're just one tiny number. And they're like, whatever, we're doing our thing, you know, we'll get to it when we get to it. That's not very compelling for an owner who wants to be forward thinking. So I think one of the keys of vertical integration is you're more nimble. So we're able to test things, try things. If they work, they work. If they don't, we can move on.
- [19:37]
A
Yeah, that's super cool. Okay, now I guess we'll flow. Now I can actually and I'll go to some of the underwriting questions. So I guess like, what are like some of like this, like how you stress test deals to ensure that they're going to perform in different markets. Right. I know you guys are mostly in Texas right now, but whether, I know, like you mentioned Dallas, I don't know if you're in Houston maybe or one of the other large metros. Like how do you stress test deals in those areas? And I guess just kind of like figure out, hey, does this actually work for us?
- [20:01]
C
Yeah, there's actually a lot that goes into a question like that. So, you know, first of all, the majority of deals that come across our desk really just get trashed immediately because the quality of the location is not high enough. Now with that being said, we're not location snobs. Like we're not only looking to buy property where, you know, the people, the residents are millionaires and you know, there's like an Hermes store next door. Like we're not location snobs, but we need to See that the location has barriers to entry, meaning it's built out. There's not a bunch of vacant land where it's just easy to build next door because that's the easiest way to destroy your investment. And then the other thing is that there's demand, there's growth drivers, you know, there's good jobs, there are high paying jobs in the area that drive that economy forward. So those are the big things we're looking for jobs, which is essentially demand, and then we're looking for high barriers to entry, which is essentially supply constraints. And from there we feel a lot more comfortable. Because when you're in a more, let's say, and I want to be more specific because when I just say high quality location, that can just mean like basically, oh, it's a nicer part of town. Like, yes, it could be the nicer part of town, but like I said specifically, it needs to have those growth and supply constraints, growth drivers and supply constraints. That's a higher quality location. And when you're in a location like that, your revenue floor is much higher, so you have higher downside protection because things just won't go as wrong as another location where the residents are lower quality, there's more crime, there's potential for blight, there's lower income, so they have no savings. So you know, there's higher delinquency. And the list goes on and on and on. Right. So having a higher revenue floor is very valuable. And I'd say that's more valuable than a revenue ceiling. Right. Like I care more about how low can the rents go down rather than how much higher can I raise them. Because I want a stable investment. And that's what, if you stress test it, you're not really running necessarily some sort of calculation. It's just logic. It's just basically I'm going to prioritize the stable location and that's going to make me feel more comfortable. Then we apply the actual metrics behind that, like the. For example, my favorite is the debt service coverage ratio. I want to know that I've got plenty of income in place at the property to cover my debt service. Because debt is a very fantastic tool and it's, it's a tool that you have to use and be comfortable using in real estate. But it's the biggest thing that can get you into trouble. So using the right amount of debt in the right structure is absolutely key. And the way we do that, like I said, is through essentially, in very simple terms, I'm looking for net income before debt Service to be 150% of our interest payments every month. So if our interest payment is 100 grand a month, we need to have net income of 150,000.
- [22:52]
B
That makes a ton of sense. Interesting question, kind of follow up, following up along those lines. I know you mentioned before that underwriting was more of an art than a science. And that's because there's a lot of assumptions that go into it, a lot of fundamental information. In your case, what mistakes do you see operators make or what mistakes do you want to make sure that you avoid? What pitfalls do you want to avoid when you're doing underwriting?
- [23:14]
C
Well, I think an easy one is on the revenue side, because revenue, mathematically it's the largest factor in your P and L. Because basically, like in any business, you know, revenue starts here as this big number. Then you have expenses, and then that cuts that number in half roughly. Then you have below the line expenses, which are just basically more expenses. But those would be like capex, those would be your entity expenses like asset management fees, accounting fees, professional fees. Right. So in multifamily, your operating expenses, it doesn't end there. You have additional expenses and you don't want to ignore those because those are real money. So you want to understand that you've got revenue, then operating expenses, then capital expenses, and then you have debt service. And then after all that, then you finally have net income or essentially cash flow that you can distribute to investors. So the reason why I explain all that, if you want to think about it like an upside down pyramid, is because at the top of the pyramid, revenue, a tiny percent change in revenue will have a massive percent change on your net income at the bottom. And so that's why investors can get in trouble by overestimating revenue. Because like I said, just being $25 too high on your rents at the top can make a very large impact to your projected free cash flow, but even worse to your projected future value of the property. And that's where investors can get themselves too excited. They can push the revenue in the spreadsheet, not in real life too high. And then now they oh yeah, I can double my money because I can sell the property. It's worth so much more because the rents are going to be higher. But in reality, raising rents is a very, very hard thing and should be treated with respect. It's not. You know, people kind of took it for granted when rents were going up 10, 20% a year and you know, the post Covid era, but that didn't Last long, as we all saw. And so we're now in a more normal environment where if you can eke out 2 to 3% rent growth in a year, you've done a really good job.
- [25:14]
B
So if we kind of switch gears just a little bit, Robert, when it, when it comes to building trust with investors, obviously, you know, raising capital, building trust with the investors is one of the most important pieces of that. What do you believe is the most important factor in that process of building trust with potential investors that might be considering investing with you?
- [25:31]
C
I think that you need to meet people where they are. And that is just that one sentence means a whole lot when it comes to building relationship and establishing trust because everyone has their own journey. And so someone might be ready to invest in 30 days, someone might be ready to invest in three years. And if I'm giving advice to a sponsor, listening to this, you know, I would tell them patience and consistency. You can't expect to get a bunch of investors, you know, the first day you start or through the first conversation. And you know, we've been doing this for almost 10 years and we still recognize and we still understand that we need to follow up and follow up and follow up. And a lot of people are busy and just because they ignore you three, four times doesn't mean they won't respond on the fifth time. So a lot of people aren't willing to do that and they just don't have confidence in what they are offering. And so they just don't follow up as much as they need to. Or. Yeah, they're just afraid. And so the key is exposure over time because that's how you. It's very hard to build trust right off the bat. It is possible if you kind of prime the pump with content, thought leadership. You know, the fact that we've published multiple books and the fact that we are very public facing and we're very available, that helps a lot. But nothing replaces just the consistency of communication to build that trust over time.
- [26:54]
B
That makes tremendous amount of sense. Like I'm invested in a few LP deals myself. I could say the biggest red flag is when they're. You go to someone's website and they don't have who they are on their website, there's not easy way to get in contact with them. When you invest with them, they don't send you quarterly reports, they don't send you quarterly webinars or some type of communication to have that transparency there. That, that is a major red flag. Nate, I know you might have a follow up question here.
- [27:16]
A
Yeah, I just think that like, like you're saying is that like the follow up, right? That's like the name of the game is like telling people like, hey, just making sure you didn't miss this, right? Our inboxes are full, right? We like literally Gmail has like a whole promotions tab for us to like immediately filter out our inboxes, but just gotta keep going. Like, I love what you said about like the confidence too, like, and what you're, what you're giving people saying, hey, I would follow up five times if I didn't think you actually would get benefit from it. And I totally agree with that. I feel like we do some of that on our own work too as tax professionals. Like, hey, like I think you're going to get gained from this. Just FYI, like they don't run away from me type thing. So I think that's really good. I wanted to ask too. When it comes to you brought you talked about building trust initially, how do you approach educating new investors, like when they come into play and like they like, they find you via like who knows ad, word of mouth, whatever it is. And how do you continue to educate them if they're like completely new to you?
- [28:06]
C
Yeah, well, I mean, if they're completely new to us, then, you know, we, we got the spiel ready, right? We can walk them through kind of who we are, what we do, and that doesn't have to take more than 15 minutes. So we're ready and willing to share about ourselves at any time. So if someone is new to us, that's fine. If someone's new to syndication and new to all, you know, private real estate investments as a whole, that's a little bit of a different story. And I mean, we welcome those conversations as well. But that's more of like a 30 minute conversation. Right? So again, it's about meeting people where they are and we have capable people on the team who, you know, their job is to do that. Their job is to educate. You know, if someone like you said, comes through the door, whether they hear us on this podcast or through an ad or through word of mouth, like it's our team's job to meet them where they're at, give them the education, the resources that they need, and then follow up from there.
- [29:01]
A
Yeah, I think it's really key to do that. Having a team that can explain what you guys are and what you do and then going from there. Now we're a tax podcast. We have to touch on taxes at least just a Little bit. So on that front, the cost of tax, right. How do you guys factor that into your models? How do you pitch that to your investors? Right. Or how do you also deal with it yourself? I know it's three questions in one, but what's your overall insight when it comes to taxes, when it comes to real estate, and just like the overall syndication fund structuring.
- [29:31]
C
So we don't factor any tax into our underwriting model, but we do present it to investors in terms of our anticipated year one depreciation, which is always a popular question for investors. And so we obviously do a cost seg estimate and we, you know, try to provide a conservative estimate in our pitch deck as far as what year one depreciation will look like for the deal and then also for the remaining term of the projected hold period. And that's kind of it. I mean, it's pretty simple, right? Real estate is one of the best vehicles from a tax advantage perspective. I think that a lot of people compare investments on a pre tax basis and that's fine. You know, you compare stocks, bonds, real estate, but on a post tax basis. That's at the end of the day, that's the most important part. And real estate blows everyone away in that regard. So now not everybody can utilize bonus depreciation to the fullest extent, you know, because most people aren't a real estate professional. But when you are investing in projects like what we do as an lp, you can at least get the benefit of deferring the income associated with the investment, typically fully until sale. And then what we do is we offer our investors the opportunity to 1031 exchange with US at the entity level into the next deal to further the deferral. Right, Because a deferral is great, but we want to defer, defer, defer so long until it feels like a actual permanent tax savings. Right. Rather than just a short term deferral.
- [31:05]
A
Yeah. Actually, let's talk about the 1031 piece. Most funds don't have that or can't offer it. How do you guys using like a drop and swap technique to do that?
- [31:14]
C
No. So we do a couple things when it comes to 1031 exchanges. First of all, we do a tenancy and common structure for investors seeking to 1031 exchange with US alongside our new acquisitions. And so that's a little bit different. That's for the more sophisticated investor that has their own portfolio, but they're looking to transition from perhaps active ownership into a more passive ownership in partnership with us. And so we facilitated over 150 million in 1031 exchanges into our investments. But then on the back end, when exiting a property, you don't have to do a drop and swap. It's really quite simple. You take the investing entity, you know, it could be, you know, 1, 2, 3 Property LLC and that is the entity that is the seller, but then also becomes the owner of the new property. And so investors can opt in or out of riding alongside that entity. You know, they can be bought out of that partnership or they can ride along in that partnership into the new deal. And that's what allows you to defer all your capital gains tax upon sale as well as your depreciation recapture upon sale. So that's very, very powerful thing to do. And if you look at that strategy over a 30 year time period, you can really 2x or even 3x your returns on a post tax basis as compared to just selling and not using 1031s.
- [32:38]
A
Yeah, that's awesome. That's like, honestly most funds don't offer that. So it's really cool that you guys do have the ability for people like through the tick. Right? The tick's actually an awesome way to do that. And then also it's like saying, hey, we're going to trying to buy the partners out before the 10:31 exchange. Because it's always right. There's always one, there's always one, maybe two, there's always one that says no, I just want my money. And so that's fine. But it creates complications and everybody else wants to stay on board. Have you guys ever done like a Redivision by chance too? And then like kind of like split off the old owner, the cash only owners, and then tried to like keep everybody else in the same other OpCo.
- [33:14]
C
No, we haven't done that.
- [33:15]
A
Okay, curious. I was just curious. Some people have, some people say it's okay, some people say it's not okay. So I was just curious with that. Okay. Very cool, very cool. And then market outlook, I guess like as of today, where do you think the current multifamily market's heading?
- [33:31]
C
Well, I think as of 2024, the multifamily market has been in a gentle recovery. And I think a lot of people were hoping for a V shaped recovery where things would bounce back really fast and values would recover. But that hasn't been the case. We've been in this gentle recovery where values have gone up and values have gone up more so for higher quality real estate than lower quality. If anything for lower quality assets, think like bad location class C, like 1970s vintage, suburban, multifamily. There hasn't been even a recovery there, pretty much there's just been no price appreciation and fundamentals are, I would say, stable, but not necessarily improving much. And in response to that, we've been focusing on higher quality assets. We've acquired some very well located deals as well as newer vintage assets over the last couple years and we've already seen tremendous results and we've seen the benefits of investing early recovery. Whereas, you know, if you like, myself included, and I'm sure many of your listeners invested in 2021 and 2022 at the peak of the market, you know that wasn't a good year to invest. There's almost nothing that you could have done to make it so. And that's just the nature of the cycle. And so dollar cost averaging across every year is really the best strategy because if you were to have let your bad results from 2022 influence your psychology negatively to not want to invest in 2024, then you missed out on one of the best, perhaps the best year to invest since 2010 in real estate. So I think 2024 looking back, is going to be viewed as one of the best years to invest in recent memory. And as we continue to grow in 26 and beyond, I think we're continuing on this gentle recovery, which is in some ways a good thing because it's a longer window of time to acquire great deals. You know, if there was just a V shaped recovery and things got super hot again, it would be very hard to find and make great investments. So I'm actually quite excited about all the properties we've acquired over the last couple years. And I think that we've got a nice window of the next couple years where there will still be strong opportunities.
- [35:44]
B
So what I'm hearing, what I'm hearing is like now is a good time to buy, now is a good time to keep an ear to the market. Even though 2024 might have been the best time in recent times, but now is still good time to keep, to keep an eye on the multifamily market, I think.
- [35:57]
C
So I think that now is a very good time. And I don't want to say it's only getting worse every day, but you know, values for the right assets are going up every day. So it is kind of technically getting worse every day. You wait. So right now, especially if you look at it from a cycle perspective, now is the time where it's more acceptable to take risk. Now I'm not promoting hey, go be crazy and take a lot of risk. But if you do want to invest in something where there's maybe a little more risk in some regard, I think now is a more appropriate time to do that. Whereas in 2022 it wasn't appropriate to take any kind of risk. The best type of deal you could have done in 2022 would have been a core main and main trophy asset that had no supply, had very high barriers to entry. Like if you bought a property on the beach, you in California where, you know, the politics hate development and they'll never let you build any competitors forever and the property's been 100% occupied for the last million years and there's a wait list and you bought that with, you know, 35% debt, like that would have been the deal to do in 2022. So the time today it's appropriate to take more risk, like you could do 65% debt. But then I think in 5ish years we're going to be looking at a situation where the market is hot again, like 2022, let's say, maybe not to that extreme, but it'll be more appropriate to take on less risk, buy in better locations, more supply barriers, lower leverage, like 50 or even 40% leverage.
- [37:31]
B
Makes a ton of sense. Everybody loves looking to the crystal ball, so hopefully that's shed some insights for everybody tuning in. Interested in multifamily? Rob, before we wrap up today, are there any major projects that you're kind of working on right now that are coming up the pipeline and how could investors best get in touch with you, learn more about what you have going on, opportunities you have coming up the pipeline for yourself, for your company?
- [37:52]
C
Yeah, right now our biggest project is we're wrapping up the fundraising and we're moving towards closing on our newest acquisition called Preserve at Copper Springs. It's our first closing of the year. I'm super excited about it. Investors can check out that deal and learn more about us by going to lscre.com PCs that's for preserve at Copper Springs. That deal is kind of in a nutshell, exactly what we're looking to do and deliver. It's a 2000s vintage asset in a great location where there's zero new supply under construction within a three mile radius. And at the same time, Apple and Nvidia just opened up a supercomputer factory just down the road, bringing thousands of jobs to the area. So like I mentioned at the beginning of the show, demand, drivers, supply constraints. So there you've got the good supply, demand, fundamentals, and it's a high quality asset with great residents. And we own a property down the street that averaged 98% occupancy in 2025.
- [38:51]
B
Sounds phenomenal. Jobs are coming in and there's limited competition. I mean it sounds like a recipe for success there on the surface. So yeah, we're gonna go ahead. We'll drop that information into the Show Notes. And of course, if anybody tuning in, if you are a syndicate or fund, you are looking for tax services, whether it's on the advisory side or accounting, anything like that, you want to get the conversation started about how we can help you out. We'll drop our information to the Show Notes as well. But Rob, any final words, any parting words before we wrap up today's episode?
- [39:19]
C
Thanks for having me. Really appreciate the time. And like I mentioned, if people want to learn more about our current investment opportunity or just about us in general, you can find that information on our website. Like I said, lscre.com and you can go PCs to learn more about Preserve at Copper Springs.
- [39:37]
B
Awesome. Thanks again for joining us and we'll catch everybody on next week's episode of the Major League Real Estate Podcast Podcast.
- [39:45]
A
Thanks for listening to the Major League Real Estate Podcast. There are three ways you can connect with us. If you're interested in getting email updates on upcoming shows, go to ww.therealestatecpa.com and subscribe there. If you'd like to explore a tax and accounting relationship with our CPA firm, you can go to www.therealestatecpa.com ML RE and fill out a web form to get started. And if you'd like to connect with Matt or I on social media, you can find us on LinkedIn or Twitter. Just search Nathan Sosa, CPA Matt Hamilton, CPA and shoot us a request. We'd love to connect. See you guys next time.